Table of Contents

 

 

 

**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For theQuarterly Period Ended March 31, 2010**

 

**OR**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from            to            .**

 

**Commissionfile number: 001-32161**

 

**ElixirGaming Technologies, Inc.**

(Exact name of registrantas specified in its charter)

 

| **Nevada**                                                       | ** ** | **91-1696010**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification no.) |

 

**Unit3705, 37/F The Centrium**

**60Wyndham Street**

**Central,Hong Kong**

(Address of principalexecutive offices, including zip code)

 

**+852-3151-3800**

(Registrant’s telephonenumber, including area code)

 

**Not Applicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days.  Yes x No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company (as defined in Rule 12b-2 of the Act):

 

| Large accelerated  filer o                |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o No x

 

As of March 31, 2010, 115,879,394 shares ofcommon stock of Elixir Gaming Technologies, Inc. were outstanding.

 

 

 

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Table of Contents

 

**Table of Contents**

 
| ** **                                   | ** **                                                                                      | **Page** |
|----------------------------------------------|-------------------------------------------------------------------------------------------------|----------|
|                                         |                                                                                            |     |
| **PART I — FINANCIAL INFORMATION** |
|                                         |                                                                                            |     |
| **Item 1.**                                  | **Financial Statements**                                                                        | 1        |
|                                         |                                                                                            |     |
|                                         | Consolidated  Balance Sheets                                                                    | 1        |
|                                         |                                                                                            |     |
|                                         | Consolidated  Statements of Operations                                                          | 2        |
|                                         |                                                                                            |     |
|                                         | Consolidated  Statements of Cash Flows                                                          | 3        |
|                                         |                                                                                            |     |
|                                         | Notes to Consolidated Financial Statements                                                      | 4        |
|                                         |                                                                                            |     |
| **Item 2.**                                  | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 15       |
|                                         |                                                                                            |     |
|                                         | Overview                                                                                        | 15       |
|                                         |                                                                                            |     |
|                                         | Results of  Operations                                                                          | 16       |
|                                         |                                                                                            |     |
|                                         | Liquidity and Capital Resources                                                                 | 22       |
|                                         |                                                                                            |     |
|                                         | Critical Accounting Policies and Estimates                                                      | 23       |
|                                         |                                                                                            |     |
| **Item 3.**                                  | **Quantitative  and Qualitative Disclosures about Market Risk**                                 | 25       |
|                                         |                                                                                            |     |
| **Item 4.**                                  | **Controls and  Procedures**                                                                    | 25       |
|                                         |                                                                                            |     |
| **PART II — OTHER  INFORMATION**   |
|                                         |                                                                                            |     |
| **Item 1.**                                  | **Legal Proceedings**                                                                           | 26       |
|                                         |                                                                                            |     |
| **Item 1A.**                                 | **Risk Factors**                                                                                | 26       |
|                                         |                                                                                            |     |
| **Item 2.**                                  | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | 27       |
|                                         |                                                                                            |     |
| **Item 6.**                                  | **Exhibits**                                                                                    | 27       |

 

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Table of Contents

 

**PART I — FINANCIALINFORMATION**

 

**Item 1.****                                  ****FinancialStatements**

 

**ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**(amounts in thousands, except share data)**

 
| ** **                                                                                                                   | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                   | ** ** | **(Unaudited)**              | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                   |       |                         |       |                            |       |
| Current assets:                                                                                                              |       |                         |       |                            |       |
| Cash and cash equivalents                                                                                                    |       | $                            | 5,094      |                            | $          | 4,190 |   |
| Accounts receivable, trade, net                                                                                              |       | 2,122                        |       | 2,670                           |       |
| Due from a related party                                                                                                     |       | 12                           |       | 12                              |       |
| Other receivables                                                                                                            |       | 167                          |       | 195                             |       |
| Inventories                                                                                                                  |       | 956                          |       | 621                             |       |
| Assets held for sale                                                                                                         |       | 905                          |       | 930                             |       |
| Prepaid commitment fees                                                                                                      |       | 3,359                        |       | 4,838                           |       |
| Deferred tax assets                                                                                                          |       | 90                           |       | 90                              |       |
| Prepaid expenses and other current assets                                                                                    |       | 1,059                        |       | 770                             |       |
| Total current assets                                                                                                         |       | 13,764                       |       | 14,316                          |       |
|                                                                                                                         |       |                         |       |                            |       |
| Accounts receivable, trade, net of current portion                                                                           |       | 68                           |       | 106                             |       |
| Gaming equipment and systems, net                                                                                            |       | 25,750                       |       | 26,507                          |       |
| Property and equipment, net                                                                                                  |       | 3,164                        |       | 3,322                           |       |
| Intangible assets, net                                                                                                       |       | 2,925                        |       | 3,026                           |       |
| Goodwill                                                                                                                     |       | 84                           |       | 84                              |       |
| Contract amendment fees                                                                                                      |       | 1,356                        |       | 688                             |       |
| Prepaids, deposits and other assets                                                                                          |       | 293                          |       | 408                             |       |
| Total assets                                                                                                                 |       | $                            | 47,404     |                            | $          | 48,457 |   |
|                                                                                                                         |       |                         |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                |       |                         |       |                            |       |
| Current liabilities:                                                                                                         |       |                         |       |                            |       |
| Accounts payable                                                                                                             |       | $                            | 1,162      |                            | $          | 1,125 |   |
| Amount due to a related party                                                                                                |       | 32                           |       | 46                              |       |
| Accrued expenses                                                                                                             |       | 1,762                        |       | 2,325                           |       |
| Notes payable to a related party, current portion                                                                            |       | 4,721                        |       | 3,128                           |       |
| Capital lease obligations, current portion                                                                                   |       | 173                          |       | 187                             |       |
| Customer deposits and others                                                                                                 |       | 72                           |       | 78                              |       |
| Total current liabilities                                                                                                    |       | 7,922                        |       | 6,889                           |       |
|                                                                                                                         |       |                         |       |                            |       |
| Notes payable to a related party, net of current  portion                                                                    |       | 4,786                        |       | 6,265                           |       |
| Capital lease obligations, net of current portion                                                                            |       | 389                          |       | 414                             |       |
| Other liabilities                                                                                                            |       | 762                          |       | 604                             |       |
| Deferred tax liabilities                                                                                                     |       | 1,019                        |       | 877                             |       |
| Total liabilities                                                                                                            |       | 14,878                       |       | 15,049                          |       |
|                                                                                                                         |       |                         |       |                            |       |
| Stockholders’ equity:                                                                                                   |       |                         |       |                            |       |
| Common stock, $.001 par value, 300,000,000 shares  authorized; and 115,879,394 and 114,956,667 shares issued and outstanding |       | 116                          |       | 115                             |       |
| Additional paid-in-capital                                                                                                   |       | 415,156                      |       | 414,864                         |       |
| Accumulated other comprehensive losses                                                                                       |       | (157                         | )          | (645                            | )          |
| Accumulated deficit                                                                                                          |       | (382,589                     | )          | (380,926                        | )          |
| Total stockholders’ equity                                                                                              |       | 32,526                       |       | 33,408                          |       |
| Total liabilities and stockholders’ equity                                                                              |       | $                            | 47,404     |                            | $          | 48,457 |   |

 

The notes toconsolidated financial statements are an integral part of these consolidatedstatements.

 

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**ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**Consolidated Statements of Operations**

