NOTE 2 - Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation  The accompanying consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”) and Regulation S-X.

The functional currency of the Czech subsidiaries is the local Czech koruna (“CZK”) and the functional currency of the German subsidiary is the euro currency (“EUR”). However, as our primary reporting subsidiary, TWH&E, is a Czech entity, all revenues and expenses, regardless of sources of origin, are recognized (and in the case of the German hotel operation, are recognized first) in the Czech currency and translated to USD for reporting purposes.

All intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents  Cash and cash equivalents are comprised of cash in hand; current balances with banks and similar institutions; term deposits of three months or less with banks and similar institutions. The carrying amounts of cash at banks and in-hand and term bank deposits approximate their fair values.

Property and Equipment  Property and equipment is stated at cost less accumulated depreciation and amortization. TWC capitalizes the cost of improvements that extend the life of the asset and expenses maintenance and repair costs as incurred. The Company provides for depreciation and amortization using the straight-line method over the following estimated useful lives:

Asset		Estimated Useful Life

Buildings		30-50 years
Furniture, fixtures and equipment		4-10 years
Leasehold improvements		5-20 years

Goodwill  Goodwill represents the excess of the cost of the Company’s subsidiaries over the fair value of their net assets at the date of acquisition. In the CZ, this consisted of the Ceska casino and a parcel of land in Hate (upon a portion of which the Route 59 Casino and Hotel Savannah are situated). In Germany, it consists of the newly acquired Hotel Freizeit Auefeld. In light of the recent acquisition of German assets, TWC’s allocation of its Czech goodwill over two geographical reporting units, which are components of the casino segment, have been renamed and classified as the “Pilsen reporting unit” (“PRU”), which consists of the Ceska casino, and the “South Moravia reporting unit” (“SMRU”), which consists of the land in Hate. The hotel segment goodwill is derived from the newly-acquired Hotel Freizeit Auefeld, and is represented by the “Lower Saxony reporting unit” (“LSRU”).

Goodwill impairment tests allow the Company to first assess qualitative factors to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company assesses the potential impairment of goodwill annually, as of September 30th, and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Upon completion of such review, if impairment is found to have occurred, a corresponding charge will be recorded.

Based on TWC’s own assessment of qualitative factors which included an analysis of macroeconomic conditions, financial performance, industry and market considerations, and other factors, the Company concluded that it was not necessary to perform a two-step quantitative goodwill impairment test and that the goodwill of the Company was not impaired as of September 30, 2015, its annual assessment date. There were no triggering factors during the fourth quarter of 2015, hence, no additional goodwill impairment testing was warranted as of December 31, 2015.

Comprehensive Income (Loss) — The Company complies with requirements for reporting comprehensive income (loss). Those requirements establish rules for reporting and display of comprehensive income (loss) and its components. Furthermore, they require the Company’s change in the foreign currency translation adjustments to be included in other comprehensive income (loss). There were no other components of the Company’s comprehensive income (loss) in 2015 and 2014.

Foreign Currency Translation  The Company complies with requirements for reporting foreign currency translation, which require that for foreign subsidiaries whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the year and resulting translation adjustments are included in “accumulated other comprehensive income.” Statement of income accounts are translated by applying monthly averages of daily exchange rates on the respective monthly local statement of operations accounts for the year.

The impact of foreign currency translation on goodwill is presented below:

	Goodwill
	Casino Segment						Hotel Segment
	Pilsen			South-Moravia			Lower Saxony
As of December 31, 2015 (in thousands, except FX)	reporting unit			reporting unit			reporting unit			Total

Balance in USD ($)	$	3,042	(1)	$	537	(1)	$	131		$	3,710
Balance in EUR (€)							€	119		€	119

Foreign Exchange Rate (“FX”)	33.883			33.883			27.245
Balance in CZK (Kč)	Kč	103,072	(2)	Kč	18,195	(2)	Kč	3,242	(3)	Kč	124,509

Applicable FX(4)	24.824			24.824			24.824
Balance at December 31, 2015	$	4,152		$	733		$	131		$	5,016


Net cumulative change to goodwill due to foreign currency translation	$	1,110		$	196		$	—		$	1,306

(1) Goodwill was amortized over 15 years until the Company started to comply with revised GAAP requirements, as of January 1, 2002. This balance represents the remaining, unamortized goodwill, after an impairment charge was taken prior to January 1, 2003.

