UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
FORM 20-F
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¨
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2011
OR
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£
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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£
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report ______________
For the transition period from __________ to
___________
Commission file number 001-34804
Asia Entertainment & Resources Ltd.
(Exact name of the Registrant as specified in
its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
Unit 605, East Town Building
16 Fenwick Street
Wanchai, Hong Kong
Phone: 852-2111-9220
Facsimile: 852-2110-9420
(Address of
principal executive offices)
Leong Siak Hung, Chief Executive Officer
Asia Entertainment & Resources Ltd.
Unit 605, East Town Building
16 Fenwick Street
Wanchai, Hong Kong
Phone: 852-2111-9220
Facsimile: 852-2110-9420
(Name, Telephone,
E-mail and/or Facsimile Number and Address of Company Contact Person)
with a copy
to:
Mitchell S. Nussbaum
Giovanni Caruso
Loeb & Loeb LLP
345 Park Avenue
New York, New York 10154
(212) 407-4000
Fax: (212) 407-4990
Securities registered or to be registered pursuant
to Section 12(b) of the Act:
ORDINARY SHARES, PAR VALUE $0.0001
Securities registered or to be registered pursuant
to Section 12(g) of the Act:
None.
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None.
On December 31, 2011, the issuer had 38,804,064 ordinary shares
outstanding.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check
mark if the registrant is required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has 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.
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act.
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Large Accelerated filer
¨
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Accelerated filer
x
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Non-accelerated filer
¨
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Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
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US
GAAP
x
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International Financial Reporting Standards
¨
as issued by the International Accounting
Standards Board
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Other
¨
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If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
TABLE OF CONTENTS
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Page
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PART I
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2
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ITEM 1.
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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2
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ITEM 2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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2
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ITEM 3.
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KEY INFORMATION
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2
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A.
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Selected financial data
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2
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B.
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Capitalization and Indebtedness
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5
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C.
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Reasons for the Offer and Use of Proceeds
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5
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D.
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Risk factors
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5
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ITEM 4.
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INFORMATION ON THE COMPANY
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18
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A.
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History and Development of the Company
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18
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B.
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Business Overview
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21
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C.
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Organizational Structure
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39
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D.
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Property, plant and equipment
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39
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ITEM 4A.
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UNRESOLVED STAFF COMMENTS
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39
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ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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39
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ITEM 6.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
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56
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A.
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Directors and senior management
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56
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B.
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Compensation
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59
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C.
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Board Practices
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68
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D.
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Employees
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70
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E.
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Share Ownership
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70
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ITEM 7.
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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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70
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A.
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Major shareholders
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70
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B.
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Related Party Transactions
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72
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C.
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Interests of Experts and Counsel
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74
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ITEM 8.
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FINANCIAL INFORMATION
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74
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A.
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Consolidated Statements and Other Financial Information.
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74
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B.
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Significant Changes
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74
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ITEM 9.
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THE OFFER AND LISTING
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74
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A.
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Offer and Listing Details
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74
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B.
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Plan of Distribution
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75
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C.
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Markets
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75
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D.
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Selling Shareholders
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75
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E.
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Dilution
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75
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F.
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Expenses of the Issue
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75
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ITEM 10.
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ADDITIONAL INFORMATION
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75
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A.
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Share Capital
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75
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B.
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Memorandum and Articles of Association
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75
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C.
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Material Contracts
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75
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D.
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Exchange controls
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76
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E.
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Taxation
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76
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F.
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Dividends and paying agents
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83
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G.
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Statement by experts
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83
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H.
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Documents on display
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83
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I.
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Subsidiary Information
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83
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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83
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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83
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PART II
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83
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ITEM 13.
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DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
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83
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ITEM 14.
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MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
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83
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ITEM 15.
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CONTROLS AND PROCEDURES
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84
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ITEM 16.
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[RESERVED]
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86
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ITEM 16A.
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AUDIT COMMITTEE FINANCIAL EXPERT.
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86
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ITEM 16B.
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CODE OF ETHICS.
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86
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ITEM 16C.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES.
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87
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ITEM 16D.
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EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
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88
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ITEM 16E.
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PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
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88
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ITEM 16F.
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CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.
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88
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ITEM 16G.
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CORPORATE GOVERNANCE
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88
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ITEM 17.
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FINANCIAL STATEMENTS
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88
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ITEM 18.
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FINANCIAL STATEMENTS
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88
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ITEM 19.
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EXHIBITS
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88
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CERTAIN INFORMATION
In this Annual Report on Form 20-F (this “Annual
Report”), unless otherwise indicated, “we,” “us,” “our,” the “Company,” and
“Asia Entertainment” refers to Asia Entertainment & Resources Ltd., a Cayman Islands company, its subsidiaries
and the Promoter Companies (as defined below).
On February 2, 2010, CS China Acquisition Corp.,
our predecessor, consummated a business combination pursuant to which it acquired all of the outstanding capital stock
of Asia Gaming & Resort Limited (“AGRL”), a Hong Kong corporation, and changed its name to “Asia Entertainment
and Resources Ltd.”
References to “Promoter Companies”
or to “AGRL’s VIP gaming promoters” refer to those VIP gaming promoters and predecessors that are affiliated
with AGRL and its subsidiaries and whose operations are included in the financial statements included in this Annual Report.
On November 10, 2010, we acquired 100% of the
profit interest in King’s Gaming Promotion Limited (“King’s Gaming”).
Unless otherwise indicated or the context indicates
otherwise, all references to “Macau” or “MSAR” refer to the Special Administrative Region of Macau, and
all references to “China” or “PRC” refer to the People’s Republic of China.
All references to Hong Kong Dollar (“HKD$”) are
to the legal currency of Hong Kong and all references to “U.S. dollars,” “dollars,” “$”
are to the legal currency of the United States. This Report contains translations of HKD$ amounts into U.S. dollars at specified
rates solely for the convenience of the reader. We make no representation that the HKD$ or U.S. dollar amounts referred to
in this Report could have been or could be converted into U.S. dollars or HKD$, as the case may be, at any particular rate or at
all. On March 2, 2012, the buying rate announced by the Federal Reserve Statistical Release was HKD$7.7585 to $1.00.
FORWARD-LOOKING STATEMENTS
This Annual Report contains “forward-looking
statements” that represent our beliefs, projections and predictions about future events. All statements other than statements
of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial
items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed
new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s
beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words
such as “may”, “will”, “should”, “could”, “would”, “predicts”,
“potential”, “continue”, “expects”, “anticipates”, “future”, “intends”,
“plans”, “believes”, “estimates” and similar expressions, as well as statements in the future
tense, identify forward-looking statements.
These statements are necessarily subjective
and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance
or achievements, or industry results, to differ materially from any future results, performance or achievements described in or
implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements,
including with respect to correct measurement and identification of factors affecting our business or the extent of their likely
impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business
strategy is based or the success of our business.
Forward-looking statements should not be read
as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which,
our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements
are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties
that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under
the headings “Risk Factors”, “Operating and Financial Review and Prospects,” “Information on the
Company” and elsewhere in this Annual Report.
This Annual Report should be read in conjunction
with our audited financial statements and the accompanying notes thereto, which are included in Item 18 of this Annual Report.
PART
I
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ITEM
1.
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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Not required.
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ITEM
2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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Not required.
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A.
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Selected financial data
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The combined balance sheet data of AGRL,
Sang Heng Gaming Promotion Company Limited, Spring Gaming Promotion Company Limited, Iao Pou Gaming Promotion Limited
(beginning in June 2009) and Doowell Limited and their predecessors (collectively, “AERL”) as of December 31,
2009, December 31, 2008 and December 31, 2007, and combined statements of operations data and cash flow data of AERL for the
years ended December 31, 2009, December 31, 2008, and December 31, 2007 are derived from the audited combined financial
statements of AGRL. The consolidated balance sheet data of AERL as of December 31, 2011 and December 31, 2010 and the
consolidated statement of operations data and cash flow data for the years ended December 31, 2011 and 2010 are derived from
the audited consolidated financial statements of AERL. The audited consolidated financial statements of AERL as of
December 31, 2011 and 2010 and for the years ended December 31, 2011, December 31, 2010, and the combined
financial statements for the year ended December 31, 2009 are included elsewhere in this Annual Report.
The information is only a summary and should
be read in conjunction with each of our historical financial statements and related notes and ”Operating and Financial
Review and Prospects” contained elsewhere herein. The historical results included below and elsewhere in this Annual
Report are not indicative of our future performance.
ASIA ENTERTAINMENT & RESOURCES LTD.
SELECTED HISTORICAL CONSOLIDATED AND COMBINED
FINANCIAL INFORMATION
Statement of Operations Data
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For the Year
Ended
December 31,
2011
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For the Year
Ended
December 31,
2010
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For the Year
Ended
December 31,
2009
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For the Year
Ended
December 31,
2008
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For the Year
Ended
December 31,
2007
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(A)
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(A)
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(A)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Revenue from VIP gaming operations
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$
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250,575,452
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$
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127,036,361
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$
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60,479,937
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$
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51,021,223
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$
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36,247,972
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Total expenses
|
|
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179,570,303
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89,740,111
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44,934,474
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30,826,123
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|
|
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22,999,398
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Operating income including pre-acquisition profit
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|
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71,005,149
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37,296,250
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15,545,463
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|
|
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20,195,100
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|
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13,248,574
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Prior owners’ interest in pre-acquisition profit
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—
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|
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|
(4,329,385
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)
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(15,563,968
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)
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(20,195,100
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)
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(13,260,115
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)
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Operating Income (Loss) Attributable to Ordinary Shareholders before change in fair value of contingent consideration
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$
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71,005,149
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$
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32,966,865
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|
$
|
(18,505
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)
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|
$
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—
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$
|
(11,541
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)
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Change in fair value of contingent consideration for the acquisition of King’s Gaming
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6,248,361
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|
|
|
—
|
|
|
|
—
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|
|
|
—
|
|
|
|
—
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|
|
Net Income (Loss) attributed to ordinary shareholders
|
|
|
77,253,510
|
|
|
|
32,996,865
|
|
|
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(18,505
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)
|
|
|
—
|
|
|
|
(11,541
|
)
|
|
Other Comprehensive Loss
|
|
|
(64,634
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)
|
|
|
(41,534
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)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total Comprehensive Income (Loss)
|
|
$
|
77,188,876
|
|
|
$
|
32,925,331
|
|
|
$
|
(18,505
|
)
|
|
$
|
—
|
|
|
$
|
(11,541
|
)
|
|
Earnings per share attributable to ordinary shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic
|
|
$
|
2.07
|
|
|
$
|
2.33
|
|
|
|
(B)
|
|
|
|
(B)
|
|
|
|
(B)
|
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Diluted
|
|
$
|
2.00
|
|
|
$
|
1.88
|
|
|
|
(B)
|
|
|
|
(B)
|
|
|
|
(B)
|
|
(A) Represents the combined
statements of operations data of AGRL, its subsidiaries and the Promoter Companies, the accounting acquirer
(B) Not a meaningful metric
prior to AERL’s acquisition of AGRL on February 2, 2010.
Balance Sheet Data
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
|
(A)
|
|
|
(A)
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
258,382,355
|
|
|
$
|
144,939,466
|
|
|
$
|
6,250,170
|
|
|
$
|
11,348,608
|
|
|
$
|
4,873,140
|
|
|
Total Assets
|
|
$
|
328,407,314
|
|
|
$
|
220,058,197
|
|
|
$
|
6,250,170
|
|
|
$
|
11,348,608
|
|
|
$
|
4,873,140
|
|
|
Current Liabilities
|
|
$
|
77,127,221
|
|
|
$
|
96,557,390
|
|
|
$
|
7,775,322
|
|
|
$
|
8,546,361
|
|
|
$
|
1,858,507
|
|
|
Total Liabilities
|
|
$
|
169,620,206
|
|
|
$
|
134,579,559
|
|
|
$
|
7,775,322
|
|
|
$
|
8,546,361
|
|
|
$
|
1,858,507
|
|
|
Total Equity (Deficit)
|
|
$
|
158,787,108
|
|
|
$
|
85,478,638
|
|
|
$
|
(1,525,152
|
)
|
|
$
|
2,802,247
|
|
|
$
|
3,014,633
|
|
(A) Represents the combined
balance sheets data of AGRL, its subsidiaries and the Promoter Companies, the accounting acquirer.
Cash Flow Data
|
|
|
For the Year
Ended
December 31,
2011
|
|
|
For the Year
Ended
December 31,
2010
|
|
|
For the Year
Ended
December 31,
2009
|
|
|
For the Year
Ended
December 31,
2008
|
|
|
For the Year
Ended
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
|
(A)
|
|
|
(A)
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
5,280,509
|
|
|
$
|
(76,451,485
|
)
|
|
$
|
3,869,081
|
|
|
$
|
550,344
|
|
|
$
|
1,899,455
|
|
|
Cash flows used in investing activities
|
|
|
(27,956
|
)
|
|
|
(9,028,590
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Cash flows (used in) provided by financing activities
|
|
|
(2,305,762
|
)
|
|
|
99,009,722
|
|
|
|
(4,303,213
|
)
|
|
|
(308,055
|
)
|
|
|
(1,482,390
|
)
|
|
Net increase (decrease) in cash
|
|
$
|
2,946,791
|
|
|
$
|
13,529,647
|
|
|
$
|
(434,132
|
)
|
|
$
|
242,289
|
|
|
$
|
417,065
|
|
|
|
(A)
|
Represents the combined cash flow data of AGRL, its subsidiaries and the Promoter Companies, the accounting acquirer
|
Recent Developments
The Company’s Board of Directors authorized
a regular semi-annual cash dividend of $0.10 per outstanding ordinary share each year after the release of the Company’s
financial results for the six months ending June 30, and, for each year after the release of the Company’s year-end financial
results, an amount per outstanding ordinary share equal to (i) 15% of the Company’s non-GAAP net income for the most recently
completed fiscal year less the amount paid pursuant to the immediately previous six-month dividend, divided by (ii) the number
of ordinary shares outstanding on the record date for such dividend. The cash dividend payable after the Company’s release
of the December 31, 2011 financial results is approximately $7.5 million.
In February 2012, the Board of Directors approved
the amendment of the employment contracts of certain executive officers to increase the annual salary, as further described under
Item 6.B. of this Annual Report.
Exchange Rates
The following table sets forth information concerning
exchange rates between the HKD$ and the U.S. dollar for the periods indicated. On March 2, 2011, the buying rate announced
by Federal Reserve Statistical Release was HKD$7.7585 to $1.00.
|
|
|
Spot Exchange Rate
|
|
|
Period
|
|
Period
Ended
|
|
|
Average
(1)
|
|
|
Low
|
|
|
High
|
|
|
|
|
(HKD$ per US$1.00)
|
|
|
2007
|
|
|
7.7984
|
|
|
|
7.8008
|
|
|
|
7.7502
|
|
|
|
7.8264
|
|
|
2008
|
|
|
7.7499
|
|
|
|
7.7814
|
|
|
|
7.7499
|
|
|
|
7.8041
|
|
|
2009
|
|
|
7.7536
|
|
|
|
7.7513
|
|
|
|
7.7497
|
|
|
|
7.7551
|
|
|
2010
|
|
|
7.7810
|
|
|
|
7.7665
|
|
|
|
7.7515
|
|
|
|
7.7865
|
|
|
2011
|
|
|
7.7663
|
|
|
|
7.7793
|
|
|
|
7.7641
|
|
|
|
7.7942
|
|
|
September
|
|
|
7.7840
|
|
|
|
7.7943
|
|
|
|
7.7830
|
|
|
|
7.8040
|
|
|
October
|
|
|
7.7641
|
|
|
|
7.7774
|
|
|
|
7.7634
|
|
|
|
7.7884
|
|
|
November
|
|
|
7.7730
|
|
|
|
7.7809
|
|
|
|
7.7679
|
|
|
|
7.7957
|
|
|
December
|
|
|
7.7663
|
|
|
|
7.7767
|
|
|
|
7.7663
|
|
|
|
7.7851
|
|
|
2012*
|
|
|
7.7585
|
|
|
|
7.7564
|
|
|
|
7.7551
|
|
|
|
7.7585
|
|
|
January
|
|
|
7.7555
|
|
|
|
7.7622
|
|
|
|
7.7538
|
|
|
|
7.7674
|
|
|
February
|
|
|
7.7551
|
|
|
|
7.7544
|
|
|
|
7.7532
|
|
|
|
7.7559
|
|
|
March*
|
|
|
7.7585
|
|
|
|
7.7568
|
|
|
|
7.7551
|
|
|
|
7.7585
|
|
* Through March 2, 2012
Source: Federal Reserve Statistical Release
|
|
(1)
|
Annual averages, lows, and highs are calculated from month-end rates. Monthly averages, lows, and highs are calculated using
the average of the daily rates during the relevant period.
|
|
|
B.
|
Capitalization and Indebtedness
|
Not required.
|
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not required.
An investment in our securities involves a high
degree of risk. You should consider carefully the material risks described below, which we believe represent all the material risks
related to an investment in our securities, together with the other information contained in this Annual Report, before making
a decision to invest in our securities. This annual report also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors,
including the risks described below.
Risk Factors Relating to Our Business
Our business, is entirely dependent
upon the operations of AGRL’s VIP gaming promoters, which have limited operating histories and are subject to many uncertainties
and contingencies.
Our sole source of revenue is the funds we receive
from the profit interest agreements between our subsidiaries and AGRL’s VIP gaming promoters. The VIP gaming promoters receive
their revenues from their promotion of VIP gaming rooms in casinos pursuant to gaming promoter agreements with the concessionaires
and sub-concessionaires that operate the casinos. The terms of the gaming promoter agreements between AGRL’s VIP gaming promoters
and the concessionaires or sub-concessionaires are usually short term and are tied to the term of the licenses of AGRL’s
VIP gaming promoters, which are subject to annual renewal. The renewal application consists of a good character certificate certifying
as to the absence of criminal activity and a copy of the renewed contract with the concessionaires. Although we believe that renewal
is likely, it cannot be assured. If a VIP gaming promoter’s license is not renewed, we will lose the source of a significant
part of our revenue.
The operations of AGRL’s VIP gaming promoters
are also subject to the significant business, economic, regulatory and competitive uncertainties and contingencies frequently encountered
by businesses in competitive environments, many of which are beyond their control. Although AGRL’s VIP gaming promoters commenced
operation in May 2006, there are presently only three operating VIP gaming rooms, which have limited operating histories. If AGRL’s
VIP gaming promoters are not able to manage these risks successfully, our business will be harmed.
AGRL’s VIP gaming promoters
are entirely dependent on their relatively limited number of VIP gaming rooms for all of their cash flow, which subjects AGRL’s
VIP gaming promoters to greater risks than a gaming promoter with more VIP gaming rooms. Also, their revenue is subject to significant
volatility.
Because AGRL’s VIP gaming promoters’
operations are presently conducted only at three VIP gaming rooms in Macau, they are subject to greater risks than a gaming promoter
with more VIP gaming rooms at many different geographic locations due to the limited diversification of their business and sources
of revenue. Specifically, they are more exposed to local economic and competitive conditions, changes in law, natural disasters,
infectious disease outbreaks, and declines in the number of visitors to Macau. Any of these factors could adversely affect AGRL
business, financial condition and results of operations.
High-end gaming at VIP gaming rooms is more
volatile than other forms of gaming. Also, large wins by one or more gaming patrons could also materially affect results in a given
period. As a consequence, VIP room revenue during any specific period may not be indicative of revenue for a full year.
The profitability of AGRL’s
VIP gaming promoters’ VIP gaming room operations depends on a variety of factors, some beyond their control.
The gaming industry is characterized by an element
of chance. In addition to the element of chance, theoretical win rates and, thus, the profitability of AGRL’s VIP gaming
promoters, are also affected by other factors, including gaming patrons’ skill and experience, the mix of games played, the
financial resources of gaming patrons, the spread of table limits, the volume of bets placed by AGRL’s VIP gaming promoters’
gaming patrons and the amount of time gaming patrons spend on gambling. As a result, VIP gaming rooms’ rolling chip turnover
(upon which commissions payable to all of AGRL’s VIP current gaming promoters are based) may differ greatly over short time
periods, such as from quarter to quarter, and could cause their quarterly results to be volatile. These factors, alone or in combination,
have the potential to negatively impact the VIP gaming promoters’ profitability.
AGRL’s VIP gaming promoters
face intense competition in Macau and elsewhere in Asia.
The VIP gaming room business in Macau is highly
competitive and AGRL’s VIP gaming promoters expect to encounter increasing competition as casino operators complete and open
new projects in the coming years. Currently, AGRL’s VIP gaming promoters’ VIP gaming rooms are located at three of
approximately 34 casinos of varying sizes in Macau. AGRL’s VIP gaming promoters currently compete with approximately 220
gaming promoters in Macau.
AGRL’s VIP gaming promoters expect competition
in Macau to increase in the near future as multiple additional hotel, casino and entertainment complex projects, which are currently
under construction or development, open in 2012. These projects are expected to include internationally recognized hotels and significant
additional gaming space. Any opening of additional casinos and hotels is likely to result in a significant increase in the number
of VIP gaming rooms, intensifying competition in Macau’s VIP gaming room gaming business and among VIP gaming promoters.
AGRL’s VIP gaming promoters’ VIP
gaming rooms also face current or prospective competition from casinos located elsewhere in Asia, such as Genting Highlands, a
major gaming and resort destination located outside of Kuala Lampur, Malaysia, and casinos in the Philippines. Certain countries,
including the Republic of Korea, Singapore, Malaysia, Vietnam and Cambodia, have already legalized casino gaming while others,
such as Japan, Taiwan and Thailand, may legalize gaming in the future, which could further increase regional competition. Two recently-opened
large-scale casinos in Singapore have added further competition in the region. Additional competition is provided from other major
gaming centers located around the world, including Australia and Las Vegas, as well as from cruise ships in Asia (many based in
Hong Kong) that offer gaming.
The profits assigned to the subsidiaries
under the profit interest agreements depend on AGRL’s VIP gaming promoters’ gaming volumes and revenue.
The profits to be assigned under the profit
interest agreements depend on AGRL’s VIP gaming promoters’ gaming volumes and revenue. If AGRL’s VIP gaming promoters
cease to be committed to the gaming promotion business or cease to be appointed as VIP gaming promoters by the concessionaires
or sub-concessionaires, their gaming volumes and revenues would be affected. AGRL’s VIP gaming promoters’ business,
financial condition and results of operations, and thereby the profit to be assigned to the AGRL subsidiaries, may be materially
reduced.
AGRL’s VIP gaming promoters’
business is dependent upon relationships with third parties. It must maintain satisfactory relationships with those parties and
the third parties, in turn, must maintain the relationships that are required for their businesses. These third parties include:
Casino Operators
. AGRL’s
VIP gaming promoters are dependent upon the casinos where they have operations. The concessionaires and sub-concessionaires that
operate casinos are licensed by the government agencies having jurisdiction in the areas where they are located. The failure of
a casino in which a VIP gaming promoter has operations, because of the failure of the casino operator to maintain its license or
to continue in business due to financial failure or otherwise, would curtail or close the operation of the VIP gaming promoter
in that casino, which could have a material adverse effect upon our business.
Junket Agents and Collaborators
. Virtually
all of AGRL’s VIP gaming promoters’ revenue is generated by gaming patrons introduced to them by junket agents and
collaborators. With the rise in gaming in Macau, the competition for services provided by junket agents and collaborators has increased.
AGRL’s VIP gaming promoters anticipate that this competition will further intensify as additional casinos are developed and
open in Macau in the near future. While they believe that they currently maintain good relationships with their existing junket
agents and collaborators, there can be no assurance that these good relationships will continue in the future. If they are unable
to maintain, or develop additional, successful relationships with reputable junket agents and collaborators or lose a significant
number of their junket agents and collaborators to competitors, their ability to maintain or grow their revenue will be hampered
and they will have to seek alternative ways of developing relationships with VIP gaming patrons.
Junket agents and collaborators often provide
credit for gaming patrons and the global financial crisis may have limited their financial resources. Therefore, their ability
to offer credit to patrons may be affected, resulting in decreased gaming volume at their VIP gaming rooms. Further, credit already
extended by the junket agents and collaborators to their gaming patrons may become increasingly difficult for them to collect.
This inability to grant credit and collect amounts due can negatively affect the operations of the junket agents and collaborators
at the VIP gaming rooms and, as a result, their operations of the VIP gaming promoters could also be adversely impacted.
Gaming Patrons
. If the junket
agents and collaborators with whom AGRL’s VIP gaming promoters have relationships are unable to develop or maintain relationships
with a sufficient number of VIP gaming patrons, the ability of the VIP gaming promoters to maintain or increase their revenue will
be hampered.
Management and Service Providers
. AGRL’s
VIP gaming promoters currently obtain certain services from outsiders, including corporate support services, marketing services
and personnel supply services. A termination of these services could cause disruption of their business and could increase future
costs for such services. If, in the future, the service providers choose not to provide such services on terms acceptable to the
VIP gaming promoters, the VIP gaming promoters will have to seek alternative means of securing comparable services, which may be
on terms that are not as favorable as the current terms.
Key Personnel
. AGRL’s
VIP gaming promoters’ ability to maintain their competitive position is dependent to a large degree on the efforts, skills
and continued service of Mr. Lam Man Pou and other key management and operating personnel such as Mr. Vong Hon Kun and Mr. Mok
Chi Hung. The loss of key management and operating personnel would likely have a material adverse effect on AGRL’s VIP gaming
promoters’ business since those individuals market the VIP gaming rooms to the agents, collaborators and patrons. Therefore,
if such persons, who are under no direct contractual obligation to continue performing such services for the VIP gaming promoters,
were to no longer perform such services for any reason, the VIP gaming promoters would generate significantly less revenue than
they currently generate. AGRL’s success also depends upon its ability to attract, hire and retain qualified operating, marketing,
financial and technical personnel in the future. Given the intense competition for qualified management personnel in the industry,
there can be no assurance that AGRL’s VIP gaming promoters will be able to continue to hire or retain the required personnel.
AGRL faces competition for qualified
and skilled employees.
Employees
. AGRL’s VIP
gaming promoters’ business success depends in large part on their ability, and the ability of their service providers, to
attract, train, motivate and retain a sufficient number of qualified and skilled employees to run their operations. Macau has a
relatively limited labor pool for existing gaming operations at AGRL’s VIP gaming promoters’ VIP gaming rooms as well
as for the operation of future projects and the ability of AGRL’s VIP gaming promoters and their service providers to seek
employees from other countries to staff operations is restricted by labor quota restrictions imposed by the Macau government. In
addition, many employees at the VIP gaming rooms are required to possess certain gaming-related skills for which substantial training
and experience are needed.
Given the limited pool of experienced gaming
and other personnel currently available in Macau as well as the large number of new casino resort developments and non-casino businesses
currently underway in Macau, AGRL’s VIP gaming promoters and their service providers will face significant competition in
the recruitment of the best qualified employees and cannot assure you that they will be able to successfully compete for the limited
supply of qualified gaming and other personnel and to recruit and retain a sufficient number of qualified employees for their Macau
operations.
Increasing competition for a limited number
of qualified employees could require AGRL and its service providers to raise the salaries of current employees or to pay higher
wages to attract new employees, which could cause labor costs to increase. If the VIP gaming promoters and their service providers
are unable to attract and retain a sufficient number of qualified employees, or if they encounter a significant increase in labor
costs due to salary increases, the ability of AGRL’s VIP gaming promoters to compete effectively with the other gaming promoters,
concessionaires or sub-concessionaires would be hampered.
Although we have determined that
we do not have a material weakness in our internal control over financial reporting for the year ended December 31, 2011, if we
fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial
results or prevent fraud, and investor confidence and the market price of our shares may be adversely affected.
We and our independent registered public accounting
firm, in connection with the audit of the consolidated financial statements for the fiscal year ended December 31, 2010, identified
a material weaknesses in our internal control over financial reporting. A “material weakness” is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We and our independent registered public accounting
firm have determined that we do not have a material weakness in our internal control over financial reporting for the year ended
December 31, 2011 as a result of measures we have taken to remediate these deficiencies, such as additional training undertaken
by our chief financial officer in dealing with U.S. GAAP and disclosure requirements, hiring a consulting firm to assist us with
U.S. GAAP compliance and financial reporting and adopting and following a number of accounting and internal control manuals and
installing process changes. However, we may in the future determine that we have a material weakness in our internal control over
financial reporting. Our failure to address any control deficiency could result in inaccuracies in our financial statements and
could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely
basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our business,
financial condition, results of operations and prospects, as well as the trading price of our shares, may be negatively impacted
by a failure to accurately report financial results.
Fulfilling our obligations incident
to being a public company will be expensive and time consuming and we may not have adequate staff to do so, which may in the future
result in a material weakness in our internal control over financial reporting in accordance with U.S. GAAP.
Under the Sarbanes-Oxley Act of 2002 and the
related rules and regulations of the SEC, we are required to maintain corporate governance practices and adhere to a variety of
reporting requirements and complex accounting rules. Compliance with these obligations have required and will require significant
management time, place significant demands on our finance and accounting staff and on our financial, accounting and information
systems, and resulted in significant insurance, legal and financial compliance costs. Our failure to meet these requirements led
to our having a material weakness in our internal control over financial reporting in accordance with U.S. GAAP
for
the year ended December 31, 2010. Although we and our independent registered public accounting firm have determined that we do
not have a material weakness in our internal control over financial reporting for the year ended December 31, 2011, if we are not
able to fulfill our obligations incident to being a public company we may in the future determine that we have a material weakness.
AGRL’s VIP gaming promoters
need to maintain effective policies and systems of internal controls. If they do not do so, it may result in a material weakness
in our internal control in financial reporting in accordance with U.S. GAAP which could result in their being unable to accurately
report their financial results or detect and prevent fraud and criminality.
AGRL’s VIP gaming promoters dedicate a
significant amount of management, operational and financial resources to enhance and maintain their internal controls. This has
increased their administrative and other operating expenses. Although they review their internal control policies and procedures
on an ongoing or material weakness basis, we cannot assure you that they will be able to successfully enhance and maintain their
internal controls, which may result in our having a material weakness in our internal controls over financial reporting in the
future. Any deficiency in internal controls could adversely affect management’s ability to monitor, evaluate and manage their
business and operations, or lead to substantial business or operational risk or inaccurate financial reporting. AGRL’s VIP
gaming promoters are also subject to the risk that they may have a material weakness regarding their ability to prepare financial
statements in accordance with U.S. GAAP.
Money Laundering and Corruption
. AGRL’s
VIP gaming promoters and their casino operators have implemented anti-money laundering policies in compliance with all applicable
laws and regulations in Macau. However, we cannot assure you that such policies will be effective to prevent their VIP gaming room
operations from being exploited for money laundering purposes. Any incidents of money laundering, accusations of money laundering
or regulatory investigations into possible money laundering activities involving them, the casino operators, the casino operators’
employees, AGRL’s VIP gaming promoters’ employees, their services providers, their junket agents and collaborators
or their gaming patrons could harm their reputation, relationship with their casino operators and the gaming regulators, business,
cash flows, financial condition, prospects and results of operations. Any serious incident of money laundering or regulatory investigation
into money laundering activities could also cause a revocation or suspension of AGRL’s VIP gaming promoters’ licenses
and termination of agreements with their casino operators. We are not aware of any cases of corruption occurring in Macau gaming
rooms in recent years.
Counterfeiting and Cheating
. All
gaming activities at the VIP gaming room table games are conducted exclusively with gaming chips which, like real currency, are
subject to the risk of alteration and counterfeiting. Although the casino operators incorporate a variety of security and anti-counterfeit
features to detect altered or counterfeit gaming chips, unauthorized parties may try to copy the gaming chips and introduce, use
and cash in altered or counterfeit gaming chips in the gaming areas. Any negative publicity arising from such incidents could also
tarnish AGRL’s VIP gaming promoters’ reputation and may result in a decline in their business, financial condition
and results of operation. Thus far, no counterfeit or altered chips have been detected in AGRL’s VIP gaming promoters’
VIP gaming rooms and we are not aware of counterfeiting occurring in any Macau VIP gaming room.
Although the casino operators have in place
surveillance and security systems designed to detect cheating at the casinos, those systems may not be able to detect all such
cheating in time or at all. There is also a possibility that gaming patrons may seek to cheat at their VIP gaming room casino games,
particularly if gaming patrons collude with the casino operators’ employees. In addition, their junket agents or other persons
could, without their knowledge, enter into betting arrangements with their gaming patrons on the outcomes of their VIP gaming room
games of chance, thus depriving them of revenues. Failure to discover such schemes in a timely manner could result in losses in
VIP room gaming operations where the VIP gaming promoter shares in losses with the concessionaire or sub-concessionaire. In addition,
negative publicity related to such schemes could harm AGRL’s VIP gaming promoters’ reputation, thereby adversely affecting
their business, cash flow, financial condition, results of operations and prospects.
Integrity
. The reputation
and integrity of the parties with whom AGRL’s VIP gaming promoters engage in business activities, in particular the junket
agents and collaborators with whom they deal, are important to AGRL’s VIP gaming promoters’ own reputation and ability
to continue to operate in compliance with their licenses, and Macau gaming laws. While they endeavor, through contractual protections
and otherwise, to ensure that their junket agents and collaborators comply with the high standards of probity and integrity required
by Macau gaming laws, AGRL’s VIP gaming promoters cannot assure you that the junket agents and collaborators will always
maintain these high standards. In addition, if AGRL’s VIP gaming promoters enter into a business relationship with a junket
agent or collaborator whose probity was in doubt, this may be considered by regulators or investors to reflect negatively on AGRL’s
VIP gaming promoters’ own probity. If any of their junket agents or collaborators violates the Macau gaming laws, the Macau
government may, in its discretion, take enforcement action against AGRL’s VIP gaming promoter, the junket agent, the collaborator
or each concurrently and they may be sanctioned and their reputation harmed. We are not aware of the government taking action against
VIP gaming room promoters relating to the activities of agents or collaborators in recent years.
If our goodwill or other intangible
assets become impaired, then our profits and shareholder equity may be significantly reduced.
Because we have acquired a significant number
of companies, goodwill and other intangible assets represent a substantial portion of our assets. As of December 31, 2011, our
goodwill was $14,992,009 and other intangible assets were $54,983,937, together comprising approximately 44.1% of our shareholders’
equity balance. We will perform a goodwill impairment test for potential impairment at least on an annual basis. This process requires
us to make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations,
as well as the interpretation of current economic indicators and market valuations. To the extent economic conditions that would
affect the future operations of our reporting units change, our goodwill and other intangible assets may be deemed to be impaired
and an impairment charge could result in a significant reduction in our shareholders’ equity. A significant impairment
charge would have a material adverse impact upon our financial condition and results of operations.
AGRL’s VIP gaming promoters
may require new or additional debt or equity financing to expand their business and fund future projects but may not be able to
obtain such financing on satisfactory terms or at all.
Apart from equity financing, AGRL’s VIP
gaming promoters have financed their operations primarily through borrowings from their shareholders, lines of credit from casinos,
and cash generated from their operations. They may require new or additional debt or equity financing in the future to expand their
business and fund future projects. Their ability to obtain new or additional financing will depend on a variety of factors, many
of which are beyond their control, including their financial performance, conditions of the U.S., Hong Kong, Macau and other capital
markets in which they may seek to raise funds, credit availability, interest rates, the conditions of the economy in general, other
gaming companies that may also seek funding, and investors’ and lenders’ perceptions of, and demand for, debt and equity
securities of gaming companies. As a result, AGRL’s VIP gaming promoters cannot assure you that they will be able to access
capital from external sources on satisfactory terms and conditions, or at all. If they are unable to obtain new or additional financing,
they may not be able to expand their business as anticipated or to fund future projects, and their business, financial condition
and results of operations could be materially and adversely affected.
Compliance with the Foreign Corrupt
Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign
Corrupt Practices Act, which generally prohibits United States public companies from engaging in bribery of or other prohibited
payments to foreign officials to obtain or retain business. We have adopted a Code of Ethics which applies to our directors, officers
and employees. While we take precautions to educate our directors, officers and employees about the Foreign Corrupt Practices Act,
our directors, officers and employees may engage in such conduct without our knowledge, for which we might be held responsible.
If that were to occur, we could suffer penalties that may have a material adverse effect on our business, financial condition and
results of operations.
Our business depends on our continued
access to lines of credit granted by casino license holders. Any inability to obtain credit from casino license holders in the
future may negatively impact our business.
We
rely on lines of credit granted by casino license holders for our ability to purchase non-negotiable chips from the concessionaires/sub-concessionaires
and provide them to VIP gaming patrons either directly or indirectly through their junket agents. We have available lines of credit
of approximately $55,263,000 from casino license holders, of which $35,989,109 was outstanding at December 31, 2011. If we are
unable to obtain such credit in the future, our ability to purchase non-negotiable chips will be impaired, which may negatively
impact our business.
AGRL is subject to junket agent
and collaborator credit risk.
Prior to the acquisition of AGRL by AERL,
AGRL’s VIP gaming promoters did not extend credit to junket agents and collaborators, although such credit was extended
personally by certain present members of our management team. However, in order to attract the most desirable gaming patrons
and retain the services of key junket agents and collaborators, the VIP gaming promoters are currently extending credit to
junket agents and collaborators, potentially exposing themselves and, hence, AGRL, to substantial collaborator and junket
agent credit risk. The average loan amount is $300,000, with a typical duration of 15–30 days. Historically, there
have been no defaults. Credit extended through junket agents and collaborators in Macau is typically unsecured and the
collectibility of receivables from junket agents and collaborators could be negatively affected by economic trends or
conditions in the countries where they reside. Additionally, we may not have access to a forum in which we will be able to
collect 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 our operating results. Although certain members of our management team guarantee these extensions of
credit, it is also possible that such persons would be unable to honor their guarantees in a timely fashion or at all. The
members of our management team do not currently make personal loans to or through junket agents and collaborators. In
addition, while regulated gaming debts are generally enforceable in Macau, other jurisdictions may determine that direct or
indirect enforcement of gaming debts is against public policy.