**(amounts in thousands, except per share data)**

**(Unaudited)**

 
| ** **                                         | ** ** | **Three  Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Revenues:                                          |       |                                   |       |   |   |
| Gaming machine participation                       |       | $                                      | 2,836      |   | $ | 946 |   |
| Table game products                                |       | 121                                    |       | 78 |   |
| Non-gaming products                                |       | 1,411                                  |       | 678 |   |
|                                               |       | 4,368                                  |       | 1,702 |   |
| Operating costs and expenses:                      |       |                                   |       |   |   |
| Cost of gaming machine participation               |       |                                   |       |   |   |
| Machine depreciation                               |       | 1,886                                  |       | 2,390 |   |
| Write-off of gaming assets                         |       | 116                                    |       | 379 |   |
| Other operating costs                              |       | 226                                    |       | 341 |   |
| Cost of table game products                        |       | 90                                     |       | 25 |   |
| Cost of non-gaming products                        |       | 1,401                                  |       | 713 |   |
| Selling, general and administrative                |       | 1,716                                  |       | 2,799 |   |
| Research and development                           |       | 85                                     |       | 55 |   |
| Depreciation and amortization                      |       | 229                                    |       | 309 |   |
| Restructuring charges                              |       | 37                                     |       | 499 |   |
| Total operating costs and expense                  |       | 5,786                                  |       | 7,510 |   |
|                                               |       |                                   |       |   |   |
| Loss from operations                               |       | (1,418                                 | )          | (5,808 | ) |
|                                               |       |                                   |       |   |   |
| Other income/(expense):                            |       |                                   |       |   |   |
| Interest expense and finance fees                  |       | (122                                   | )          | (136 | ) |
| Interest income                                    |       | 12                                     |       | 38 |   |
| Foreign currency gains/(losses)                    |       | 9                                      |       | (127 | ) |
| Other                                              |       | 91                                     |       | 13 |   |
| Total other expense                                |       | (10                                    | )          | (212 | ) |
|                                               |       |                                   |       |   |   |
| Loss before income tax and discontinued operations |       | (1,428                                 | )          | (6,020 | ) |
|                                               |       |                                   |       |   |   |
| Income tax expense                                 |       | (235                                   | )          | (3 | ) |
|                                               |       |                                   |       |   |   |
| Net loss from continuing operations                |       | (1,663                                 | )          | (6,023 | ) |
| Net loss from discontinued operations, net of tax  |       | —                                 |       | (218 | ) |
|                                               |       |                                   |       |   |   |
| Net loss                                           |       | $                                      | (1,663     | ) | $ | (6,241 | ) |
|                                               |       |                                   |       |   |   |
| Loss per share:                                    |       |                                   |       |   |   |
| Loss from continuing operations                    |       | $                                      | (0.01      | ) | $ | (0.05 | ) |
| Loss from discontinued operations                  |       | —                                 |       | (0.00 | ) |
| Basic and diluted loss per share                   |       | (0.01                                  | )          | (0.05 | ) |
|                                               |       |                                   |       |   |   |
| Weighted average common shares outstanding         |       | 114,967                                |       | 114,957 |   |

 

The notes toconsolidated financial statements are an integral part of these consolidatedstatements.

 

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**ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