(2) USD residual balance translated to CZK at June 30, 1998, the date of acquisition of such assets, with the date of acquisition CZK to USD FX rate of 33.883.

(3) Provisional EUR balance translated to CZK at June 1, 2015, the date of acquisition of the Hotel Freizeit, with the date of acquisition CZK to EUR FX rate of 27.245

(4) FX central bank foreign exchange rates taken from www.CNB.CZ.

Earnings Per Common Share  The Company complies with accounting and disclosure requirements regarding earnings per share. Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the dilutive effect of Common Stock equivalents on an average basis during the period. As of December 31, 2015, the Company’s Common Stock equivalents include 635,000 unexercised stock options, 75,000 shares of restricted stock, and 436,842 shares issuable under the Company’s Deferred Compensation Plan. As of December 31, 2014, the Common Stock equivalents included 595,125 unexercised stock options, 75,000 shares of restricted stock, and 305,482 deferred compensation shares. These shares for the respective years were included in the computation of diluted earnings per common share, if such unexercised stock options, warrants, restricted stock, and deferred compensation stock were vested and “in-the-money.”

A table illustrating the impact of dilution on earnings per share, based on the treasury stock method, is presented below:

	For the Year Ended
	December 31,
	2015		2014
Basic earnings per share:
Net income	$	3,858	$	2,638


Weighted average common shares	8,822,488		8,814,287


Basic earnings per share	$	0.44	$	0.30


Diluted earnings per share:
Net income	$	3,858	$	2,638


Weighted average common shares	8,822,488		8,814,287


Addition due to the effect of dilutive securities using the treasury stock method:
Stock options, restricted stock and warrants	223		18
Stock issuable under the Deferred Compensation Plan	436,842		305,482


Dilutive potential common shares	9,259,553		9,119,787


Diluted earnings per share	$	0.42	$	0.29

Revenue Recognition  Casino revenue is defined as the net win from gambling activities, which is the difference between gaming wagers and the amount paid out to patrons, and is recognized on the day it is earned. Revenues generated from ancillary services include hotel room rentals, sales of F&B, spa services, and sales of casino logo merchandise and are recognized at the time the related services are performed or goods sold, as shown in the table below, as a percentage of total revenue.

	For the Year Ended December 31,
Revenue segment as percentage of total revenue	2015		2014

Gaming	87.5	%	92.9	%
Rooms	7.1	%	4.0	%
F&B	4.7	%	2.6	%
Spa/Other departments	0.3	%	0.4	%
Other	0.4	%	0.1	%


Total Revenue	100.0	%	100.0	%

Business Acquisitions  Assets acquired and liabilities assumed in business combinations are recorded on the Company’s consolidated balance sheets as of the respective agreed acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the consolidated statements of income since their respective dates of acquisition. In certain circumstances, the purchase price allocations may be based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision until the Company receives final information and other analyses during the measurement period ending a year after the date of acquisition.

Segment Reporting  On September 1, 2014, the Company acquired Hotel Columbus and after this acquisition, the Company determined, due to the significance of the assets acquired and pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting, that the Company had two reportable segments, a casino segment and a hotel segment. ASC 280 designates the internal reporting that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. The Company is including this segment reporting under Note 15 — “Segment Information,” below.