Extensions of credit to junket agents and collaborators
may be made with limited information or credit analysis and are often based primarily on historical gaming chip purchases. The
VIP gaming promoters’ limited operating history may put them at a disadvantage compared to its competitors when evaluating
credit risk. Any inability to collect receivables from junket agents and collaborators could have a material adverse impact on
AGRL’s business, cash flows, financial condition, results of operations and prospects.
Local taxation may increase and
current tax exemptions may not be extended.
AGRL benefits from the following:
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AGRL is not subject to Hong Kong profits tax because all operations are performed outside Hong Kong and it is an investment
holding company. All subsidiaries of AGRL are incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004) and exempted
from payment of BVI taxes.
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AGRL’s VIP gaming promoters in Macau are not subject to Macau Complimentary Tax because, pursuant to the VIP room gaming
promoter agreements with the casino operators, the gaming revenue is received net of taxes collected by the Macau government paid
directly by the casino operator on a monthly basis. No provision for Macau Complimentary Tax has been made. As a VIP room gaming
promoter, AGRL’s VIP gaming promoters are subject to a tax on the amount of non-negotiable chips played by their gaming patrons
in the VIP gaming rooms (“rolling chip 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 chip turnover
of the VIP gaming room and the rolling tax is deducted as a cost of revenue.
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A loss of any of these exemptions or increases
in tax rates or imposition of additional taxes will likely have a material adverse effect on AGRL’s earnings.
Gaming promoters are jointly liable
for the activities of their employees and collaborators within the casino premises of concessionaires and sub-concessionaires and
could be held responsible if such persons violated the law.
Gaming promoters are jointly liable for the
activities of their employees and collaborators within the casino premises of concessionaires and sub-concessionaires and for their
compliance with applicable laws and regulations. Failure by the gaming promoters to fulfill their major obligations under the Gaming
Promoters Regulation may result in the following consequences:
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the issue of a non-suitability report;
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refusal to grant a new gaming promotion license or to renew an existing license;
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upon notice by the concessionaire or sub-concessionaire to the DICJ, suspension of the gaming promotion activities of gaming
promoters; or
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administrative liability arising out of violation of the Gaming Promoters Regulation without prejudice of contractual liability
of the gaming promoter towards the concessionaire.
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Probable weakening in economic and
credit market conditions may adversely affect tourism and the profitability of AGRL’s VIP gaming promoters’ business.
There can be no assurance that the recent difficult
financial conditions will improve or that government responses to these conditions will successfully address fundamental weakness
in the markets, restore consumer confidence or increase market liquidity. Weakness in the global economy or in the economy of China,
where a significant number of the gaming patrons reside and/or generate their income, may result in a reduction of the number of
gaming patrons, including VIP gaming patrons, visiting the VIP gaming rooms or a reduction in the frequency of visits by these
gaming patrons. In particular, the economies in China’s Guangdong province, where most visitors to Macau come from, are either
export-driven or remain weak. Any reduction in demand for the gaming activities that AGRL’s VIP gaming promoters promote
would reduce gaming revenue.
The level of visitor arrivals to
Macau from China and elsewhere may decline or travel to Macau may be disrupted by natural disasters, outbreaks of disease, terrorist
attacks, security alerts, military conflicts or other factors.
Macau’s subtropical climate and location
on the South China Sea subject it to extreme weather conditions, including typhoons and heavy rainstorms. For example, in 2011,
there were 5 typhoons. Unfavorable weather conditions or other natural disasters such as earthquakes, tsunamis or major typhoons
could severely disrupt transportation to Macau and prevent gaming patrons from traveling to Macau. Similarly, outbreaks of infectious
diseases, such as the H1N1, terrorist attacks, security alerts or military conflicts could have a negative impact on travel and
leisure expenditures, including lodging, gaming and tourism. Any of these, or other factors such as riots or demonstrations, could
have a negative impact on visitor arrivals to Macau from China and elsewhere.
Consolidation of junket agents in
recent years has led to increased bargaining power of junket agents, which could reduce profits for VIP gaming promoters.
Over the past several years Macau has
experienced a consolidation of junket agents. As a consequence, certain junket agents are recognizing enhanced leverage and
bargaining power when negotiating terms with gaming promoters. Although there is some uncertainty as to whether such
consolidation will become a trend in Macau, any consolidation in the market may provide junket agents with significant
negotiating leverage, which could result in negative changes in their terms with the junket agents, including higher
commissions, the loss of business to a competitor or the loss of AGRL’s VIP gaming promoters’ exclusive
relationships with their junket agents. While AGRL’s VIP gaming
promoters have not had to materially adjust their compensation arrangements with junket agents thus far, AGRL’s VIP
gaming promoters understand that there have been recent instances of increased commission rates paid by other gaming
promoters to junket agents in the Macau market. If AGRL’s VIP gaming promoters need to increase junket agent commission
rates, their profits would be reduced.
If we become directly subject to
the recent scrutiny involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and/or
defend the matter, which could harm our business operations, stock price and reputation and could result in a complete loss of
your investment in us.
Recently, U.S. public companies that have substantially
all of their operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory
agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of effective internal
controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock
of many U.S. listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these
companies are now subject to shareholder lawsuits and/or SEC enforcement actions that are conducting internal and/or external investigations
into the allegations. If we become the subject of any such scrutiny, whether any allegations are true or not, we may have to expend
significant resources to investigate such allegations and/or defend our company. Such investigations or allegations will be costly
and time-consuming and distract our management from our business plan and could result in our reputation being harmed and
our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.
Risks Relating to the Gaming Industry in Macau
Gaming is a highly regulated industry
in Macau and the gaming and licensing authorities may exercise significant control over AGRL’s VIP gaming promoters’
operations.
Gaming is a highly regulated industry in Macau.
AGRL’s VIP gaming promoters’ operations are contingent upon their maintaining all regulatory licenses, permits, approvals,
registrations, findings of suitability, orders and authorizations pursuant to Macau law.
In addition, the casinos’ activities in
Macau are subject to administrative review and approval by various agencies of the Macau government, including the Gaming Inspection
and Coordination Bureau (“DICJ”), Health Department, Labor Bureau, Public Works Bureau, Fire Department, Financial
Services Bureau (including the Tax Department), Macau Monetary Authority, Financial Intelligence Bureau and Macau Government Tourism
Office. AGRL’s VIP gaming promoters cannot assure you that the casino operators and they will be able to obtain all necessary
approvals and licenses, and their failure to do so may materially affect their business and operations. Macau law permits redress
to the courts with respect to administrative actions; such redress is, however, largely untested in relation to gaming regulatory
issues.
Current laws, such as licensing requirements,
tax rates and other regulatory obligations, could change or become more stringent, resulting in additional regulations being imposed
upon the gaming operations or an increase in competition in the gaming industry. For example, in September 2009, the Macau government
set a cap on commission payments to gaming promoters of 1.25% of net rolling chips. This policy, which has been enforced since
December 2009, may limit our ability to develop successful relationships with gaming agents and collaborators and attract rolling
chip patrons. Any failure to comply with these regulations may result in the imposition of liabilities, fines and other penalties
and may materially and adversely affect our gaming promotion license.
The Macau government recently announced
its intention to raise the minimum age required for the entrance in casinos in Macau from 18 to 21. It was further announced
that this measure, when adopted, would allow casino employees to maintain their positions while in the process of reaching
the minimum required age. Nevertheless, if implemented, this could adversely affect our ability and the ability of our
consultants to engage sufficient staff for the operation of our projects. The number of gaming tables operated in Macau was
5,302 in the fourth quarter of 2011, and the Macau government has announced that the number of gaming tables operating in
Macau should not exceed 5,500 by the end of 2012, which may adversely affect the future expansion of our business.
There is limited precedent interpreting and
applying the laws of Macau and regulations concerning gaming. These laws and regulations are complex and a court or administrative
or regulatory body may in the future render an interpretation of these laws and regulations or issue new or modified regulations
that differ from AGRL’s VIP gaming promoters’ interpretation, which could have a material adverse effect on their business,
financial condition and results of operations.
Conducting business in Macau involves
certain economic and political risks.
Conducting business in Macau involves certain
risks such as risks relating to changes in Macau’s and China’s political, economic and social conditions, changes in
Macau governmental policies, changes in Macau laws or regulations or their interpretation, changes in exchange control regulations,
potential restrictions on foreign investment and repatriation of capital, measures that may be introduced to control inflation,
such as interest rate increases, and changes in the rates or method of taxation. In addition, AGRL’s VIP gaming promoters’
operations in Macau are exposed to the risk of changes in laws and policies that govern operations of Macau-based companies.
Agreements for concessions and sub-concessions
to operate casinos in Macau are for specific periods of time and might not be renewed upon their expiration. Also, the Macau government
has the right to unilaterally terminate the concession or sub-concessions in certain circumstances. Because the VIP gaming promoters
derive their rights from agreements with the concessionaires and sub-concessionaires, a termination of a license of a concessionaire
or sub-concessionaire to operate a casino will cause a termination of the VIP gaming promoter’s business at that casino.
The concession of Galaxy Casino, S.A. and sub-concession
of Venetian Macau, S.A. expire on June 26, 2022, unless extended pursuant to certain provisions of Macau law. Upon expiration of
these agreements, all casinos, gaming assets and equipment and ownership rights to the casino properties in Macau will revert to
the Macau government without compensation to the casinos. Moreover, beginning on December 26, 2017, the fifteenth year of the concession
of Galaxy Casino, S.A. and sub-concession of Venetian Macau, S.A., the Macau government may exercise its right to redeem the concession
or sub-concession agreements by providing the concessionaires or sub-concessionaires with at least one-year prior written notice.
AGRL’s VIP gaming promoters cannot assure you that the concessionaires or sub-concessionaires will be able to renew or extend
their concession or sub-concession agreements on terms favorable to them or at all. If the concession or sub-concession agreements
are not renewed or extended upon their stated expiration date, or if the Macau government exercises its early redemption right,
AGRL’s VIP gaming promoters in Macau will cease to generate any revenue.
The Macau government has the right to unilaterally
terminate the concession or sub-concession agreements upon the occurrence of certain events of default. The concession and sub-concession
agreements contain various general covenants and other provisions with which the concessionaires or sub-concessionaires are required
to comply. These include the obligations to submit periodic information to the Macau government, operate casinos in a fair and
honest manner and maintain certain levels of insurance. Failure to comply with the terms and conditions of the concession or sub-concession
agreements in a manner satisfactory to the Macau government could ultimately result in the termination of the concession or sub-concession
agreements. The occurrence of any event of default may, and any termination of the concession or sub-concession agreements will,
cause all of the casinos, gaming assets and equipment and ownership rights to the casino properties in Macau to be automatically
transferred to the Macau government. If this occurs, AGRL’s VIP gaming promoters will cease to generate any revenue from
their operations.
Since May 2008, China has imposed
government restrictions on Chinese citizens traveling from mainland China to Macau. If China or other countries impose additional
government restrictions on travel, the number of visitors to Macau could decline.
AGRL’s VIP gaming promoters have increased
the number of tables and intend to take part in the promotion of additional VIP gaming rooms, based, in part, on their expectation
of future visitor arrivals in Macau, particularly from China. In 2007, 2008, 2009, 2010, and 2011, tourists from mainland China
accounted for approximately 55.0%, 50.6%, 50.5%, 53.0%, and 57.7%, respectively, of all visitors to Macau. If visitors from China
and elsewhere fail to increase as anticipated or decrease further, AGRL’s VIP gaming promoters would not be as profitable
as they currently are.
Since May 2008, the Chinese government has imposed
restrictions on travel to Macau and may impose further restrictions in the future. In May and July 2008, the Chinese government
readjusted its visa policy toward Macau and limited the number of visits that some mainland Chinese citizens may make to Macau
in a given time period. In September 2008, it was publicly announced that mainland Chinese citizens with only a Hong Kong visa
and not a Macau visa could no longer enter Macau from Hong Kong. In addition, in May 2009, China also began to restrict the operation
of “below-cost” tour groups involving low up-front payments and compulsory shopping. Further restrictions on travel
from China or other countries to Macau or any increase in prices of tours to Macau as a result of new regulations on travel agencies
or otherwise may reduce the number of visitors to Macau.
Macau’s infrastructure may
limit the development of its gaming industry.
According to data from the Gaming Inspection
and Coordination Bureau of Macau, the year over year gaming revenue of Macau grew at 29% in 2003, 44% in 2004, 8% in 2005, 22%
in 2006, 46% in 2007, 31% in 2008, 10% in 2009, 57% in 2010, and 42% in 2011. Accordingly, demands on the capacity of Macau’s
transportation infrastructure have also increased. To improve Macau’s existing transportation infrastructure, the Macau government
has announced a number of infrastructure projects to facilitate travel to and within Macau. These projects, which are in various
stages of planning or development, include a further expansion of the Macau International Airport, construction of a light rail
transit system, construction of two new tunnels linking the Macau peninsula and Taipa, construction of the Hong Kong-Zhuhai-Macau
bridge and improved pedestrian walkways and border crossings. However, these projects may not be approved or completed in a timely
fashion or at all and, if completed, may not be able to alleviate the growing transportation demand associated with the rapid expansion
of Macau’s gaming industry and the related recent increase in visitor levels to Macau. If Macau fails to adequately address
the growing transportation demand, transportation infrastructure problems could limit the number of visitors arriving in Macau,
which, in turn, could have a material and adverse effect on AGRL’s VIP gaming promoters’ business, financial condition
and results of operations.
Unfavorable changes in currency
exchange rates may cause fluctuations in the value of AGRL’s VIP gaming promoters’ investment in Macau.
The vast majority of AGRL’s VIP gaming
promoters’ revenues are expressed in Hong Kong dollars, and a portion of their revenues are denominated in Patacas, the Macau
currency. The Hong Kong dollar is linked to the U.S. dollar and the exchange rate between these two currencies has remained relatively
stable over the past several years. The Pataca, which is not a freely convertible currency, is linked to the Hong Kong dollar,
and in many cases the two are used interchangeably in Macau. The exchange linkages of the Hong Kong dollar and Pataca, and the
Hong Kong dollar and the U.S. dollar, are subject to potential changes due to, among other things, Chinese, Hong Kong and Macau
governmental policies and international economic and political developments.
In the event of unfavorable Hong Kong dollar
or Pataca exchange rate changes as against the U.S. dollar, AGRL’s or AGRL’s VIP gaming promoters’ obligations
that are denominated in U.S. dollars would increase in Hong Kong dollar and/or Pataca terms. Also, depreciation of the Hong Kong
dollar or Pataca in relation to the U.S. dollar could adversely affect AGRL’s VIP gaming promoters’ ability to service
debt.
Risks Related to Our Business Structure and Securities
As a result of our status as a foreign
private issuer, publicly disseminated information about us may be limited.
In accordance with the rules applicable to foreign
private issuers, we are exempt from certain requirements under the Securities and Exchange Act of 1934, as amended (“Exchange
Act”) relating to the furnishing and content of proxy statements and certain periodic reports. As a result, the publicly
disseminated information available to our shareholders and others may not be as extensive as would be required if we did not have
such status.
We are a holding company and our
subsidiaries’ ability to pay dividends is dependent upon the earnings of AGRL’s VIP gaming promoters and distributions
by its subsidiaries.
We are a holding company incorporated
under the laws of the Cayman Islands. AGRL incorporated under the laws of the Hong Kong Special Administrative Region. All of
our business operations are conducted through AGRL’s subsidiaries and its VIP gaming promoters. They are currently
engaged in the promotion of three major VIP gaming rooms and are entirely dependent upon their VIP gaming rooms for all of
their cash flow. AGRL’s ability to pay dividends to us is dependent upon the earnings of AGRL’s VIP gaming
promoters and the distributions of funds to AGRL by its subsidiaries, primarily in the form of dividends. The ability of
AGRL’s subsidiaries to make distributions to AGRL depends upon, among other things, the profits interest assigned to
them. There are currently no withholding taxes levied on dividends in Hong Kong or the Cayman Islands. Other factors
such as cash flow conditions, restrictions on distributions contained in our subsidiaries’ articles of
association, withholding tax and other arrangements will also affect AGRL’s subsidiaries’ ability to make
distributions to it. These restrictions could reduce the amount of distributions that AGRL will receive from its
subsidiaries, which in turn would restrict AGRL’s ability to fund operations and pay dividends on the shares to us, as
AGRL’s parent company.
As our subsidiaries are located
outside of the United States, we will be subject to a variety of additional risks that may negatively impact our operations. In
addition, the laws applicable to AGRL will likely govern all of our material agreements and we may not be able to enforce our legal
rights.
Because AGRL is a Hong Kong company that operates
through subsidiaries and VIP gaming promotions in Macau, we are subject to special considerations or risks associated with companies
operating outside of the United States, including some or all of the following:
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rules and regulations or currency conversion or corporate withholding taxes on individuals;
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tax issues, such as tax law changes and variations in tax laws as compared to the United States;
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currency fluctuations and exchange controls;
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challenges in collecting accounts receivable;
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cultural and language differences; and
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employment regulations.
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If we are unable to adequately address these
additional risks, our operations might suffer.
In addition, the laws of Hong Kong or Macau
will likely govern almost all of the material agreements relating to our operations. We cannot assure you that AGRL will be able
to enforce any of its material agreements or that remedies will be available in such jurisdictions. The systems of laws and the
enforcement of existing laws in such jurisdictions may not be as certain in implementation and interpretation as in the United
States. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business,
business opportunities or capital. Also, substantially all of our assets will be located outside of the United States and most
of our officers and directors reside outside of the United States. As a result, it may not be possible for investors in the United
States to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United
States courts predicated upon civil liabilities and criminal penalties of our directors and officers under U.S. federal securities
laws.
If our outstanding unit purchase
option (and the warrants included in the unit purchase option) are exercised, the underlying ordinary shares will be eligible for
future resale in the public market. “Market overhang” from the warrants results in dilution and could reduce the market
price of the ordinary shares. Similarly, the registration of the Founder’s Shares and the shares issued in connection with
the acquisition of AGRL and King’s Gaming will increase the number of shares that will be available for resale in the public
market.
Up to 1,440,000 ordinary shares are issuable
upon exercise of the unit purchase option granted to the representative of the underwriters of our IPO and the ordinary shares
issuable upon exercise of the warrants included in such option. If such warrants and unit purchase option are exercised, a substantial
number of additional shares of our ordinary shares will be eligible for resale in the public market, which may reduce the market
price. Further, the registration of our founders’ shares, the 3,103,000 ordinary shares that will be issued to Spring Fortune
and its designees following the filing of this annual report, the 3,103,000 shares that may be issued to Spring Fortune and its
designees in the future upon achievement by AGRL of the 2012 incentive targets, the 520,000 ordinary shares that will be issued
following the filing of this annual report in connection with our acquisition of King’s Gaming, the ordinary shares issuable
in connection with our acquisition of King’s Gaming upon the achievement of future incentive targets, and the issuance of
50,400 ordinary shares to our officers and directors as compensation for 2010 and 2011 will increase the number of shares available
for resale and could have an adverse effect upon the market price of the ordinary shares.
We believe that affiliates of
Spring Fortune currently own approximately 66.3% of the issued and outstanding ordinary shares of the Company, and the
interests of Spring Fortune and its affiliates could increase as a result of the issuance of additional shares to Spring
Fortune giving the affiliates of Spring Fortune the ability to substantially control our operations.
In connection with the Company’s
acquisition of AGRL, on February 2, 2010, 9,729,000 shares were issued to Spring Fortune and an aggregate of 621,000 ordinary
shares were issued to consultants of Spring Fortune who are not affiliates of Spring Fortune. On May 13, 2010, Spring Fortune
distributed all of the 9,729,000 ordinary shares to its shareholder and its shareholder’s designees, all of which are
affiliates of Spring Fortune. In addition, following the filing of our Annual Report for the year ended December 31, 2010,
Spring Fortune received an additional 16,260,000 ordinary shares, of which 252,600 ordinary shares were issued to
non-affiliate consultants of Spring Fortune, and the remaining 16,007,400 ordinary shares were issued to Spring
Fortune’s shareholder and designees of Spring Fortune’s shareholder. In addition, the 2011 incentive targets were
achieved, and Spring Fortune is entitled to an 3,103,000 ordinary shares, which we currently expect will be issued to Spring
Fortune’s shareholder and its shareholder’s designees. Therefore, following the issuance of the 2011 incentive
shares and assuming that none of the ordinary shares have been transferred, it is currently expected that Spring
Fortune and/or its affiliates will be the holders of 28,839,400 ordinary shares, or approximately 68.8% of the outstanding
ordinary shares of the Company, giving the affiliates of Spring Fortune the ability to substantially control our operations.
For example, such a block of securities effectively insures that the affiliates of Spring Fortune have the ability to elect
our directors.
If all of the 3,103,000 additional
incentive shares are issued, Spring Fortune and its affiliates will be the holders of ordinary shares of 31,942,400 ordinary
shares, or approximately 71.0% of the outstanding ordinary shares of the Company (assuming no other ordinary shares are
issued and that none of the ordinary shares have been transferred).
We may be classified as a passive
foreign investment company (“PFIC”), which could result in adverse U.S. federal income tax consequences to U.S. investors.
In general, we will be treated as a PFIC for
any taxable year in which either (1) at least 75% of our gross income (including our pro-rata share of the gross income of certain
25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including
our pro-rata share of the assets of certain 25% or more-owned corporate subsidiaries) is attributable to assets that produce,
or are held for the production of, passive income. Passive income generally includes, without limitation, dividends, interest,
rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or
portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this Annual Report captioned
“Taxation—United States Federal Income Taxation—General” under Item 10.E.) of our ordinary shares, the
U.S. Holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
Based on the composition (and estimated values) of the assets and the nature of the income of us and our subsidiaries during our
2011 taxable year, we do not believe that we will be treated as a PFIC for such year. However, because we have not performed a
definitive analysis as to our PFIC status for our 2011 taxable year, there can be no assurance in respect to our PFIC status for
our 2011 taxable year. There also can be no assurance in respect to our status as a PFIC for our current (2012) taxable year or
any future taxable year. U.S. Holders of our ordinary shares are urged to consult their own tax advisors regarding the possible
application of the PFIC rules. See the discussion in the section of this Annual Report under Item 10.E entitled “Taxation—United
States Federal Income Taxation—U.S. Holders—Passive Foreign Investment Company Rules.”
The Macau government may decide
that the practice of our promoters to issue credits to gaming patrons is in violation of the Gaming Credit Law.
Macau Law No. 5/2004, enacted on June 14, 2004
(the “Gaming Credit Law”) governs the granting of gaming credits in the MSAR, and forbids the assignment or transfer
in any form of the power to grant gaming credits. For the past 20 years, it has been customary practice in Macau that casinos issue
credits to VIP gaming promoters in the form of nonnegotiable chips that can only be used by patrons in that gaming promoter’s
VIP gaming room. The chips may not be redeemed for cash or exchanged for negotiable chips or other goods or services. The VIP gaming
promoters then issue such credits, or their own credits, to gaming patrons either directly or through junket agents and collaborators
who in turn extend the credits to patrons. The junket agents and collaborators act as a customer representative between the VIP
gaming promoters and the patrons, and are representatives of the patrons. Therefore, the credits extended by VIP gaming promoters
to junket agents and collaborators are actually credits issued to gaming patrons under the Gaming Credit Laws. However, if the
Macau government in the future imposes a law governing agents in extending credits to gaming patrons, then we will be required
to change our operations to comply with such law, which may result in a decrease in revenue.
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ITEM
4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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Our legal and commercial name is “Asia
Entertainment & Resources Ltd.” We are a Cayman Islands exempted company. Our principal place of business is located
at Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong, telephone number 852-2111-9220. On February 2, 2010, we
acquired all of the outstanding capital stock of AGRL, a Hong Kong company that, through “profit interest agreements”
between its subsidiaries and affiliated companies known as VIP gaming promoters, receive the profit streams from gaming operations
conducted by the VIP gaming promoters. In connection with the acquisition, we changed our name from “CS China Acquisition
Corp.” to “Asia Entertainment & Resources Ltd.” Prior to our acquisition of AGRL, we had no operating business.
Initial Public Offering
On August 15, 2008, we consummated our IPO of
4,800,000 units at $6.00 per unit. On August 21, 2008, we consummated the closing of an additional 720,000 units that were subject
to the underwriters’ over-allotment option. Each unit consisted of one ordinary share and two warrants, each entitling the
holder to purchase one ordinary share at an exercise price of $5.00 until August 10, 2013. Simultaneously with the consummation
of IPO, we sold an aggregate of the 3,608,000 warrants at $0.50 per warrant (for an aggregate purchase price of $1,804,000) in
a private placement to our founders. Gross proceeds from the IPO (including from the private placement of warrants and exercise
of the underwriters’ over-allotment option) were $34,924,000. We paid a total of $1,324,800 in underwriting discounts and
commissions (after deferring $993,600 that was paid to the underwriters upon the consummation of our acquisition of AGRL) and for
costs and expenses related to the IPO. After deducting the underwriting discounts and commissions and offering expenses, the total
net proceeds to us from the IPO (including the over-allotment option and the private sale) were $33,280,880, of which $32,899,200
was deposited into the trust account and the remaining proceeds became available to be used to provide for business, legal and
accounting due diligence on prospective business combinations and continuing general and administrative expenses.
Pursuant to the Warrant Agreement between the
Company and Continental Stock Transfer and Trust Company, our ordinary share purchase warrants were redeemed for cash at the redemption
price of $0.01 per warrant on October 28, 2010. 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 October 28, 2010, the Warrants
not exercised were no longer exercisable for ordinary shares and the holders only have the right to receive the redemption price.
The Acquisition
On October 6, 2009, we entered into a Stock
Purchase Agreement (the “Purchase Agreement”) with AGRL and Spring Fortune, a British Virgin Islands company, that
provided for the purchase by us from Spring Fortune of all of the outstanding capital stock of AGRL. The Purchase Agreement was
subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010, and April 18, 2011 and we acquired all of the outstanding
capital stock of AGRL on February 2, 2010.
Pursuant to the Purchase Agreement, as amended,
the aggregate consideration paid by us to Spring Fortune for the shares of AGRL stock was (a) 10,350,000 ordinary shares that were
issued upon the closing of the acquisition to Spring Fortune, Kenworth Capital, Inc., a consultant of Spring Fortune, and Blum
& Co., Inc. and Nuero International Company Limited, each a designee of Kenworth Capital, Inc. and (b) 4,210,000 ordinary shares
that were issued upon the filing of the Annual Report on Form 20-F for the 2010 fiscal year. Of the upfront shares, 9,729,000
shares were issued to Spring Fortune and subsequently distributed to its shareholder and its shareholder’s designees and
an aggregate of 621,000 shares were issued to Kenworth Capital, Inc., Blum & Co., Inc. and Nuero International Limited.
In addition to the ordinary shares described
above, Spring Fortune was entitled to receive ordinary shares for each of the years 2009, 2010, 2011, and 2012 in which AGRL has
net after tax income that equals or exceeds the target specified for such year in the Purchase Agreement, as amended (the
“Incentive Target”), as follows:
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Year
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Incentive Target
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Incentive Share
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|
|
2009
|
|
|
$16,000,000 to $16,999,999
|
|
|
|
1,150,000
|
|
|
|
|
|
$17,000,000 to $17,999,999
|
|
|
|
2,464,000
|
|
|
|
|
|
$18,000,000 to $18,999,999
|
|
|
|
3,981,000
|
|
|
|
|
|
$19,000,000 to $19,999,999
|
|
|
|
5,750,000
|
|
|
|
|
|
$20,000,000 and above
|
|
|
|
7,841,000
|
|
|
2010
|
|
|
$36,800,000 to $37,799,999
|
|
|
|
4,210,000
|
|
|
|
|
|
$37,800,000 to $38,799,999
|
|
|
|
6,300,000
|
|
|
|
|
|
$38,800,000 to $39,799,999
|
|
|
|
8,069,000
|
|
|
|
|
|
$39,800,000 to $40,799,999
|
|
|
|
9,586,000
|
|
|
|
|
|
$40,800,000 to $41,799,999
|
|
|
|
10,900,000
|
|
|
|
|
|
$41,800,000 and above
|
|
|
|
12,050,000
|
|
|
2011
|
|
|
$65,000,000 and above
|
|
|
|
2,573,000
|
|
|
2012
|
|
|
$78,000,000 and above
|
|
|
|
2,573,000
|
|
Also, for each of the years 2010, 2011 and
2012, we will issue to Spring Fortune or its designees 530,000 ordinary shares if AGRL has adjusted net income equal to or
greater than $60 million, $78 million, and $94 million, respectively.
AGRL’s net income after taxes for
2009 was $15,545,463. Accordingly, the Incentive Targets for 2009 were not met and no additional shares were issued
with respect to that year. AGRL’s net income after taxes for 2010 was $41,810,004. Accordingly, the Incentive Targets
for 2010 were met, and Spring Fortune and its affiliates were issued an aggregate of 12,050,000 ordinary shares with respect
to that year; however, Spring Fortune did not earn the additional 530,000 ordinary shares for the year ended December 31,
2010. AGRL’s net income after taxes for 2011 was $80,144,002. Accordingly, the Incentive Targets for 2011 were met, and
an aggregate of 2,573,000 ordinary shares will be issued to Spring Fortune or its designees. Spring Fortune also earned the
additional 530,000 ordinary shares for the year ended December 31, 2011, so an aggregate of 3,103,000 ordinary shares will be
issued to Spring Fortune or its designers following the filing of this Annual Report.
Acquisition of King’s Gaming Promotion Limited
On November 15, 2010, we consummated the transactions
contemplated by that certain Profit Interest Purchase Agreement dated as of November 10, 2010 (the “Kings Gaming Purchase
Agreement”) among us, King’s Gaming, Mr. Mok and Mr. Wong (collectively, the “Seller”), whom collectively
own 100% of the equity interests of King’s Gaming, pursuant to which the Company acquired 100% of the profit interest in
King’s Gaming (the “Kings Gaming Acquisition”). Mr. Wong is the brother of Vong Hon Kun, our Chief Operating
Officer, and owned 4% of King’s Gaming immediately prior to the acquisition.
Pursuant to the Kings Gaming Purchase Agreement,
King’s Gaming sold to us the Profit Interest (as defined below) pursuant to a separate Profit Interest Agreement entered
into between King’s Gaming and Billion Boom International Limited, a company incorporated in the British Virgin Islands and
our wholly owned subsidiary. The Profit Interest was assigned to us at the closing as of November 1, 2010. Following the closing,
we have the right to restructure the management and organizational structure of King’s Gaming. For purposes of the Kings
Gaming Purchase Agreement, “Profit Interest” means the right, title, interest and benefits in and to 100% of the net
operating profit generated by King’s Gaming at the VIP gaming room located at the Venetian Macao-Resort-Hotel located in
Taipa, Macao.
We purchased the Profit Interest for an aggregate
amount of up to (i) US$36,000,000, of which US$9,000,000 was paid at the closing, and (ii) 1,500,000 ordinary shares (the “Purchase
Price”). The balance of up to 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 us until paid to the Seller in accordance with the terms of the Kings Gaming 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 our audit committee. 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.
In addition, as more fully set forth below,
we 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”). 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.
The Earnout Shares, the Incentive Shares and
the Additional Incentive Shares shall be released and issued to the Seller as follows:
|
|
a.
|
In the event the Minimum Gross Profit Requirement for fiscal year 2011 is achieved, the Seller shall receive 500,000 Earnout
Shares and for each US$1,000,000 in which the Minimum Gross Profit Requirement for such year is exceeded, 10,000 Additional Incentive
Shares.
|
|
|
b.
|
In the event the Gross Profit of US$7,380,000 for fiscal year 2012 is achieved, the Seller shall receive 500,000 Earnout Shares
and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
|
|
c.
|
In the event the Gross Profit of US$8,860,000 for fiscal year 2013 is achieved, the Seller shall receive 500,000 Earnout Shares
and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
|
|
d.
|
In the event the Gross Profit of US$9,740,000 for the fiscal year 2014 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
|
|
e.
|
In the event the Gross Profit of US$10,720,000 for fiscal year 2015 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
|
|
f.
|
In the event the Gross Profit of US$11,790,000 for fiscal year 2016 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
|
|
g.
|
In the event the Gross Profit of US$12,970,000 for fiscal year 2017 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
|
|
h.
|
In the event the Gross Profit of US$14,260,000 for fiscal year 2018 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
|
|
i.
|
In the event the Gross Profit of US$15,690,000 for fiscal year 2019 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
|
|
j.
|
In the event the Gross Profit of US$17,260,000 for fiscal year 2020 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
|
King’s Gaming achieved approximately $8.2
million of gross profit for the year ended December 31, 2011, and, accordingly, and the Seller shall receive an aggregate of 520,000
Earnout Shares and Additional Incentive Shares following the filing of this Annual Report.
Other Events
In January 2011, Sang Heng increased the number
of gaming tables from 11 to 12 at the Galaxy Star World Hotel.
On April 18, 2011, our board of directors approved
the opening of a new VIP gaming room at the Galaxy Macau Resort on the Cotai Strip, through Sang Heng Gaming Promotion Company
Limited. The VIP gaming room currently has 12 tables and opened on May 15, 2011.
On June 11, 2011, the VIP gaming room at the
MGM Grand Hotel and Casino operated through Iao Pou Gaming Promotion Limited was closed.
The Macau Gaming Industry
Macau is a part of the territory of the People’s
Republic of China, located on China’s southeast coast to the west of the Pearl River delta. The Macau Special Administrative
Region (the “MSAR”) was established on December 20, 1999, after Macau was administered by Portugal for more than 400
years. Macau consists of the Macau peninsula and the islands of Taipa and Coloane. Three bridges link the peninsula to Taipa while
the two islands are connected by the land reclamation area known as Cotai.
Macau has been one of the most rapidly growing
economies in Asia since the liberalization of the gaming industry in 2002 and it is also the only territory within China where
casino operations have been legalized. Macau is one of the most popular destinations for gaming in Asia and has more casinos than
any other region in Asia. In 2011, total revenues generated by casinos in Macau were approximately $33.5 billion, more than four
times the revenues generated by the Las Vegas Strip during the same period (source: Macau Gaming Inspection and Coordination Bureau
(“DICJ”)).
The gaming industry and tourism comprise the
largest components, and are the major growth drivers, of Macau’s economy. The gaming industry is the most important contributor
to the economy, with almost 70.0% of Macau’s gross domestic product in 2009, 86.0% of Macau’s public revenues in 2010
and 88.4% of public revenues in the first 11 months of 2011 being derived from gaming and gaming-related industries. The sector
contributed $11.36 billion in direct tax to the MSAR in the first eleven months of 2011, up 46.2% when compared to the same period
in 2010.
Although Macau was affected by the 1997 Asian
financial crisis, the global financial downturn in 2001 and the impact of SARS in 2003, the economy rebounded and the Gross Domestic
Product (“GDP”) grew at an annual growth rate of 27.3% in 2004, 6.9% in 2005, 16.5% in 2006, 26.0% in 2007 and 12.9%
in 2008. For 2009, Macau’s GDP recorded negative growth for the first two quarters but returned to positive growth in the
third quarter and ended up 1.3% year- on-year. AGRL and AGRL’s VIP gaming promoters believe that this growth was largely
driven by the liberalization of Macau’s gaming industry, the significant investments associated with the expansion and development
of the gaming industry, a rapid rise in the number of visitors from mainland China and an increase in Macau’s spending on
public infrastructure projects. GDP was $27.2 billion and $26.0 billion for 2010 and for the first nine months of 2011, respectively,
and the GDP real growth rate was 27.1% for 2010 and 20.9%, 23.4%, and 21.1% for the first, second and third quarters of 2011, respectively.
Due in part to the global financial downturn,
gaming revenues in Macau decreased from $7.29 billion in the first half of 2008 to $6.22 billion in the second half of that year.
Macau gaming revenues increased to $6.43 billion in the first half of 2009 and then increased to $8.5 billion in the second half
of 2009, resulting in a total of $14.93 billion for the year, a 10.5% year-on-year increase over 2008. For 2010, gaming revenues
totaled $23.5 billion, 57.8% higher than the $14.93 billion reported in 2009. In 2011, gaming revenues totaled $33.50 billion.
In 2007, Macau’s gaming revenue increased
more than 45% compared to 2006, surpassing the Las Vegas Strip as the world’s biggest casino market, followed by Atlantic
City. The following table shows the gaming revenue of Macau compared to that of the Las Vegas Strip and Atlantic City between 2005
and 2011 (sources: DICJ, Las Vegas Review Journal and UNLV Center for Gaming Research).
Gaming Revenue (Selected Locations)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
U.S. $ Billion
|
|
|
Macau
|
|
|
10.34
|
|
|
|
13.51
|
|
|
|
14.93
|
|
|
|
23.50
|
|
|
|
33.50
|
|
|
Las Vegas
|
|
|
6.83
|
|
|
|
6.12
|
|
|
|
5.55
|
|
|
|
5.77
|
|
|
|
6.09
|
|
|
Atlantic City
|
|
|
4.92
|
|
|
|
4.54
|
|
|
|
3.94
|
|
|
|
3.57
|
|
|
|
3.32
|
|
Macau VIP Gaming Market
VIP gaming rooms are well appointed suites generally
located within a large casino that provide luxury accommodations and privacy exclusively for gambling by high-tier gaming patrons.
VIP gaming has historically been the major component of Macau’s gaming industry. VIP gaming patrons are typically high-stakes
gaming patrons who play VIP baccarat almost exclusively in dedicated VIP gaming rooms or designated casino areas. VIP gaming operations
are generally less subject to seasonal variations than, and face limited competition from, mass market gaming operations and non-casino
gaming activities.
VIP gaming patrons are usually brought to VIP
gaming rooms by VIP gaming promoters. Marketing and promotion of VIP gaming rooms through this business model is implemented between
concessionaires that are granted licenses to operate casinos and casino games in Macau (or sub-concessionaires that operate casinos
and casino games under an administrative contract with a concessionaire) and their gaming promoters. Gaming promoters, particularly
VIP gaming promoters, are incentivized to bring VIP gaming patrons to designated VIP gaming rooms by compensation systems based
on the net-win of the VIP gaming rooms and/or the amount of non-redeemable chips sold in the VIP gaming rooms pursuant to contracts
with a concessionaire or sub-concessionaire.