**(amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Three  Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities:**                                   |       |                                   |       |   |   |
| Net loss                                                                     |       | $                                      | (1,663     | ) | $ | (6,241 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                   |       |   |   |
| Income tax expense                                                           |       | 142                                    |       | 3 |   |
| Foreign currency (gains)/losses                                              |       | (9                                     | )          | 125 |   |
| Depreciation of gaming machines and systems and  property and equipment      |       | 2,130                                  |       | 2,661 |   |
| Restructuring charges                                                        |       | —                                 |       | 29 |   |
| Amortization of intangible assets                                            |       | 101                                    |       | 149 |   |
| Amortization of deferred interest                                            |       | —                                 |       | 7 |   |
| Stock-based compensation                                                     |       | 294                                    |       | 202 |   |
| Write-off of gaming assets                                                   |       | 116                                    |       | 379 |   |
| Provision for bad debt expense                                               |       | —                                 |       | 12 |   |
| Changes in operating assets and liabilities:                                 |       |                                   |       |   |   |
| Accounts receivable and other receivables                                    |       | 612                                    |       | (433 | ) |
| Inventories                                                                  |       | (319                                   | )          | (1,220 | ) |
| Customer deposits                                                            |       | (8                                     | )          | — |   |
| Prepaid expenses and other current assets                                    |       | 183                                    |       | 318 |   |
| Prepaids, deposits and other assets                                          |       | 55                                     |       | 308 |   |
| Prepaid commitment fees                                                      |       | 1,153                                  |       | — |   |
| Contract amendment fees                                                      |       | (668                                   | )          | — |   |
| Accounts payable                                                             |       | 10                                     |       | 1,139 |   |
| Amount due (to)/from related parties                                         |       | (14                                    | )          | 563 |   |
| Deferred revenue                                                             |       | —                                 |       | 180 |   |
| Accrued expenses and other current liabilities                               |       | (425                                   | )          | 471 |   |
| Income tax payable                                                           |       | 93                                     |       | — |   |
| Net cash provided by/(used in) operating activities                          |       | 1,783                                  |       | (1,348 | ) |
| ** **                                                                   |       |                                   |       |   |   |
| **Cash flows from investing  activities:**                                   |       |                                   |       |   |   |
| Purchase of property and equipment                                           |       | (15                                    | )          | — |   |
| Sale of shuffler business                                                    |       | —                                 |       | 2,400 |   |
| Purchase of gaming machines, systems and deposits  paid                      |       | (877                                   | )          | (1,163 | ) |
| Sale of gaming machines, property and equipment                              |       | 30                                     |       | 70 |   |
| Net cash provided by/(used in) investing activities                          |       | (862                                   | )          | 1,307 |   |
| ** **                                                                   |       |                                   |       |   |   |
| **Cash flows from financing  activities:**                                   |       |                                   |       |   |   |
| Repayment of short-term debt and leases                                      |       | (57                                    | )          | (87 | ) |
| Repayment of notes payable                                                   |       | —                                 |       | (1,462 | ) |
| Net cash used in financing activities                                        |       | $                                      | (57        | ) | $ | (1,549 | ) |
|                                                                         |       |                                   |       |   |   |
| Effect of exchange rate changes on cash                                      |       | 40                                     |       | (33 | ) |
| Increase/(Decrease) in cash and cash equivalents                             |       | 904                                    |       | (1,623 | ) |
| Cash and cash equivalents at beginning of period                             |       | 4,190                                  |       | 14,504 |   |
| Cash and cash equivalents at end of period                                   |       | $                                      | 5,094      |   | $ | 12,881 |   |
| ** **                                                                   |       |                                   |       |   |   |
| **Supplemental disclosure of cash  flow information**                        |       |                                   |       |   |   |
| Interest paid                                                                |       | $                                      | 17         |   | $ | 169 |   |

 

The notes toconsolidated financial statements are an integral part of these consolidatedstatements.

 

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**ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements**

(Unaudited)

 

**Note 1.****                                 ****Description of Business andSignificant Accounting Policies**

 

The principal business activities of Elixir GamingTechnologies, Inc. and its subsidiaries (the “Company”) are the owning andleasing of electronic gaming machines placed in resorts, hotels, and othervenues across certain countries in Asia and the developing and distributing ofproducts related to the gaming and automotive industries. These productsinclude RFID casino chips and component parts for the automotive industry.

 

***Basis ofPresentation***

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States (U.S.) for interim financialinformation and with the instructions to Form 10-Q and Rule 8-03 ofRegulation S-X promulgated by the Securities and Exchange Commission (“SEC”)and reflect all adjustments, consisting of normal recurring adjustments andother adjustments, which management believes are necessary to fairly presentthe financial position, results of operations and cash flows of the Company,for the respective periods presented. The results of operations for an interimperiod are not necessarily indicative of the results that may be expected forany other interim period or the year as a whole. The accompanying unauditedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2009, filed withthe SEC on March 30, 2010.

 

***Principles ofConsolidation***

 

These consolidated financial statements include theaccounts of Elixir Gaming Technologies, Inc. and its subsidiaries. Allintercompany accounts and transactions have been eliminated.

 

***Use of Estimates***

 

The Company is required to make estimates, judgmentsand assumptions that it believes are reasonable based on its historicalexperience, contract terms, observance of known trends in the Company and theindustry as a whole, and information available from other outsidesources.  These estimates affect the reported amounts of assets,liabilities, revenues and expenses and related disclosures of contingent assetsand liabilities.  On a regular basis, the Company evaluates its estimates,including those related to revenue recognition, product returns, long-livedassets, inventory obsolescence, stock-based compensation, income taxes, baddebts, warranty obligations, long-term contracts, contingencies andlitigation.  Actual results may differ from those estimates.