Promotional Allowances  Promotional allowances primarily consist of the provision of complimentary food and beverages and, to certain of its valuable players, hotel or room accommodations. For the years ended December 31, 2015 and 2014, revenues do not include the aggregate of retail amount of food and beverages (“F&B”) and hotel or room accommodations of $6,688 and $7,752, respectively, provided at no-charge to customers. The retail value of the F&B given away is determined by dividing the F&B costs charged to the gaming operation of $2,404 and $2,447, for the respective periods, by the average percentage of cost of F&B sold. The cost of hotel or room accommodations is either the out-of-pocket expenses paid to other hotels to accommodate TWC’s customers or the retail charge of room accommodations at the Company’s Hotel Savannah and at its VIP guest rooms at Ceska and at Route 55.

The promotional allowances are summarized below:

	For the Year Ended
	December 31,
	2015			2014

Cost of complimentary F&B (A)	$	2,404		$	2,447
Average cost of F&B sold (B)	36.7		%	32.2		%

Retail value of F&B (A/B)	6,550			7,599

Cost of hotel accommodations	138			153

Total hypothetical retail value	$	6,688		$	7,752

External Advertising  The Company complies with the accounting and reporting requirements for reporting on advertising costs. External advertising expenses are charged to operations as incurred and were $175 and $458 for the years ended December 31, 2015 and 2014, respectively, as recorded in the selling, general and administrative expenses of the consolidated statements of operations.

Fair Value of Financial Instruments  The fair values of the Company’s assets and liabilities that qualify as financial instruments, mainly the debts underlying the assets of the two German hotels, approximate their carrying amounts presented in the accompanying consolidated balance sheets at December 31, 2015 and 2014, respectively.

Use of Estimates  The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Impairment of Long-Lived Assets  The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived assets, or by the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. An estimate of the asset’s fair value is based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable market value. There were no impairment losses for long-lived assets recorded for the years ended December 31, 2015 and 2014, respectively.

Stock-based Compensation  The Company accounts for stock options and warrants using the modified prospective method in accordance with FASB ASC 718-10, “Compensation-Stock Compensation.” Under this method, compensation costs include the estimated grant date fair value of the awards amortized over the options’ vesting period. The Company currently utilizes the Black-Scholes option pricing model to measure the fair value of stock options granted to certain key management employees (“KMEs”), as well as for warrants issued to third parties for services. Stock-based compensation was approximately $78 and $59 for the years ended December 31, 2015 and 2014, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.

Czech Gaming Taxes  In December 2011, the Czech parliament passed sweeping gaming tax legislation, which was then signed by the Czech president into law. The gaming tax law (“2012 Gaming Tax Law”) law took effect on January 1, 2012. The gaming tax law is summarized below, in actual monetary amounts (not in thousands):

		2012 Gaming Tax Law
		(Effective from January 1, 2012 to December 31, 2015)

Live Games		20% gaming tax from revenue earned from live games (70% of tax paid to the federal government; 30% paid to the local municipality).

Slots		20% gaming tax from revenue earned from slot games (20% of tax paid to the federal government; 80% paid to the local municipality); CZK 55 (or approximately $2.22) gaming tax per slot machine, per day (paid to the federal government).

Net Income		19% corporate income tax on adjusted net income earned in the Czech Republic, net of exemptions (paid to the federal government).

In December 2015, the President of the Czech Republic signed an amendment to the Gaming Tax Law (“2016 Gaming Tax Amendment”) that effectively raised the rates of these gaming taxes. The amendment became effective on January 1, 2016 and the new rates in the gaming tax law are as follow:

		2016 Gaming Tax Amendment
		(Effective from January 1, 2016)

Live Games		23% gaming tax from revenue earned from live games (70% of tax paid to the federal government; 30% paid to the local municipality).

Slots		28% gaming tax from revenue earned from slot games (20% of tax paid to the federal government; 80% paid to the local municipality); CZK 80 (or approximately $3.23) gaming tax per slot machine, per day (paid to the federal government).

Net Income		No changes from the 19% corporate income tax noted above.

Gaming taxes are payable by the 25th day following the end of each calendar quarter, while corporate income tax obligation is paid by June 30th of the subsequent year. The Company has also been required to make estimated quarterly income tax payments since the third quarter of 2013. TWC was current on all of its Czech tax payments at December 31, 2015 and through the date of this report.