Macau Mass Gaming Market
Since the granting of new concessions in 2002
and the Chinese government’s implementation of the Facilitated Individual Travel Scheme (“FITS”) by the Macau
government, Macau’s gaming industry has witnessed significant growth in mass market casino gaming operations. However, most
mass market gaming patrons are not high-stakes gaming patrons. Mass market gaming patrons’ desire to visit casinos may be
influenced by a number of factors, such as the variety and quality of services and amenities offered, the ambience, promotions
and diversity of games in the casinos, the location of and ease of transportation to the casinos, and the presence of other attractions
and gaming-related facilities. Visits to casinos by mass market gaming patrons may also be negatively affected by a worsening economic
environment while those by high-tier gaming patrons historically have been much less affected.
Revenue generated by table games in Macau has
historically exceeded revenue generated by slot machines by a wide margin. Baccarat has been the most popular table game in Macau
since the 1970s, followed by various other traditional western and Asian casino games, such as blackjack and fish-prawn-crab. According
to the DICJ, in 2010 approximately 73.2% of gross revenue from casino games was derived from VIP baccarat and approximately 18.2%
of gross revenue from casino games was derived from baccarat played in the mass market sections in casinos.
The following table shows a breakdown of the
gross revenue from different casino games in Macau for the years 2005 to 2011 (source: Macau Statistics and Census Bureau (“DSEC”)):
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
VIP baccarat
|
|
$
|
3.59
|
|
|
$
|
4.58
|
|
|
$
|
6.94
|
|
|
$
|
9.19
|
|
|
$
|
9.98
|
|
|
$
|
16.94
|
|
|
$
|
24.42
|
|
|
% change (year-on-year)
|
|
|
-3
|
%
|
|
|
28
|
%
|
|
|
52
|
%
|
|
|
32
|
%
|
|
|
8.6
|
%
|
|
|
70
|
%
|
|
|
44
|
%
|
|
Mass market baccarat and mini-baccarat
|
|
$
|
1.29
|
|
|
$
|
1.49
|
|
|
$
|
2.05
|
|
|
$
|
2.65
|
|
|
$
|
3.19
|
|
|
$
|
4.39
|
|
|
$
|
6.06
|
|
|
% change (year-on-year)
|
|
|
74
|
%
|
|
|
15
|
%
|
|
|
38
|
%
|
|
|
29
|
%
|
|
|
20
|
%
|
|
|
38
|
%
|
|
|
38
|
%
|
|
Other mass market table games
|
|
$
|
0.69
|
|
|
$
|
0.73
|
|
|
$
|
0.90
|
|
|
$
|
1.10
|
|
|
$
|
0.95
|
|
|
$
|
1.09
|
|
|
$
|
1.45
|
|
|
% change (year-on-year)
|
|
|
10
|
%
|
|
|
6
|
%
|
|
|
23
|
%
|
|
|
22
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
33
|
%
|
|
Slot machines
|
|
$
|
0.15
|
|
|
$
|
0.26
|
|
|
$
|
0.45
|
|
|
$
|
0.57
|
|
|
$
|
0.81
|
|
|
$
|
1.08
|
|
|
$
|
1.42
|
|
|
% change (year-on-year)
|
|
|
100
|
%
|
|
|
67
|
%
|
|
|
75
|
%
|
|
|
27
|
%
|
|
|
42
|
%
|
|
|
33
|
%
|
|
|
31
|
%
|
|
Total
|
|
$
|
5.72
|
|
|
$
|
7.06
|
|
|
$
|
10.34
|
|
|
$
|
13.51
|
|
|
$
|
14.93
|
|
|
$
|
23.50
|
|
|
$
|
33.36
|
|
Demand for Gaming and Gaming-Related Services
According to the DSEC, approximately 27.90 million
visitors arrived in Macau in 2011, up by 11.6% over 2010, of which approximately 16.1 million, or 57.7%, were from mainland China,
as compared to 53.0% in 2010. Gaming patrons can reach Macau in a relatively short period of time using various means of transportation,
including by car or bus from Guangdong province, by high-speed ferry or helicopter from Hong Kong and Shenzhen and by air from
elsewhere in China and other Asian countries.
AGRL believes that the increase in the number
of gaming and gaming-related facilities is likely to continue Macau’s transformation into a premier integrated gaming and
tourism centre. The completion of new world-class gaming and gaming-related facilities in Macau could attract a greater number
of gaming patrons and potentially result in an increase in total gaming revenue in Macau.
The following public policies implemented by
the Chinese government are expected to continue to have a positive influence on the development of the gaming industry of Macau:
FITS.
Since July 2003, residents
of selected areas of mainland China have been allowed to visit Macau and Hong Kong under FITS, whereby approval requirements are
significantly reduced and the application process is expedited. Since the introduction of FITS, visitors to Macau from mainland
China have outnumbered visitors from Hong Kong. FITS has been extended to additional areas of mainland China and, at December
31, 2011, encompassed 49 cities, including Beijing, Chongqing, Guangzhou, Shanghai and Tianjin.
Chinese Government Policy With Respect to
Gaming.
Macau is the only region in China offering legal casino gaming and the Chinese government has strictly enforced
its regulations prohibiting domestic gaming operations and discouraging unlicensed gaming operations along China’s borders.
Chinese Government’s Relaxation of
Foreign Exchange Controls.
The Chinese government has recently undertaken a number of measures to relax its controls
on the national currency,
renminbi
. Currently, each PRC resident is allowed to carry a maximum $5,000 in a single trip abroad,
but mainland China visitors to Macau may now charge spending on their credit cards or bank charge cards.
The growth of Macau’s gaming industry
has correlated positively with the continued economic growth and development of mainland China. AGRL believes that the emergence
of the middle class in China represents a significant long-term growth opportunity for Macau’s gaming industry. However,
there is no guarantee that the economic growth in China will continue at its historic pace.
Macau also draws a significant number of visitors
from Hong Kong. The principal means of transportation to Macau from Hong Kong is the one hour high-speed ferry service.
In addition to visitors from mainland China
and Hong Kong, a substantial number of visitors to Macau are from nearby countries and territories in Southeast Asia, including
Taiwan. The following table illustrates the number of visitors by region with respect to the periods indicated (source: DSEC):
|
|
|
2007
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2010
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
Mainland China
|
|
|
14,866.4
|
|
|
|
55.1
|
|
|
|
11,613.1
|
|
|
|
50.6
|
|
|
|
10,989.5
|
|
|
|
50.5
|
|
|
|
13,229.1
|
|
|
|
53.0
|
|
|
|
16,162.7
|
|
|
|
57.7
|
|
|
Hong Kong
|
|
|
8,174.1
|
|
|
|
30.3
|
|
|
|
7,016.4
|
|
|
|
30.6
|
|
|
|
6,727.8
|
|
|
|
30.9
|
|
|
|
7,466.1
|
|
|
|
29.9
|
|
|
|
7,582.9
|
|
|
|
27.0
|
|
|
Taiwan
|
|
|
1,444.1
|
|
|
|
5.3
|
|
|
|
1,315.8
|
|
|
|
5.7
|
|
|
|
1,292.5
|
|
|
|
5.9
|
|
|
|
1,292.7
|
|
|
|
5.2
|
|
|
|
1,215.2
|
|
|
|
4.3
|
|
|
Others
|
|
|
2,508.4
|
|
|
|
9.3
|
|
|
|
2,987.8
|
|
|
|
13.1
|
|
|
|
2,743.3
|
|
|
|
12.7
|
|
|
|
2,977.5
|
|
|
|
11.9
|
|
|
|
3,041.5
|
|
|
|
11.0
|
|
|
Total
|
|
|
26,993.0
|
|
|
|
100.0
|
|
|
|
22,933.1
|
|
|
|
100.0
|
|
|
|
21,753.1
|
|
|
|
100.0
|
|
|
|
24,965.4
|
|
|
|
100.0
|
|
|
|
28,002.3
|
|
|
|
100.0
|
|
Both VIP and mass-market gaming have benefited
from the increasing number of visitors to Macau. We expect the strong growth rate will continue because of the following factors:
Opening of New Casinos and Resorts.
The
opening of new mixed-use developments, together with the entertainment business, sports events, conventions, exhibitions and trade
shows that they will bring to Macau, will attract more regional visitors and visitors from outside the Asia-Pacific region.
UNESCO World Heritage List.
The
MSAR government has devoted substantial resources to marketing campaigns that promote Macau’s history, cultural heritage
and hotel and convention facilities, aiming to turn Macau into a premier integrated gaming and tourism centre. On July 15, 2005,
the United Nations Educational, Scientific and Cultural Organization (UNESCO) identified and inscribed the “Historic Centre
of Macau,” comprising eight squares and twenty-two monuments, on its prestigious World Heritage List, pursuant to the terms
of the Convention Concerning the Protection of the World Culture and Natural Heritage.
In addition, we believe that improved transportation
to and within Macau will also contribute to continued growth in visitation. A number of infrastructure projects to facilitate travel
have been recently completed or are in various stages of planning and development:
Hong Kong-Zhuhai-Macau Bridge.
The
project linking the three areas would include a bridge with a total length of around 30 km, boundary crossing facilities, access
roads and associated works. In January 2007, the three local governments established the HZMB Task Force to implement the project,
which is expected to open around 2015. This bridge is currently under construction.
Expansion of Border Gate
. The expansion
of the border gate checkpoint in the Portas do Cerco area of Northern Macau is expected to increase the capacity of the border
from 300,000 people per day to more than 500,000 people per day.
Guangzhou-Zhuhai Super Highway
. This
highway opened in 2004 and links Macau to Hengqin Island, a PRC government-mandated strategic new zone planned for development
into a commercial, residential and resort destination.
Inner Harbour Ferry Terminal.
In
February 2008, the Macau Maritime Administration opened the new Inner Harbour Ferry Terminal, providing increased berths and customs
counters for transfer to and from neighboring mainland China cities.
Lotus Flower Bridge and Boundary Crossing.
Renovations
have been completed for the bridge linking Cotai and Hengqin Island in mainland China, and the associated boundary crossing, which
reopened to traffic in May 2007.
Macau International Airport Expansion.
With the continuous upgrade in the capacity
and facilities of the Macau International Airport, it is expected the airport will be equipped to receive 5.6 million passengers
per year by 2015 and 15 million passengers per year after 2030. This
additional capacity is expected to increase the number of routes flown to and from the Macau international Airport, increasing
the number of persons who could potentially easily reach this market.
Macau Light Railway System.
The
MSAR government has conducted public consultations concerning the proposed elevated light rail system and reviewed proposals for
consultancy. It was announced in October 2006 that the railway could be in operation four years after acceptance of tender. The
first phase would extend approximately twenty kilometers, with twenty-three stations starting at the border gate and serving the
Macau peninsula including the Macau Maritime Terminal, as well as Cotai, Macau International Airport and the new ferry terminal
at Pac On. Phase I of the Macau Light Railway System commenced construction in February 2012 and is due to be in operation in May
2015, according to an announcement from the Bureau for Transport Infrastructure (GIT) published in the local press.
Pac on Ferry Terminal.
A temporary
ferry terminal on Taipa near Macau International Airport opened in October 2007. It aims to handle increasing visitor traffic between
Hong Kong and Macau and facilitate sea linkage service for air transfer.
Guangzhou-Zhuhai Intercity Mass Rapid Transit
(‘‘MRT’’).
The first stage of the MRT opened on January 7, 2011, between Guangzhou South
Station and Zhuhai North. Travel time between Guangzhou and Macau is expected to be between 40 and 50 minutes.
Travel Restrictions on Chinese Citizens
Since May 2008, the Chinese government
has imposed restrictions on travel to Macau and may impose further restrictions in the future. In May and July 2008, the Chinese
government readjusted its visa policy toward Macau and limited the number of visits that some mainland Chinese citizens may make
to Macau in a given time period. In September 2008, it was publicly announced that mainland Chinese citizens with only a Hong Kong
visa and not a Macau visa could no longer enter Macau from Hong Kong. In addition, in May 2009, China also began to restrict the
operation of “below-cost” tour groups involving low up-front payments and compulsory shopping. Due to the popularity
of these tours with mainland Chinese citizens, the number of visitors to Macau declined. Further restrictions on travel from China
or other countries to Macau or any increase in prices of tours to Macau as a result of new regulations on travel agencies or otherwise
may reduce the number of visitors to Macau.
Concessionaires and Sub-Concessionaires
Six entities are currently authorized to operate
casinos in Macau as either concessionaires or sub-concessionaires:
Concessionaires:
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Sociedade de Jogos de Macau, S.A. (“SJM”);
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Galaxy Casino, S.A. (“Galaxy”); and
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Wynn Resorts (Macau), S.A. (“Wynn Macau”).
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Sub-Concessionaires:
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·
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Venetian Macau, S.A. (“Venetian Macau”);
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·
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Melco PBL Gaming (Macau) Limited (“Melco PBL”); and
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·
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MGM Grand Paradise Limited (“MGM Grand Paradise”).
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These concessionaires and sub-concessionaires
have committed to invest in Macau pursuant to their respective concession and sub-concession contracts in order to develop projects
such as casinos, hotels, convention facilities and facilities for retailing, dining, entertainment and recreation. AGRL believes
that the substantial financial commitment by the concessionaires and sub-concessionaires will stimulate further revenue growth
in Macau’s gaming and tourism industries.
As at December 31, 2011, SJM operated 20 of
the 34 casinos in Macau, Galaxy operated five casinos, Venetian Macau operated three casinos, Melco PBL operated three casinos
and Wynn Macau and MGM Grand Paradise each operated one casino (Source: DICJ).
Galaxy was awarded a gaming concession in 2002
and opened its six casinos between 2004 and 2011. Galaxy entered into a sub-concession with Venetian Macau in December 2002. Venetian
Macau currently operates three casinos in Macau, which opened in 2004, 2007 and 2008. Venetian Macau is reported to be opening
additional casinos in 2012.
Wynn Macau was also awarded a concession in
2002 and opened its casino in September 2006. Wynn Macau entered into a sub-concession with Melco PBL in 2006. Melco PBL operates
three casinos, of which its latest, the $2.1 billion City of Dreams project located on the Cotai Strip, opened on June 1, 2009,
and the others opened in 2007 and 2008.
SJM was awarded its concession in March 2002
and currently operates 20 casinos. SJM entered into a sub-concession with MGM Grand Paradise on April 19, 2005. MGM Grand Paradise
opened its first casino in December 2007.
With the recovery of Macau’s gaming market,
some of the concessionaires and sub-concessionaires have increased their investments in gaming and gaming-related facilities. For
example, the Galaxy mega resort on the Cotai Strip opened in the second quarter of 2011, Sands China on the Cotai Strip is scheduled
to open in the first half of 2012.
VIP Gaming Promoters
The gaming promoter system began in Las Vegas
in the mid-1950s. In Las Vegas, gaming promoters are also known as casino junkets. In those days, casino operators would hire representatives
to fill a plane with qualified patrons. Typically, the patrons might receive free airfare, free hotel accommodations, free meals
and free shows in exchange for their commitment to gamble a specific number of hours per day at an explicit average bet size. The
casinos believed that the patrons would lose more than their out of pocket expenses for bringing, housing and feeding them. Today,
junkets function in a very similar way in Las Vegas, with the number of free items a patron receives based on the number of chips
that patron turns over.
VIP Gaming Promotion in Macau
Unlike in Las Vegas, the gaming promoter system
in Macau developed to promote VIP gaming operations. A VIP gaming room is an individual room within a casino specifically designed
and designated for VIP room gaming patrons’ usage only. A VIP gaming room has its own cage, which functions as a financial
vehicle between the casino and the VIP gaming promoter. All properties of the VIP gaming room belong to the casino, the dealers
and the gaming managers are employees of the casino, and the gaming operations of a VIP gaming room are run by the casino. In effect,
only the marketing efforts have been contracted out to the VIP gaming promoters, which efforts include the making of loans to agents
and collaborators. Unlike in Las Vegas, in Macau, it is this VIP room gaming segment, not the mass market, that is driving the
growth of its gaming industry. For 2011, VIP gaming operations in Macau amounted to $24.4 billion, or 72.9% of the gross revenue
from casino games.
Initially, U.S. companies operating in Macau
did not emphasize the importance of VIP gaming rooms. However, these U.S. companies quickly realized the importance of VIP gaming
rooms, as demonstrated by disclosures contained in the prospectuses of a number of companies operating casinos in Macau, including
Melco Crown Entertainment Limited, SJM Holdings Limited, Wynn Macau, Limited, and Sands China Ltd. Such disclosures indicate that
the various casino operators rely on VIP gaming promoters to generate revenue. Because VIP gaming promoters play such an important
role in the Macau gaming industry, they are heavily regulated by the government.
The gaming promoter system in Macau was developed
to promote VIP gaming operations. A VIP gaming promoter enters into a gaming promoter agreement (sometimes referred to as junket
representative agreements) with the concessionaire or sub-concessionaire pursuant to which the VIP gaming promoter agrees to provide
promotional services to the concessionaire or sub-concessionaire in consideration for a commission or other forms of remuneration,
including, for example, a share of net-win or percentage of rolling chip turnover from the VIP gaming room, fees and allowances.
The VIP gaming promoters then enter into arrangements with the junket agents (also known as collaborators) who have the direct
relationship with the gaming patrons and are relied upon by the VIP gaming promoters to direct gaming patrons to their VIP gaming
rooms. A concessionaire or sub-concessionaire may enter into gaming promoter agreements with multiple VIP gaming promoters for
operating at a single casino, all in competition with each other.
Under the gaming promoter agreements, VIP gaming
promoters are required to purchase non-negotiable chips from the concessionaires/sub-concessionaires and provide them to VIP gaming
patrons either directly or indirectly through their junket agents. The gaming promoter agreement may be terminated by (i) mutual
agreement, or (ii) if any party to the agreement cannot carry out its obligations under the agreement and this results in a material
breach of the terms of the agreement. In addition, the agreement is voidable upon the death or deregistration of the VIP gaming
promoter or the bankruptcy of any party to the agreement. Unless an agreement is terminated or notice is served by a party thirty
days prior to the date on which the agreement expires, the agreement will be automatically renewed for a period of one to five
years until the end of the term of the concessionaires or sub-concessionaires’ concessions.
Rolling Chip Turnover
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.
“Non-negotiable chips” are specifically designed for VIP gaming patrons to allow casinos to calculate the commission
payable to VIP gaming promoters. Commissions are paid based on the total amount of “non-negotiable chips” purchased
by each gaming patron. VIP gaming promoters therefore require the gaming patrons to “roll,” from time to time, their
“cash chips” into “non-negotiable” chips for further betting so that they may receive their commissions
(hence the term “rolling chip turnover”). Through the VIP gaming promoters “non-negotiable chips” can be
converted back into cash at any time. Betting using rolling chips, as opposed to using cash chips, is also used by the DICJ to
distinguish between VIP table revenue and mass market table revenue.
Compensation Methods
Commissions paid to VIP gaming promoters are
calculated on a monthly basis. Generally, the different compensation methods provide VIP gaming promoters with the ability to diversify
their commission base to balance short-term volatility. During 2011, the AGRL VIP gaming promoters received 97% of their commissions
based on chip commission calculated by reference to monthly rolling chip turnover. In this arrangement, the casino bears the risk
of losses from the gaming operations.
Gaming wins are generally expressed in terms
of “net-win,” which is the difference between wins and losses from gaming to the casino operator. Win rates for VIP
gaming promoters are generally expressed as the net-win as a percentage of rolling trip turnover and depend upon a number of factors,
some beyond their control. In addition to the element of chance inherent in gaming, win rates are also affected by factors such
as the skill, experience and financial resources of the gaming patrons, the mix of games played and the amount of time spent at
the gaming tables and the volume of bets placed by the gaming patrons. Win rates may differ greatly over short time periods, such
as from quarter to quarter, resulting in volatility in periodic results of VIP game promoters.
In July 2009, all concessionaires and sub-concessionaires
in Macau entered into an agreement among themselves to cap gaming promoter commissions. Under this agreement, commission payments
to gaming promoters based on rolling chip turnover cannot exceed 1.25% of rolling chip volumes. The cap became effective on December
1, 2009. The agreement sets forth standards for what constitutes a commission to gaming promoters, including all types of payments,
either monetary or otherwise, 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, concessionaires and sub-concessionaires to report regularly to the
DICJ and permits the imposition of 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.
Credit Arrangements
The parties involved in VIP gaming frequently
enter into various credit arrangements, the ultimate goal of which are to provide credit to the gaming patrons for their gaming
activities. Thus, casino concessionaires and sub-concessionaires may grant credit to VIP gaming promoters who, in turn, may extend
credit to the agents or collaborators who have the direct relationships with the gaming patrons. The agents then may extend credit
to the gaming patrons. Such credit facilities may or may not be secured, depending upon the creditworthiness of the borrowers and
the relationship between the lender and borrower. In relatively rare circumstances, the VIP gaming promoters may extend credit
directly to the gaming patrons.
AGRL’s Gaming Operations
AGRL operates through six wholly owned subsidiaries
that were incorporated in the British Virgin Islands, listed in the table below. The principal business activities of the subsidiaries
are to hold profit interest agreements with the VIP gaming promoters that assign the profit streams from the gaming related businesses
of the VIP gaming promoters to the subsidiaries.
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Subsidiary
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Date of Incorporation
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Foxhill Group Limited (“Foxhill”)
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February 15, 2007
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Kasino Fortune Investments Limited (“Kasino Fortune”)
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February 16, 2007
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Well Mount International Limited (“Well Mount”)
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November 1, 2007
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Link Bond International Limited (“Link Bond”)
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November 1, 2007
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Billion Boom International Limited (“Billion Boom”)
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November 1, 2007
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Super Number Limited (“Super Number”)
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April 11, 2011
|
Foxhill, Kasino Fortune, Billion Boom and Super
Number are each a party to a profit interest agreement with a VIP gaming promoter, as described below. Well Mount and Link Bond
are each a party to a profit interest agreement with a VIP gaming promoter that is inactive.
The major shareholders and management of AGRL’s
VIP gaming promoters are members of AGRL’s management team who operate the VIP gaming promoters for the benefit of AGRL.
These individuals, Messrs. Lam Man Pou, Vong Hon Kun, Leong Siak Hung, and Mok Chi Hung have extensive experience in the gaming
business and long personal and business relationships among each other, some beginning as early as 1990. See the section entitled
“Information About the Directors and Executive Officers” under Item 6.A. herein.
The following companies are the Promoter
Companies:
VIP Gaming
Promoter
|
|
Date Formed
(Jurisdiction)
|
|
Location
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|
Major Shareholder(s)
|
|
AGRL Profit Interest
Agreement Party
|
|
MACAU
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Sang Heng Gaming Promotion Company Limited (“Sang Heng”)
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March 28, 2007 (Macau)
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Star World Hotel and Casino — Downtown Macau
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Lam Man Pou
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Kasino Fortune
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King’s Gaming Promotion Ltd. (“King’s Gaming”)
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April 15, 2008 (Macau)
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Venetian Resort Hotel — Cotai, Macau
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Mok Chi Hung
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Billion Boom
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Sang Lung Gaming Promotion Company Limited (“Sang Lung”)
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|
March 28, 2011
|
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Galaxy Macau Resort, Macau
|
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Lam Man Pou and Vong Hon Kun
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Super Number
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Iao Pou Gaming Promotion Limited (“Iao Pou”)
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May 27, 2009
(Macau)
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MGM Grand Hotel and Casino — Macau — Not currently operating
|
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Lam Chou In
|
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Foxhill
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Spring Gaming Promotion Limited (“Spring”)
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March 28, 2007 (Macau)
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Not currently operating
|
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Lam Man Pou
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NA
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Jinark Limited (“Jinark”)
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November 20, 2007 (British Virgin Islands)
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Not currently operating
|
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Lam Man Pou
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NA
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JEJU
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Champion Lion Limited (“Champion Lion”)
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November 14, 2009
(British Virgin Islands)
|
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Unicorn Hyatt Regency Casino — Jeju — Not currently operating
|
|
Leong Siak Hong and Vong Hon Kun
|
|
Link Bond
|
VIP Gaming
Promoter
|
|
Date Formed
(Jurisdiction)
|
|
Location
|
|
Major Shareholder(s)
|
|
AGRL Profit Interest
Agreement Party
|
|
Doowell Limited (“Doowell”)
|
|
November 20, 2007 (British Virgin Islands)
|
|
T.H.E. Hotel and Casino — Jeju — Not currently operating
|
|
Lam Man Pou
|
|
Well Mount
|
Sang Heng’s gaming promoter agreement
for the operation of the VIP gaming room at the Star World Hotel and Casino in Macau was entered into with Galaxy on September
4, 2009. Iao Pou’s gaming promoter agreement for the operation of the VIP gaming room at the MGM Grand Hotel and Casino was
entered into with MGM Grand Paradise on November 9, 2009. MGM Grand Paradise is the holder of a sub-concession granted by SJM.
The agreements related to the MGM Grand Paradise terminated in June 2011 upon the closing of the VIP gaming room operated there.
King’s Gaming’s promoter agreement for the operation of the VIP gaming room at the Venetian-Resort-Hotel on the Cotai
Strip, Macau was entered into with Venetian Macau on December 9, 2010. Venetian Macau is the holder of a sub-concession granted
by Galaxy. Sang Lung’s gaming promoter agreement for the operation of the VIP gaming room at the Galaxy Macau Resort was
entered into with Galaxy Casino Holdings Limited (“Galaxy”), the concessionaire currently authorized to operate the
Galaxy Resort.
The following diagram illustrates our current
corporate structure and the relationships with AGRL’s VIP gaming promoters that are currently active:
To carry out their promotional activities, AGRL’s
VIP gaming promoters have a team of over 1,500 gaming collaborators and junket agents who have direct relationships with VIP gaming
patrons, a significant percentage of whom are mainland Chinese nationals. Junket agents compete among themselves for VIP gaming
patrons primarily through personal service. The VIP gaming promoter pays commissions to its collaborators and junket agents based
on the rolling chip turnover of each individual collaborator or junket agent.
Day-to-day management and operation of the VIP
gaming rooms is contracted by the VIP gaming promoter to a management company that is responsible for hiring and managing all staff
needed for the operation. This includes local managers and executives to provide supervision, finance and cage personnel, public
relations, drivers and other service staff (waiters, cleaners, etc.). The VIP gaming promoters have entered into such agreements
with Pak Si Management and Consultancy Limited (“Pak Si”), owned by Ms. Tam Lai Ching, Mr. Vong’s sister-in-law,
pursuant to which Sang Heng pays Pak Si approximately US $180,000 per month for the VIP room at Star World Hotel; King’s
Gaming pays approximately US $103,000 per month for the VIP room at the Venetian Resort Hotel; and Sang Lung pays approximately
$180,000 per month for the VIP room at the Galaxy Resort, Macau. Pak Si must pay all salaries, benefits and other expenses of operation
out of such amounts. Total staff at each operation, including executives, is approximately 100 people. Such agreements are for
one-year terms effective January 1, 2010.
AGRL’s VIP gaming rooms are primarily
focused on high-stakes baccarat. In 2011, baccarat accounted for approximately 73.1% of total Macau casino winnings. The AGRL VIP
gaming promoters at the Galaxy Star World Hotel Casino, Galaxy Macau Resort, and Venetian Resort Hotel in Macau are paid on the
basis of 1.25% of rolling chip turnover. The AGRL VIP gaming promoters at the MGM Grand Hotel and Casino, which was closed in June
2011, was paid on the basis of 40.25% of gaming wins before expenses; if there are losses during the relevant period,
the VIP gaming promoter will reimburse the concessionaire or sub-concessionaire in accordance with the gaming promoter agreement.
AGRL’s VIP gaming promoters’ gross win rate as a percentage of rolling chips turnover has historically ranged between
approximately 1.1% and 4.5%.
Profit Interest Agreements
Current Macau laws do not allow non-Macau companies
such as AGRL to directly operate a gaming promotion business in Macau. Consequently, AGRL’s gaming promotion business is
operated through a series of contractual arrangements, including profits interest agreements, that enable AGRL to receive substantially
all of the economic benefits of AGRL’s VIP gaming promoters and exercise effective control over those VIP gaming promoters.
Pursuant to these arrangements, each VIP gaming
promoter enters into an agreement with the casino operator to operate a VIP gaming room in the casino. These agreements provide
that the VIP gaming promoter receives a commission of the type described above. The VIP gaming promoter then enters into a profit
interest agreement with an AGRL subsidiary, providing for the assignment to the subsidiary of 100% of the profits derived by the
VIP gaming promoter from its operation of the VIP gaming room. The manner of calculation of the profit is set out in an exhibit
to the profit interest agreement. All of the current profit interest agreements to which the AGRL subsidiaries are party provided
that such assignments were effective on February 2, 2010, the date of the consummation of our acquisition of AGRL.
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 our 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 and Vong
have agreed to make loans to AGRL for use by AGRL for working capital and to make loans to AGRL’s VIP gaming promoters. Pursuant
to the agreement relating to such loans, such loans will be in an amount not less than approximately US $19,300,000 on and after
February 2, 2010 (the date of the acquisition of AGRL by AERL) and not less than approximately US $45,000,000 on and after March
31, 2010 and until the agreement is terminated. At February 2, 2010, the amount of the funding advanced to AGRL by Messrs. Lam
and Vong was US $20,220,000 and as of December 31, 2011, the amount of funding advanced to AGRL by Messrs. Lam and Vong was approximately
$62,641,619. This funding commitment was to terminate at the end of the fiscal quarter that AGRL’s working capital was
not less than approximately US $100,000,000, exclusive of any working capital provided by Messrs. Lam and Vong. On April 18, 2011,
to memorialize such loans, we issued an interest-free convertible note for $30 million to each of Mr. Lam Man Pou and Mr. Vong
Hon Kun (for an aggregate amount of $60 million). The notes expire on April 18, 2014 and are convertible into our ordinary
shares at a price of $20 per share at the option of the holder and callable at our option at a price of $20 per share if the closing
price of our ordinary shares for any ten consecutive trading days exceeds $25. Messrs. Lam and Vong will also guaranty to AGRL
the repayment of all loans made by AGRL to the VIP gaming promoters. 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 to Messrs. Lam and Vong by AGRL pursuant
to the agreement.
Competition
There are a large number of VIP gaming promoters
in Macau and competition among them is intense. They first compete at the level of obtaining gaming promoter agreements with concessionaires
and sub-concessionaires. Then, because concessionaires and sub-concessionaires frequently enter into gaming promoter agreements
with a number of VIP gaming promoters to operate VIP gaming rooms in the same hotel, they compete against each other in efforts
to attract gaming patrons to their own VIP gaming rooms through their arrangements with junket agents and collaborators. Finally,
they compete with VIP gaming promoters who operate in other hotels in which they don’t have a presence.
One of the most critical factors in competing
successfully in this environment is the experience of management. In this regard, AGRL believes that it is favorably positioned
as the owners and managers of its VIP gaming promoters have been engaged in the specialized market of VIP gaming for over 20 years
and have developed an agent marketing program of over 1,600 agents with a client referral base throughout Asia. Another critical
factor is the level of services that are provided to the agents and collaborators and their gaming patrons. AGRL believes that
the level of such services that it provides is very high and quite competitive. A third competitive factor is the relationships
that exist between the VIP gaming promoters and the agents and collaborators, on the one hand, and between the agents and collaborators
and their VIP gaming patrons, on the other hand. AGRL makes great efforts to select agents and collaborators that have excellent
patron relationships and to maintain strong personal relationships with them once they are selected.
Because VIP gaming promoters are almost all
privately held companies, no public financial information is available as to their operations.
Business Strategy
We plan to expand AGRL’s operations in
Macau by looking for opportunities to promote new VIP gaming rooms that are under the 1.25% fixed commission model. We are also
considering the possibility of negotiating with the casino operators of our current VIP gaming rooms to increase the number of
tables or size of our operations in such rooms and are seeking opportunities to move the current VIP gaming room at the Venetian
Resort Hotel and Casino to a bigger room at the hotel where more tables can be operated.
AGRL believes that gaming revenue growth and
visitation to Macau have been, and will continue to be, driven by a combination of factors, including: (i) Macau’s proximity
to major Asian population centers; (ii) the liberalization of currency restrictions to permit Chinese travelers to take larger
sums of currency out of mainland China; (iii) the increase in regional wealth, leading to a large and growing middle- and upper
middle-class in China with more disposable income; (iv) infrastructure improvements that are expected to facilitate more convenient
travel to and within Macau; and (v) an increasing supply of casino, hotel and entertainment offerings in Macau, including large
mixed-use developments. AGRL believes that its management’s knowledge of the Macau gaming industry and expertise in VIP gaming
provide it with a platform to capitalize on the opportunities in the overall growth of the Macau gaming industry.
In view of the increasing number of casinos
in Macau, AGRL’s VIP gaming promoters are applying a number of strategies, including:
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·
|
Seeking to grow AGRL’s VIP gaming promoters’ business through the development of strategically located gaming clusters
in Macau to target different segments of the VIP gaming patrons. For example, we have acquired a VIP room at the Venetian Resort
Hotel that targets higher middle-tier gaming patrons.
|
|
|
·
|
Having AGRL’s VIP gaming promoters continue to actively manage their portfolios by expanding and upgrading their existing
services and marketing efforts in line with the AGRL’s development strategy to improve overall yield. For example, we have
acquired King’s Gaming, whose VIP room in Cotai provides an alternative gaming location to downtown Macau for our patrons.
|
|
|
·
|
Increasing the number of collaborators and junket agents to promote the VIP gaming rooms. For example, we have increased our
network of agents through our acquisition of King’s Gaming and through referrals from our existing agents.
|
|
|
·
|
Marketing the Star World Hotel, the Galaxy Resort and the Venetian-Resort-Hotel & Casino as 5-star hotels with comprehensive
attractions and facilities for top tier gaming patrons to collaborators and promoters.
|
|
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·
|
Providing an even more comfortable and relaxing atmosphere in the VIP gaming rooms. For example, we have increased the number
of service staff in our VIP gaming rooms at Star World.
|
|
|
·
|
Expanding our presence in the Macau VIP gaming market into the Cotai Strip. Our acquisition of 100% profit interest of King’s
Gaming Promotion Limited has enabled us to have a presence on the Cotai Strip.
|
|
|
·
|
In addition, on April 18, 2011, our board of directors approved the opening of a new VIP gaming room at the Galaxy Casino,
S.A. on the Cotai Strip, through Sang Heng Gaming Promotion Company Limited. The VIP gaming room has 12 tables and opened in May
2011. It is currently operated by Sang Lung Gaming Promotion Company Limited.
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Marketing
Our marketing channels consist of AGRL’s collaborator and
junket agent network. Collaborators and junket agent cultivate relationships with high-tier gaming patrons, who they bring the
VIP gaming rooms. The collaborators and junket agents typically maintain these relationships by arranging the patrons’ transport,
accommodations, eating, and entertainment. Gaming credits may also be issued to the patrons to promote turnover in the VIP gaming
rooms. For additional details regarding such gaming credits, please refer to “–Governmental Regulation–Macau–Law
No. 5/2004, Enacted on June 14, 2004.
Governmental Regulation–Macau
The operation of casino games or other games
authorized by the Macau government is subject to general administrative, civil and criminal laws and to the specific gaming laws.
Law No. 16/2001 (the “Macau Gaming Law”) introduced and established the legal framework and the principal rules for
the operation of casino games and sets out the governing framework for regulation of casinos in Macau.
The concession regime restricts the operation
of casino games to private companies incorporated in Macau that have concessions granted by the MSAR pursuant to the concession
contracts and applicable gaming laws and regulations. Pursuant to the Macau Gaming Law, the MSAR granted concessions to SJM, Wynn
Macau and Galaxy under an international public tender. The Macau government also authorized three sub-concessions, one by Galaxy
to Venetian Macau, one by SJM to MGM Grand Paradise and one by Wynn Macau to Melco PBL. It is provided under SJM’s concession,
as well as in Galaxy’s and Wynn Macau’s concession contracts, that the concessionaires cannot enter into sub-concessions
without the authorization of the Macau government. The Macau government has stated in public announcements that only three sub-concessions
will be permitted.
The DICJ’s Role and Authority
The DICJ is the primary regulator and supervisory
institution of the MSAR’s gaming industry. The DICJ plays an active role in fulfilling the objectives set forth in the Macau
Gaming Law. The main objectives of the Macau Gaming Law are (i) that concessionaires and sub-concessionaires carry on adequate
operation of casino games or other forms of gaming, (ii) that parties involved in the operation, management and supervision of
casino games or other forms of gaming are eligible to perform their functions and undertake respective responsibilities, (iii)
that operation of casino games or other forms of gaming is performed in a just, honest manner and free from criminal influences
and (iv) that MSAR’s public interests relating to special gaming tax and other contributions are well protected by maintaining
effective controls and procedures.
Among other requirements, concessionaires and
sub-concessionaires are required to submit to the DICJ for record or inspection all significant documentation and periodic reports
regarding their business and operation, as well as to submit to the DICJ all matters requiring the Macau government’s approval
or authorization as required by laws, the concession or sub-concession contracts, as applicable (such as changes in shareholding
structure, changes in control, directorship and key employees, gaming equipment and other matters related to operation of casino
games).
In addition, the DICJ is responsible for assessing
the taxes and other amounts payable by concessionaires and sub-concessionaires to the MSAR. The DICJ continuously monitors concessionaires’
and sub- concessionaires’ daily operations and tabulation of net-win generated from casino games including casino table games
and slot machines through various control procedures conducted in the casinos.
Macau Gaming Commission
The Macau Gaming Commission was created by the
MSAR Chief Executive’s Dispatch No. 120/2000, of July 4, 2000, further amended by Dispatch No. 194/2003. The Gaming Commission
is a specialized commission directly reporting to and presided over by the MSAR Chief Executive, with the responsibility to formulate
policies and facilitate the development of Macau’s gaming operations and relevant regulatory framework.