 

***Cash and CashEquivalents***

 

All highly liquid instruments with an originalmaturity of three months or less are considered cash equivalents.  TheCompany places its cash with financial institutions.  At March 31,2010, the Company had deposits with financial institutions in excess of FederalDeposit Insurance Corporation (FDIC) insured limits by $4.8 million.

 

***Accounts Receivableand Allowances for Doubtful Accounts***

 

Accounts receivable are stated at face value less anyallowances for doubtful accounts.  Allowances for doubtful accounts aremaintained at levels determined by Company management to adequately provide foruncollectible amounts.  In determining the estimated uncollected amounts,the Company evaluates a combination of factors, including, but not limited to,activity in the related market, financial condition of customers, specificcustomer collection experience and history of write-offs and collections.

 

***Inventories***

 

Inventories are stated at the lower of cost,determined using the first-in, first-out method, or market.  Cost elementsincluded in work-in-process and finished goods include raw materials, directlabor, and manufacturing overheads.

 

***Long-Lived Assets***

 

The Company accounts for impairment of long-livedassets in accordance with Financial Accounting Standards Board (FASB)Accounting Standards Codification (ASC) 360, *Property,Plant and Equipment*. Long-lived assets are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  In such instances, theCompany estimates the undiscounted future cash flows that result from the useof the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carryingvalue, the Company recognizes an impairment 

 

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loss, measured as the amount by which the carryingvalue exceeds the fair value of the asset, determined principally usingdiscounted cash flows.  There are no otherimpairment charges for long-lived assets for the three months ended March 31,2010 except for the write-off of $116,000 in infrastructure costs due to theclosure of one under-performing venue in the Philippines.

 

***Prepaids, Depositsand Other Current Assets***

 

Prepaids, deposits and other current assets consistprimarily of prepaid value-added taxes in foreign countries, sales tax indispute and deposits.  The Company hasrestricted cash in the amount of $100,000 in the form of a certificate ofdeposit as security on a lease.  Therestriction for the security deposit will be removed in February 2012 upontermination of the lease.  Restrictedcash has been recorded in deposits and other assets in the accompanyingconsolidated balance sheets.

 

***Gaming Machines andSystems***

 

Gaming machines and systems are stated at cost. The Company depreciates new gaming machines and systems over a five-year usefullife and depreciates refurbished gaming machines over a three-year useful lifeonce placed in service. Depreciation of gaming machines and systems ofapproximately $1.9 million and $2.4 million are included in cost of gamingmachine participation in the consolidated statements of operations for thethree-month periods ended March 31, 2010 and 2009, respectively. Anysubsequent costs relating to gaming machine redeployments are expensed in theperiod when incurred.

 

***Property andEquipment***

 

Property and equipment items are stated at cost.Depreciation is computed using the straight-line method over the useful livesof the assets currently estimated to be three to five years, which in the caseof leasehold improvements, is limited to the lives of the leases and throughoutthe renewal period so long as renewal is reasonably assured. Depreciation ofproperty and equipment of approximately $116,000 and $54,000 is included incost of operations (table game products or non-gaming products) in theconsolidated statements of operations for the three-month periods ended March 31,2010 and 2009, respectively.

 

***Goodwill andIntangible Assets***

 

Goodwill primarily resultedfrom a business combination. The Company adopted ASC 350, *Intangibles —Goodwill and Other*, effective January 1, 2002. Under ASC 350,goodwill is no longer amortized but is subject to periodic impairment tests.

 

Intangible assets consist of patents, customerrelationships, trademarks and goodwill. They are recorded at cost and areamortized, except goodwill, on the straight-line basis over the period of timethe asset is expected to contribute directly or indirectly to future cashflows, which range from 10 to 13 years. The straight-line amortizationmethod is utilized because the Company believes there is not a more reliablydeterminable method of reflecting the pattern for which the economic benefitsof the intangible assets are consumed or otherwise used.