TWC’s gaming-related taxes and fees, which are recognized in the Gaming Department’s expenses, for the years ended December 31, 2015 and 2014 are summarized in the following table:

	For the Year Ended December 31,
	2015			2014

Gaming revenues (excluding ancillary revenues)	$	35,682		$	34,024

Gaming taxes	7,441			7,160
Gaming taxes as % of gaming revenues (above)	20.9		%	21.0		%

In conformity with the European Union (“EU”) taxation legislation, the Czech Republic’s VAT has gradually increased from 5%, when that country joined the EU in 2004, to 21%, the effective rate since 2013. Unlike in other industries, VATs are not recoverable for gambling operations. The recoverable VAT under the Hotel Savannah and Hotel Columbus operations was not material for the years ended December 31, 2015 and 2014, respectively.

Income Taxes  The Company complies with accounting and reporting requirements with respect to accounting for U.S. federal and foreign income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and the tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. This policy also provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities. The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized as of and for the years ended December 31, 2015 and 2014. However, management’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.

Effective January 1, 2012, the Czech government instituted an effective corporate income tax of 19% on income derived from gaming revenues, which prior to the law changes were subject only to gaming taxes. See Note 10 — “Income Taxes,” below.

Germany had an effective corporate income tax rate of 30% for the year ended December 31, 2015. The Company’s German hotel operations were not subject to income tax due to a net operating loss for the years ended December 31, 2015 and 2014, respectively.

Recent Accounting Pronouncements  In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The guidance clarifies the principles for recognizing revenue and establishes a common revenue standard for US GAAP and International Financial Reporting Standards. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted. Retrospective application is required. The Company is currently evaluating the impact of adopting and does not expect the standard to have any material impact on its consolidated financial statements.

In June 2014, the FASB issued guidance on stock compensation that requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. The guidance is effective for annual reporting periods beginning after December 31, 2015, with early adoption permitted. The Company has not adopted this guidance for 2015 and is evaluating the potential impacts of the new guidance on its existing stock-based compensation plans. TWC does not expect this standard to have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued guidance on the presentation of financial statements for a going concern. The aim is to provide guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for fiscal years ending after December 15, 2016, and annual and interim periods thereafter. The Company is reviewing the new standard and does not expect this standard to have a material impact on the Company’s consolidated financial statements.

In November 2014, the FASB issued guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. The guidance was effective on November 18, 2014. The impact of the adoption did not have an effect on the Company’s consolidated financial statements.

In April 2015, the FASB issued amended accounting guidance that changes the balance sheet presentation of debt issuance costs. Under the amended guidance, debt issuance costs will be presented on the balance sheet as a direct deduction from the related debt liability rather than as an asset. For public companies, the new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015 (including interim periods within those fiscal years), and is required to be applied on a retrospective basis. Early adoption is permitted. The Company has not adopted this guidance for 2015 and is currently evaluating the impact of adopting. TWC does not expect the guidance to have any material impact on its consolidated financial statements.

In September 2015, the FASB issued updated guidance on business combinations. GAAP requires that during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The acquirer also must revise comparative information for prior periods presented in financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, this update eliminates the requirement to retrospectively account for those adjustments. For public companies, the updated guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015. This update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company will adopt this guidance in 2016. TWC does not expect the guidance to have any material impact on its consolidated financial statements.

In November 2015, the FASB issued updated guidance on income taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, this update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this update. For public companies, the updated guidance is effective for financial statements issued for annual periods beginning after December 15, 2016. Early adoption is permitted. The Company’s adoption of this guidance in 2015 did not have an effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued updated guidance to increase transparency and comparability among organizations by reporting lease assets and lease liabilities, both finance (capital) and operating leases, on the balance sheet and disclosing key information about leasing arrangements. For public companies, the updated guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years). Early adoption is permitted. The Company has not adopted this guidance for 2016 and is currently evaluating the impact of adopting.