Regulations Relating to Macau’s Gaming Industry
The following are the pertinent laws and regulations
relating to us and the gaming industry in Macau:
The Macau Gaming Law.
The
Macau Gaming Law established the legal framework and the principal rules for the operation of casino games or other forms of gaming
in the MSAR. It sets forth the objectives of the legal system governing the operation of casino games and it defines the permitted
types of casino games, places, locations and periods for operation. It further sets forth principal rules for the concession regime
and provides for obligations of the concessionaires including submitting their accounts and records to the Macau government, and
special gaming tax to the MSAR.
Administrative Regulation No. 26/2001 (“Gaming
Tender Regulation”).
The Gaming Tender Regulation, as amended, sets forth the terms of the public tender procedures
for the granting of concessions for the operation of casino games and the eligibility and financial capacity requirements of bidders
(also applicable to the sub-concessions).
The Rules of Casino Games.
The
Macau government has promulgated additional rules to supplement the rules of casino games set forth in Section 55 of the Macau
Gaming Law. These supplemental rules were approved by the External Dispatches of the Secretary for Economy and Finance, which set
out or renewed the detailed procedures and rules of certain casino games, namely football poker, wheel of fortune, baccarat, soccer
poker, black jack, fish-prawn-crab, roulette, Q poker, fan-tan and stud poker.
Law No. 5/2004, Enacted on June 14, 2004
(“Gaming Credit Law”).
The Gaming Credit Law governs the granting of gaming credit in the MSAR and authorizes
the (i) concessionaires, (ii) sub-concessionaires and (iii) VIP gaming promoters who enter into a contract with a concessionaire
or sub-concessionaire to grant gaming credits. Pursuant to the Gaming Credit Law, the granting of gaming credit is limited to the
following three circumstances: (i) a concessionaire or a sub-concessionaire as a creditor may grant gaming credits to a gaming
patron as a borrower; (ii) an authorized gaming promoter as a creditor may grant gaming credits to a gaming patron as a borrower;
or (iii) a concessionaire or a sub-concessionaire as a creditor may grant gaming credits to an authorized gaming promoter as a
borrower. It also forbids the assignment or transfer in any form of the power to grant gaming credits. However, for the past 20
years, it has been customary practice in Macau that casinos issue credits to VIP gaming promoters in the form of nonnegotiable
chips that can only be used by patrons in that gaming promoter’s VIP gaming room. The chips may not be redeemed for cash
or exchanged for negotiable chips or other goods or services. The VIP gaming promoters then issue such credits, or their own credits,
to gaming patrons either directly or through junket agents and collaborators who in turn extend the credits to patrons. The junket
agents and collaborators act as a customer representative between the VIP gaming promoters and the patrons, and are representatives
of the patrons. Therefore, the credits extended by VIP gaming promoters to junket agents and collaborators are actually credits
issued to gaming patrons under the Gaming Credit Laws. The Gaming Credit Law provides for the obligations of the credit grantors
towards the DICJ and scope of the DICJ’s supervision. Specifically, the granting of gaming credits is enforceable as a civil
debt pursuant to Article 4 of the Gaming Credit Law.
Law No. 8/96/M, Enacted on July 22, 2002
(“Law on Illicit Gaming”).
The Law on Illicit Gaming prohibits all forms of operation, promotion or
assistance to gaming outside the authorized areas, as well as any fraudulent gaming in authorized areas, or any unlicensed granting
of loans or gaming credits to gaming patrons.
Administrative Regulation No. 27/2009, Enacted
on August 10, 2009.
As a result of the amendments made to Administrative Regulation No. 6/2002 by the recently enacted
Administrative Regulation 27/2009 dated August 10, 2009, the Secretary of Economy and Finance of the Macau government 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 commission cap became effective on December
1, 2009. The amendment sets forth standards for what constitutes a commission to VIP gaming promoters, including all types of payments,
either monetary or otherwise, that are made to Gaming VIP gaming promoters such as food and beverage, hotel and other services
and allowances. The amendment also imposes obligations on VIP gaming promoters, concessionaires and sub-concessionaires to report
regularly to the DICJ and imposes fines or other sanctions for non-compliance with the commission cap or the monthly obligations
to report and detail the amount of commissions paid to VIP gaming promoters.
Compulsory Licensing and Registration Requirements
for VIP Gaming Promoters.
The DICJ initiated the first licensing process in Macau for gaming promoters, under the
transition arrangements introduced by the Gaming Promoters Regulation. Gaming promoters must also be registered with one or more
than one concessionaire or sub-concessionaire, unless otherwise restricted by contract. The gaming promoters must also execute
a contract with the concessionaire or sub-concessionaire after obtaining gaming promoter licenses.
The Gaming Promoters Regulation restricts the
operation of gaming promotion to licensed corporate entities, commercial partnerships or individuals that are registered as entrepreneurs
with the MSAR Finance Department and meet the relevant requirements promulgated by the DICJ. In order to obtain a license for gaming
promotion, the applicant must submit its application for suitability assessment by the DICJ, which includes assessment of the suitability
of the gaming promoters’ key employees. When the gaming promoter is a commercial partnership or a company, the suitability
of the gaming promoter’s directors and shareholders holding 5% or more of the share capital is also assessed. A gaming promoter
license is valid until December 31st in the year it is granted and can be renewed each year upon submission of an application to
the DICJ. The renewal application must include a signed declaration by the legal representative of the relevant concessionaire
that it is the intention of the concessionaire to operate with such gaming promoter in the following year. Gaming promoters that
are sole proprietors are subject to compulsory assessment of their suitability every three years, and gaming promoters that are
commercial partnerships or companies are subject to compulsory assessment every six years. Extraordinary suitability assessment
may be conducted also by the DICJ.
Concessionaires and sub-concessionaires are
jointly liable to the Macau government for the activities conducted by the gaming promoters, gaming promoters’ employees,
collaborators and junket agents within their respective casino premises. Gaming promoters are jointly liable for the activities
of their employees and collaborators within the casino premises of concessionaires and sub-concessionaires and for their compliance
with applicable laws and regulations. Failure by the gaming promoters or the concessionaires or sub-concessionaires to fulfill
their major obligations under the Gaming Promoters Regulation may result in the following consequences:
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·
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the issue of a non-suitability report;
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refusal to grant a new gaming promotion license or to renew an existing license;
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upon notice by the concessionaire or sub-concessionaire to the DICJ, suspension of the gaming promotion activities of gaming
promoters; and
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·
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administrative liability arising out of violation of the Gaming Promoters Regulation without prejudice of contractual liability
of the gaming promoter towards the concessionaire.
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Major Obligations Imposed Upon Gaming Promoters.
VIP
gaming promoters in Macau are required to comply with the following obligations:
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·
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to register with concessionaires or sub-concessionaires and operate under the terms agreed in a written contract submitted
to the DICJ (including, in particular, the amount and payment method of commissions or other agreed remunerations, the nature of
their activities in the casinos, including the designation of any gaming rooms or other premises within the casinos, the amounts
and forms of required securities and guarantees and the waiver indicating that concessionaires or sub-concessionaires and gaming
promoters agree to submit to the exclusive jurisdiction of the MSAR courts and defer to Macau Laws);
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·
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to execute written contracts with their collaborators and submit copies of such contracts to the DICJ;
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·
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to submit annually, through concessionaires or sub-concessionaires, a list containing the identification of their chosen collaborators
for the following year, and copies of their identification documents and no criminal record certificates or equivalent documents
to the DICJ for approval;
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·
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to comply with laws and regulations relating to gaming promoters and gaming promoter related announcements and instructions
issued by the DICJ;
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to accept auditing carried out by the DICJ and the MSAR Finance Department;
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to make all books and records available for the inspection and review by the DICJ and the MSAR Finance Department and provide
any additional information and materials upon their request;
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to perform all contractual obligations, especially obligations to gaming patrons;
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to comply with the reasonable instructions issued by the concessionaires or sub-concessionaires to the extent that such instructions
do not interfere with the gaming promoters’ autonomy;
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to perform all contractual obligations stipulated in the written contracts with concessionaires or sub-concessionaires; and
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to comply with all legal and regulatory requirements required by the laws and regulations of the MSAR.
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Major Obligations Imposed Upon Concessionaires
and Sub-Concessionaires.
Concessionaires and sub-concessionaires in Macau are required to comply with the following
obligations with respect to their gaming promoters:
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·
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to submit to the DICJ annually a list of gaming promoters with whom they intend to operate in the following year (the Macau
government, through the DICJ, determines annually the maximum number of gaming promoters and issues licenses to the gaming promoters
identified in lists provided to it by the concessionaires and sub-concessionaires);
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·
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to submit to the DICJ, prior to the 10th of each month, a detailed list of the amounts of commissions or other remunerations
paid to each gaming promoter in the previous month, as well as the amounts of taxes withheld;
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to prepare and maintain an updated list of the names of registered gaming promoters, their directors, key employees and collaborators
for submission to the DICJ quarterly;
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to inform the DICJ or proper authorities of any fact that may affect the solvency of their gaming promoters;
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to maintain and update the book records with their gaming promoters;
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to supervise the activities of their gaming promoters, in particular their compliance with legal and contractual obligations;
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to inform the authorities of any potential criminal activity by their gaming promoters, in particular potential money laundering
activities;
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to promote a healthy relationship with registered gaming promoters;
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to settle commissions or other remunerations agreed upon with their gaming promoters in a timely manner; and
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to pay withholding taxes for their gaming promoters in a timely manner.
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Anti-Money Laundering Regulations
The MSAR has been a member of the Asia/Pacific
Group on Money Laundering (“APG”) since 2000. As a member of APG, the MSAR undertook, between 1990 and 2004, to implement
the 40 recommendations and nine special recommendations of the Financial Action Task Force on Money Laundering (“FATF”),
an inter-governmental body created in 1989 to develop and promote policies to combat money laundering and terrorist financing.
As at July 24, 2007, the APG and Offshore Group of Banking Supervisors (“OGBS”), in their “Mutual Evaluation
Report on Macau, China Against the FATF 40 Recommendations (2003) and 9 Special Recommendations,” determined that, despite
non-compliance with Special Recommendation 9 relating to cross-border declaration and disclosure, Macau had demonstrated a strong
commitment towards implementing laws and institutional bodies to enhance its compliance with international anti-money laundering
standards. The MSAR Legislative Assembly approved a new anti-money laundering law on March 23, 2006 to combat money laundering
by further strengthening the record-keeping and reporting requirements relating to suspicious activities.
The following are the pertinent laws and regulations
relating to the anti-money laundering regulations in Macau that have recently been enacted:
Law No. 2/2006, Published in Macau Official
Gazette No. 14 of 3 April 2006.
This law requires casino operators, concessionaires, sub-concessionaires, gaming
promoters, and other entities such as financial institutions, insurance companies, exchange houses, money remittance companies
and professionals to assist the Macau government in its efforts to combat money laundering activities. Corporate entities and associations
are responsible and liable for money laundering when the crime is committed in their name and corporate interest be either (i)
their corporate bodies or representatives, or (ii) a person under their authority, when the crime became possible by virtue of
an unlawful breach of the vigilance or control duties pending on such entity.
Section 34 of the Gaming Law.
This
section imposes a duty on the external auditors of the concessionaires, sub-concessionaires and managing companies of gaming operations
to inform the DICJ and the Finance Department about any facts that may give rise to a suspicion of that entity, the members of
that relevant corporate bodies or their employees of being involved in money laundering.
Section 30 of the Gaming Promoters Regulation.
This
section provides that the concessionaires and sub-concessionaires must inform the relevant authorities about any fact indicating
gaming promoters and their collaborators involved in acts of money laundering.
Legislative Developments
In order to better address the needs of the
existing concession regime and to facilitate the modernization of the gaming industry in the MSAR, the Macau government and its
Legislative Assembly have been revising the existing gaming regulations and are expected to enact new legislation or amend existing
legislation to strengthen the legal framework on gaming activities. The MSAR Legislative Assembly enacted legislation in 2004 allowing
concessionaires or sub-concessionaires to extend gaming credits to gaming patrons and to enforce gaming debts. Future legislation
may cover operation of gaming areas, gaming chips and tokens, slot machines and offenses related to gaming and may change or update
existing legislation.
Environmental Regulations
All organizations in Macau have to comply with
the environmental principles of the environmental protection policy according to the Macau Ordinance, namely in respect of noise,
pollution and construction nuisance. AGRL does not believe that it is in violation of any environmental laws.
Labor and Safety Regulations
Pursuant to Macau laws and regulations, Macau
employers must register their employees under the mandatory Social Security Fund, make social security contributions for each of
its employees and contract insurance to protect the rights and interests of their employees in the event of working accident and/or
professional disease. AGRL believes that it is in compliance with all such regulations.
New Smoking Regulations in Macau
The Macau Legislative Assembly has approved
a new Smoking Prevention and Tobacco Control law. Under this new law, smoking is not permitted on casino premises except for a
separated area of up to 50% of the casino which is open to the public and complies with other requirements to be determined. Casinos
must comply with the smoking ban by January 1, 2013, at which time it is expected that the designated smoking areas will have been
created.
Seasonality
Typically, holiday periods in China, such as
the New Year, the National Day, the Labour Day and the Mid-Autumn Festival, when many people in China take vacations, show peaks
in gambling activity. Because AGRL has operated for only a few years and has experienced large growth from its inception, its results
to date do not reflect any such peaks. However, as its business matures, it expects that it will experience peaks of activity at
the times of holidays.
Legal Proceedings
We are not involved in any legal proceedings
that are anticipated to have a significant effect on our business, financial position, results of operations or liquidity, nor
are we aware of any proceedings that are pending or threatened that may have a significant effect on our business, financial position,
results of operations or liquidity. From time to time, AGRL is subject to legal proceedings and claims in the ordinary course of
business, certain of which would be covered by insurance. Such claims, even if lacking merit, could result in the expenditure of
significant financial and managerial resources.
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C.
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Organizational Structure
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The following diagram illustrates oue corporate structure and the
relationships with AGRL’s VIP gaming promoters that are currently active:
Please refer to the section titled “AGRL’s
Gaming Operations” under Item 4.B. herein for additional information about our organizational structure.
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D.
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Property, plant and equipment
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We lease a building located at Alameda Drive,
Carlos d’Assumpcao; No. 181-187 Centro Commercial; c/o Grupo Brilhantismo; 12 Andar; Macau, which we use for our administrative
offices. Rent is $2,315 per month. We also lease a building located at Unit 605 East Town Building, 16 Fenwick Street, Wanchai,
Hong Kong. Rent is $3,249 per month.
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ITEM 4A.
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UNRESOLVED STAFF COMMENTS
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None.
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ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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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 Annual 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 operates a gaming
promotion business in VIP Rooms located in hotels and casinos in Macau through our wholly owned subsidiary, Asia Gaming & Resort
Limited (“AGRL”), its subsidiaries and VIP Gaming Promoters.
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, Billion Boom, Kasino Fortune and Super
Number are the significant subsidiaries of AGRL, which have a 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 are 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 for the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in
Macau in November 2010.
Sang Heng, King’s Gaming, Iao Pou and
Sang Lung 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:
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Quarter
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1
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Chinese New Year Celebration
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2
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Labor Day Golden Week
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3
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None
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4
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National Day Golden Week
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Highlights
When compared to that of the period ended December
31, 2010, we performed substantially better in the period ended December 31, 2011. Our revenue growth in the year ended December
31, 2011 was 97.3%, which exceeded the overall growth in Macau of 42.2%. Our income growth (operating income before change in fair
value of contingent consideration and pre-acquisition profit) in the year ended December 31, 2011 was 90.4%. The following factors
contributed to our improved performance:
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Overall gaming revenue growth of 42.2% period-over-period for Macau in 2011;
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Organic growth in both retained earnings and our network of agents;
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Increased cage capital as a result of reinvesting profits, increased lines of credit granted by the casino license holders,
increased shareholder loans, and the warrant exercises of $35.5 million, during October 2010;
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The acquisition of King's Gaming effective November 1, 2010;
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The opening of the Iao Kun VIP Room at the newly opened Galaxy Resort Macau in Cotai on May 15, 2011;
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The reduction in the number of tables and the eventual closing of the VIP gaming room at the MGM Grand Hotel and Casino in
June 2011 which allowed us to allocate additional cage capital to our VIP gaming promoters which are compensated with 1.25% fixed
commission;
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The increase in the number of tables from eleven to twelve at the Iao Kun VIP Room at the Star World Hotel and Casino and increased
cage capital during 2011;
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The increasing number of “rich” Chinese, year over year; and
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Increased marketing efforts to increase the number of patrons and the amount of play at the VIP Rooms which operate under 1.25%
fixed commission model. This resulted in higher fixed commission income. The VIP gaming rooms at the Star World Hotel and Casino,
Galaxy Resort Macau and the Venetian Hotel and Casino in Macau contributed over 97% of our business and over 97% of our revenue
in 2011.
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Recent Activities
In June 2011, the Board of Directors
authorized a regular semi-annual cash dividend of $0.10 per outstanding ordinary share each year after the release of the Company’s
financial results for the six months ending June 30, and, for each year after the release of the Company’s annual financial
results, an amount per outstanding ordinary share equal to (i) 15% of the Company’s non-GAAP net income (defined as operating
income before amortization of intangible assets and change in fair value of contingent consideration) for the most recently completed
fiscal year less the amount paid pursuant to the immediately previous six-month dividend, divided by (ii) the number of ordinary
shares outstanding on the record date for such dividend. The first dividend was paid on September 2, 2011, totaling $3,880,406.
We anticipate an additional dividend of approximately $7.5 million to be declared and paid in 2012 based on 2011 performance.
In June 2011, the Board of Directors authorized
the establishment of a share repurchase program for the Company to purchase up to two million of its ordinary shares on the open
market at prices to be determined by the Company’s management. In order to comply with the Company's insider trading policy,
the program began after the release of the Company’s financial results for the six-month period ended June 30, 2011 and will
expire on June 30, 2012. Purchases pursuant to the program may be made from time to time in accordance with SEC rules and regulations
through open market transactions, subject to market conditions, the Company’s share price and other factors. The repurchase
program may be modified, suspended or discontinued at any time. As of the date of this report, no ordinary shares have
been repurchased under the program.
On April 18, 2011, $60,000,000 of the loans
owing to Messrs. Lam and Vong were converted into two $30,000,000 interest-free notes ($60,000,000 in the aggregate), due on April
18, 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 December 2011, shareholders
approved the 2011 Omnibus Securities and Incentive Plan. The purpose of the plan is to assist the Company in attracting,
retaining and providing incentives to key management employees and nonemployee directors of, and nonemployee consultants to,
the Company and its Affiliates, and to align the interests of such employees, nonemployee directors and nonemployee
consultants with those of the Company’s shareholders. The Plan provides for the granting of Distribution Equivalent
Rights, Incentive Share Options, Non-Qualified Share Options, Performance Share Awards, Performance Unit Awards, Restricted
Share Awards, Restricted Share Unit Awards, Share Appreciation Rights, Tandem Share Appreciation Rights, Unrestricted Share
Awards or any combination of the foregoing up to a maximum of 200,000 Ordinary Shares, as may be best suited to the
circumstances of the particular Employee, Director or Consultant. To date no shares have been issued. An aggregate of 50,400
ordinary shares will be issued to our directors and officers as compensation for their services in 2010 and 2011.
RESULTS OF OPERATIONS
Year ended December 31, 2011 Compared to the Year ended December
31, 2010
The following table sets forth certain information
regarding our results for the years ended December 31, 2011 and 2010 (all figures are in $ thousands except ratios and percentages).
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Year Ended
December
31, 2011
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Year Ended
December 31,
2010
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% change from
2010 to 2011
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Revenue from VIP gaming operations
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$
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250,575
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$
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127,036
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97
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%
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Commission to agents
|
|
$
|
155,969
|
|
|
$
|
76,608
|
|
|
|
104
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
16,550
|
|
|
$
|
11,247
|
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income after amortization of intangible assets including pre-acquisition income and before change in fair value of contingent consideration
|
|
$
|
71,005
|
|
|
$
|
37,296
|
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of operating income after amortization of intangible assets, including pre-acquisition income and before change in fair value of contingent consideration/Revenue from VIP gaming operations
|
|
|
28.34
|
%
|
|
|
29.36
|
%
|
|
|
|
|
Non-GAAP Financial Results
The following Non-GAAP financial results for
the years ended December 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 figures are in $ thousands
except ratios and percentages) (see Reconciliation of Non-GAAP to GAAP financial results on page 50).
|
|
|
Year Ended
December
31, 2011
|
|
|
Year Ended
December
31, 2010
|
|
|
% change from
2010 to 2011
|
|
|
Non-GAAP income before amortization of intangible assets including pre-acquisition profit and change in fair value of contingent consideration
|
|
$
|
76,063
|
|
|
$
|
38,139
|
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Non-GAAP income before amortization of intangible assets including pre-acquisition profit and change in fair value of contingent consideration/Revenue from VIP gaming operations
|
|
|
30.36
|
%
|
|
|
30.02
|
%
|
|
|
|
|
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, and represent the growth in revenues, expenses and income in comparison to the
growth in gaming volume and investors and management to assess 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 years ended December 31,
2011 and 2010 (all figures are in $ thousands except for ratios and percentages).
|
|
|
Year Ended
December
31, 2011
|
|
|
Year Ended
December
31, 2010
|
|
|
% change from
2010 to 2011
|
|
|
Rolling Chip Turnover
|
|
$
|
19,931,385
|
|
|
$
|
10,423,462
|
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from VIP gaming operations/Rolling Chip Turnover
|
|
|
1.26
|
%
|
|
|
1.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission to agents/Rolling Chip Turnover
|
|
|
0.78
|
%
|
|
|
0.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses/Rolling Chip Turnover
|
|
|
0.08
|
%
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of operating income after amortization of intangible assets, including pre-acquisition income and before change in fair value of contingent consideration/Rolling Chip Turnover
|
|
|
0.36
|
%
|
|
|
0.36
|
%
|
|
|
|
|
Revenue from VIP gaming promotion was $250,575,452
for the year ended December 31, 2011, as compared to $127,036,361 for the year ended December 31, 2010, an increase of 97.3%, principally
as a result of the following factors:
(i) the acquisition of King's Gaming
effective November 1, 2010 and its network of agents;
(ii) recovery of the Macau
gaming markets;
(iii) increased cage capital as a result
of reinvesting profits, use of increased lines of credit available from the casino license holders, use of increased shareholder
loans, and the use of warrant exercises proceeds of $35.5 million in October 2010; and
(iv) the opening of the Iao Kun VIP
Room at the Galaxy Resort Macau on May 15, 2011;
Revenue for the year ended December 31, 2011
from VIP gaming promotion increased in proportion to the increase in Rolling Chip Turnover due to the majority of our business
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 rate for the Iao
Kun VIP Room at the MGM Grand Hotel and Casino was 4.21% through the period ended June 16, 2011. 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 six at the MGM Grand Hotel and Casino, and subsequently closed the VIP gaming room on June 16, 2011. The closure of the VIP
gaming room at the MGM Grand Hotel and Casino did not materially impact our revenues for 2011 due to the percentage of revenues
in relationship to total Rolling Chip Turnover is less than 3% and our concentration of our business at our other three VIP gaming
rooms, which are now all under the fixed 1.25% commission revenue model.
Revenues from VIP gaming promotion, as a percentage
of Rolling Chip Turnover, increased 0.04% to 1.26% during the year ended December 31, 2011, up from 1.22% during the year ended
December 31, 2010 due to the majority of our business earning revenues on a fixed 1.25% commission and the higher win rate at the
Iao Kun VIP Room at the MGM Grand Hotel and Casino through the period ended June 16, 2011. The VIP gaming rooms in the Star World
Hotel and Casino, the Venetian Hotel and Casino and the Galaxy Resort Macau constitute over 97% of the Company’s revenue.
The gross win rate for the Iao Kun VIP room in MGM Grand Hotel and Casino was 4.23% for the year ended December 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 2011, additional cage capital was made available as a result of increased lines of credit provided by
the casino license holders. The total lines of credit are $55,263,000. Additionally, during 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. Over 97% of our revenues were based upon a fixed commission on Rolling Chip Turnover of approximately $19,458,960,000,
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 chip turnover. Rolling Chip Turnover is impacted by the availability of cage capital. With the increase
in cage capital, we can increase our Rolling Chip Turnover, which then results in increased revenues under the fixed commission
revenue model. Since June 16, 2011, all of our revenue is based upon a fixed commission on Rolling Chip Turnover.
The commission paid to agents increased by $79,360,792,
or 103.6%, during the year ended December 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 0.78% for the year ended December 31, 2011,
up from 0.73% for the year ended December 31, 2010, as a result of greater non-marker commissions paid in 2011 and a smaller percentage
of direct business in relation to total Rolling Chip Turnover. An increase in Rolling Chip Turnover may decrease the percentage
of direct business which may result in a higher percentage of commissions paid to agents in relation to the revenue received.
Sales, general and administrative expenses increased
by approximately $5,303,449, or 47.2%, while revenues increased by 97.3%, during the year ended December 31, 2011 as compared to
2010. Management salaries and director fees increased approximately $211,000 as a result of employment contracts and director fees
initiated in the first half of 2010. Management fees increased approximately $1,580,000 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 and the Iao Kun VIP Room in the Galaxy Resort Macau in May 2011. Additional increased operating costs in the VIP
gaming rooms were approximately $3,325,000 as a result of our expanded operations and the addition of King’s Gaming and the
Iao Kun VIP Room in the Galaxy Resort Macau in May 2011. Our investor relations expenses increased by approximately $259,000 in
2011 due to increased investor relations activities. The percentage of VIP Room administrative costs and other selling, general
and administrative expenses may decrease in relation to revenues received as most of these costs are fixed in nature or are not
impacted by changes in revenues.
The special rolling tax increased by $950,808,
or 91.2%, during the year ended December 31, 2011 as compared to 2010 as a direct result of an increase in Rolling Chip Turnover.
The percentage of the rolling tax to revenue remained consistent at 0.08%
Operating income, after amortization of
intangible assets and before change in the fair value of contingent consideration for the acquisition of King's Gaming, was
$71,005,149 for the year ended December 31, 2011 as compared to operating income of $37,296,250, including pre-acquisition
profit, for the year ended December 31, 2010, an increase of approximately 90.4%, 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 its network of agents; (iii) increased cage capital as a result of reinvesting profits,
increased lines of credit from the casino license holders, increased shareholder loans, and the warrant exercises of $35.5
million in October 2010, and (iv) the opening of the Iao Kun VIP Room at the Galaxy Resort Macau on May 15, 2011.
Operating income after amortization of intangible assets and before the change in the fair value of contingent consideration
for the acquisition of King's Gaming as a percentage of VIP gaming revenues was 28.3% for the year ended December 31, 2011 as
compared to 29.4% for the year ended December 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, a smaller percentage of direct business in relation to
total Rolling Chip Turnover and amortization of intangible assets.
Our Non-GAAP income,before amortization of intangible
assets and change in fair value of contingent consideration related to the acquisition of King's Gaming, was $76,063,353 for the
year ended December 31, 2011 as compared to income of $38,139,311, including pre-acquisition profit, for the year ended December
31, 2010, an increase of approximately 99.4%, 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 its network of agents;
(iii) increased cage capital as a result of reinvesting profits, investing increased lines of credit from the casino license holders,
investing increased shareholder loans, and investing warrant exercises of $35.5 million in October 2010, and (iv) the opening of
the Iao Kun VIP Room at the Galaxy Resort Macau on May 15, 2011. Non-GAAP income before amortization of intangible assets
and change in fair value of contingent consideration related to the acquisition of King's Gaming, as a percentage of VIP gaming
revenues was 30.4% for the year ended December 31, 2011 as compared to 30.0% for the year ended December 31, 2010. The decrease
as a percentage of VIP gaming revenues was due to higher commissions paid in the current period, a smaller percentage of direct
business in relation to total Rolling Chip Turnover and a higher win rate for the Iao Kun VIP Room at the MGM Grand Hotel and Casino
during the current period.
Amortization of intangible assets for the year
ended December 31, 2011 was $5,058,204 for the full year as a result of the acquisition of King's Gaming. Amortization expense
for the year ended December 31, 2010 was $843,061 since its acquisition in November, 2010.
The change in the fair value of the contingent
consideration resulted in a decrease to the contingent consideration liability of $6,248,361 due primarily to the decrease in the
market price of our ordinary shares and increased 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.
During June 2011, we issued 12,050,000 ordinary
shares to Spring Fortune pursuant to the incentive share provisions of our merger agreement with AGRL. Additionally, we issued
4,210,000 shares as a result of the filing of Form 20-F for the fiscal year ended December 31, 2010 in May of 2011 pursuant to
the provisions of our merger agreement. The shares are considered to be issued as part of our merger and therefore have been
treated as issued for no additional cost or compensation.
EPS attributable to ordinary shareholders for
the year ended December 31, 2011 was $2.07, based upon the basic weighted average share count of 37,371,426 (which includes director
and management compensation of 18,796 ordinary shares, which have not been issued) and $2.00 based upon the fully diluted weighted
average share count of 38,691,186. The fully diluted share count includes ordinary share equivalents for the issuance of a total
of 3,103,000 shares for AGRL having met its earnings incentive targets, 520,000 for King’s having met its earnings incentive
targets and 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 before amortization of intangible
assets and change in the fair value of contingent consideration for the year ended December 31, 2011 was $2.04 for basic and $1.97
for fully diluted.
Year ended December 31, 2010 Compared to Year ended December
31, 2009
The following table sets forth certain information
regarding our results for the year ended December 31, 2010 and 2009 (all figure are in $ thousands except ratios and percentages).
|
|
|
Year Ended
December 31,
2010
|
|
|
Year Ended
December 31,
2009
|
|
|
% change from
2010
to 2011
|
|
|
Revenue from VIP gaming operations
|
|
$
|
127,036
|
|
|
$
|
60,480
|
|
|
|
110
|
%
|
|
Commission to agents
|
|
$
|
76,608
|
|
|
$
|
39,146
|
|
|
|
96
|
%
|
|
Selling, general and administrative expenses
|
|
$
|
11,247
|
|
|
$
|
5,271
|
|
|
|
113
|
%
|
|
Operating income after amortization of intangible assets, including pre-acquisition income and before change in fair value of contingent consideration
|
|
$
|
37,296
|
|
|
$
|
15,545
|
|
|
|
140
|
%
|
|
Operating income after amortization of intangible assets, including pre-acquisition income and before change in fair value of contingent consideration/Revenue from VIP gaming operations
|
|
|
29.36
|
%
|
|
|
25.7
|
%
|
|
|
|
|
Non-GAAP Financial Results
The following Non-GAAP financial results for
the year ended December 31, 2010 and 2009 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 on page 50).
|
|
|
For the Year
Ended
December
31, 2010
|
|
|
For the Year
Ended
December
31, 2009
|
|
|
% change from
2010 to 2011
|
|
|
Non-GAAP income before amortization of intangible assets including pre-acquisition profit and change in fair value of contingent consideration
|
|
$
|
38,139
|
|
|
$
|
15,545
|
|
|
|
145
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Non-GAAP income before amortization of intangible assets including pre-acquisition profit and change in fair value of contingent consideration/Revenue from VIP gaming operations
|
|
|
30.0
|
%
|
|
|
25.7
|
%
|
|
|
|
|
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 assess 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 years ended December 31, 2010
and 2009 (all figures are in thousands except for ratios and percentages).
|
|
|
Year Ended
December 31,
2010
|
|
|
Year Ended
December 31,
2009
|
|
|
% change from
2010 to 2011
|
|
|
Rolling Chip Turnover
|
|
$
|
10,423,462
|
|
|
$
|
5,192,657
|
|
|
|
101
|
%
|
|
Revenue from VIP gaming operations/Rolling Chip Turnover
|
|
|
1.22
|
%
|
|
|
1.16
|
%
|
|
|
|
|
|
Commission to agents/Rolling Chip Turnover
|
|
|
0.73
|
%
|
|
|
0.75
|
%
|
|
|
|
|
|
Selling, general and administrative expenses/Rolling Chip Turnover
|
|
|
0.11
|
%
|
|
|
0.10
|
%
|
|
|
|
|
|
Operating income after amortization of intangible assets, including pre-acquisition income and before change in fair value of contingent consideration
)/Rolling Chip Turnover
|
|
|
0.36
|
%
|
|
|
0.30
|
%
|
|
|
|
|
Revenue from VIP gaming promotion was $127,036,361
for the year ended December 31, 2010, as compared to $60,479,937 for the year ended December 31, 2009, an increase of 110%. Rolling
chip turnover has increased by $5,230,804,781, or 100.7%, in the year ended December 31, 2010 as compared to that of the same period
in 2009, principally as a result of the following factors:
|
|
(i)
|
successfully transitioning the Iao Kun VIP room in the Star World Hotel and Casino in Downtown Macau to a fixed 1.25% commission
on rolling chip turnover effective October 2009, thereby reducing volatility during a particular quarter and having the effect
that an increase in rolling chip turnover would result in a higher net income. Had the Iao Kun VIP room in the Star World Hotel
and Casino continued under the win/loss split revenue model, revenues would have been approximately $6,377,000 less during 2010;
|
|
|
(ii)
|
we relocated our VIP room to the MGM Hotel and Casino during June 2009 which resulted in an increase in the number of tables
from four at the Grand Waldo Hotel and Casino to eleven at the MGM Hotel and Casino, which is a more widely known and upscale facility.
Rolling chip turnover at the MGM Hotel and Casino averaged approximately $163,840,000 per month during 2010, while rolling chips
turnover at the Grand Waldo Hotel and Casino averaged approximately $25,544,000 per month during its five months of operations
in 2009. The increase in the number of tables, as well as the reputation of the MGM Hotel and Casino’s VIP gaming room facilities,
attracted patrons with higher betting limits;
|
|
|
(iii)
|
the Macau gaming markets’ continued recovery from the impact of the global economic crisis;
|
|
|
(iv)
|
the acquisition of King’s Gaming effective November 1, 2010, which contributed approximately $4,641,000 of revenue during
2010; and
|
|
|
(v)
|
increased cage capital as a result of shareholder loans, reinvesting profits and the warrant exercises of $35.5 million. Generally,
for each $1 of cage capital, we receive a return of approximately 40%. Our gross profit prior to corporate overhead costs is approximately
45% of revenues, and our corporate overhead costs are approximately 5% of revenues.
|
Revenue for the year ended December 31, 2010
from VIP gaming promotion increased in proportion to the increase in rolling chip turnover because of the successful transition
of the Iao Kun VIP room in the Star World Hotel and Casino in Downtown Macau to a fixed 1.25% commission on rolling chip turnover
effective October 2009. The 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 year ended December 31, 2010 were 2.31% (Iao
Kun VIP room at the MGM Hotel and Casino only) and 2.60% (overall), respectively. Subsequent to December 31, 2010, 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 six at the MGM Grand Hotel in the respective VIP gaming rooms. The reduction of tables at the MGM Hotel and Casino did not
impact our revenues due to the win/loss split revenue model at the MGM Hotel and Casino 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, increased 4.6% to 1.22% during the year ended December 31, 2010, up from 1.16% during the year ended
December 31, 2009 due to the transition of the VIP room in the Star World Hotel and Casino in Downtown Macau to the fixed commission
of 1.25%. The VIP room in the Star World Hotel and Casino constitutes over 80% of the Company’s revenue. In addition, the
gross win rate for the Iao Kun VIP room in MGM Hotel and Casino was 2.31% for the year ended December 31, 2010, below 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 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 81.1% of our revenues are based upon
a fixed commission on rolling chips turnover, which has reduced the risks associated with our revenues. As a result, we are able
to concentrate our marketing efforts and increase our rolling chips turnover. Rolling chips turnover is impacted by the availability
of cage capital. The industry average monthly rolling chips turnover ranges from 6 to 10 times of cage capital. Therefore, 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 $37,461,302,
or 95.7%, during the year ended December 31, 2010 as compared to the same period in 2009 as a result of an increase in rolling
chip turnover. The commissions to agents, as a percentage of Rolling Chip Turnover, was 0.73% in the year ended December 31, 2010,
down from 0.75% for the year ended December 31, 2009 as a result of Macau government policy to cap the commission that the casinos
offer to the promoters.
Sales, general and administrative expenses increased
by approximately $5,976,000 or 113.4%, during the year ended December 31, 2010 as compared to that of the same period in 2009.
The increase included administrative overhead costs as a result of our first year as a public company, including legal and professional
fees associated with our merger, registration statements and other regulatory filings of $1,768,000. Management salaries and director
fees increased approximately $1,275,000 as a result of new employment contracts and director fees initiated in 2010. Management
fees increased approximately $1,532,000 as a result of the expansion of operations at the Iao Kun VIP room in the Star World Hotel
and Casino in Downtown Macau from six tables in 2009 to eleven tables in 2010 and the relocation of our VIP room to the MGM Hotel
and Casino during June 2009 which resulted in an increase in the number of tables from four at the Grand Waldo Hotel and Casino
to eleven at the MGM Hotel and Casino, as well as the addition of King's Gaming in November 2010. Additional increased operating
costs in the three VIP rooms were approximately $943,000 as a result of our expanded operations and the addition of King's Gaming.
Our investor relations expenses were approximately $221,000 in 2010, while we had no investor relations expenses as a private company
in 2009. Our acquisition costs for King's Gaming were approximately of $242,000, while we had no acquisitions in 2009.
The special rolling tax increased by $525,658,
or 101.7%, during the year ended December 31, 2010 as compared to that of the same period in 2009 as a direct result of an increase
in rolling chip turnover.
Amortization expense for the year ended December
31, 2010 was $843,061 as a result of the acquisition of King's Gaming. There was no amortization expense for the year ended December
31, 2009.
Operating income, including pre-acquisition
profit, was $37,296,250 for the year ended December 31, 2010 as compared to $15,545,463 for the year ended December 31, 2009, an
increase of approximately 140%, principally as a result of (i) AERL successfully transitioning the Iao Kun VIP room in the Star
World Hotel and Casino in Downtown Macau to a fixed 1.25% commission on rolling chip turnover effective October 2009, thereby reducing
volatility during a particular quarter and an increase in rolling chip turnover would result in a higher net income; (ii) the increase
in the number of tables from four at the Grand Waldo Hotel and Casino to eleven at the MGM Hotel and Casino after the relocation
of the VIP room; (iii) the Macau gaming markets continued recovery, from the impact of the global economic crisis; (iv) the acquisition
of King's Gaming effective November 1, 2010; and (v) increased cage capital as a result of reinvesting profits and the warrant
exercises of $35.5 million.