 

The Company measures and tests goodwill and intangibleassets for impairment in accordance with ASC 350, *Intangible — Goodwill and Other*, and ASC 360, *Property, Plant and Equipment*, at leastannually on December 31 or more often if there are indicators ofimpairment.

 

***Litigation andOther Contingencies***

 

The Company may be involved in legal matters,litigation and claims of various types in the ordinary course of its businessoperations. The Company has regular litigation reviews, including updates fromcorporate and outside counsel, to assess the need for accounting recognition ordisclosure of these contingencies. The status of a significant legal matter issummarized in Note 17.

 

ASC 450, *Contingencies,*requires that liabilities for contingencies be recorded when it is probablethat a liability has been incurred and that the amount can be reasonablyestimated. Significant management judgment is required related to contingentliabilities and the outcome of litigation because both are difficult topredict. For contingencies for which unfavorable outcomes are reasonablypossible and which are significant, the Company discloses the nature of thecontingency and, where feasible, estimates of the possible losses.

 

***Revenue Recognition***

 

The Company recognizes revenue when all of thefollowing have been satisfied:

 

·                  persuasive evidence of an arrangementexists;

·                  the price to the customer is fixed anddeterminable;

·                  delivery has occurred and any acceptanceterms have been fulfilled;

·                  no significant contractual obligationsremain; and

·                  collection is reasonably assured.

 

*Gaming Machine Participation Revenue*

 

The Company earns recurring revenue by providingcustomers with electronic gaming machines and casino management systems 

 

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which track game performance and provide statistics oninstalled electronic gaming machines owned by the Company and leased to venueowners.  Revenues are recognized on thecontractual terms of the participation agreements between the Company and thevenue owners and are based on the Company’s share of net winnings.

 

Commitment fees paid to the venue operator where theagreement stipulates that the fees will be recovered from the daily net winsharing are capitalized as assets. As required by ASC 605-50, *Customer Payments and Incentives*, the cash considerationreceived for the portion of net winnings relating to the commitment fees isamortized as a reduction of revenue if the expected benefit from commitmentfees cannot be separately identified or reasonably estimated. We had prepaidcommitment fees of approximately $3.4 million and $4.8 million as of March 31,2010 and December 31, 2009, respectively.

 

Commitment fees paid to the venue operators relatingto contract amendments are also capitalized as assets and amortized as areduction of revenue fees over the term of the amended contracts. We hadcontract amendment fees of approximately $1.4 million and $688,000 as of March 31,2010 and December 31, 2009, respectively.

 

*Table Game and Non-Gaming ProductRevenues*

 

The Company recognizes revenue from the sale of itsproducts to end users upon shipment against customer contracts or purchaseorders.

 

The Company recognizes revenue from its sales toindependent distributors upon shipments to the distributors against distributorcontracts or purchase orders for products.  The Company recognizes revenueon consignment inventory when ownership of product and title passes to thedistributor, which occurs upon the distributor’s use of the product in itsservice organization or sale to an end user.

 

***Stock-BasedCompensation***

 

The Company adopted ASC 718, *Compensation-Stock Compensation*, toaccount for all its stock-based compensation beginning January 1, 2006,and elected the modified prospective method of transition. Under the fair valuerecognition provisions of ASC 718, for stock-based compensation accrued toemployees and non-employee directors, the Company recognizes stock-basedcompensation expense for all service-based awards with graded vesting scheduleson the straight-line basis over the requisite service period for the entireaward.   Estimates are revised ifsubsequent information indicates that forfeitures will differ from previousestimates, and the cumulative effect on compensation cost of a change in theestimated forfeitures is recognized in the period of the change.  For non-employee awards, the Companyremeasures compensation cost each period until the service condition iscomplete and recognizes compensation cost on the straight-line basis over therequisite service period.  Optionvaluation models require the input of highly subjective assumptions, andchanges in the assumptions used can materially affect the fair value estimates.Judgment is required in estimating stock price volatility, forfeiture rates,expected dividends, and expected terms that options remain outstanding. Forrestricted stock awards with performance conditions, the Company evaluates ifperformance conditions are probable in each reporting period. The compensationexpense of restricted awards is recognized ratably over the implicit serviceperiod if achieving performance conditions is probable. Cumulative catch-upadjustments are required in the event of changes in assessment of probability.