EPS attributable to ordinary shareholders for
the year ended December 31, 2010 was $2.33 based on a basic weighted average share count of 14,177,408 and $1.88 based on a fully
diluted weighted average share count of 17,571,255. The fully diluted share count includes 12,050,000 ordinary share equivalents
to be issued for earning incentives and 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
and shares issuable upon exercise of the warrants included in such option and 18,796 ordinary share equivalents for director compensation.
Non-GAAP Financial Measure
Our calculation of non-GAAP income (operating
income before amortization of intangible assets and change in fair value of contingent consideration) and Non-GAAP earnings per
share for the year December 31, 2011, differs from earnings per share based on net income because it does not include amortization
of intangible assets and change in fair value of contingent consideration. We use this information internally in evaluating
our operations and believe this information is important to investors because it provides a complete picture of our operations
for the entire period and is more accurately comparable to the prior-year period. Notwithstanding the foregoing, 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 Year Ended
December 31, 2011
|
|
|
For the Year Ended
December 31, 2010
|
|
|
For the Year Ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to ordinary shareholders
|
|
$
|
77,253,510
|
|
|
$
|
32,966,865
|
|
|
$
|
(18,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
5,058,204
|
|
|
|
843,061
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Owners' Interest in Pre-Acquisition Profit
|
|
|
-
|
|
|
|
4,329,385
|
|
|
|
15,563,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
|
|
(6,248,361
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP income (before amortization of intangible assets including pre-acquisition profit and change in fair value of contingent consideration)
|
|
$
|
76,063,353
|
|
|
$
|
38,139,311
|
|
|
$
|
15,545,463
|
|
|
|
|
For the Year Ended December
31, 2011
|
|
|
For the Year Ended December
31, 2010
|
|
|
For the Year Ended December
31, 2009
|
|
|
|
|
Basic
|
|
|
Fully Diluted
|
|
|
Basic
|
|
|
Fully Diluted
|
|
|
Basic
|
|
|
Fully Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to ordinary shareholders
|
|
$
|
2.07
|
|
|
$
|
2.00
|
|
|
$
|
2.33
|
|
|
$
|
1.88
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
0.14
|
|
|
|
0.13
|
|
|
|
0.06
|
|
|
|
0.05
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Owners' Interest in Pre-Acquisition Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
0.31
|
|
|
|
0.25
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
|
|
(0.17
|
)
|
|
|
(0.16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Earnings per share (before amortization of intangible assets including pre-acquisition profit and change in fair value of contingent consideration)
|
|
$
|
2.04
|
|
|
$
|
1.97
|
|
|
$
|
2.69
|
|
|
$
|
2.17
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
Liquidity and Capital Resources — Historical
Cash Flows
As of December 31, 2011, total available cage
capital was approximately $256,241,000. The total available cage capital is comprised of markers receivable of approximately
$240,131,089 and cash, cash chips and non-negotiable chips of approximately $16,110,000. AERL’s related parties
have increased financing slightly from $61,066,220 as of December 31, 2010 to $62,641,619 for the year ended December 31, 2011,
an increase of $1,575,399. In addition, $60,000,000 of the loans were converted to convertible long-term loans. AERL’s
related parties have guaranteed the lines of credit with the casino license holders as well as uncollectible markers (if any),
which further reasonably demonstrates the strong commitment from the principals to the continual success of the operations.
As of December 31, 2011, AERL had a total cash
and cash equivalents balance of $16,718,565. Cash and cash equivalents provided by operations was $5,280,509 for the year ended
December 31, 2011 compared to cash used in operations of $76,451,485 in the same period in 2010 as a result of the implementation
by the Promoter Companies to fund the marker system with agents and lines of credit increased from the casino license holder. Additional
cash used for providing markers was $119,933,203 during the year ended December 31, 2011 compared to $120,140,393 for the same
period in 2010.
We have available lines of credit of approximately
$55,263,000 from casino license holders, of which $35,989,109 was outstanding at December 31, 2011. The lines of credit may be
increased from time to time at the discretion of the Casino Operators. Additionally, we received a short term line of credit of
$10,281,454 from an unrelated party, which was repaid on January 1, 2012.
Throughout the year, we may receive advance
payments on commissions earned prior to the end of the month in which they were earned. For the month of December 2011, we
received $19.8 million of advance commission payments.
We paid a dividend on September 2, 2011, totaling
$3,880,406. The Company estimates that an additional dividend will be declared and paid in 2012 amounting to $7,529,000.
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;
|
|
|
·
|
Obtaining funds as a result of the exercise of our Unit Purchase Option;
|
|
|
·
|
Raising funds through the sale of our securities; and
|
|
|
·
|
Accumulation and reinvestment of earnings.
|
Off-Balance Sheet Arrangements
None.
Contractual Obligations
|
|
|
Payments due by period
|
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder Loans
|
|
$
|
62,641,619
|
|
|
$
|
2,641,619
|
|
|
$
|
60,000,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating Lease Obligations
|
|
|
98,661
|
|
|
|
63,446
|
|
|
|
35,215
|
|
|
|
-
|
|
|
|
-
|
|
|
Management Agreements
|
|
|
5,556,000
|
|
|
|
5,556,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Employment Agreements
|
|
|
2,147,411
|
|
|
|
951,548
|
|
|
|
1,031,101
|
|
|
|
164,762
|
|
|
|
|
|
|
Contingent Consideration
|
|
|
44,550,585
|
|
|
|
12,057,600
|
|
|
|
24,407,481
|
|
|
|
2,109,650
|
|
|
|
5,975,854
|
|
|
|
|
$
|
114,994,276
|
|
|
$
|
21,270,213
|
|
|
$
|
85,473,797
|
|
|
$
|
2,274,412
|
|
|
$
|
5,975,854
|
|
We have the following long term debt, capital
lease obligations, operating lease obligations, purchase obligations or other long term liabilities:
|
|
·
|
Loans payable ($62,641,619 and $61,066,220 at December 31, 2011 and 2010, respectively) to Messrs. Lam and Vong;
|
|
|
·
|
Office leases in Hong Kong and Macau for executive offices which expire in September 2013. Minimum future lease
payments are $63,446 and $35,215, during the years ended December 31, 2012 and 2013 respectively.
|
|
|
·
|
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 $5,556,000;
|
|
|
·
|
Employment agreements with certain of our executive officers, as described under Item 6.B.; and
|
|
|
·
|
Contingent consideration ($44,550,585 and $50,857,564 at December 31, 2011 and 2010, respectively) due to the former owners
of King’s Gaming.
|
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 not less than $45,000,000. 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. Messrs. Lam and Vong will also guaranty to AGRL the repayment of the loans made by AGRL to the VIP gaming
promoters. On April 18, 2011, to memorialize such loans we issued an interest-free convertible note for $30 million to each of
Mr. Lam Man Pou and Mr. Vong Hon Kun (for an aggregate amount of $60 million). The notes expire on April 18, 2014 and are
convertible into our ordinary shares at a price of $20 per share at the option of the holder and callable at our option at a price
of $20 per share if the closing price of our ordinary shares for any ten consecutive trading days exceeds $25.
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 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, 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 chip turnover. Management had 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 chip turnover. MGM Grand Hotel and Casino declined the request to allow for fixed commissions. The Company
closed its VIP Room in the MGM Hotel and Casino on June 16, 2011. The Sang Lung and King’s Gaming arrangements are also based
on 1.25% of the rolling chip turnover. 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 rolling chip turnover, rather than the win/loss of the gaming operations. Total rolling chip turnover
in the Group’s VIP gaming rooms was approximately $19,931,385,000, $10,423,462,000, and $5,192,657,000 during the years ended
December 31, 2011, 2010, and 2009 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, the operations and extension
of credit by the cage became controlled by the Company 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 December 31, 2011, the loan amounted to $62,641,619. On April 18, 2011, to memorialize such loans we issued an interest-free
convertible note for $30 million to each of Mr. Lam Man Pou and Mr. Vong Hon Kun (for an aggregate amount of $60 million).
The notes expire on April 18, 2014 and are convertible into our ordinary shares at a price of $20 per share at the option of the
holder and callable at our option at a price of $20 per share if the closing price of our 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. 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.
With the completion of the acquisition of AGRL
by AERL, the Company, through the Promoter Companies, extends credit to junket agents. A majority of the Company’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 Company may not be able to collect all of
their markers receivables from the junket agents. Management expects that the Company will be able to enforce these obligations
only in a limited number of jurisdictions, including Macau. To the extent that junket agents of the Company, through the Promoter
Companies, are from other jurisdictions, the Company 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 Company
may encounter forums that will refuse to enforce such debts. The Company’s inability to collect gaming debts could have a
significant negative impact on their operating results.
The Company 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 December 31, 2011, 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 Gaming’s 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
|
|
5.5 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”) pursuant to the terms of
its incentive plan which is further described under Item 6.B. 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.
Fair Market Value of Contingent Consideration
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. 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 Company’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 Company’s statement of operations and financial position in the period of change in estimate. Fluctuations
in the market value of the Company's ordinary shares and subsequent performance will cause the fair value to increase or decrease
and the resulting change will be recognized in earnings.
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 $”, “Functional Currency”). Monetary
assets and liabilities denominated in currencies other than the Functional Currency are translated into the Functional Currency
at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional Currency
are translated into the Functional Currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the respective period. Exchange gains or losses have
historically been insignificant.
For financial reporting purposes, the consolidated/combined
financial statements of the Company, which are prepared using the Functional Currency, are then translated into the Reporting Currency.
Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated
at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any translation adjustments
resulting are not included in determining net income but are included in foreign currency translation adjustment in other comprehensive
income, a component of shareholders’ equity.
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
December 31,
2009
|
|
|
Period end HK$:US$ exchange rate
|
|
$
|
7.78
|
|
|
$
|
7.77
|
|
|
$
|
7.75
|
|
|
Average annual HK$:US$ exchange rate
|
|
$
|
7.78
|
|
|
$
|
7.77
|
|
|
$
|
7.75
|
|
|
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
|
A.
|
Directors and senior management
|
Our board of directors consists of nine (9)
directors divided into three classes, each of which serves for a term of three years, with only one class of directors being elected
in each year. All of the current directors other than João Manuel Santos Ferreira, George Chui Vai Hou, and Yeung Lun Allan,
and Peter Li were initially elected by the shareholders at the time of the acquisition of AGRL. Messrs. Ferreira, Chui and Yeung
were initially appointed by the existing directors on April 7, 2010. Peter Li was initially elected by the shareholders at our
2011 annual meeting on December 13, 2011. The directors serve as follows:
|
|
·
|
in the class to stand for reelection in 2012: Leong Siak Hung, James R. Preissler and João Manuel Santos Ferreira;
|
|
|
·
|
in the class to stand for reelection in 2013: Lam Man Pou, Vong Hon Kun and George Chui Vai Hou; and
|
|
|
·
|
in the class to stand for reelection in 2014: Peter Li, Raymond Li Chun Ming, and Yeung Lun Allan.
|
Our executive officers are:
|
Name
|
|
Position
|
|
Lam Man Pou
|
|
Chairman and Chief Marketing Officer
|
|
Leong Siak Hung
|
|
Chief Executive Officer
|
|
Raymond Li Chun Ming
|
|
Chief Financial Officer
|
|
Vong Hon Kun
|
|
Chief Operating Officer
|
|
Sylvia Lee
|
|
Executive Vice President
|
Our executive officers other than Ms. Lee also
hold the same positions with AGRL and are paid in accordance with their employment agreements with AGRL that are described below.
The following pages set forth the names, ages
and director start dates of the directors and director nominees, their respective principal occupations or brief employment history
for the past five years and the names of other publicly-held companies of which each serves or has served as a director during
the past five years.
Lam Man Pou
, age 48, has been the chairman and chief
marketing officer and a director of the Company since February 2010 and has been the chairman, chief marketing officer and a director
of AGRL since its inception in May 2007. He is responsible for the overall direction and development of the Company, its subsidiaries
and VIP gaming promoters. He is also responsible for developing AGRL’s and its VIP gaming promoters’ marketing programs.
Mr. Lam is a citizen of Macau, China and has been involved in the gaming industry in Macau for over 20 years. He had served as
junket agent for various VIP gaming rooms in SJM casinos and Waldo Casino before setting up his own gaming promotion business
in May 2006. From May 2006 to early July 2007, he was the sole proprietor of Sang Heng and Spring. From March 1990 to May 2002,
Mr. Lam was a junket agent for the Casinos of Sociedade de Turismo e Diversoes de Macau, S.A. From June 2002 through May 2005,
Mr. Lam was a junket agent for Casino New Century. From July 2004 through May 2006 Mr. Lam was a junket agent for Waldo Casino.
He is a member of the Macau Gaming Industry General Association of Administrators and VIP Gaming Promoters. Mr. Lam’s business
address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Leong Siak Hung
, age 41, has served as the Chief
Executive Officer and a director of the Company since February 2010 and has served as the chief executive officer and a
director of AGRL since its formation and is responsible for the direct general administration of the Company and the
Company’s strategic planning and expansion. Mr. Leong is a citizen of Macau, China and has over 17 years of active
management with various industrial and real property companies in Macau, Hong Kong and China. From November 2001 through June
2003, he was chief executive officer of National Craft Industrial Co. Ltd, a toys manufacturing company in China. From July
2003 to June 2006, he was chief executive officer of Idea Kids Toy Co. Ltd. and Genesis Industrial Co. Ltd. Since July 2006,
he has been chairman of Idea Kids Toy Co., Ltd, a toy manufacturing company in China, and also has been chairman of Genesis
Industrial Co., Ltd, a toy manufacturing company in Macau. From July 2006 to December 31, 2009, he was chairman of Zhuhai
Zhongzhu Real Estate Development Company Ltd, a real property developer. He has acted as management advisor for Mr. Lam in
respect of general administration and human resources management for VIP gaming rooms since May 2006. Mr. Leong’s
business address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Raymond Li Chun Ming
, age 54, has served as the
chief financial officer and a director of the Company since February 2010 and has served as chief financial officer and a
director of AGRL since its formation and is responsible for the accounting and finance of the Company. Mr. Li is a citizen of
Hong Kong, China and is a practicing Certified Public Accountant and a member of the Hong Kong Institute of Certified Public
Accountants. He is also an associate of the Hong Kong Taxation Institute and the Association of International Accountants. He
is a graduate of Hong Kong Polytechnic University, Department of Accounting. From July 1984 through July 2005 he worked as
senior manager for Tony C. M. Yau & Company, Certified Public Accountant, in Hong Kong, where he was engaged in auditing,
accounting and corporate services. From August 2005 through July 2006 he worked as a consultant for K Li Business Consultancy
Limited, where he was engaged in the provision of corporate and financial advisory services. Since August 2006 he has been an
executive director of Klis & Associates CPA Limited, Certified Public Accountants, in Hong Kong. In September 2004, he
was appointed as an independent non-executive director of Benefun International Holding Limited, a Hong Kong publicly listed
company engaged in the sales of plantation products, property development, garment manufacturing and retailing, and held such
position until May 2009. He has acted as an advisor to Mr. Lam in respect of the financial management of the VIP gaming rooms
since May 2006. Mr. Li’s business address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Vong Hon Kun
, 46, has served as the chief
operating officer and a director of the Company since February 2010 and has served as chief operating officer and a director
of AGRL since its formation and is responsible for the day-to-day operation of the Company and developing the VIP gaming
patron market in mainland China and the junket agent network throughout that country. Mr. Vong is a citizen of Macau, China.
Mr. Vong has spent over 20 years in the gaming industry and had served as junket agent for various VIP gaming rooms in SJM
casinos and Waldo Casino before joining Lam Man Pou for promoting gaming business in May 2006. From July 1990 to May 2002,
Mr. Vong was a junket agent for the Casinos of Sociedade de Turismo e Diversoes de Macau, S.A. From June 2002 through May
2005, Mr. Vong was a junket agent for Casino New Century. From July 2004 through May 2005 Mr. Vong was a junket agent for
Waldo Casino. Before he joined the gaming industry, Mr. Vong had worked as a civil servant for six years. He is a member of
the Macau Gaming Industry General Association of Administrators and VIP Gaming Promoters. Mr. Vong’s business address
is Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
James R. Preissler
, age 39, has served as a director
of CS China Acquisition Corp. (“CS China”), the Company’s corporate predecessor, from June 2008 and served as
chief financial officer and secretary of the Company from June 2008 until the Company’s acquisition of AGRL on February
2, 2010. Since November 2006, Mr. Preissler has served as a managing partner of Panthera Capital Group, an advisory firm for Chinese
companies. From November 2004 until November 2006, Mr. Preissler served as the chief financial officer and secretary for China
Unistone Acquisition Corp., a blank check company that subsequently merged with a target in China to form Yucheng Technologies
(Nasdaq: YTEC), a provider of financial technologies and solutions to banks in China. Mr. Preissler has served as an investment
advisor to Yucheng Technologies since its merger in November 2006. From March 2003 until September 2005, Mr. Preissler served
as the associate director of research for Majestic Research, a New York-based independent research boutique firm focused on proprietary
research for hedge funds and institutional investors. From March 2002 to February 2003, he served as a head of the digital media
research group of Investec, an investment bank specializing on mid-cap growth companies in the United States and Europe. Mr. Preissler
received a Bachelor of Arts degree from Yale University and currently holds Series 7, 24, 63, and 79 securities licenses. Mr.
Preissler’s business address is 50 Old Route 25A, Fort Salonga, New York
João Manuel Santos Ferreira
, age 58, has
served as a director of the Company since April 7, 2010. Mr. Ferreira is an attorney at law in Macau. From 1996 to July 2008,
he was a practicing solicitor at the Macau Jurisdiction Court. From 1975 to 1996, he served in various positions with Macau
public departments, including the Macau Inspection Gaming Bureau (DICJ), where he was a Gaming Inspector from 1989 to 1996.
He holds a Bachelor’s degree in law from the University of Macau. Mr. Ferreira’s business address is Suite G,
2/F, 26 Rua Dr. Pedro Jose Lobo, Macau.
Yeung Lun Allan
, age 55,
has served as a director of the Company since April 7, 2010. Since 1982, Mr. Yeung has had extensive experience in the
manufacturing industry in China. Since June 2008, he has been the operation manager of Yen Hing Leather Works Factory, which operates
a manufacturing plant of 3,500 employees in Dongguang, China. From 1982 to 1985, he was with Sun Chung Precision Metal Industry
Limited, where he was General Manager at the time he left that company. From 1995 to March 2007, as general manager or deputy
general manager, he managed 5 other manufacturing plants in China having thousands of employees. From April 2007 to March 2009,
he was an assistant operations manager for High-Tech Industrial (HK) Ltd. Mr. Yeung holds a Bachelor’s degree in Electrical
Engineering from Aichi Institute of Technology in Japan. Mr. Yeung’s business address is 27/F, Yen Sheng Centre, 64 Hoi
Yuen Road, Kwun Tong, Kowloon, Hong Kong.
George Chui Vai Hou
, age 44, has served as a director
of the Company since April 7, 2010. Mr. Chui has been Executive Director of Wai Luen Import & Export Company Limited in Macau
since 1998. Since December 2008, he has also been Executive Director of Ieng Tat Investment & Development Company Limited,
a Macau company engaged in investment activities. From December 2000 to June 2006, he was also Executive Director of Tai Chong
Ip (Group) Company Limited, a real estate trading company in Macau. Mr. Chui has also been invited and serves as a Member of the
9th, 10th and 11th Guangzhou Committees of the Chinese People’s Political Consultative Conference of China, which are consultative
committees for the Conference. He received a Bachelor’s degree in Social Sciences with First Class Honours, majoring in
accounting and statistics, from the University of Southampton in the United Kingdom and also holds a Master of Science degree
in International Banking and Financial Studies from the same university. Mr. Chui’s business address is 13A Seng Vo Kok,
405 Rua De Amizade, Macau.
Peter Li
, age 47, has served as our director
since December 2011. Mr. Li served as a director of CS China from June 2008 until the Company’s acquisition of AGRL on
February 2, 2010. Mr. Li is currently chief financial officer of Hollysys Automation Technologies (NASDAQ: HOLI), a leading
automation technology and product provider to industrial, rail, and nuclear sectors in China. Mr. Li is an independent
director and audit committee chairman for China Valves Technology, Inc. (NASDAQ: CVVT) and Yuhe International Inc.(PK.YUII).
Prior to working at Hollysys, Mr. Li was CFO of Yucheng Technologies (NASDAQ: YTEC), a leading IT service provider to banking
industry in China. Mr. Li was Internal Controller with Lenovo, a leading PC maker in China, before he joined Yucheng
Technologies. Mr. Li graduated from Beijing Foreign Studies University with a B.A. and received a Master of Education from
University of Toronto. Mr. Li is a Certified General Accountant in Ontario, Canada.
Sylvia Lee
, age 47, became our executive vice
president in April 2010. She served as the president, chief financial officer and secretary of CS China from its inception
until June 2008 and as a director of the Company from February to April 2010. Ms. Lee is a founding member, and has served as
the vice chairman and chief financial officer of CS Capital USA since August 2004. She has also been a director of SK
Development since May 2006. Ms. Lee is a founding member and has been the executive vice president of Lee Holdings Company,
Inc. since August 1989. From November 1994 to January 2001, Ms. Lee served as the president and was a co-founder of Unique
Domain, Inc., an interior design firm and furniture trade showroom chain store in Florida. From June 1993 to September 1997,
Ms. Lee was a member and also served as the treasurer of the Arts and Design Village Development Council of Buena Vista,
Inc., a non-profit organization which had helped revitalize the mid-town Miami area and the Miami Design District. From
August 1989 to August 1995, Ms. Lee served as the vice president of City Homes, Inc. Ms. Lee received a Master of Science
degree. from Florida International University and a Bachelor of Arts degree from the University of Hawaii. Ms. Lee’s
business address is 4100 N.E. Second Avenue, Suite 318, Miami, Florida 33137.
There are currently no family relationships
among our directors and executive officers.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee has
at any time been our officer or employee, or our subsidiaries. No interlocking relationship exists between our board of directors
or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship
existed in the past.
During the last fiscal year, none of our officers
and employees, and none of our former officers participated in deliberations of our Board of Directors or our compensation committee
concerning executive officer compensation.
Benchmarking of Cash and Equity Compensation
We believe it is important when making compensation-related
decisions to be informed as to current practices of similarly situated publicly held companies. We expect to stay apprised of the
cash and equity compensation practices of publicly held companies in the gaming industry through the review of such companies’
public reports and other resources. It is expected that any companies chosen for inclusion in any benchmarking group would have
business characteristics comparable to us, including revenues, financial growth metrics, stage of development, employee headcount
and market capitalization. While benchmarking may not always be appropriate as a stand-alone tool for setting compensation due
to the aspects of our business and objectives that may be unique to us, we generally believe that gathering this information will
be an important part of our compensation-related decision-making process.
Compensation Components
Base Salary
. Generally, we
set executive base salaries for our executives and those of AGRL at levels comparable with those of executives in similar positions
and with similar responsibilities at comparable companies. We seek to maintain base salary amounts at or near the industry norms
while avoiding paying amounts in excess of what we believe is necessary to motivate executives to meet corporate goals. Base salaries
will generally be reviewed annually, subject to terms of employment agreements, and we will seek to adjust base salary amounts
to realign such salaries with industry norms after taking into account individual responsibilities, performance and experience.
Incentive Bonuses
. We may
design and utilize cash incentive bonuses for our executives and those of AGRL to focus them on achieving key operational and financial
objectives within a yearly time horizon. It is expected that such bonuses will be based on the standards include objective standards
for job specific matters and subjective standards based on diligence, improvement of skills and company loyalty, decisiveness and
an appropriate service mind-set. Improvement over the prior year is considered highly important. No cash bonuses have been granted
to date.
Equity-Based Awards.
We may
also use equity-based awards, such as stock options and stock grants, as part of our compensation packages. As of the date of this
annual report, we have not adopted any plans or policies regarding such awards. As part of her annual compensation, Sylvia Lee,
our executive vice president, receives $20,000 of our ordinary shares, as further described under “—Officer Compensation;
Employment Agreements” below.
Officer Compensation; Employment Agreements
The following table sets forth all compensation
paid to our executive officers (not including amounts paid in connection with their services as directors, which is described below)
during 2011:
|
Name and Principal Position
|
|
Fees
Earned or
Paid in
Cash
(US$)
|
|
|
Ordinary
Shares
(US$)
|
|
|
Total
(US$)
|
|
|
Lam Man Pou, Chairman and Chief Marketing Officer
|
|
$
|
96,000
|
|
|
$
|
-
|
|
|
$
|
96,000
|
|
|
Leong Siak Hung, Chief Executive Officer
|
|
|
240,000
|
|
|
|
-
|
|
|
|
240,000
|
|
|
Raymond Li Chun Ming, Chief Financial Officer
|
|
|
156,000
|
|
|
|
-
|
|
|
|
156,000
|
|
|
Vong Hon Kun, Chief Operating Officer
|
|
|
96,000
|
|
|
|
-
|
|
|
|
96,000
|
|
|
Sylvia Lee, Executive Vice President
|
|
|
30,000
|
|
|
|
35,000
|
(1)
|
|
|
65,000
|
|
(1) Our board of directors determined that the valuation price
of our ordinary shares with respect to the 2010 and 2011 equity compensation was $7.98 and $6.09, respectively. Includes
$15,000 earned in 2010 and accrued by the Company in 2011.
AGRL has entered into employment agreements
with its four executive officers that became effective upon the closing of our acquisition of AGRL. The following table sets forth
certain information about these employment agreements as of December 31, 2011.
|
Officer
|
|
Position
|
|
Term
|
|
Annual Salary
|
|
|
Leong Siak Hung
|
|
Chief Executive Officer
|
|
Three Years
|
|
$
|
240,000
|
|
|
Raymond Li Chun Ming
|
|
Chief Financial Officer
|
|
Three Years
|
|
$
|
156,000
|
|
|
Lam Man Pou
|
|
Chief Marketing Officer
|
|
Five Years
|
|
$
|
96,000
|
|
|
Vong Hon Kun
|
|
Chief Operating Officer
|
|
Five Years
|
|
$
|
96,000
|
|
|
Sylvia Lee
|
|
Executive Vice President
|
|
Indefinite
|
|
$
|
50,000
|
(1)
|
|
|
(1)
|
Includes $30,000 in cash and $20,000 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.
|
Certain of the agreements were amended on February
2, 2012 to increase annual salary, effective January 1, 2012. Leong Siak Hung’s annual salary increased to $262,217, Raymond
Li Chun Ming’s annual salary increased to $192,777, Lam Man Pou’s annual salary increased to $126,462, and Von Hon
Kun’s annual salary increased to $126,462.
Each officer is entitled to paid vacation
in accordance with AGRL’s policies. Each officer, except Ms. Lee, is also entitled to reasonable use of company-provided
automobiles, with the officer to be reimbursed for all reasonable expenses related to the use and operation of such
automobiles. However, no automobiles are currently being provided and we currently have no plan in place to provide
automobiles.
The employment agreements, except
Ms. Lee’s employment agreement, 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, except
Ms. Lee’s employment agreement, 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 us all securities then held by him and all rights to receive securities in
the future, which securities will be canceled.
Messrs. Leong, Li, Lam and Vong serve in similar
positions as our officers, for which they receive no additional compensation.
Director Compensation
All of our directors presently receive annual
compensation of $30,000 in cash and $20,000 in our 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 directors of the Company are entitled to receive
an aggregate of 26,440 ordinary shares for fiscal 2011. The chairman of the audit committee receives additional annual cash compensation
of $10,000 and the other members of the audit committee 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 receives $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 $500 for
each board or committee meeting he or she attends that is less than an hour in duration.
The following table sets forth information regarding
compensation provided to our directors for their service on the board of directors in 2011.
|
Name
|
|
Fees Earned
or Paid in
Cash
(US$)
|
|
|
Ordinary
Shares(1)
(US$)
|
|
|
Total
(US$)
|
|
|
Michael Zhang(2)
|
|
$
|
65,752
|
(3)
|
|
$
|
-
|
|
|
$
|
65,752
|
|
|
Raymond Li Chun Ming
|
|
|
35,000
|
|
|
|
20,000
|
|
|
|
55,000
|
|
|
Yeung Lun Allan
|
|
|
38,000
|
|
|
|
20,000
|
|
|
|
58,000
|
|
|
Lam Man Pou
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
50,000
|
|
|
Vong Hon Kun
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
50,000
|
|
|
George Chui Vai Hou
|
|
|
38,000
|
|
|
|
20,000
|
|
|
|
58,000
|
|
|
Leong Siak Hung
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
50,000
|
|
|
James R. Preissler
|
|
|
40,000
|
|
|
|
20,000
|
|
|
|
60,000
|
|
|
Manuel Santos Ferreira
|
|
|
38,000
|
|
|
|
20,000
|
|
|
|
58,000
|
|
|
Peter Li
|
|
|
1,941
|
|
|
|
1,021
|
|
|
|
2,962
|
|
|
|
(1)
|
Our board of directors determined that the valuation price of our ordinary shares with respect to the 2011 directors’
equity compensation was $6.09.
|
|
|
(2)
|
Michael Zhang did not stand for re-election at our 2011 annual meeting.
|
|
|
(3)
|
Includes amounts earned in 2010 but accrued by the Company in 2011.
|
Incentive Plan
On December 13, 2011, our shareholders approved
the the Asia Entertainment & Resources Ltd. 2011 Omnibus Securities and Incentive Plan (the “2011 Incentive Plan”).
The purpose of the 2011 Incentive Plan is to assist us to attract, retain and provide incentives to key management employees and
nonemployee directors of, and nonemployee consultants, to us and our affiliates, and to align the interests of such employees,
nonemployee directors and nonemployee consultants with those of our shareholders. Awards under the 2011 Incentive Plan are limited
in the aggregate to 200,000 ordinary shares. As of the date of this Annual Report, there are 149,600 ordinary shares available
for issuance under the 2011 Incentive Plan.
General Description of the 2011 Incentive Plan
The following is a summary of the material provisions
of the 2011 Incentive Plan and is qualified in its entirety by reference to the complete text of the 2011 Incentive Plan, a copy
of which is attached as an exhibit hereto.
Administration
. The 2011 Incentive Plan
is administered by a committee (the “Committee”) designated by the Board of Directors, which shall consist solely of
three (3) or more Directors who are each (i) “outside directors” (“Outside Directors”) within the meaning
of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), (ii) “non-employee directors”
within the meaning of Rule 16b-3 (“Non-Employee Directors”) and (iii) “independent” for purposes of
any applicable listing requirements; provided, however, that the Board of Directors or the Committee may delegate to a committee
of one or more members of the Board of Directors who are not (x) Outside Directors, the authority to grant awards to eligible persons
who are not (A) then “covered employees” within the meaning of Section 162(m) of the Code and are not expected to be
“covered employees” at the time of recognition of income resulting from such award, or (B) persons with respect to
whom the Company wishes to comply with the requirements of Section 162(m) of the Code, and/or (y) Non-Employee Directors, the authority
to grant awards to eligible persons who are not then subject to the requirements of Section 16 of the Exchange Act. Our Compensation
Committee serves as this Committee. If a member of the Committee shall be eligible to receive an award under the Plan, such Committee
member shall have no authority hereunder with respect to his or her own award. Among other things, the Committee has complete discretion,
subject to the terms of the 2011 Incentive Plan, to determine the employees, non-employee directors and non-employee consultants
to be granted an award under the 2011 Incentive Plan, the type of award to be granted, the number of ordinary shares subject to
each award, the exercise price under each option and base price for each SAR (as defined below), the term of each award, the vesting
schedule for an award, whether to accelerate vesting, the value of the ordinary shares underlying the award, and the required withholdings,
if any. The Committee is also authorized to construe the award agreements, and may prescribe rules relating to the 2011 Incentive
Plan.
Grant of Awards; Shares Available for Awards
.
The 2011 Incentive Plan provides for the grant of awards which are distribution equivalent rights, incentive share options, non-qualified
share options, performance shares, performance units, restricted shares, restricted share units, share appreciation rights (“SARs”),
tandem share appreciation rights, unrestricted shares or any combination of the foregoing, to key management employees and nonemployee
directors of, and nonemployee consultants of, the Company or any of its subsidiaries (each a “participant”) (however,
solely employees of the Company or its subsidiaries are eligible for awards which are incentive share options). We have reserved
a total of 200,000 shares for issuance as or under awards to be made under the 2011 Incentive Plan. To the extent that an award
lapses, expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason, or the rights of its holder
terminate, any shares subject to such award shall again be available for the grant of a new award. The 2011 Incentive Plan shall
continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is adopted by the Board
of Directors (except as to awards outstanding on that date). The Board of Directors in its discretion may terminate the 2011 Incentive
Plan at any time with respect to any shares for which awards have not theretofore been granted; provided, however, that the 2011
Incentive Plan’s termination shall not materially and adversely impair the rights of a holder with respect to any award theretofore
granted without the consent of the holder. The number of shares for which awards which are options or SARs may be granted to a
participant under the 2011 Incentive Plan during any calendar year is limited to 10,000.
Future new hires, non-employee directors and
additional non-employee consultants would be eligible to participate in the 2011 Incentive Plan as well. The number of awards to
be granted to officers, non-employee directors, employees and non-employee consultants cannot be determined at this time as the
grant of awards is dependent upon various factors such as hiring requirements and job performance.
Options
. The term of each option shall
be as specified in the option agreement; provided, however, that except for options which are incentive share options (“ISOs”)
granted to an employee who owns or is deemed to own (by reason of the attribution rules applicable under Code Section 424(d)) more
than 10% of the combined voting power of all classes of stock of the Company or the parent or a subsidiary of the Company (a “ten
percent shareholder”), no option shall be exercisable after the expiration of ten (10) years from the date of its grant.
The price at which an ordinary share may be
purchased upon exercise of an option shall be determined by the Committee; provided, however, that such option price (i) shall
not be less than the fair market value of an ordinary share on the date such option is granted, and (ii) shall be subject to adjustment
as provided in the 2011 Incentive Plan. The Committee or the Board of Directors shall determine the time or times at which or the
circumstances under which an option may be exercised in whole or in part, the time or times at which options shall cease to be
or become exercisable following termination of the option holder’s employment or upon other conditions, the methods by which
such exercise price may be paid or deemed to be paid, the form of such payment, and the methods by or forms in which ordinary shares
will be delivered or deemed to be delivered to participants who exercise options.
Options which are ISOs shall comply in all respects
with Section 422 of the Code. In the case of ISOs granted to a ten percent shareholder, the per share exercise price under such
ISO (to the extent required by the Code at the time of grant) shall be no less than 110% of the fair market value of a Share on
the date such ISO is granted. The term of an ISO may not exceed 10 years (5 years in the case of an ISO granted to a ten percent
shareholder). ISOs may solely be granted to employees. In addition, the aggregate fair market value of the Shares subject to an
ISO (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not
exceed $100,000.
Restricted Share Awards
. A restricted
share award is a grant or sale of ordinary shares to the participant, subject to such restrictions on transferability, risk of
forfeiture and other restrictions, if any, as the Committee or the Board may impose, which restrictions may lapse separately or
in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee or the Board of Directors may determine at the date of grant
or purchase or thereafter. Except to the extent restricted under the terms of the 2011 Incentive Plan and any agreement relating
to the restricted share award, a participant who is granted or has purchased restricted shares shall have all of the rights of
a shareholder, including the right to vote the restricted shares and the right to receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee or the Board of Directors). During the restricted period applicable
to the restricted shares, subject to certain exceptions, the restricted shares may not be sold, transferred, pledged, hypothecated,
or otherwise disposed of by the participant.
Unrestricted Share Awards
. Pursuant to
the terms of the applicable unrestricted share award agreement, a holder may be awarded (or sold) ordinary shares which are not
subject to restrictions, in consideration for past services rendered thereby to us or an affiliate or for other valid consideration.
Restricted Share Units Awards
. The Committee
shall set forth in the applicable restricted share unit award agreement the individual service-based or performance-based vesting
requirement which the holder would be required to satisfy before the holder would become entitled to payment and the number of
units awarded to the Holder. Such payment shall be subject to a “substantial risk of forfeiture” under Section 409A
of the Code. At the time of such award, the Committee may, in its sole discretion, prescribe additional terms and conditions or
restrictions. The holder of a restricted share unit shall be entitled to receive a cash payment equal to the fair market value
of an ordinary share, or one (1) ordinary share, as determined in the sole discretion of the Committee and as set forth in the
restricted share unit award agreement, for each restricted share unit subject to such restricted share unit award, if and to the
extent the applicable vesting requirement is satisfied. Such payment shall be made no later than by the fifteenth (15th) day of
the third (3rd) calendar month next following the end of the calendar year in which the restricted share unit first becomes vested.
Performance Unit Awards
. The Committee
shall set forth in the applicable performance unit award agreement the performance goals and objectives (and the period of time
to which such goals and objectives shall apply) which the holder and/or the Company would be required to satisfy before the holder
would become entitled to payment, the number of units awarded to the holder and the dollar value assigned to each such unit. Such
payment shall be subject to a “substantial risk of forfeiture” under Section 409A of the Code. At the time of such
award, the Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions. The holder of a performance
unit shall be entitled to receive a cash payment equal to the dollar value assigned to such unit under the applicable performance
unit award agreement if the holder and/or the Company satisfy (or partially satisfy, if applicable under the applicable performance
unit award agreement) the performance goals and objectives set forth in such performance unit award agreement. If achieved, such
payment shall be made no later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the
Company’s fiscal year to which such performance goals and objectives relate.
Performance Share Awards
. The Committee
shall set forth in the applicable performance share award agreement the performance goals and objectives (and the period of time
to which such goals and objectives shall apply) which the holder and/or the Company would be required to satisfy before the holder
would become entitled to the receipt of ordinary shares pursuant to such holder’s performance share award and the number
of ordinary shares subject to such performance share award. Such payment shall be subject to a “substantial risk of forfeiture”
under Section 409A of the Code and, if such goals and objectives are achieved, the distribution of such ordinary shares shall be
made no later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the Company’s
fiscal year to which such goals and objectives relate. At the time of such award, the Committee may, in its sole discretion, prescribe
additional terms and conditions or restrictions. The holder of a performance share award shall have no rights as a shareholder
of the Company until such time, if any, as the holder actually receives ordinary shares pursuant to the performance share award.
Distribution Equivalent Rights
. The Committee
shall set forth in the applicable distribution equivalent rights award agreement the terms and conditions, if any, including whether
the holder is to receive credits currently in cash, is to have such credits reinvested (at fair market value determined as of the
date of reinvestment) in additional ordinary shares or is to be entitled to choose among such alternatives. Such receipt shall
be subject to a “substantial risk of forfeiture” under Section 409A of the Code and, if such award becomes vested,
the distribution of such cash or ordinary shares shall be made no later than by the fifteenth (15th) day of the third (3rd) calendar
month next following the end of the Company’s fiscal year in which the holder’s interest in the award vests. Distribution
equivalent rights awards may be settled in cash or in ordinary shares, as set forth in the applicable distribution equivalent rights
award agreement. A distribution equivalent rights award may, but need not be, awarded in tandem with another award, whereby, if
so awarded, such distribution equivalent rights award shall expire, terminate or be forfeited by the holder, as applicable, under
the same conditions as under such other award. The distribution equivalent rights award agreement for a distribution equivalent
rights award may provide for the crediting of interest on a distribution rights award to be settled in cash at a future date (but
in no event later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the Company’s
fiscal year in which such interest was credited), at a rate set forth in the applicable distribution equivalent rights award agreement,
on the amount of cash payable thereunder.
Share Appreciation Rights
. A SAR provides
the participant to whom it is granted the right to receive, upon its exercise, the excess of (A) the fair market value of the number
of ordinary shares subject to the SAR on the date of exercise, over (B) the product of the number of ordinary shares subject to
the SAR multiplied by the base value under the SAR, as determined by the Committee or the Board. The base value of a SAR shall
not be less than the fair market value of an ordinary share on the date of grant. If the Committee grants a share appreciation
right which is intended to be a tandem SAR, additional restrictions apply.
Recapitalization or Reorganization
. Subject
to certain restrictions, the 2011 Incentive Plan provides for the adjustment of ordinary shares underlying awards previously granted
if, and whenever, prior to the expiration or distribution to the holder of ordinary shares underlying an award theretofore granted,
the Company shall effect a subdivision or consolidation of the ordinary shares or the payment of an ordinary share dividend on
ordinary shares without receipt of consideration by the Company. If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise or satisfaction, as applicable, of a previously granted award, the holder shall be entitled
to receive (or entitled to purchase, if applicable) under such award, in lieu of the number of ordinary shares then covered by
such award, the number and class of shares and securities to which the holder would have been entitled pursuant to the terms of
the recapitalization if, immediately prior to such recapitalization, the holder had been the holder of record of the number of
ordinary shares then covered by such award. The 2011 Incentive Plan also provides for the adjustment of shares underlying awards
previously granted by the Board of Directors in the event of changes to the outstanding ordinary shares by reason of extraordinary
cash dividend, reorganization, mergers, consolidations, combinations, split ups, spin offs, exchanges or other relevant changes
in capitalization occurring after the date of the grant of any award, subject to certain restrictions.
Amendment and Termination
. The 2011 Incentive
Plan shall continue in effect, unless sooner terminated pursuant to its terms, until the tenth (10th) anniversary of the date on
which it is adopted by the Board of Directors (except as to awards outstanding on that date). The Board of Directors may terminate
the 2011 Incentive Plan at any time with respect to any shares for which awards have not theretofore been granted; provided, however,
that the 2011 Incentive Plan’s termination shall not materially and adversely impair the rights of a holder with respect
to any award theretofore granted without the consent of the holder. The Board of Directors shall have the right to alter or amend
the 2011 Incentive Plan or any part hereof from time to time; provided, however, that without the approval by a majority of the
votes cast at a meeting of shareholders at which a quorum representing a majority of the ordinary shares of the Company entitled
to vote generally in the election of directors is present in person or by proxy, no amendment or modification of the 2011 Incentive
Plan may (i) materially increase the benefits accruing to holders, (ii) except as otherwise expressly provided in the 2011 Incentive
Plan, materially increase the number of ordinary shares subject to the 2011 Incentive Plan or the individual award agreements,
(iii) materially modify the requirements for participation, or (iv) amend, modify or suspend certain repricing prohibitions or
amendment and termination provisions as specified therein. In addition, no change in any award theretofore granted may be made
which would materially and adversely impair the rights of a holder with respect to such award without the consent of the holder
(unless such change is required in order to cause the benefits under the 2011 Incentive Plan to qualify as “performance-based”
compensation within the meaning of Section 162(m) of the Code or to exempt the 2011 Incentive Plan or any Award from Section 409A
of the Code).
Certain U.S. Federal Income Tax Consequences of the
2011 Incentive Plan
The following is a general summary of the
U.S. federal income tax consequences under current tax law to the Company, were it subject to U.S. federal income taxation,
and to participants under the 2011 Incentive Plan who perform services for the Company and who are individual citizens
or residents of the United States for U.S. federal income tax purposes (“U.S. participants”) of options,
which include ISOs and non-qualified share options, SARs, restricted shares, performance shares, performance units,
restricted share units, dividend equivalent rights and unrestricted shares. It does not purport to cover all of the special
rules that may apply, including special rules relating to limitations on the ability of the Company, were it subject to U.S.
federal income taxation, to deduct certain compensation for U.S. federal income tax purposes, special rules relating
to deferred compensation, golden parachutes, participants subject to Section 16(b) of the Exchange Act and the exercise of
a share option with previously-acquired ordinary shares of the Company. This summary assumes that U.S. participants will
hold their ordinary shares as capital assets within the meaning of Section 1221 of the Code. This summary does not address
the foreign, state or local income or other tax consequences, or any U.S. federal non-income tax consequences, inherent
in the acquisition, ownership, vesting, exercise, termination or disposition of an award under the 2011 Incentive Plan
or ordinary shares issued pursuant thereto. Participants are urged to consult their own tax advisors concerning the
tax consequences to them of an award under the 2011 Incentive Plan or ordinary shares issued pursuant thereto.
A U.S. participant generally does not
recognize taxable income upon the grant of an option. Upon the exercise of a non-qualified share option, the participant
generally recognizes ordinary income in an amount equal to the excess, if any, of the fair market value of the ordinary
shares acquired on the date of exercise over the exercise price therefor, and the Company would be entitled to a deduction
for such amount at that time. If the U.S. participant later disposes of the ordinary shares acquired under a non-qualified
share option, the U.S. participant generally recognizes a long-term or short-term gain or loss, depending upon the period for
which the ordinary shares were held thereby. A long-term capital gain generally is subject to more favorable tax treatment
than ordinary income or a short-term capital gain. The deductibility of capital losses is subject to certain limitations.
Upon the exercise of an ISO, a U.S. participant generally does not recognize taxable income. If the U.S. participant disposes
of the ordinary shares acquired pursuant to the exercise of an ISO more than two years after the date of grant and more than
one year after the transfer of the shares to the U.S. participant, the U.S. participant generally recognizes a long-term
capital gain or loss, and the Company would not be entitled to a deduction. However, if the U.S. participant disposes of such
ordinary shares prior to the end of the required holding period, all or a portion of the gain is treated as ordinary income,
and the Company generally would be entitled to deduct such amount.
In addition to the U.S. federal income tax consequences
described above, the U.S. participant may be subject to the alternative minimum tax (“AMT”), which is payable to the
extent it exceeds the U.S. participant’s regular income tax. For this purpose, upon the exercise of an ISO, the excess of
the fair market value of the ordinary shares for which the ISO is exercised over the exercise price for such ordinary shares is
a preference item for purposes of the AMT. In addition, the U.S. participant’s basis in such ordinary shares is increased
by such excess for purposes of computing the gain or loss on the disposition of the ordinary shares for AMT purposes. If a U.S.
participant is required to pay any AMT, the amount of such tax which is attributable to deferral preferences (including any ISO
adjustment) generally may be allowed as a credit against the participant’s regular income tax liability (and, in certain
cases, may be refunded to the participant) in subsequent years. To the extent the credit is not used, it may be carried forward.
A U.S. participant who receives a grant of restricted
ordinary shares or who purchases restricted ordinary shares, which ordinary shares, in either case, are subject to a substantial
risk of forfeiture and certain transfer restrictions, generally does not recognize income on the receipt of the grant or the purchased
restricted ordinary shares and generally recognizes ordinary compensation income at the time the restrictions lapse in an amount
equal to the excess, if any, of the fair market value of the shares at such time over any amount paid by the U.S. participant for
the ordinary shares. Alternatively, the U.S. participant may elect to be taxed upon receipt of the restricted ordinary shares based
on the value of the ordinary shares at the time of receipt. The Company generally would be entitled to deduct such amount at the
same time as ordinary compensation income is required to be included by the U.S. participant and in the same amount. Dividends
received with respect to restricted ordinary shares generally are treated as compensation, unless the U.S. participant elects to
be taxed on the receipt (rather than the vesting) of the restricted ordinary shares.
A U.S. participant generally does not recognize
income upon the grant of an SAR. The U.S. participant recognizes ordinary compensation income upon the exercise of the SAR equal
to the increase in the value of the underlying ordinary shares, and the Company generally would be entitled to a deduction for
such amount.
A U.S. participant generally does not recognize
income on the receipt of a performance shares award, performance units award, restricted share units award, unrestricted shares
award, or dividend equivalent right award until a payment is received under the award. At such time, the U.S. participant recognizes
ordinary compensation income equal to the amount of any cash payments and the fair market value of any ordinary shares received,
and the Company generally would be entitled to deduct such amount at such time.
Indemnification
Cayman Islands law provides that a corporation
may indemnify its directors and officers as well as its other employees and agents against judgments, fines, and amounts paid in
settlement and expenses, including attorneys’ fees, in connection with various proceedings, except where there has been fraud
or dishonesty or willful neglect or willful default. Our Second Amended and Restated Memorandum and Articles of Association provide
that each member of our board of directors, officer and agent shall be indemnified out of our assets against any liability incurred
by him or her as a result of any act or failure to act in carrying out his or her functions other than such liability (if any)
that he or her may incur by his or her own fraud or willful default and that no such director, agent or officer shall be liable
to us for any loss or damage in carrying out his or her functions unless that liability arises through the fraud or willful default
of such director, officer or agent. Our Second Amended and Restated Memorandum and Articles of Association do not eliminate any
of our director’s fiduciary duties. The inclusion of the foregoing provision may, however, discourage or deter shareholders
or management from bringing a lawsuit against directors even though such an action, if successful, might otherwise have benefited
us and our shareholders. This provision, however, will not eliminate or limit liability arising under United States federal securities
laws.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended (the “Securities Act”) may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in that act and is therefore unenforceable. It should
be noted, however, that the opinion of the SEC is not binding on courts and courts, particularly those of jurisdictions other than
the United States, may determine otherwise.
We have entered into indemnification agreements
separately with each of our current directors and officers that provide, in consideration of the director or officer continuing
to serve us in his current capacity, for us to indemnify, and advance expenses to, him or her to the fullest extent permitted by
law in effect on the date of execution of the agreements or to such greater extent as applicable law may thereafter permit. The
rights of indemnification apply if, by reason of such person’s position as an officer or director of us or any of our subsidiaries,
he or she was or is threatened to be made, a party to any threatened, pending or completed legal proceeding. With respect to proceedings
other than one brought by or in our right (
i.e.,
a shareholders’ derivative proceeding), the indemnification covers
expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by the indemnified person
or on his or her behalf in connection with any such proceeding or any claim, issue or matter therein, if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful. With respect to proceedings brought by or in our
right, the indemnification covers expenses and amounts paid in settlement (such settlement amounts not to exceed, in the judgment
of our board of directors, the estimated expense of litigating the proceeding to conclusion) actually and reasonably incurred by
him or her or on his or her behalf in connection with any such proceeding if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to our best interests. However, no indemnification against such expenses or amounts
paid in settlement shall be made in respect of any claim, issue or matter in any such proceeding as to which indemnified person
has been adjudged to be liable to us if applicable law prohibits such indemnification unless the court in which such proceeding
shall have been brought, was brought or is pending, shall determine that indemnification against expenses or amounts paid in settlement
may nevertheless be made by us. We will advance an indemnified person reasonable and substantiated expenses, judgments, penalties
and fines and amounts paid in settlement in advance of a final determination of liability upon such person agreeing to repay amounts
advanced in the event of an ultimate determination that he or she is not entitled to be indemnified with respect to the amounts
advanced. The rights of the indemnitees under the agreements are not deemed exclusive of any other rights they may be entitled
to under applicable law, our memorandum and articles of association, any agreement, vote of shareholders or resolution of directors
or otherwise. Each agreement will remain in effect until the later of ten years after the date the indemnitee shall have ceased
to serve as a director or officer or the final determination of all pending proceedings.
Term of Office and Benefits
Our board of directors is divided into three
classes, each of which serves a term of three years, with only one class of directors being elected in each year. Please refer
to the disclosure under Item 6.A. herein for further information about the term of our directors.
Board Operations
The positions of principal executive officer
and chairman of the Board of Directors are held by different persons. The chairman of the Board of Directors chairs Board of Director
and shareholder meetings and participates in preparing their agendas.
The Board of Directors is responsible for overall
supervision of our risk oversight efforts as they relate to the key business risks facing the organization. Management identifies,
assesses, and manages the risks most critical to the Company’s operations on a day-to-day basis and routinely advises the
Board of Directors on those matters as the CEO and CFO have access to the Board of Directors, attend regular meetings as well as
the audit committee meetings. The Board’s role in risk oversight is consistent with our leadership structure, with senior
management having responsibility for assessing and managing our risk exposure, and the Board and its Committees, providing oversight
as necessary in connection with those efforts.
Independence of Directors
Messrs. James Preissler, João Manuel
Santos Ferreira, Yeung Lun Allan, Peter Li and George Chui Vai Hou, who constitute a majority of our board of directors, meet the
standards for independence that are required by the Nasdaq Stock Market. The Nasdaq Stock Market’s listing standards define
an “independent director” generally as a person, other than an officer of a company, who does not have a relationship
with the company that would interfere with the director’s exercise of independent judgment.
Code of Ethics
In August 2008, our board of directors adopted
a code of ethics that applies to our directors, officers and employees as well as those of our subsidiaries and is described in
the section of this Annual Report entitled “
Code of Ethics and Related Person Policy
” under Item 7.B. herein.
Copies of the code of ethics are available free of charge upon request. Requests for copies of the code of ethics should be sent
in writing to Asia Entertainment & Resources Ltd., Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Committee Information
Audit Committee
On March 10, 2010, the Board of Directors formed
the Audit Committee and adopted a written charter. The Audit Committee is established in accordance with Section 3(a)(58)(A) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). James R. Preissler (Chairman), Yeung Lun Allan
and George Chui Vai Hou currently serve on this committee. So that we meet the Nasdaq Stock Exchange and other stock exchange listing
requirements, the audit committee will now at all times be composed exclusively of “independent directors” who are
“financially literate” as defined under the Nasdaq Stock Exchange listing standards. The definition of “financially
literate” generally means being able to read and understand fundamental financial statements, including a company’s
balance sheet, income statement and cash flow statement. Messrs. Preissler, Yeung and Chui meet the standards for independence
and financial literacy that are required by the Nasdaq Stock Market and other exchanges and Mr. Preissler also meets the standards
for an “Audit Committee Financial Expert” required by SEC rules and current stock exchange listing standards.
The audit committee’s duties, which are
specified in our audit committee charter, include, but are not limited to:
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reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending
to the board whether the audited financial statements should be included in our Annual Report on Form 20-F;
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discussing with management and the independent auditor significant financial reporting issues and judgments made in connection
with the preparation of our financial statements;
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discussing with management major risk assessment and risk management policies;
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monitoring the independence of the independent auditor;
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verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit
partner responsible for reviewing the audit as required by law;
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inquiring and discussing with management our compliance with applicable laws and regulations;
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pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the
fees and terms of the services to be performed;
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appointing or replacing our independent auditor;
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determining the compensation and oversight of the work of our independent auditor (including resolution of disagreements between
management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or
related work;
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establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal
accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and
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reviewing and approving any related party transactions we may enter into. The audit committee will consider all relevant factors
when determining whether to approve a related party transaction, including whether the related party transaction is on terms no
less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent
of the related party’s interest in the transaction.
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Nominating Committee
On April 7, 2010, the Board of Directors formed
the Nominating Committee and adopted a written charter. Manuel Santos Ferreira (Chairman), George Chui Vai Hou and Peter Li, each
of whom is independent as defined in Rule 5605(a)(2) of the Nasdaq Listing Rules, currently serve on this committee. The nominating
committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominating
committee considers persons identified by its members, management, shareholders and others. The guidelines for selecting nominees,
which are specified in the nominating committee charter, generally provide that persons to be nominated:
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should have demonstrated notable or significant achievements in business, education or public service;
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should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors
and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and
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should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests
of the shareholders.
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The nominating committee will consider a number
of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating
a person’s candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes,
such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating committee
does not distinguish among nominees recommended by shareholders and other persons. The procedures by which security holders may
recommend nominees to our board of directors have not been changed by the formation of the nominating committee.
Compensation Committee
On April 7, 2010, the Board of Directors formed
a Compensation Committee and adopted a written charter. Peter Li (Chairman), Manuel Santos Ferreira, and Yeung Lun Allan, each
of whom is independent as defined in Rule 5605(a)(2) of the Listing Rules, currently serve on this committee. The charter sets
forth responsibilities, authority and specific duties of the Compensation Committee. The principal functions of the compensation
committee are to evaluate the performance of our officers, to review any compensation payable to our directors and officers, to
prepare compensation committee reports, and to administer the issuance of any common stock or other equity awards issued to our
officers and directors.
The table below provides information as to the
total number of employees at the end of the last three fiscal years. We have no contracts or collective bargaining agreements with
labor unions and have never experienced work stoppages. We consider our relations with our employees to be good.
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2009
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2010
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2011
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Number of Employees
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10
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14
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14
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The staffing of the VIP gaming rooms is outsourced.
See Item 7, below.
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ITEM 7.
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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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The following table sets forth information regarding
the beneficial ownership of our ordinary shares as of March 7, 2012 by:
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each person known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares;
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each of our current executive officers and directors; and
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all of our current executive officers and directors as a group.
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Information in the table does not reflect
the issuance to Spring Fortune or its designees of 3,103,000 ordinary shares issuable upon the filing of this annual report
and up to 3,103,000 Ordinary Shares upon achievement of incentive targets for 2012. It is currently anticipated that, of the
3,103,000 ordinary shares issuable under the purchase agreement upon the filing this Annual Report on Form 20-F for
the 2011 fiscal year, 3,103,000 will be issued to Spring Fortune (and to be subsequently distributed to its shareholder and
its shareholder’s designees).
Information in the table also does not reflect
the issuance of 520,000 ordinary shares issuable upon the filing of this annual report in connection with our acquisition of King’s
Gaming.
Unless otherwise indicated, we
believe that all persons named in the table have sole voting and investment power with respect to all ordinary shares
beneficially owned by them. Our major shareholders do not have different voting rights than our non-majority shareholders.
Percentages of ownership are based on 38,804,064 ordinary shares outstanding as of March 7, 2012. Ordinary shares which an
individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or
other convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other
person shown in the table.
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Name and Address of Beneficial Owner
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Amount and Nature of
Beneficial Ownership
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Percent of
Class
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Chien Lee(1)
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2,055,292
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(2)
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5.3
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%
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Sylvia Lee(1)
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2,055,292
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(2)
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5.3
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%
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Vong Hon Kun(3)
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6,034,452
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15.55
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%
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Lam Man Pou(3)
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4,486,455
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11.56
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%
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Chui Vai Hou, George(3)
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0
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—
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%
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James R. Preissler(4)
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289,767
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*
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%
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Leong Siak Hung(5)
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867,288
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2.24
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%
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Li Chun Ming, Raymond(3)
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0
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—
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%
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Joao Manuel Santos Ferreira(3)
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0
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—
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%
|
|
Yeung Lun, Allan(3)
|
|
|
0
|
|
|
|
—
|
%
|
|
Peter Li(3)
|
|
|
0
|
|
|
|
—
|
%
|
|
All of our directors and executive officers as a group (10 individuals)
|
|
|
13,717,254
|
|
|
|
35.35
|
%
|
|
Lam Chou In(3)
|
|
|
4,668,135
|
|
|
|
12.03
|
%
|
|
|
(1)
|
The business address of Mr. and Mrs. Lee is 4100 N.E. Second Avenue, Suite 318, Miami, Florida 33137.
|
|
|
(2)
|
Represents 83,700 ordinary shares owned jointly by Mr. and Mrs. Lee and 1,847,892 ordinary shares held by CS Capital USA, LLC,
an affiliate of Mr. and Mrs. Lee.
|
|
|
(3)
|
Each of these persons maintains a business address at 605 East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
|
|
|
(4)
|
The business address of James R. Preissler is 50 Old Route 25A, Fort Salonga, NY 11768.
|
|
|
(5)
|
Shares are held by Legend Global International Limited, of which Leong Siak Hung, director, has sole voting and dispositive
power over the shares owned by it, which shares constitute all of the shares beneficially owned by Mr. Leong. The business address
of Legend Global International Limited is Flat G, 37/F, Block 3, Island Harbourview, Tai Kok Tsui, Kowloon, Hong Kong.
|
As of March 7, 2012, we believe that 10
holders of record of approximately 36% of our outstanding ordinary shares reside in the United States.
|
|
B.
|
Related Party Transactions
|
Code of Ethics and Related Person Policy
Our Code of Ethics requires us to avoid, wherever
possible, all related party transactions that could result in actual or potential conflicts of interest, except under guidelines
approved by the board of directors (or the audit committee, if one exists at the time). Related-party transactions are defined
as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year, (2)
we or any of our subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director,
(b) greater than 5 percent beneficial owner of our ordinary shares, or (c) immediate family member, of the persons referred to
in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director
or a less than 10 percent beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions
or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also
arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position. We
are not prohibited from entering into related-party transactions with our directors and officers.
Our board of directors is responsible for reviewing
and approving related-party transactions to the extent we enter into such transactions. The board of directors will consider all
relevant factors when determining whether to approve a related party transaction, including whether the related party transaction
is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances
and the extent of the related party’s interest in the transaction. No director may participate in the approval of any transaction
in which he is a related party, but that director is required to provide the other members of the board of directors with all material
information concerning the transaction. Additionally, we require each of our directors and executive officers to complete a directors’
and officers’ questionnaire that elicits information about related party transactions. These procedures are intended to determine
whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part
of a director, employee or officer.
Related Person Transactions of the Company
From August 2009 until the business combination
on February 2, 2010, Chien Lee and James Preissler loaned to us, in the aggregate, $162,000 for working capital. Such amounts were
represented by unsecured non-interest bearing promissory notes that were paid upon the closing of the acquisition of AGRL.
We reimbursed our officers and directors a total
of $151,169 for their reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our
behalf such as identifying and investigating possible target businesses and business combinations.
On November 15, 2010, we acquired King’s
Gaming from Mr. Mok Chi Hung and Mr. Wong Hon Meng, as described in the section titled “Our History and Business—Acquisition
of King’s Gaming Promotion Limited.” Mr. Wong is the brother of Mr. Vong Hon Kun, our Chief Operating Officer, and
owned 4% of the equity of King’s Gaming immediately prior to the acquisition. In connection with the acquisition, on November
10, 2010, we entered into an employment agreement with Mr. Wong, pursuant to which he will serve as our operating officer at the
Wen Zhou VIP Club located at the Venetian Macau Resort Hotel in exchange for $4,800 per month plus expenses. Mr. Wong’s salary
was increased to $6,200 per month plus expenses effective January 1, 2012. We may terminate Mr. Wong’s employment for cause
or upon Mr. Wong’s disability without any obligation of further payment. The agreement has a term of five years from November
10, 2010.
All ongoing and future transactions between
us and any of our officers and directors or their respective affiliates, including loans by our officers and directors, will be
on terms believed by us to be no less favorable to it than are available from unaffiliated third parties. Such transactions or
loans, including any forgiveness of loans, will require prior approval by a majority of our uninterested independent directors
or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our
attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested independent directors
determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect
to such a transaction from unaffiliated third parties.
AGRL Related Party Transactions
Because AGRL and its subsidiaries are not able
to directly operate as VIP gaming promoters, AGRL’s management has technical ownership of AGRL’s VIP gaming promoters,
but each such VIP gaming promoter has entered into an agreement with a subsidiary of AGRL providing that 100% of the profits of
each VIP gaming promoter be paid to a subsidiary of AGRL. None of the members of AGRL’s management team receive compensation
for being the owners of AGRL’s VIP gaming promoters. The following table shows the relationships of AGRL’s management
team to its VIP gaming promoters:
|
Entity Name
|
|
Management Team Member Owning Entity
|
|
Sang Heng Gaming Promotion Company Limited
|
|
Lam Man Pou, Vong Hon Kun and Leong Siak Hung
|
|
Doowell Limited
|
|
Lam Man Pou, Vong Hon Kun and Leong Siak Hung
|
|
Iao Pou Gaming Promotion Limited
|
|
Lam Chou In
|
|
King’s Gaming Promotion Limited
|
|
Mok Chi Hung
|
Star World Hotel and Casino has extended a credit
line of $25.7 million to Sang Heng which is guaranteed by Mr. Lam. Galaxy Macau Resort has extended a credit line of $25.7 million
to Sang Lung which is guaranteed by Mr. Lam. These credit lines are used to advance funds to junket agents and patrons so that
the junket agents can provide gaming patrons with credit at the Iao Kun VIP Rooms operated by Sang Heng at the Star World Hotel
and Casino and by Sang Lung at the Galaxy Macau Resort. The credit lines are non-interest bearing, and Mr. Lam is not compensated
by AGRL for the guarantee.
The Venetian Resort Hotel has extended a credit
line of $3.86 million to King’s Gaming, which is guaranteed by Mr. Vong and Mr. Mok. The credit line is used to advance funds
to junket agents and patrons so that the junket agents can provide gaming patrons with credit at the Wenzhou VIP Room operated
by King’s Gaming at the Venetian Resort Hotel. The credit line is non-interest bearing and Mr. Vong and Mr. Mok are not compensated
by AGRL for the guarantees.
From time to time, Mr. Lam makes small loans
to AGRL for operational purposes. Such loans do not bear interest and Mr. Lam is not otherwise compensated for making such loans.
Sang Heng paid approximately $131,578 to KLi
Business Consultancy Limited, a company controlled by Ms. Ip Ching Wah, spouse of Mr. Li Chun Ming, for the year ended December
31, 2009. The amount paid to this company were for the services provided by Mr. Li to AGRL and AGRL’s VIP gaming promoters.
Messrs. Lam and Vong have agreed to extend credit
to AGRL to lend funds to its VIP gaming promoters so that they in turn can extend credit to their agents and collaborators. Such
loans by Messrs. Lam and Vong are non-interest bearing. See the section entitled “AGRL’s Gaming Operations—Profit
Interest Agreements” under Item 4.B. herein for further information regarding these arrangements.
Day-to-day management and operation of the VIP
gaming rooms is contracted by the VIP gaming promoter to a management company that is responsible for hiring and managing all staff
needed for the operation. This includes local managers and executives to provide supervision, finance and cage personnel, public
relations, drivers and other service staff (waiters, cleaners, etc.). The VIP gaming promoters have entered into such agreements
with Pak Si, owned by Ms. Tam Lai Ching, Mr. Vong’s sister-in-law, pursuant to which Sang Heng pays Pak Si approximately
US $180,000 per month for the VIP room at Star World Hotel; King’s Gaming pays approximately US $103,000 per month for the
VIP room at the Venetian Resort Hotel; and Sang Lung pays approximately $180,000 per month for the VIP room at the Galaxy Resort,
Macau. Pak Si must pay all salaries, benefits and other expenses of operation out of such amounts. Total staff at each operation,
including executives, is approximately 100 people. Such agreements are for one-year terms effective January 1, 2010. Similar agreements
were made with Ms. Tam for each of the two preceding years, including for the VIP gaming room at the MGM Grand Hotel and Casino
which is now closed.
|
|
C.
|
Interests of Experts and Counsel
|
Not required.
|
|
ITEM 8.
|
FINANCIAL INFORMATION
|
|
|
A.
|
Consolidated Statements and Other Financial Information.
|
See Item 18.
None
|
|
ITEM 9.
|
THE OFFER AND LISTING
|
|
|
A.
|
Offer and Listing Details
|
The following table sets forth the range of
high and low closing bid prices for the ordinary shares and warrants for the periods indicated since the ordinary shares and warrants
commenced separate public trading on September 5, 2008. It also sets forth the range of high and low closing bid prices for our
units (each consisting of one ordinary share and two warrants; symbol: CSACF) for such periods until the units were separated into
their component shares and warrants and ceased trading separately on February 19, 2010. The over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
Our warrants were redeemed for cash at the redemption price of $0.01 on October 28, 2010. Accordingly, there are
currently no warrants outstanding.
|
|
|
Ordinary Shares
|
|
|
Warrants
|
|
|
Units
|
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Annual Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012*
|
|
$
|
7.24
|
|
|
$
|
5.47
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2011
|
|
|
12.41
|
|
|
|
6.90
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2010
|
|
|
11.55
|
|
|
|
4.96
|
|
|
|
1.90
|
|
|
|
0.25
|
|
|
|
10.01
|
|
|
|
6.50
|
|
|
2009
|
|
|
6.00
|
|
|
|
4.70
|
|
|
|
0.63
|
|
|
|
0.03
|
|
|
|
6.70
|
|
|
|
4.85
|
|
|
2008
|
|
|
5.275
|
|
|
|
4.25
|
|
|
|
0.45
|
|
|
|
0.04
|
|
|
|
6.14
|
|
|
|
4.55
|
|
|
Quarterly Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter*
|
|
|
7.24
|
|
|
|
5.47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
12.41
|
|
|
|
8.32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Second Quarter
|
|
|
10.75
|
|
|
|
5.50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Third Quarter
|
|
|
10.87
|
|
|
|
5.39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Fourth Quarter
|
|
|
7.49
|
|
|
|
4.72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
11.55
|
|
|
|
5.00
|
|
|
|
0.58
|
|
|
|
0.29
|
|
|
|
—
|
|
|
|
—
|
|
|
Third Quarter
|
|
|
6.70
|
|
|
|
4.96
|
|
|
|
0.84
|
|
|
|
0.25
|
|
|
|
—
|
|
|
|
—
|
|
|
Second Quarter
|
|
|
9.75
|
|
|
|
5.50
|
|
|
|
1.65
|
|
|
|
0.40
|
|
|
|
—
|
|
|
|
—
|
|
|
First Quarter
|
|
|
10.10
|
|
|
|
5.65
|
|
|
|
1.75
|
|
|
|
0.38
|
|
|
|
10.01
|
|
|
|
6.50
|
|
|
Monthly Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2012*
|
|
|
6.75
|
|
|
|
5.80
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
February 2012
|
|
|
7.24
|
|
|
|
5.56
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
January 2012
|
|
|
6.52
|
|
|
|
5.47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
December 2011
|
|
|
6.53
|
|
|
|
5.51
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
November 2011
|
|
|
7.49
|
|
|
|
5.40
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
October 2011
|
|
|
6.80
|
|
|
|
4.72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
September 2011
|
|
|
8.00
|
|
|
|
5.39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
* Through March 7, 2012
The closing bid price for our ordinary shares
on March 7, 2012 was $6.23.
Holders of ordinary shares should obtain current
market quotations for their securities. The market price of the ordinary shares could vary at any time.
Not Applicable.
Our ordinary shares have traded on the Nasdaq
Global Market under the symbol AERL since July 3, 2010. Our warrants traded on the NASDAQ Market under the symbol AERLW from July
3, 2010 until October 28, 2010, when they ceased trading. From February 22, 2010 until July 2, 2010, the ordinary shares and warrants
traded on the OTC Bulletin Board under the symbols AERCF and AERLF, respectively. Prior to February 22, 2010, the ordinary shares
and the warrants traded under the symbols CSAQF and CSAXF, respectively. The warrants ceased trading on October 29, 2010.
Not Applicable.
Not Applicable.
Not Applicable.
|
|
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not Applicable.
|
|
B.
|
Memorandum and Articles of Association
|
The information required by Item 10.B. of Form
20-F is included in the section titled “Description of Securities—Memorandum and Article of Association” in our
Post-Effective Amendment on Form F-3 to Registration Statement on Form F-1 initially filed with the SEC on October 20, 2010, as
amended (File No. 333-166860), which section is incorporated herein by reference.
Our only long term liabilities are 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 $5,560,000. See the section entitled “AGRL’s
Gaming Operations” under Item 4.B. herein.
On October 6, 2009, we entered into a Stock
Purchase Agreement with AGRL and Spring Fortune, a British Virgin Islands company, that provided for the purchase by us from Spring
Fortune of all of the outstanding capital stock of AGRL. The Purchase Agreement was subsequently amended on November 10, 2009,
December 9, 2009, January 11, 2010 and April 18, 2011. For further details about such agreement, please refer to the section titled
“The Acquisition” under Item 4.A. herein.
On November 15, 2010, we consummated the transactions
contemplated by that certain Profit Interest Purchase Agreement dated as of November 10, 2010 among us, King’s Gaming, Mr.
Mok Chi Hung and Mr. Wong Hon Meng, pursuant to which we acquired 100% of the profit interest in King’s Gaming. For further
details about such agreement, please refer to the section titled “Acquisition of King’s Gaming Promotion Limited”
under Item 4.A. herein.
Messrs. Lam and Vong have agreed to extend credit
to AGRL to lend funds to its VIP gaming promoters so that they in turn can extend credit to their agents and collaborators. Such
loans by Messrs. Lam and Vong are non-interest bearing. See the section entitled “AGRL’s Gaming Operations—Profit
Interest Agreements” under Item 4.B. herein for further information regarding these arrangements.
There is no exchange control legislation under
Cayman Islands law and accordingly there are no exchange control regulations imposed under Cayman Islands law.
The following summary sets forth the material
Cayman Islands and U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares covered
by this annual report, based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all
of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our
ordinary shares, such as the tax consequences under state, local and other tax laws. As used in this discussion, references to
“we,” “our,” “us,” or “the company” refer only to Asia Entertainment & Resources
Ltd.
Cayman Islands Taxation
The government of the Cayman Islands will not,
under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding
tax upon the company or its shareholders. The Cayman Islands are not party to any double taxation treaties that are applicable
to payments made to or by us.
No Cayman Islands stamp duty will be payable
by you in respect of the issue or transfer of shares. However, an instrument transferring title to a share, if brought to or executed
in the Cayman Islands, would be subject to Cayman Islands stamp duty.
We have received an undertaking from the Governor-in-Cabinet
of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (Revised) of the Cayman Islands, for a period
of 20 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any tax to be levied on profits,
income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to be levied on profits, income,
gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable (i) on or in respect of the
shares, debentures or other obligations, of the company or (ii) by way of the withholding in whole or in part of a payment of a
dividend or other distribution of income or capital by the company to its shareholders or a payment of principal or interest
or other sums due under a debenture or other obligation of the company.
United States Federal Income Taxation
General
The following is a summary of the material U.S.
federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. The discussion below of the
U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares that
is for U.S. federal income tax purposes:
|
|
·
|
an individual citizen or resident of the United States;
|
|
|
·
|
a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized)
in or under the laws of the United States, any state thereof or the District of Columbia;
|
|
|
·
|
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
|
|
|
·
|
a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons
are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.
|
A beneficial owner of our ordinary shares that
is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of our ordinary shares is not described
as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes,
such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically
to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
This summary is based on the Internal Revenue
Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations,
possibly on a retroactive basis.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances.
In particular, this discussion considers only holders that own and hold our ordinary shares as capital assets within the meaning
of Section 1221 of the Code, and does not discuss the potential application of the alternative minimum tax or the U.S. federal
income tax consequences to holders that are subject to special rules, including:
|
|
·
|
financial institutions or financial services entities;
|
|
|
·
|
persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
|
|
|
·
|
governments or agencies or instrumentalities thereof;
|
|
|
·
|
regulated investment companies;
|
|
|
·
|
real estate investment trusts;
|
|
|
·
|
certain expatriates or former long-term residents of the United States;
|
|
|
·
|
persons that actually or constructively own 5% or more of our voting shares;
|
|
|
·
|
persons that acquired our ordinary shares pursuant to an exercise of employee options, in connection with employee incentive
plans or otherwise as compensation;
|
|
|
·
|
persons that hold our ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
or
|
|
|
·
|
persons whose functional currency is not the U.S. dollar.
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This discussion does not address any aspect
of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed
herein, any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider
the tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities.
If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of
our ordinary shares, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status
of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made)
in respect of our ordinary shares and any consideration received (or deemed received) by a holder in connection with the sale or
other disposition of such ordinary shares will be in U.S. dollars.
We have not sought, and will not seek, a ruling
from the Internal Revenue Service (“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence described
herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be
no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy
of the statements in this discussion.
THIS DISCUSSION IS ONLY A SUMMARY OF
THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS
NOT TAX ADVICE. EACH HOLDER OF OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE
TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions Paid
on Ordinary Shares
Subject to the passive foreign investment company
(“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary income
the amount of any cash dividend paid on our ordinary shares. A cash distribution on such ordinary shares generally will be treated
as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings
and profits (as determined for U.S. federal income tax purposes), although we do not intend to calculate such earnings and profits.
Such dividend generally will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect
of dividends received from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and
profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in our ordinary shares.
Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such ordinary shares.
With respect to non-corporate U.S. Holders for
taxable years beginning before January 1, 2013, any such dividends may be subject to U.S. federal income tax at the lower applicable
regular long term capital gains tax rate (see “ — Taxation on the Disposition of Ordinary Shares” below) provided
that (1) our ordinary shares are readily tradable on an established securities market in the United States, (2) we are not a PFIC,
as discussed below, for either the taxable year in which such dividend was paid or the preceding taxable year, and (3) certain
holding period requirements are met. Under published IRS authority, ordinary shares are considered for purposes of clause (a) above
to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which
presently include the Nasdaq Global Market. Although our ordinary shares are currently listed on the Nasdaq Global Market, U.S.
Holders nevertheless should consult their own tax advisors regarding the availability of the lower rate for any dividends paid
in respect to our ordinary shares. For taxable years beginning on or after January 1, 2013, the regular U.S. federal income tax
rate applicable to such dividends currently is scheduled to return to the regular U.S. federal income tax rate generally applicable
to ordinary income.
Taxation on the Disposition of Ordinary
Shares
Upon a sale or other taxable disposition of
our ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss
in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary
shares.
The regular U.S. federal income tax rate on
capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income,
except that long-term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at
a maximum regular rate of 15% for taxable years beginning before January 1, 2013 (but currently scheduled to increase to 20% for
taxable years beginning on or after January 1, 2013). Capital gain or loss will constitute long-term capital gain or loss if the
U.S. Holder’s holding period for the ordinary shares exceeds one year. The deductibility of capital losses is subject to
various limitations.
Passive Foreign Investment Company
Rules
A foreign (i.e., non-U.S.) corporation will
be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share
of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income,
or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value
and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to
own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business),
and gains from the disposition of passive assets.
Based on the composition (and estimated values)
of the assets and the nature of the income of us and our subsidiaries for our 2011 taxable year, we do not believe that we will
be treated as a PFIC for such year. However, because we have not performed a definitive analysis as to our PFIC status
for our 2011 taxable year, there can be no assurance in respect to our PFIC status for our 2011 taxable year. There
also can be no assurance in respect to our status as a PFIC for our current (2012) taxable year or any subsequent taxable year.
If we are determined to be a PFIC for any taxable
year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, and such U.S. Holder
did not make either a timely qualified electing fund (“QEF”) election for our first taxable year as a PFIC in which
the U.S. Holder held (or was deemed to hold) our ordinary shares, or a mark-to-market election, as described below, such holder
generally will be subject to special rules in respect to:
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any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares; and
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any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable
year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect
of the ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding
period for the ordinary shares).
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Under these rules,
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the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for
the ordinary shares;
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the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess
distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which
we qualified as a PFIC, will be taxed as ordinary income;
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the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will
be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each
such other taxable year of the U.S. Holder.
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In general, if we are determined to be a PFIC,
a U.S. Holder may avoid the PFIC tax consequences described above in respect to our ordinary shares by making a timely QEF election
to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as
ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which
or with which our taxable year ends. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed
income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
The QEF election is made on a shareholder-by-shareholder
basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching
a completed IRS Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund), including
the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for the taxable
year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement with
such return and if certain other conditions are met or with the consent of the IRS.
In order to comply with the requirements of
a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to provide
to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual information
statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that we will
have timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has made a QEF election in
respect to our ordinary shares, and the special tax and interest charge rules do not apply to such ordinary shares (because of
a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares or
a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized on the sale or other taxable
disposition of such ordinary shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed
above, U.S. Holders of a QEF are currently taxed on their pro rata shares of the QEF’s earnings and profits, whether or not
distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income should
not be taxable as a dividend to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s ordinary shares in a QEF will
be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the
above rules. Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated under
the applicable attribution rules as owning ordinary shares in a QEF.
Although a determination as to our PFIC status
will be made annually, an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder who
held our ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent years. A U.S.
Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed
to hold) our ordinary shares, however, will not be subject to the PFIC tax and interest charge rules discussed above in respect
to such ordinary shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime in respect to such ordinary
shares for any of our taxable years that end within or with a taxable year of the U.S. Holder and in which we are not a PFIC. On
the other hand, if the QEF election is not effective for each of our taxable years in which we are a PFIC and during which the
U.S. Holder holds (or is deemed to hold) our ordinary shares, the PFIC rules discussed above will continue to apply to such shares
unless the holder makes a “purging election” in respect to such ordinary shares. A purging election generally creates
a deemed sale of such ordinary shares at their fair market value. The gain recognized by the purging election generally will be
subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result
of the purging election, the U.S. Holder generally will increase the adjusted tax basis in its ordinary shares by the gain recognized
and also will have a new holding period in its ordinary shares for purposes of the PFIC rules.
Alternatively, if a U.S. Holder, at the close
of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market
election in respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for
the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which
we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its ordinary
shares. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value
of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares. The U.S. Holder also
will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over
the fair market value of its ordinary shares at the end of its taxable year (but only to the extent of the net amount of previously
included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its ordinary shares
will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition
of the ordinary shares will be treated as ordinary income.
The mark-to-market election is available only
for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission,
including the Nasdaq Global Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that
the market price represents a legitimate and sound fair market value. Although our ordinary shares are currently listed on the
Nasdaq Global Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election in respect to our ordinary shares.
If we are a PFIC and, at any time, have a foreign
subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares generally should be deemed to own a portion of the
shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if
we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder otherwise were deemed to have
disposed of an interest in, the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S.
Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election in respect
to the lower-tier PFIC. However, there is no assurance that we will have timely knowledge of the status of any such lower-tier
PFIC or will be able to cause the lower-tier PFIC to provide the required information. A mark-to-market election generally would
not be available in respect to such lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax
issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to
own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a
QEF election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax
return and provide such other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and with the QEF
and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly,
U.S. Holders of our ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to our ordinary
shares under their particular circumstances.
Additional Taxes After 2012
For taxable years beginning on or
after January 1, 2013, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally
will be subject to a 3.8% Medicare contribution tax on unearned income, including, among other things, cash dividends on, and
capital gains from the sale or other taxable disposition of, our ordinary shares, subject to certain limitations and
exceptions. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership
and disposition of our ordinary shares.
Non-U.S. Holders
Cash dividends paid to a Non-U.S. Holder in
respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively connected
with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States).
In addition, a Non-U.S. Holder generally will
not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our ordinary shares
unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an
applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains in the United
States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of
sale or other taxable disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is
subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Cash dividends and gains that are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject
to U.S. federal income tax (but not the Medicare contribution tax) at the same regular U.S. federal income tax rates as applicable
to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, also
may be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S.
federal income tax purposes will apply to cash distributions made on our ordinary shares within the United States to a U.S.
Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of our ordinary shares by a
U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other
dispositions effected at an office) outside the United States will be subject to information reporting in limited
circumstances. In addition, pursuant to recently enacted legislation, certain information concerning a U.S. Holder’s
adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any gain or loss in respect to such
ordinary shares is long-term or short-term also may be required to be reported to the IRS, and certain holders may be
required to file an IRS Form 8938 (Statement of Specified Foreign Assets) to report their interest in our ordinary shares.
Moreover, backup withholding of U.S. federal
income tax at a rate of 28% for taxable years beginning before January 1, 2013 (but currently scheduled to increase to 31% for
taxable years beginning on or after January 1, 2013), generally will apply to cash dividends paid on our ordinary shares to a U.S.
Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder
(other than an exempt recipient), in each case who:
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fails to provide an accurate taxpayer identification number;
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is notified by the IRS that backup withholding is required; or
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in certain circumstances, fails to comply with applicable certification requirements.
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A Non-U.S. Holder generally may eliminate the
requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties
of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax.
Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s
U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely
furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the
availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
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F.
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Dividends and paying agents
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Not required.
Not required.
Documents concerning us that are referred to
in this document may be inspected at Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
In addition, we file annual reports and other
information with the Securities and Exchange Commission. We file annual reports on Form 20-F and submit other information under
cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act and
our officers, directors and principal shareholders will be exempt from the insider short-swing disclosure and profit recovery rules
of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission may be inspected at the public
reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies of all
or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call the Commission at 1-800-SEC-0330
for further information on the operation of the public reference rooms and you can request copies of the documents upon payment
of a duplicating fee, by writing to the Commission. In addition, the Commission maintains a web site that contains reports and
other information regarding registrants (including us) that file electronically with the Commission which can be assessed at http://www.sec.gov.
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I.
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Subsidiary Information
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Not required.
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
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Foreign Currency Risk
We do not currently have any foreign exchange
exposure as our promotion income and expenses are predominantly denominated in HKD$. However, in the future, it is possible
that a proportion of our promotion income and expenses may be denominated in other currencies if we expand into
overseas markets. In such circumstances, we anticipate our primary market risk, if any, to be related to fluctuations in exchange
rates. Exchange rate risk may arise if the we are required to use different currencies for various aspects of our
operations.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not required.
PART
II
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ITEM 13.
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DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
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There has been no default of any indebtedness
nor is there any arrearage in the payment of dividends.
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ITEM 14.
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MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
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There were no material modifications to the
rights of our shareholders during fiscal year 2011.
There are no restrictions on working capital
and no removal or substitution of assets securing any class of our registered securities.
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ITEM 15.
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CONTROLS AND PROCEDURES
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Disclosure Controls and Procedures
An evaluation was performed under the supervision
and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and
Chief Financial Officer, who is our principal financial officer, regarding the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2011. Based on that evaluation, our management, including our Chief Executive
Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures as of December 31, 2011 were effective.
Disclosure controls and procedures are designed
to provide that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Management’s annual report on internal control
over financial reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process
designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our management
and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of
our financial statements for external reporting purposes in accordance with US GAAP. Internal control over financial reporting
includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately reflect the transactions
and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation
of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
Because of inherent limitations, internal control
over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with our policies and procedures may deteriorate.
Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management has concluded that our internal
control over financial reporting was effective as of December 31, 2011. The registered public accounting firm that audited the
financial statements included in the annual report containing the disclosure required by this Item has issued an attestation report
on management’s assessment of the issuer’s internal control over financial reporting.
Attestation report of the independent registered
public accounting firm
To the Board of Directors and
Stockholders of Asia Entertainment & Resources
Ltd.
We have audited Asia Entertainment & Resources
Ltd.’s (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Asia Entertainment & Resources
Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated
statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows of Asia Entertainment &
Resources Ltd., and our report dated March 16, 2012, expressed an unqualified opinion.
/s/ UHY LLP
New York, New York
March 16, 2012
Changes in Internal Controls over Financial Reporting
In 2011, we made the following changes to our
internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting and which resulted in our determination
that we did not have a material weakness in our internal controls over financial reporting for the year ended December 31, 2011:
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We performed a complete review of our accounting and reporting processes and procedures to identify potential weaknesses and
to adopt measures to improve and strengthen our overall control environment. We will continue to monitor the effectiveness of these
processes, procedures and controls.
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We updated our accounting manual to include new closing procedures and a procedural checklist, the purpose of which are to
ensure the accuracy of the financial data for the preparation of our financial statements, and new financial reporting procedures,
the purpose of which are to prepare financial statements that fairly present our financial position and results of operations and
cash flows in conformity with U.S. GAAP.
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We implemented the use of financial statement and reporting disclosure checklists to ensure that all of our related
disclosures are properly included and reported.
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Our chief financial officer received additional training in U.S. GAAP through self-study, and began to periodically review major accounting literature updates provided by a major accounting firm which provide an overview of recent U.S. accounting developments.
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We engaged AJ. Robbins, PC as a consultant to assist in improving the Company’s financial reporting and internal control
system based on the COSO Framework and to assist us in preparing our financial statements and related disclosures in accordance
with U.S. GAAP.
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We implemented the following new policies and procedures:
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Financial and budget analyses to identify accounts with an increased risk of misstatement,
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New procedures to review detailed breakdown of material items such as marker receivables, income, and the distribution
of commissions paid.
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o
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An enhanced IT control policy to ensure that appropriate controls are in place over systems and related reporting.
|
|
|
o
|
An oversight control policy for important internal spreadsheets which we use for significant reporting items.
|
|
|
o
|
A policy with respect to our communications with third parties. The policy requires that before material financial and
U.S. GAAP related issues that involve external parties are released, management, in consultation with the Company’s
legal counsel, shall have such information discussed and reviewed by the Company’s independent auditor and qualified
U.S. GAAP accountant to ensure that requirements from regulatory authorities concerned are complied with and that the
interests of investors whose decisions regarding the Company’s securities may be based are protected.
|
It should be noted that while our management
has taken and will continue to take steps to improve our disclosure controls and procedures, our management does not expect
that our disclosure controls and procedures or internal financial controls will prevent all errors or fraud. A control system,
no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.
|
|
ITEM 16A.
|
AUDIT COMMITTEE FINANCIAL EXPERT.
|
The Company’s Board of Directors has determined
that Mr. James Preissler is an audit committee financial expert, and “independent” as that term is defined in the NASDAQ
listing standards.
|
|
ITEM 16B.
|
CODE OF ETHICS.
|
We have adopted a Code of Business Conduct and
Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer,
and principal accounting officer. Copies of the code of ethics are available free of charge upon request. Requests for copies of
the code of ethics should be sent in writing to Asia Entertainment & Resources Ltd., Unit 605, East Town Building, 16 Fenwick
Street, Wanchai, Hong Kong.
|
|
ITEM 16C.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|
Independent Auditors
The firm of UHY LLP has acted since our inception
as our principal independent registered public accounting firm. UHY LLP leases all its personnel, who work under the control of
UHY LLP partners, from wholly-owned subsidiaries of UHY Advisors, Inc. (“UHY”) in an alternative practice structure.
UHY LLP is a registered firm with the Public Company Accounting Oversight Board and is a member of the American Institute of Certified
Public Accountants.
AJ. Robbins, PC acted as AGRL’s and AGRL’s
VIP gaming promoters’ principal independent registered public accounting firm prior to our acquisition of AGRL and is currently
acting as our consultant to assist us in complying with U.S. securities laws and provide advice on U.S. GAAP and related disclosures.
AJ. Robbins, PC is a registered firm with the Public Company Accounting Oversight Board and is a member of the American Institute
of Certified Public Accountants, the Colorado Society of Certified Public Accountants and the Center for Audit Quality.
The business address of UHY LLP is 19 West 44
th Street, New York, New York 10036 and the business address of AJ. Robbins, PC is 1600 Broadway, Suite 1940,
Denver Colorado 80202.
The following is a summary of fees paid or to
be paid by us to UHY LLP and by AGRL to AJ. Robbins, PC for services rendered as the principal accountant.
|
|
|
Year Ended December 31, 2010
|
|
|
Year Ended December 31, 2011
|
|
|
Audit Fees – UHY LLP
|
|
$
|
294,425
|
|
|
$
|
321,025
|
|
|
Audit Fees – AJ. Robbins, PC
|
|
$
|
32,500
|
|
|
|
NA
|
|
|
Audit-Related Fees – UHY LLP
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Audit-Related Fees – AJ. Robbins, PC
|
|
$
|
0
|
|
|
|
NA
|
|
|
Tax Fees – UHY LLP
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Tax Fees – AJ. Robbins, PC
|
|
$
|
0
|
|
|
|
NA
|
|
|
All Other Fees – UHY LLP
|
|
$
|
0
|
|
|
$
|
0
|
|
|
All Other Fees – AJ. Robbins, PC
|
|
$
|
0
|
|
|
|
NA
|
|
Audit fees billed by UHY LLP during the
fiscal years ended December 31, 2010 and 2011 related to professional services rendered in connection with the audits of our
annual financial statements and internal control included in our Annual Reports on Form 20-F for those fiscal periods, the
review of our financial information included in semi-annual Reports of Foreign Private Issuer on Form 6-K, and our
registration statements and proxy statement filings.
Audit fees billed by AJ. Robbins, PC during
the fiscal years ended December 31, 2010 related to professional services rendered in connection with the review of our financial
statements included in our Annual Report on Form 20-F and registration statements and proxy statement filings.
Audit Committee Pre-Approval
We do not rely on pre-approval policies and
procedures. Our audit committee approved the services described above relating to the 2010 and 2011 fiscal years.
|
|
ITEM 16D.
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
|
None.
|
|
ITEM 16E.
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
|
None.
|
|
ITEM 16F.
|
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.
|
Reference is made to the disclosure set forth
under Item 16F in the Company’s Annual Report on Form 20-F, as amended, for the year ended December 31, 2010.
|
|
ITEM 16G.
|
CORPORATE GOVERNANCE
|
There are no material differences in the Company’s
corporate governance practices from those of U.S. domestic companies under listing standards of NASDAQ.
|
|
ITEM 17.
|
FINANCIAL STATEMENTS
|
We have elected to provide financial statements
pursuant to Item 18.
|
|
ITEM 18.
|
FINANCIAL STATEMENTS
|
The financial statements are filed as part of
this annual report beginning on page F-1.
Exhibit
No.
|
|
Description
|
|
2.1
|
|
Stock Purchase Agreement (Restated as Amended), dated October 6, 2009, as amended November 10, 2009, December 9, 2009 and January 11, 2010 among CS China Acquisition Corp., Asia Gaming & Resort Limited (“AGRL”), and Spring Fortune Investment Ltd (included as Annex A to the Proxy Statement filed as Exhibit 10.1 to the Report of Foreign Private Issuer on Form 6-K filed on January 19, 2010 and incorporated herein by reference)
|
|
2.2
|
|
Amendment No. 4 to Stock Purchase Agreement, dated April 18, 2011, among Asia Entertainment & Resources Ltd., AGRL, and Spring Fortune Investment Ltd(8)
|
|
2.3
|
|
Profit Interest Purchase Agreement, dated November 10, 2010, by and among Asia Entertainment & Resources Ltd. and King’s Gaming Promotion Limited, Mr. Mok Chi Hung and Mr. Wong Hon Meng(5)
|
|
3.1
|
|
Form of Second Amended Memorandum and Articles of Association (included as Annex D to the Proxy Statement filed as Exhibit 10.1 to the Report of Foreign Private Issuer on Form 6-K filed on January 19, 2010 and incorporated herein by reference)
|
|
4.1
|
|
Specimen Unit Certificate(1)
|
|
4.2
|
|
Specimen Ordinary Share Certificate(2)
|
|
4.3
|
|
Specimen Warrant Certificate(1)
|
|
4.4
|
|
Form of Unit Purchase Option granted to EarlyBirdCapital, Inc.(1)
|
|
4.5
|
|
Form of Warrant Agreement between Continental Stock Transfer & Trust Company and registrant(1)
|
|
10.1
|
|
Form of Escrow Agreement among CS China Acquisition Corp., Spring Fortune Investment Ltd, Spring Fortune Investment Ltd Designee(s) and Continental Stock Transfer & Trust Company(3)
|
Exhibit
No.
|
|
Description
|
|
10.2
|
|
Employment Agreement, dated October 6, 2009 between AGRL and Leong Siak Hung(3)
|
|
10.3
|
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Leong Siak Hung
|
|
10.4
|
|
Employment Agreement, dated October 6, 2009 between AGRL and Raymond Li Chun Ming(3)
|
|
10.5
|
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Raymond Li Chun Ming
|
|
10.6
|
|
Employment Agreement, dated October 6, 2009 between AGRL and Lam Man Pou(3)
|
|
10.7
|
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Lam Man Pou
|
|
10.8
|
|
Employment Agreement, dated October 6, 2009 between AGRL and Vong Hon Kun(3)
|
|
10.9
|
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Vong Hon Kun
|
|
10.10
|
|
Employment Agreement, dated November 10, 2010, between the Company and Wong Hon Meng (7)
|
|
10.11
|
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Wong Hon Meng
|
|
10.12
|
|
Employment Agreement, dated February 2, 2010, between the Company and Lam Chou In
|
|
10.13
|
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Lam Chou In
|
|
10.14
|
|
Employment Agreement, dated November 2010, between the Company and Mok Chi Hung
|
|
10.15
|
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Mok Chi Hung
|
|
10.16
|
|
Management Service Contract dated January 1, 2010 between Iao Pou Gaming Promotion Limited and Pak Si Management and Consultancy Limited(3)
|
|
10.17
|
|
Management Service Contract dated January 1, 2010 between Sang Heng Gaming Promotion Company Limited and Pak Si Management and Consultancy Limited(3)
|
|
10.18
|
|
VIP Junket Promotion Agreement, dated January 18, 2008 between Gillmann Investments Asia, Ltd. and Doowell Limited(3)
|
|
10.19
|
|
VIP Gaming Promotion Agreement, dated November 14, 2008 between Unicorn Incorporation and Champion Lion Limited(3)
|
|
10.20
|
|
Gaming Promotion Agreement between Galaxy Casino S.A. and Sang Lung Gaming Promotion Company Limited
|
|
10.21
|
|
Profit Interest Agreement, dated February 2, 2010 between Well Mount International Limited and Doowell Limited(3)
|
|
10.22
|
|
Profit Interest Agreement, dated February 2, 2010 between Link Bond International Limited and Champion Lion Limited(3)
|
|
10.23
|
|
Profit Interest Agreement, dated February 2, 2010 between Foxhill Group limited and Iao Pou Gaming Promotion Limited(3)
|
|
10.24
|
|
Profit Interest Agreement, dated February 2, 2010 between Kasino Fortune Investments Limited and Sang Heng Gaming Promotion Company Limited(3)
|
|
10.25
|
|
Form of Share Purchase Agreement (included Exhibit 10.1 to the Report of Foreign Issuer on Form 6-K filed on January 29, 2010 and incorporated herein by reference)
|
|
10.26
|
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Chien Lee(1)
|
|
10.27
|
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Sylvia Lee(2)
|
|
10.28
|
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Michael Zhang(2)
|
|
10.29
|
|
Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and registrant(1)
|
|
10.30
|
|
Form of Stock Escrow Agreement between registrant, Continental Stock Transfer & Trust Company and the Initial Shareholders(1)
|
|
10.31
|
|
Form of Letter Agreement between registrant and CS Capital USA, LLC regarding administrative support(2)
|
|
10.32
|
|
Form of Registration Rights Agreement among registrant and the Initial Shareholders(2)
|
|
10.33
|
|
Form of Subscription Agreement among registrant, EarlyBirdCapital, Inc., Graubard Miller and each of CS Capital USA, LLC, Bill Haus, James Preissler, Peter Li and William B. Heyn(1)
|
|
10.34
|
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Bill Haus(1)
|
|
10.35
|
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Jim Preissler(1)
|
|
10.36
|
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Peter Li(1)
|
|
10.37
|
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and William B. Heyn(1)
|
|
10.38
|
|
Form of Indemnification Agreement between registrant and, separately, each of its directors and executive officers(6)
|
|
10.39
|
|
Loan Agreement and Guaranty dated as of February 2, 2010 between Lam Man Pou and Vong Hon Kun and AGRL(6)
|
|
10.40
|
|
Form of Amendment to Profit Interest Agreements(6)
|
|
10.41
|
|
Convertible Term Note issued by the Company to Lam Man Pou dated April 18, 2011(8)
|
|
10.42
|
|
Convertible Term Note issued by the Company to Vong Hon Kun dated April 18, 2011(8)
|
|
10.43
|
|
Lock-up Agreement by and among the Company and Lam Man Pou dated April 18, 2011(8)
|
|
10.44
|
|
Lock-up Agreement by and among the Company and Vong Hon Kun dated April 18, 2011(8)
|
|
10.45
|
|
Lock-up Agreement by and among the Company and Lam Chou In dated April 18, 2011(8)
|
|
10.46
|
|
Lock-up Agreement by and among the Company and Legend Global International Limited dated April 18, 2011(8)
|
Exhibit
No.
|
|
Description
|
|
10.47
|
|
Gaming Promotion Agreement, dated December 9, 2010 between Venetian Macau S.A. and Sociedad de Promocao de Jogos Imperador, Limitada (portions of this exhibit have been omitted pursuant to a request for confidential treatment on file with the Securities and Exchange Commission)(9)
|
|
10.48
|
|
Star World Hotel and Casino Gaming Promoter Loan Contract dated June 30, 2008 by and among Galaxy Casino Holdings Limited, Sang Heng Gaming Promotion Limited and Lam Man Pou (10)
|
|
10.49
|
|
Venetian Macau Limited Junket Credit Agreement dated March 29, 2011 by and between Kasino Fortune Investments Limited and Sang Heng Gaming Promotion Limited.(10)
|
|
10.50
|
|
Profit Interest Agreement by and between Super Number and Sang Lung dated as of July 1, 2011(12)
|
|
10.51
|
|
Gaming Promotion Agreement between Galaxy Casino S.A. and Sang Heng Gaming Promotion Company Limited
|
|
10.52
|
|
Star World Casino Gaming Promoter Loan Contract dated February 9, 2010 by and among Galaxy Casino Holdings Limited, Sang Heng Gaming Promotion Limited and Vong Hon Kun.(10)
|
|
10.53
|
|
Lease, dated September 6, 2011, between AGRL and Hong Yip Service Company Limited
|
|
10.54
|
|
Employment Agreement, dated April 7, 2010, between the Company and Sylvia Lee
|
|
15.1
|
|
Consent of UHY LLP, independent registered public accounting firm
|
|
15.2
|
|
Consent of AJ. Robbins, PC, independent registered public accounting firm
|
|
21.1
|
|
Subsidiaries(6)
|
|
99.1
|
|
Audit Committee Charter(4)
|
|
99.2
|
|
Nominating Committee Charter(4)
|
|
99.3
|
|
Compensation Committee Charter(4)
|
|
99.4
|
|
Asia Entertainment & Resources Ltd. 2011 Omnibus Securities and Incentive Plan (11)
|
|
101.1
|
|
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated and Combined Balance Sheets; (ii) the Consolidated and Combined Statements of Operations and Comprehensive Income (Loss); (iii) the Consolidated and Combined Statement of Changes in Shareholders’ and Owners’ Equity (Deficit); (iv) the Consolidated and Combined Statements of Cash Flows; and (v) the Notes to Consolidated and Combined Financial Statements.
|
|
|
(1)
|
Filed as an exhibit to Amendment No. 5 to registrant’s Registration Statement on Form S-1 filed on July 8, 2008.
|
|
|
(2)
|
Filed as an exhibit to Amendment No. 2 to registrant’s Registration Statement on Form S-1 filed on January 31, 2008.
|
|
|
(3)
|
Filed as an exhibit to the Company’s Shell Company Report on Form 20-F filed on February 8, 2010.
|
|
|
(4)
|
Filed as an exhibit to the Company’s Report of Foreign Private Issuer on Form 6-K filed April 23, 2010.
|
|
|
(5)
|
Filed as Appendix A to Exhibit 99.1 to the Report on Form 6-K filed on November 10, 2010.
|
|
|
(6)
|
Filed as an exhibit to the Company’s Registration Statement on Form F-1 originally filed on May 14, 2010 (File No.: 333-166860).
|
|
|
(7)
|
Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on April 8, 2011.
|
|
|
(8)
|
Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on May 3, 2011.
|
|
|
(9)
|
Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on July 29, 2011.
|
|
|
(10)
|
Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on May 31, 2011.
|
|
|
(11)
|
Filed as Annex A to Exhibit 99.1 to the Report on Form 6-K filed on November 3, 2011.
|
|
|
(12)
|
Filed as an exhibit to the Company’s Report on Form 6-K filed on August 22, 2011.
|
ASIA ENTERTAINMENT
& RESOURCES LTD.
INDEX TO
FINANCIAL STATEMENTS
|
Reports of Independent Registered Public Accounting Firms
|
F-1
|
|
Consolidated Balance Sheets at December 31, 2011 and 2010
|
F-3
|
|
Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) for the years Ended December 31, 2011, 2010, and 2009
|
F-4
|
|
Consolidated and Combined Statement of Changes in Shareholders’ and Owners’ Equity (Deficit) for the years ended December 31, 2011, 2010 and 2009
|
F-5
|
|
Consolidated and Combined Statement of Cash Flows for the years ended December 31, 2011, 2010, and 2009
|
F-6
|
|
Notes to Consolidated and Combined Financial Statements for the years ended December 31, 2011, 2010, and 2009
|
F-7
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and
Stockholders of Asia Entertainment & Resources Ltd.
We have audited the accompanying consolidated balance sheets of
Asia Entertainment & Resources Ltd. (the “Company”) as of December 31, 2011 and 2010, and the related consolidated
statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the
two-year period ended December 31, 2011. The Company’s management is responsible for these financial statements. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and 2010, and the
results of its consolidated operations and its cash flows for each of the years in the two-year period ended December 31, 2011
in conformity with accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming and opinion
on the consolidated financial statements as a whole. In connection with the reverse acquisition on February 2, 2010, as discussed
in Note 1, the earnings per share amounts for the year ended December 31, 2009 have been recalculated as if the recapitalization
took effect on January 1, 2009. The recalculation of the earnings per share has been subjected to the auditing procedures applied
in the audit of the consolidated financial statements and certain additional procedures in accordance with auditing standards
generally accepted in the United States of America. In our opinion, the earnings per share for the year ended December 31, 2009
are fairly stated in all material respects in relation to the financial statements as a whole.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December
31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 16, 2012, expressed an unqualified opinion.
/s/ UHY LLP
New York, New York
March 16, 2012
AJ. ROBBINS, PC
1600 Broadway, Suite 1940
DENVER, COLORADO 80202
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Asia Entertainment & Resources Ltd.
Hong Kong
We have audited, before the effect of retrospective
changes to the earnings per share calculation and the number of ordinary shares outstanding described in Note 1, the accompanying
combined statements of operations and comprehensive income (loss), changes in shareholders' and owners' equity (deficit), and cash
flows of the Operations of Sang Heng Gaming Promotion Company Limited, Spring Gaming Promotion Company Limited, Iao Pou Gaming
Promotion Limited, Doowell Limited (the “Promoter Companies”) and Asia Gaming & Resort Limited (collectively known
as “Asia Entertainment & Resources Ltd.” or the “Company”) for the year ended December 31, 2009. Asia
Entertainment & Resources Ltd.'s management is responsible for these combined financial statements. Our responsibility is to
express an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. The
Company was not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Asia Entertainment & Resources
Ltd.'s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the combined financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements
referred to above present fairly, in all material respects, the results of operations and cash flows of Asia Entertainment &
Resources Ltd. for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 of the consolidated
and combined financial statements, the Company completed a share exchange transaction (the “Share Exchange”) with Asia
Gaming and Resorts Limited on February 2, 2010. The Share Exchange represents a reverse acquisition involving a public shell company
and has been accounted for financial reporting purposes as the issuance of securities by Asia Gaming and Resorts Limited in exchange
for the assets and liabilities of the Company, accompanied by a recapitalization. The accompanying combined financial statements
for period prior to the consummation of the Share Exchange are those of the Promoter Companies, Asia Gaming and Resorts Limited
and its subsidiaries, except the equity section. Accordingly, the Company revised its earnings per share calculation.
For the purpose of calculating earnings per
share for the period presented, the number of ordinary shares outstanding is based on the weighted average number of ordinary shares
of Asia Gaming and Resorts Limited that would have been outstanding during the period presented (assuming the Share Exchange occurred
on January 1, 2009) and, they retrospectively adjusted the accompanying 2009 combined financial statements for the change. We were
not engaged to audit, review, or apply any procedures to the retrospective changes to the earnings per share calculation, the number
of ordinary shares outstanding and the financial statement schedules as of and for the year ended December 31, 2009 as discussed
above and accordingly, we do not express an opinion or any other form of assurance about whether such retrospective changes are
appropriate and have been properly applied. These changes were audited by UHY LLP.
/s/ AJ. ROBBINS, PC
CERTIFIED PUBLIC ACCOUNTANTS
Denver, Colorado
May 11, 2010
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
16,718,565
|
|
|
$
|
13,843,622
|
|
|
Accounts Receivable, Net
|
|
|
1,240,142
|
|
|
|
10,802,582
|
|
|
Markers Receivable
|
|
|
240,131,089
|
|
|
|
120,140,393
|
|
|
Prepaid Expenses and Other Assets
|
|
|
292,559
|
|
|
|
152,869
|
|
|
Total Current Assets
|
|
|
258,382,355
|
|
|
|
144,939,466
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets (net of accumulated amortization of $5,902,419 and $842,712 at December 31, 2011 and 2010, respectively)
|
|
|
54,983,937
|
|
|
|
60,110,307
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
14,992,009
|
|
|
|
15,008,424
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment (net of accumulated depreciation of $1,101 and $0 at December 31, 2011 and 2010, respectively)
|
|
|
26,855
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
22,158
|
|
|
|
-
|
|
|
TOTAL ASSETS
|
|
$
|
328,407,314
|
|
|
$
|
220,058,197
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of Credit Payable
|
|
$
|
46,270,563
|
|
|
$
|
11,840,640
|
|
|
Accrued Expenses
|
|
|
16,157,439
|
|
|
|
10,815,135
|
|
|
Payable-King's Gaming Acquisition, current portion
|
|
|
12,057,600
|
|
|
|
12,835,395
|
|
|
Loan Payable, Shareholders, current
|
|
|
2,641,619
|
|
|
|
61,066,220
|
|
|
Total Current Liabilities
|
|
|
77,127,221
|
|
|
|
96,557,390
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Payable, Shareholders
|
|
|
60,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Payable-King's Gaming Acquisition, net of current portion
|
|
|
32,492,985
|
|
|
|
38,022,169
|
|
|
Total Liabilities
|
|
|
169,620,206
|
|
|
|
134,579,559
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
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 38,804,064 at December 31, 2011 and 22,544,064 at December 31, 2010
|
|
|
3,881
|
|
|
|
2,255
|
|
|
Additional Paid-in Capital
|
|
|
52,581,098
|
|
|
|
52,581,098
|
|
|
Retained Earnings
|
|
|
106,308,297
|
|
|
|
32,936,819
|
|
|
Accumulated Comprehensive Loss
|
|
|
(106,168
|
)
|
|
|
(41,534
|
)
|
|
Total Shareholders' Equity
|
|
|
158,787,108
|
|
|
|
85,478,638
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
328,407,314
|
|
|
$
|
220,058,197
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED AND COMBINED STATEMENTS OF
OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31,
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from VIP Gaming Operations
|
|
$
|
250,575,452
|
|
|
$
|
127,036,361
|
|
|
$
|
60,479,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Commission to Agents
|
|
|
155,968,504
|
|
|
|
76,607,712
|
|
|
|
39,146,410
|
|
|
- Selling, General and Administrative Expenses
|
|
|
16,550,387
|
|
|
|
11,246,938
|
|
|
|
5,271,322
|
|
|
- Special Rolling Tax
|
|
|
1,993,208
|
|
|
|
1,042,400
|
|
|
|
516,742
|
|
|
- Amortization of Intangible Assets
|
|
|
5,058,204
|
|
|
|
843,061
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
179,570,303
|
|
|
|
89,740,111
|
|
|
|
44,934,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income including pre-acquisition profit before change in fair value of contingent consideration
|
|
|
71,005,149
|
|
|
|
37,296,250
|
|
|
|
15,545,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Owners' Interest in Pre-Acquisition Profit
|
|
|
-
|
|
|
|
(4,329,385
|
)
|
|
|
(15,563,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income attributable to ordinary shareholders before change in fair value of contingent
consideration
|
|
|
71,005,149
|
|
|
|
32,966,865
|
|
|
|
(18,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Contingent Consideration for the Acquisition of
King's Gaming
|
|
|
6,248,361
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Ordinary Shareholders
|
|
|
77,253,510
|
|
|
|
32,966,865
|
|
|
|
(18,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Translation Adjustment
|
|
|
(64,634
|
)
|
|
|
(41,534
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss)
|
|
$
|
77,188,876
|
|
|
$
|
32,925,331
|
|
|
$
|
(18,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.07
|
|
|
$
|
2.33
|
|
|
$
|
-
|
|
|
Diluted
|
|
$
|
2.00
|
|
|
$
|
1.88
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,371,426
|
|
|
|
14,177,408
|
|
|
|
10,350,000
|
|
|
Diluted
|
|
|
38,691,186
|
|
|
|
17,571,255
|
|
|
|
10,350,000
|
|
(A) Represents the combined statements of operations of AGRL, its
subsidiaries and VIP Gaming Promoters, the Accounting Acquirer.
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
ASIA ENTERTAINMENT
& RESOURCES LTD.
CONSOLIDATED AND COMBINED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ AND OWNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Owners' Equity
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
|
Ordinary Shares
|
|
|
Paid-In
|
|
|
Retained
|
|
|
(Deficit)
|
|
|
Comprehensive
|
|
|
Equity
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Pre-Acquisition
|
|
|
(Loss)
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008 (A)
|
|
|
10,350,000
|
|
|
$
|
1,035
|
|
|
$
|
11,788
|
|
|
$
|
(11,541
|
)
|
|
$
|
2,800,965
|
|
|
$
|
-
|
|
|
$
|
2,802,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net distributions to owner
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,868,463
|
)
|
|
|
-
|
|
|
|
(19,868,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,399
|
)
|
|
|
-
|
|
|
|
(4,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Promoter Companies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,563,968
|
|
|
|
-
|
|
|
|
15,563,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,505
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2009 (A)
|
|
|
10,350,000
|
|
|
|
1,035
|
|
|
|
11,788
|
|
|
|
(30,046
|
)
|
|
|
(1,507,929
|
)
|
|
|
-
|
|
|
|
(1,525,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares effectively issued to former shareholders as part of the recapitalization
|
|
|
2,195,224
|
|
|
|
220
|
|
|
|
451,824
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
452,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution by shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,507,929
|
|
|
|
-
|
|
|
|
1,507,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued in May 2010 for cash at $9.50 per share
|
|
|
60,000
|
|
|
|
6
|
|
|
|
569,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
570,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for exercise of warrants at $5.00 per share
|
|
|
7,095,790
|
|
|
|
710
|
|
|
|
35,478,240
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,478,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for cash-less exercise of warrants
|
|
|
1,343,050
|
|
|
|
134
|
|
|
|
(134
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for warrants expired unexercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,464
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued in acquisition
|
|
|
1,500,000
|
|
|
|
150
|
|
|
|
16,109,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,966,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,966,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41,534
|
)
|
|
|
(41,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2010
|
|
|
22,544,064
|
|
|
|
2,255
|
|
|
|
52,581,098
|
|
|
|
32,936,819
|
|
|
|
-
|
|
|
|
(41,534
|
)
|
|
|
85,478,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive shares issued for 2010 net income target
|
|
|
12,050,000
|
|
|
|
1,205
|
|
|
|
-
|
|
|
|
(1,205
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive shares issued for filing of 2010 Form 20-F
|
|
|
4,210,000
|
|
|
|
421
|
|
|
|
-
|
|
|
|
(421
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared dividend paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,880,406
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,880,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77,253,510
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77,253,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(64,634
|
)
|
|
|
(64,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2011
|
|
|
38,804,064
|
|
|
$
|
3,881
|
|
|
$
|
52,581,098
|
|
|
$
|
106,308,297
|
|
|
$
|
-
|
|
|
$
|
(106,168
|
)
|
|
$
|
158,787,108
|
|
(A) Represents the combined changes in shareholders' equity (deficit)
of AGRL, its subsidiaries and VIP Gaming Promoters, the Accounting Acquirer.