 

Stock-based compensation expense totaled approximately$294,000 and $202,000 for the three-month periods ended March 31, 2010 and2009, respectively, and is included in selling, general and administrativeexpense in the accompanying consolidated statements of operations.  SeeNote 12 for additional information regarding these assumptions.

 

***Research andDevelopment Expenses***

 

Research and development costs are charged to expenseas incurred.  Employee related costs associated with product developmentare included in research and development costs. The Company incurred approximately $85,000 and $55,000 in research anddevelopment expenses for the three-month periods ended March 31, 2010 and2009, respectively.

 

***Income Taxes***

 

The Company is subject to income taxes in the U.S.(including federal and state) and several foreign jurisdictions in which itoperates. Deferred income tax balances reflect the effects of temporarydifferences between the carrying amounts of assets and liabilities and their taxbases and are stated at enacted tax rates expected to be in effect when taxesare actually paid or recovered. ASC 740, *IncomeTaxes*, requires that deferred tax assets be evaluated for futurerealization and reduced by a valuation allowance to the extent the Companybelieves a portion will not be realized. The Company considers many factorswhen assessing the likelihood of future realization of its deferred tax assets,including its recent cumulative earnings experience and expectations of futuretaxable income by taxing jurisdiction, the carry-forward periods available tothe Company for tax reporting purposes, and other relevant factors.

 

The Company accounts for uncertain tax positions inaccordance with ASC 740, which contains a two-step approach to recognizing andmeasuring uncertain tax positions. The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates it is more likely than not that the position will be sustained onaudit, including resolution of related appeals or litigation processes, if any.The second step is to measure the tax benefit as the largest amount, 

 

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which is more than 50% likely of being realized uponultimate settlement. The Company considers many factors when evaluatingand estimating its tax positions and tax benefits, which may require periodic****adjustments and which may not accuratelyanticipate actual outcomes.

 

***Loss Per Share***

 

Basic loss per share is computed by dividing thereported net loss by the weighted average number of shares of common stockoutstanding during the year. There is no difference in diluted loss per share frombasic loss per share as the assumed exercise of common stock equivalents wouldhave an anti-dilutive effect due to losses.

 

***Foreign CurrencyTranslations and Transactions***

 

The functional currency of the Company’s internationalsubsidiaries is the local currency.  For these subsidiaries, the Companytranslates the assets and liabilities at exchange rates in effect at thebalance sheet date and income and expense accounts at average exchange ratesduring the year.  Resulting currency translation adjustments are recordeddirectly to accumulated other comprehensive income/(losses) within stockholders’equity.  Gains and losses resulting from transactions in non-functionalcurrencies are recorded in operations.

 

***Fair ValueMeasurements***

 

Fair value is defined under ASC 820, *Fair Value Measurement and Disclosures*, as the exchangeprice that would be received for an asset or paid to transfer a liability (anexit price) in the principal or most advantageous market for the asset orliability in an orderly transaction between market participants on themeasurement date. Valuation techniques used to measure fair value under ASC 820must maximize the use of observable input and minimize the use of unobservableinput. The standard establishes a fair value hierarchy based on three levels ofinput, of which the first two are considered observable and the lastunobservable.

 

·                  Level 1 - Quoted prices in active markets for identical assets orliabilities. These are typically obtained from real-time quotes fortransactions in active exchange markets involving identical assets.

 

·                  Level 2 - Input, other than quoted prices included within Level 1,which are observable for the asset or liability, either directly or indirectly.These are typically obtained from readily-available pricing sources forcomparable instruments.

 

·                  Level 3 - Unobservable input, where there is little or no marketactivity for the asset or liability. This input reflects the reporting entity’sown assumptions of the data that participants would use in pricing the asset orliability, based on the best information available under the circumstances.

 

At March 31, 2010, cash and cash equivalentsincluded $863,000 in bank deposits, which are reported at fair value.  The fair values of cash and cash equivalents,restricted cash, accounts receivable and accounts payable approximate carryingvalues due to the short maturity of these items.