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED AND COMBINED STATEMENTS OF
CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
|
Cash flows provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) Attributable to Ordinary Shareholders including pre-acquisition profit
|
|
$
|
77,253,510
|
|
|
$
|
32,966,865
|
|
|
$
|
(18,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) attributable to ordinary shareholders to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
5,058,204
|
|
|
|
843,061
|
|
|
|
-
|
|
|
Change in fair value of contingent consideration for the acquisition of King's Gaming
|
|
|
(6,248,361
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Depreciation
|
|
|
1,101
|
|
|
|
-
|
|
|
|
-
|
|
|
Change in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
9,557,858
|
|
|
|
(6,446,270
|
)
|
|
|
(1,316,137
|
)
|
|
Markers Receivable
|
|
|
(119,933,203
|
)
|
|
|
(120,140,393
|
)
|
|
|
-
|
|
|
Advance to Owner pre-acquisition
|
|
|
-
|
|
|
|
1,547,668
|
|
|
|
24,957
|
|
|
Prepaid Expenses and Other Assets
|
|
|
(161,770
|
)
|
|
|
(127,826
|
)
|
|
|
2,103,006
|
|
|
Lines of Credit Payable
|
|
|
34,413,426
|
|
|
|
9,247,096
|
|
|
|
1,045,876
|
|
|
Accrued Expenses
|
|
|
5,339,744
|
|
|
|
5,658,314
|
|
|
|
2,029,884
|
|
|
Net cash provided by (used in) operating activities
|
|
|
5,280,509
|
|
|
|
(76,451,485
|
)
|
|
|
3,869,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(27,956
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Cash paid for acquisition
|
|
|
-
|
|
|
|
(9,028,590
|
)
|
|
|
-
|
|
|
Net cash used in investing activities
|
|
|
(27,956
|
)
|
|
|
(9,028,590
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for cash
|
|
|
-
|
|
|
|
36,048,950
|
|
|
|
-
|
|
|
Cash dividends paid
|
|
|
(3,880,406
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Redemption of warrants for cash
|
|
|
-
|
|
|
|
(40,464
|
)
|
|
|
-
|
|
|
Net distribution to prior owners of interest in pre-acquisition profit
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,304,495
|
)
|
|
Shareholder loans, net
|
|
|
1,574,644
|
|
|
|
62,549,192
|
|
|
|
-
|
|
|
Subscription receivable collected
|
|
|
-
|
|
|
|
-
|
|
|
|
1,282
|
|
|
Proceeds from merger
|
|
|
-
|
|
|
|
452,044
|
|
|
|
-
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,305,762
|
)
|
|
|
99,009,722
|
|
|
|
(4,303,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,946,791
|
|
|
|
13,529,647
|
|
|
|
(434,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash
|
|
|
(71,848
|
)
|
|
|
(7,172
|
)
|
|
|
(4,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
13,843,622
|
|
|
|
321,147
|
|
|
|
759,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,718,565
|
|
|
$
|
13,843,622
|
|
|
$
|
321,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated payable for King's acquisition
|
|
$
|
-
|
|
|
$
|
50,857,564
|
|
|
$
|
-
|
|
|
Ordinary shares issued for acquisition
|
|
$
|
-
|
|
|
$
|
16,110,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes issued for shareholder loans
|
|
$
|
60,000,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Capital contributed by shareholders offset to Shareholder loans payable
|
|
$
|
-
|
|
|
$
|
1,507,929
|
|
|
$
|
-
|
|
(A) Represents the combined statement of cash flows of AGRL, its
subsidiaries and VIP Gaming Promoters, the Accounting Acquirer.
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
Note 1 – Organization and Business of Companies
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 9. The operations of the AGRL's Promoter Companies
are based in Macau, and are subject to Macau jurisdiction. The Company operates a gaming promotion business in VIP rooms located
in hotels and casinos in Macau.
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 and agreements subsequent to that date.
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 10.
On May 15, 2011 the Company opened a new VIP
gaming room at Galaxy Resort Macau located in Cotai, Macau.
On June 16, 2011, the Company closed the VIP
gaming room at the MGM Grand Hotel and Casino in Macau.
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 AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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 AERL 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 and agreements subsequent to that date).
Macau Operations
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. Effective June 16, 2011,
Iao Pou closed the VIP gaming room at the MGM Grand Hotel and Casino in Macau, to allow the Group to focus its resources at its
other three VIP gaming rooms.
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 Star World Grand Hotel and Casino in Macau, pursuant to the profit interest agreement between Kasino Fortune and Sang Heng.
From May 15, 2011 to July 1, 2011, Sang Heng operated a second VIP gaming room at the new Galaxy Resort Macau, which was subsequently
transferred to Sang Lung Gaming Promotion Company Limited ("Sang Lung") effective July 1, 2011.
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.
Super Number Limited ("Super Number")
was incorporated on April 11, 2011. The main asset of Super Number is the right to 100% of the profit derived by Sang Lung
from the promotion of the Iao Kun VIP Room at the Galaxy Macau Resort in Macau, pursuant to the profit interest agreement between
Super Number and Sang Lung effective July 1, 2011.
During the year ended December 31, 2010, AGRL
established AERL Company Limited (Macau) to perform certain executive management functions for the Promoter Companies.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
Other Operations
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.
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 has delayed 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.
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 AERL, 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 interest 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 amendments made on April 18, 2011 (see Note
8), 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 guarantee to AGRL the
repayment of the loans made by AGRL to the VIP gaming promoters. As amended on April 18, 2011 $60,000,000 of the loans owing
to Messrs. Lam and Vong 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
8).
VIP Gaming Promoter Agreements
Sang Heng’s Gaming Representative (VIP
Room Promoter) Agreement dated as of February 1, 2008 entered into between Galaxy Casino, S.A., and Sang Heng allowed for the
sharing of profits as a gaming representative of Iao Kun VIP Room in Star World Hotel and Casino in Macau for the period from
November 30, 2007 to December 31, 2008. Pursuant to an agreement in October 2009, both parties agreed that Sang Heng should be
compensated in accordance with Order no. 83/2009, which provides the maximum commission for gaming activity of promotion of games
at 1.25% of the rolling chip turnover. The agreement became effective on November 1, 2009. The agreement must be renewed annually.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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 chip turnover. The agreement
became effective on November 1, 2009. The agreement automatically renews annually.
Sang Lung’s Gaming Representative (VIP
Room Promoter) Agreement dated as of June 24, 2011 entered into between Galaxy Casino, S.A., and Sang Lung allowed for Sang Lung
to be compensated in accordance with Order no. 83/2009, which provides the maximum commission for gaming activity of promotion
of games at 1.25% of the rolling chip turnover. The agreement became effective on July 1, 2011. The agreement is expected to be
renewed annually.
Iao Pou’s Gaming Representative (VIP
Room Promoter) Agreement dated as of June 22, 2009 entered into 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 was automatically renewed on January
1 for a one year period. The Group closed the Iao Kun VIP Room on June 16, 2011 to focus its resources at its three other
VIP gaming rooms and the Agreement was terminated.
Spring’s (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.
Doowell’s 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:
Macau Promoter Companies
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 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 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 were relocated to the Iao Kun VIP Room at the MGM
Grand Hotel and Casino, located in downtown Macau.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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. The Group closed the Iao Kun VIP Room on June 16, 2011 to focus its resources at its three other
VIP gaming rooms.
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 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.
Sang Lung was incorporated in Macau on March
28, 2011, owned by Mr. Lam and Mr. Vong, who collectively own 100% of the equity interests of Sang Lung. The operations
of Sang Lung are to promote the Iao Kun VIP Room at the Galaxy Macau Resort located on the Cotai in Macau. Sang Lung was licensed
on June 3, 2011 by the Macau SAR as a gaming promoter to promote the VIP gaming room and commenced operation on July 1, 2011. Prior
to July 1, 2011 the VIP gaming room was promoted by Sang Heng.
Other Promoter Companies
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 and 2011. 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.
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
Principles of Consolidation and Combination
The operations of the Promoter Companies are
consolidated with those of AGRL and its wholly owned subsidiaries and AERL as of December 31, 2011 and 2010 and for the years
ended December 31, 2011, 2010, and 2009 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 of the Company is December
31.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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 to the Promoter Companies are calculated and reported by the Casino Operators
on a monthly basis, usually within two 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 win 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 Company 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/combined 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 chip turnover. Management had 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 chip turnover. MGM Grand Hotel and Casino declined the request to allow for fixed commissions.
The Company closed its VIP Room in the MGM Hotel and Casino on June 16, 2011. The Sang Lung and King’s Gaming arrangements
are also based on 1.25% of the rolling chip turnover. 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 rolling chip turnover, rather than the win/loss of the gaming
operations. Total rolling chip turnover in the Group’s VIP gaming rooms was approximately $19,931,385,000, $10,423,462,000,
and $5,192,657,000 during the years ended December 31, 2011, 2010, and 2009 respectively.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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 9), 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 December 31, 2011 and December 31, 2010, the loan amounted to $62,641,619 and $61,066,220, respectively.
On April 18, 2011, $60,000,000 of the loans owing to Messrs. Lam and Vong 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 8).
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 patrons continue
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 receivable from the junket agents. Management expects that the Group will be able to enforce these obligations only
in a limited number of jurisdictions, including Macau. To the extent that junket agents of the Group, through the 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
receivable because, among other reasons, courts of many jurisdictions do not enforce gaming debts and the Group may encounter
forums that will refuse to enforce such debts. The Group’s inability to collect gaming debts could have a significant negative
impact on their operating results.
The Group 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
guaranteed all markers receivable; therefore, as of December 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.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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.
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.
|
|
|
Level 3 —
|
Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
|
For certain of the Group's financial instruments,
none of which are held for trading purposes, including cash and cash equivalents, accounts receivable, markers receivable, certain
other current assets, line of credit payable, accrued expenses, payable-King’s Gaming acquisition, and loan payable
to shareholders, the carrying values of these financial instruments, other than long-term loan payable to shareholders and
payable-King’s Gaming acquisition approximate their fair value due to their short maturities. The carrying value
of long-term loan payable to shareholders approximates their fair value since they guarantee the markers receivable. The
payable-King’s Gaming acquisition was initially recognized for the fair value of the acquisition contingent consideration
and is adjusted to the fair value at each subsequent reporting date (see Note 10).
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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 years ended December 31,:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to ordinary shareholders for basic and diluted earnings per share
|
|
$
|
77,253,510
|
|
|
$
|
32,966,865
|
|
|
$
|
(18,505
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Weighted-average Ordinary Shares outstanding during the year
|
|
|
37,371,426
|
|
|
|
14,177,408
|
|
|
|
10,350,000
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Weighted average Contingent Ordinary Shares to be Issued for Earnings Incentives
|
|
|
913,194
|
|
|
|
3,012,500
|
|
|
|
—
|
|
|
– Weighted average Unit Purchase Option
|
|
|
406,484
|
|
|
|
381,291
|
|
|
|
—
|
|
|
– Weighted-average Director shares issuable
|
|
|
82
|
|
|
|
56
|
|
|
|
—
|
|
|
Denominator for diluted earnings per share
|
|
|
38,691,186
|
|
|
|
17,571,255
|
|
|
|
10,350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.07
|
|
|
$
|
2.33
|
|
|
$
|
—
|
|
|
Diluted earnings per share
|
|
$
|
2.00
|
|
|
$
|
1.88
|
|
|
$
|
—
|
|
During the fourth quarter of 2010, the contingent
Ordinary Shares of 12,050,000 for the AGRL 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 year ended December 31, 2011 and have been included in the dilutive
earnings per share based on the weighted average shares since the 4th quarter of 2010.
During the fourth quarter of 2011, contingent
Ordinary Shares of 2,573,000 and 530,000 for the AGRL 2011 earnings incentive were earned and have been included in
the basic and diluted earnings per share based on the weighted average shares for the 4
th
quarter of 2011.
During the fourth quarter of 2011, contingent
Ordinary Shares of 500,000 and 20,000 for the King’s Gaming 2011 earnings incentive were earned and have been
included in the basic and diluted earnings per share based on the weighted average shares for the 4
th
quarter of 2011.
4,210,000 Ordinary Shares were to be issued
within 30 days of the Company filing its Form 20-F for 2010 (filed on May 6, 2011) and have been included in the basic and diluted
earnings per share based on the weighted average shares for the year ended December 31, 2011.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
The Company agreed that a portion of the Directors
fees be paid in Ordinary Shares which had not been issued pending shareholder approval of its Incentive Plan. The shares are to
be issued in January of each year. A total of 18,796 and 31,604 shares will be issued in 2012 to satisfy this liability
and have been included in the basic and diluted earnings per share based on the weighted average shares for the years ended December
31, 2010 and 2011. A liability of approximately $346,000 and $150,000 is included in accrued expenses at December 31, 2011
and 2010, respectively.
The Company has 1,440,000 dilutive potential
Ordinary Shares related to the Underwriter Unit Purchase Option (UPO). The UPO expires in 2013.
Property and Equipment
Property and equipment is stated at cost. Depreciation
and amortization is recorded on a straight-line basis over the estimated useful lives of the assets ranging from two to five years,
which do not exceed the lease term for leasehold improvements, if applicable.
Goodwill and Other Intangible Assets
The Company amortizes intangible assets over
their estimated useful lives unless it is determined their lives to be indefinite. Goodwill and other intangible assets with indefinite
lives are not amortized but are subject to tests for impairment at least annually. Management performs impairment tests more frequently
than annually if events or circumstances indicate that the value of goodwill or intangible assets with indefinite lives might
be impaired.
The following are the useful lives of the respective
intangible assets:
|
Bad Debt Guarantee
|
|
5.5 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
The Company evaluates when events or circumstances
indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted
cash flows from the assets are estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted
cash flows was less than the carrying amount of the assets, an impairment loss would be recorded. The impairment loss would be
measured on a location by location basis by comparing the fair value of the asset with its carrying amount. Long-lived assets
that are held for disposal are reported at the lower of the assets’ carrying amount or fair value less costs related to
the assets’ disposition. No impairment has been recognized.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
Advertising Costs
Costs for advertising and marketing are expensed
the first time the advertising or marketing takes place or as incurred. Advertising and marketing costs for ongoing operations
are included in selling, general and administrative expense. During the year ended December 31, 2011, the Group incurred
advertising expenses of $100,196. The Group did not incur advertising or marketing expenses during the years ended December 31,
2010 and 2009.
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, 2011 and 2010, the Company has reserved 31,604 and 18,796 Ordinary Shares for issuance to
the Company's directors and key management employees.
In December 2011, shareholders approved the
2011 Omnibus Securities and Incentive Plan (the “Plan”). The purpose of the plan is to assist the Company in attracting,
retaining and providing incentives to key management employees and nonemployee directors of, and nonemployee consultants to, the
Company and its Affiliates, and to align the interests of such employees, nonemployee directors and nonemployee consultants with
those of the Company’s shareholders. The Plan provides for the granting of Distribution Equivalent Rights, Incentive Share
Options, Non-Qualified Share Options, Performance Share Awards, Performance Unit Awards, Restricted Share Awards, Restricted Share
Unit Awards, Share Appreciation Rights, Tandem Share Appreciation Rights, Unrestricted Share Awards or any combination of the
foregoing up to a maximum of 200,000 Ordinary Shares, as may be best suited to the circumstances of the particular Employee, Director
or Consultant. To date no shares have been issued.
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 $”, “Functional Currency”).
Monetary assets and liabilities denominated in currencies other than the Functional Currency are translated into the Functional
Currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional
Currency are translated into the Functional Currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the respective period.
For financial reporting purposes, the consolidated
financial statements of the Group, which are prepared using the Functional Currency, are then translated into the Reporting Currency.
Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated
at the average exchange rates and shareholders' equity is translated at historical exchange rates. Any translation adjustments
resulting are not included in determining net income but are included in foreign currency translation adjustment in other comprehensive
income, a component of shareholders' equity.
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
December 31,
2009
|
|
|
Period end HK$:US$ exchange rate
|
|
$
|
7.78
|
|
|
$
|
7.77
|
|
|
$
|
7.75
|
|
|
Average annual HK$:US$ exchange rate
|
|
$
|
7.78
|
|
|
$
|
7.77
|
|
|
$
|
7.75
|
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
Comprehensive Income
The Group follows standards for the reporting
and display of comprehensive income and its components in the financial statements. 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 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, Spring, Iao Pou and
Sang Lung 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, Spring, Iao Pou and Sang Lung are subject to a tax on the amount of non-negotiable chips wagered by gaming patrons
in the VIP gaming rooms (“rolling chip 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 chip
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.
AGRL is not subject to Hong Kong profits tax
because all operations are performed outside Hong Kong and Hong Kong adopts a territorial tax regime under which only Hong Kong
sourced income is subject to the profit tax.
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 nor does it
engage in any trade or business 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.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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.
The Company 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 December 31, 2011 and 2010, there were no amounts that had been accrued with respect to uncertain
tax positions.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued Accounting
Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, (“ASU
2011-08”), which amends current guidance to allow a company to first assess qualitative factors to determine whether it
is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding
upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective
for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early
adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15,
2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Group
does not expect that the adoption of ASU 2011-08 will have a material impact on our consolidated financial statements.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
Note 3 — Accounts Receivable, Net
Accounts receivable consisted of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Gaming revenues receivable
|
|
$
|
1,240,142
|
|
|
$
|
10,802,582
|
|
As of December 31, 2011, accounts receivable
were due from three Casino Operators. The accounts receivable from the three casinos at December 31, 2011 were 76%, 20%
and 3% of total receivables. 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%, 19% and 18% of total receivables.
Prior to December 31, 2011, the Promoter Companies
received advanced payments totaling $19,791,801, all of which was earned during December 2011.
Note 4 — Intangible Assets
Intangible assets as of December 31, 2011 and
2010 consist of the following:
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Balance at
|
|
|
|
|
January 1,
|
|
|
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Currency
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
Additions
|
|
|
Expense
|
|
|
Charge
|
|
|
Translation
|
|
|
2011
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Guarantee
|
|
$
|
451,991
|
|
|
$
|
-
|
|
|
$
|
(84,781
|
)
|
|
$
|
-
|
|
|
$
|
(521
|
)
|
|
$
|
366,689
|
|
|
Non-Compete Agreement
|
|
|
781,450
|
|
|
|
-
|
|
|
|
(65,146
|
)
|
|
|
-
|
|
|
|
(886
|
)
|
|
|
715,418
|
|
|
Profit Interest Agreement
|
|
|
58,876,866
|
|
|
|
-
|
|
|
|
(4,908,277
|
)
|
|
|
-
|
|
|
|
(66,759
|
)
|
|
|
53,901,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets
|
|
$
|
60,110,307
|
|
|
$
|
-
|
|
|
$
|
(5,058,204
|
)
|
|
$
|
-
|
|
|
$
|
(68,166
|
)
|
|
$
|
54,983,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
15,008,424
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(16,415
|
)
|
|
$
|
14,992,009
|
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Balance at
|
|
|
|
|
January 1,
|
|
|
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Currency
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
Additions
|
|
|
Expense
|
|
|
Charge
|
|
|
Translation
|
|
|
2010
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Guarantee
|
|
$
|
-
|
|
|
$
|
466,116
|
|
|
$
|
(14,131
|
)
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
451,991
|
|
|
Non-Compete Agreement
|
|
|
-
|
|
|
|
792,304
|
|
|
|
(10,858
|
)
|
|
|
-
|
|
|
|
4
|
|
|
|
781,450
|
|
|
Profit Interest Agreement
|
|
|
-
|
|
|
|
59,694,600
|
|
|
|
(818,072
|
)
|
|
|
-
|
|
|
|
338
|
|
|
|
58,876,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets
|
|
$
|
-
|
|
|
$
|
60,953,020
|
|
|
$
|
(843,061
|
)
|
|
$
|
-
|
|
|
$
|
348
|
|
|
$
|
60,110,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
-
|
|
|
$
|
15,008,424
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,008,424
|
|
Estimated amortization expense of intangibles
for the years ending December 31, 2012 through 2016 and thereafter is as follows:
|
2012
|
|
$
|
5,056,275
|
|
|
2013
|
|
|
5,056,275
|
|
|
2014
|
|
|
5,056,275
|
|
|
2015
|
|
|
5,056,275
|
|
|
2016
|
|
|
4,999,776
|
|
|
Thereafter
|
|
|
29,759,061
|
|
|
|
|
$
|
54,983,937
|
|
Note 5 — Property and Equipment
Property and equipment consisted of the following
at December 31:
|
|
|
2011
|
|
|
2010
|
|
|
Office Equipment
|
|
$
|
1,502
|
|
|
$
|
-
|
|
|
Furniture and Fixtures
|
|
|
4,400
|
|
|
|
-
|
|
|
Leasehold Improvements
|
|
|
22,054
|
|
|
|
-
|
|
|
|
|
|
27,956
|
|
|
|
-
|
|
|
Less: Accumulated Depreciation
|
|
|
(1,101
|
)
|
|
|
-
|
|
|
|
|
$
|
26,855
|
|
|
$
|
-
|
|
Depreciation expense was $1,101 for year ended December 31, 2011.
There was no depreciation expense in prior years.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
Note 6 — Lines of Credit Payable
Lines of Credit Payable consisted of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Due to Casino Operators (A)
|
|
$
|
35,989,109
|
|
|
$
|
11,840,640
|
|
|
Due to Others (B)
|
|
|
10,281,454
|
|
|
|
-
|
|
|
|
|
$
|
46,270,563
|
|
|
$
|
11,840,640
|
|
A-Due to Casino Operators
represents an advance of non-negotiable chips to Sang Heng, Sang Lung and King's Gaming and are interest free and renewable monthly,
secured by personal guarantees of Messrs. Lam and Vong.
The Casino Operators have extended lines of
credit totaling approximately $55,263,000 as of December 31, 2011. The lines of credit may be exceeded from time to time
at the discretion of the Casino Operators. The lines of credit are guaranteed by Mr. Lam or Mr. Vong and are secured
by their personal checks and a deposit paid by Mr. Lam. Prior to the acquisition of AGRL by AERL, it was the Promoter Companies’
policy not to extend credit to patrons or 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 gaming 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.
B- Due to Others is a temporary advance from
a third party. The amount is unsecured and interest free and was repaid on January 1, 2012.
Note 7 — Accrued Expenses
Accrued Expenses consist of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Commission payable-Junket Agents
|
|
$
|
14,545,733
|
|
|
$
|
9,802,113
|
|
|
Management fee payable-related party (Note 12)
|
|
|
462,665
|
|
|
|
385,977
|
|
|
Management and Directors' compensation
|
|
|
720,131
|
|
|
|
286,286
|
|
|
Others
|
|
|
428,910
|
|
|
|
340,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,157,439
|
|
|
$
|
10,815,135
|
|
Note 8 — 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, Messrs. Lam and Vong
may request repayment for the excess amount. As of December 31, 2011 and December 31, 2010, the amount of the funding advanced
to AGRL by Messrs. Lam and Vong was approximately $62,641,619 and $61,066,220, respectively. Messrs. Lam and Vong also guarantee
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.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
On April 18, 2011, the terms of the loan agreement
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, this portion of the loan amount as of December 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, 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 9 — 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.
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 to receive 2,573,000 incentive shares for each year. 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 were designees of the ordinary shares issued 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 are 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 issued subsequent to the filing of the Group's 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, 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 are those of AGRL and the Promoter Companies
and are 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 issued to Spring Fortune
and its designees and an additional 4,210,000 Ordinary Shares issued upon the filing of AERL’s annual report on Form 20-F
for the 2010 fiscal year. In addition, Spring Fortune is 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:
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
|
Year
|
|
Incentive Target
|
|
|
Incentive Shares
|
|
|
2011
|
|
$
|
|
|
|
|
65,000,000 and above
|
|
|
|
2,573,000
|
|
|
2012
|
|
$
|
|
|
|
|
78,000,000 and above
|
|
|
|
2,573,000
|
|
As of December 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 12,050,000 ordinary shares were issued subsequent to the filing of the 2010 annual report on Form 20-F.
AGRL achieved the performance target for the
year ended December 31, 2011 of $65,000,000 to earn 2,573,000 Ordinary Shares and the additional incentive target of $78,000,000
to earn 530,000 Ordinary Shares in 2011 pursuant to the Agreement. The shares will be issued subsequent to the filing of the 2011
annual report on Form 20-F.
Additionally, the Company issued 4,210,000 shares
as a result of the filing of Form 20-F for the fiscal year ended December 31, 2010 in May of 2011. The shares are considered
to be issued as part of the merger and therefore have been treated as issued for no additional cost or compensation. The
issuance is treated as an increase to Ordinary Shares and a decrease to Retained Earnings of $1,626 to reflect the par value of
the Ordinary Shares. The Company considered indicators to determine if the contingent payments as a result of the reverse
merger between AGRL and AERL constituted a form of additional compensation to/or profit sharing with the sellers and concluded
they are not to be treated as additional compensation or profit sharing.
Note 10—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.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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.
The Earnout Shares, Incentive Shares and Additional Incentive Shares
shall be released and issued to the Seller as follows:
|
|
|
Gross Profit Target
|
|
|
|
|
|
|
|
|
Year
|
|
For Earnout/Incentive Shares
|
|
|
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.
For the year ended December 31, 2011, Incentive
Shares of 500,000 were earned since King’s Gaming met it’s 2011 Gross Profit Target exceeding $6,150,000 and earned
additional incentive shares of 20,000 by exceeding it’s Gross Profit Target by over $2,000,000.
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:
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
|
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 year ended December 31, 2011,
the Company recognized gains of $6,248,361 due to the change in the fair value of the contingent consideration utilizing Level
3 fair value measurements. Fluctuations in the market value of the Company's ordinary shares and subsequent performance will
cause the fair value to increase or decrease and the resulting change will be recognized in earnings.
The following is a reconciliation of the change
in fair value of the contingent consideration:
|
Contingent Consideration as of December 31, 2010
|
|
$
|
50,857,564
|
|
|
|
|
|
|
|
|
Change in Fair Value of Contingent Consideration
|
|
|
(6,248,361
|
)
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
|
(58,618
|
)
|
|
|
|
|
|
|
|
Contingent Consideration as of December 31, 2011
|
|
$
|
44,550,585
|
|
Management has considered the factors that make
up the goodwill recognized in the transaction including the reputation of the VIP room and its location at the Venetian Resort
and Casino on the Cotai strip in Macau. Additional factors include the synergies between the operations of King's Gaming and the
operations of Sang Heng and Sang Lung, including the expanded network of agents and the ability to offer higher tier patrons the
opportunity to play at either a high end luxury Cotai strip location or a high end luxury downtown Macau location. These factors
do not qualify for separate recognition in the overall purchase price allocation.
The following is a summary of the current and
long term portions of the estimated contingent consideration expected to be paid for the acquisition of King's Gaming:
|
Years Ended
December 31,
|
|
Total Contingent Consideration
|
|
|
|
|
|
|
|
2012*
|
|
$
|
12,057,600
|
|
|
2013
|
|
|
12,144,039
|
|
|
2014
|
|
|
12,263,442
|
|
|
2015
|
|
|
993,960
|
|
|
2016
|
|
|
1,115,690
|
|
|
Thereafter
|
|
|
5,975,854
|
|
|
|
|
$
|
44,550,585
|
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
*-contingent consideration totaling $12,057,600 earned in 2011,
but not payable until the completion of the 2011 annual audit.
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.
Management determined that the acquisition of
the operations of King’s from the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau would allow
the Company to rapidly expand its operations to the Cotai area of Macau and appeal to a wider number of gaming patrons. Prior to
the acquisition, the Company's operations were only located in downtown Macau. Additionally, the acquisition of King's brought
an additional network of agents and collaborators that may increase revenues at the Company's other VIP rooms.
The following is a summary of revenues, expenses
and net income of King’s since the effective acquisition date (November 1, 2010) included in the consolidated results of
operations for the Company during the year ended December 31, 2010:
|
Revenues
|
|
$
|
4,641,331
|
|
|
Expenses
|
|
|
3,240,158
|
|
|
Net Income Attributable To King’s
|
|
$
|
1,401,173
|
|
Transaction costs for the acquisition of King's Gaming charged to
operations in 2010 were $241,730.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
The following unaudited, pro forma consolidated
and combined statements of operations have been prepared assuming that the acquisition of King’s occurred on January 1 of
each year presented.
|
|
|
Pro Forma
Consolidated
For the Year
Ended
December 31,
2010
|
|
|
Pro Forma
Combined
For the Year
Ended
December 31,
2009
|
|
|
Revenue
|
|
$
|
145,392,594
|
|
|
$
|
73,291,510
|
|
|
Expenses
|
|
|
106,176,729
|
|
|
|
59,517,603
|
|
|
Pro Forma Net Income Attributable To Ordinary Shareholders
|
|
$
|
39,215,865
|
|
|
$
|
13,773,907
|
|
|
Pro Forma Net Income Per Share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.53
|
|
|
$
|
1.16
|
|
|
Diluted
|
|
$
|
2.08
|
|
|
$
|
1.16
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,488,367
|
|
|
|
11,850,000
|
|
|
Diluted
|
|
|
18,882,214
|
|
|
|
11,850,000
|
|
Note 11 — Shareholders’ Equity
Ordinary Shares
AERL is authorized to issue 200,000,000 Ordinary
Shares, par value $.0001. As of December 31, 2011, 2010, and 2009, 38,804,064, 22,544,064, and 10,350,000 Ordinary Shares
are outstanding, respectively. The Company issued 12,050,000 and 4,210,000 ordinary shares related to achieving earnings
targets in 2010 following the filing of Form 20-F during the second quarter of 2011. Ordinary shares totaling 31,604 and
18,796 issuable for 2011 and 2010 director and key management compensation have not yet been issued. 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.
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).
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 the following
year. The chairman of the audit committee will receive additional annual cash compensation of $10,000 and the other members
of the audit committee will each receive additional annual cash compensation of $5,000. The chairman of the compensation and nominating
committees each receive additional annual cash compensation of $5,000 and the other members of these committees each receive additional
annual cash compensation of $3,000. Each director will also receive cash compensation of $1,000 for each board or committee meeting
that he or she attends (whether in person or telephonically) that is at least an hour in duration and $500 for each board or committee
meeting he or she attends that is less than an hour in duration. Total director fees charged to operations during the years
ended December 31, 2011, 2010 and 2009 were $508,000, $477,000 and $0, respectively.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
Warrants
As of December 31, 2011 and 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 warrants sold to certain of AERL’s founders simultaneously with AERL’s IPO, or 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.
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.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
|
|
|
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 December 31, 2011
|
|
|
1,440,000
|
|
|
|
1,440,000
|
|
|
$
|
5.64
|
|
|
|
1.5 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 are 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.
Share Repurchase Program
During June 2011, the Board of Directors authorized
the establishment of a share repurchase program for the Company to purchase up to two million of its ordinary shares on the open
market at prices to be determined by the Company’s management. In order to comply with the Company's insider trading policy,
the program began after the release of the Company’s financial results for the six-month period ended June 30, 2011 and will
expire on June 30, 2012. Purchases pursuant to the program may be made from time to time in accordance with SEC rules and regulations
through open market transactions, subject to market conditions, the Company’s share price and other factors. The repurchase
program may be modified, suspended or discontinued at any time. As of the date of this report, no shares have been repurchased.
Dividend
During June 2011, the Board of Directors
has authorized a regular semi-annual cash dividend of $0.10 per outstanding ordinary share each year after the release of the Company’s
financial results for the six months ending June 30, and, for each year after the release of the Company’s annual financial
results, an amount per outstanding ordinary share equal to (i) 15% of the Company’s non-GAAP net income (defined as operating
income before amortization of intangible assets and change in fair value of contingent consideration) for the most recently completed
fiscal year less the amount paid pursuant to the immediately previous six-month dividend, divided by (ii) the number of ordinary
shares outstanding on the record date for such dividend.
The record date for each period’s dividend
will be set by the Company’s management to be as close as practicable to, but no less than, 15 days after the public release
by the Company of the financial results for the applicable six-month period and fiscal year end. The payment date for each period’s
dividend will be set by the Company’s management to be as close as practicable to, but no less than, 10 days after the record
date. The first dividend was paid on September 2, 2011, totaling $3,880,406. The Company estimates that an additional dividend
will be declared and paid in 2012 amounting to $7,529,000.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
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 December 31, 2011 and 2010.
Note 12 — 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.). The principal of Pak Si is the sister-in-law of Mr. Vong, a director of the Company and its chief
operating officer.
Sang Heng and Iao Pou, have initially entered
into one year agreements to provide such services with Pak Si, pursuant to which each of them paid Pak Si $155,000 per month, and
King's Gaming paid approximately $77,500 per month for the VIP room at the Venetian-Resort-Hotel, from which Pak Si is responsible
to pay all salaries, benefits and other expenses of operation.
Beginning in March 2011, the monthly payments
were revised for Sang Heng, Iao Pou and King's, to $180,000, $103,000 and $103,000, respectively. Beginning on May 15, 2011,
Sang Heng entered into an additional management agreement with Pak Si for the management of the Iao Kun VIP gaming room located
in the Galaxy Resort Macau for $180,000 per month, which was then transferred to Sang Lung.
Total expenses for Pak Si's services were $5,305,258,
$3,732,650, and $2,200,890 during the years ended December 31, 2011, 2010, and 2009, respectively. Amounts due to Pak Si
as of December 31, 2011 and 2010 were $462,665 and $385,977, respectively and have been recorded in accrued expenses.
Employment Agreements
AGRL has entered into employment agreements
with five executive officers: Mr. Lam (Chairman of the Board), Leong Siak Hung (Chief Executive Officer), Li Chun Ming (Chief Financial
Officer), Mr. Vong (Director), and Lam Chou In (Operating Officer) that became effective upon the closing of the acquisition of
AGRL. 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. In February 2012 the Board amended the employment contracts effective January 1, 2012 for
certain officers of the Company to increase the annual salary.
Annual minimum compensation for the terms of
the employment agreements, as amended, is as follows:
|
2012
|
|
$
|
951,548
|
|
|
2013
|
|
|
534,507
|
|
|
2014
|
|
|
496,594
|
|
|
2015
|
|
|
164,762
|
|
|
Total
|
|
$
|
2,147,411
|
|
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.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
Total compensation charged to operations during
the years ended December 31, 2011, 2010, and 2009 related to these employment contracts were $775,200, $690,200, and $0, respectively.
Office Lease
The Company has office leases in Hong Kong and
Macau for executive offices which expire in September and April , 2013 respectively. Minimum future lease payments are
$63,446 and $35,215, during the years ended December 31, 2012 and 2013 respectively. Rent expense was $38,976 and $0 for the years
ended December 31, 2011 and 2010 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 these areas were to decline materially or additional
casino licenses to new Casino Operators were awarded in these locations, the Group’s consolidated results of operations could
be materially affected.
Note 13 — Segment and Geographic Information
The Group’s principal operating and developmental
activities occur in two geographic areas: Macau and Jeju. Management reviews the results of operations for each of its key geographic
areas: Macau and Jeju. During the year ended December 31, 2011 and 2010, there was no operation in Jeju. The Group’s geographic
information is as follows as of and the years ended December 31,
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
AND 2009
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Net Revenues (Macau)
|
|
$
|
250,575,452
|
|
|
$
|
127,036,361
|
|
|
$
|
59,548,437
|
|
|
Net Income (Loss) Attributable to Ordinary Shareholders (Macau)
|
|
$
|
77,253,510
|
|
|
$
|
32,966,865
|
|
|
$
|
(18,505
|
)
|
|
Total Assets (Macau)
|
|
$
|
328,407,314
|
|
|
$
|
220,058,197
|
|
|
$
|
6,242,268
|
|
|
Net Revenues (Jeju)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
931,500
|
|
|
Net Income (Loss) Attributable to Ordinary Shareholders (Jeju)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total Assets (Jeju)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,902
|
|
There were no operations in Jeju in fiscal 2011
and 2010 because, due to the strong year-over-year gaming revenue growth in Macau beginning in the second half of fiscal 2009,
the Company decided to increase its efforts in Macau.
When allocating its investment resources, the
Group fundamentally looks at the costs and benefits of an opportunity. The Company expects that it will resume operations in Jeju
when the benefits of geographical diversification and other economic benefits of resuming operations in Jeju outweigh the marginal
return of expanding operations in Macau alone.
SIGNATURES
The Registrant hereby certifies that it meets
all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
|
|
ASIA ENTERTAINMENT & RESOURCES
LTD.
|
|
|
|
|
|
March 16, 2012
|
By:
|
/s/ Leong Siak Hung
|
|
|
|
Name: Leong Siak Hung
|
|
|
|
Title: Chief Executive Officer (Principal
Executive Officer)
|
|
March 16, 2012
|
By:
|
/s/ Raymond Li Chun Ming
|
|
|
|
Name: Raymond Li Chun Ming
|
|
|
|
Title: Chief Financial Officer (Principal
Financial and Accounting Officer)
|
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