 

***Recently IssuedAccounting Standards***

 

The Financial AccountingStandards Board (FASB) issued Accounting Standards Codification (ASC) effectivefor financial statements issued for interim and annual periods ending after September 15,2009. The ASC is an aggregation of previously issued authoritative U.S.generally accepted accounting principles (GAAP) in one comprehensive set ofguidance organized by subject area. In accordance with the ASC, references topreviously issued accounting standards have been replaced by ASC references.Subsequent revisions to GAAP will be incorporated into the ASC throughAccounting Standards Updates (ASU).

 

In April 2009, the FASB amended ASC 820, *Fair Value Measurement and Disclosures,* in which, if anentity determines that the level of activity for an asset or liability hassignificantly decreased and that a transaction is not orderly, further analysisof transactions or quoted prices is needed, and a significant adjustment to thetransaction or quoted prices may be necessary to estimate fair value inaccordance with ASC 820. The Company adopted this amendment and there was nomaterial impact on the financial position, results of operations or cash flows.

 

In April 2009, the FASB amended ASC 825, *Financial Instruments*, and ASC 270, *InterimReporting.* The amendment requires an entity to provide disclosuresabout fair value of financial instruments in interim financial information.This amendment is to be applied prospectively and is effective for interim andannual periods ending after June 15, 2009 with early adoption beingpermitted for periods ending after March 15, 2009. The Company adoptedthis amendment and there was no impact on the financial position, results ofoperations or cash flows.

 

In May 2009, the FASB issued ASC 855, *Subsequent Events.*  This Standard sets forth: 1) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements; 2) the circumstancesunder which an entity should recognize events or transactions occurring afterthe balance sheet date in its financial statements; and 3) the disclosures thatan entity should make about events or transactions that occurred after thebalance sheet date. This statement is effective for interim and annual periodsending after June 15, 2009. The Company adopted this statement and there wasno impact on the financial position, results of operations or 

 

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cash flows.

 

**Note 2.****                                 ****Segments**

 

The Company currently conducts business in threeoperating segments: (i) gaming machine participation operations; (ii) tablegame product operations, which after the sale of the shuffler and deck checkerassets that was completed in April 2009 consist exclusively of gamingchips and plaques; and (iii) non-gaming product operations, which consistprimarily of the Dolphin Advanced Technologies Pty Ltd (“Dolphin”) automotivecomponents. The accounting policies of these segments are consistent with theCompany’s policies for the accompanying consolidated financial statements.  The following table presents the financialinformation for each of the Company’s operating segments.

 
| ** **                                            | ** ** | **Three  Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| **(amounts in thousands)**                            | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Revenues:                                             |       |                                   |       |   |   |
| Gaming  machine participation operations              |       | $                                      | 2,836      |   | $ | 946 |   |
| Table  game product operations                        |       | 121                                    |       | 78 |   |
| Non-gaming  product operations                        |       | 1,411                                  |       | 678 |   |
| Total  revenues                                       |       | $                                      | 4,368      |   | $ | 1,702 |   |
|                                                  |       |                                   |       |   |   |
| Operating  income/(loss):                             |       |                                   |       |   |   |
| Gaming  machine participation operations gross margin |       | $                                      | 608        |   | $ | (2,164 | ) |
| Table  game product operations gross margin           |       | 31                                     |       | 53 |   |
| Non-gaming  product operations gross margin           |       | 10                                     |       | (35 | ) |
| Corporate  and other operating costs and expenses     |       | (2,067                                 | )          | (3,662 | ) |
| Total  operating loss                                 |       | $                                      | (1,418     | ) | $ | (5,808 | ) |
|                                                  |       |                                   |       |   |   |
| Depreciation  and amortization:                       |       |                                   |       |   |   |
| Gaming  machine participation operations              |       | $                                      | 1,886      |   | $ | 2,390 |   |
| Table  game product operations                        |       | 128                                    |       | 186 |   |
| Non-gaming  product operations                        |       | 90                                     |       | 19 |   |
| Corporate                                             |       | 127                                    |       | 158 |   |
| Total  depreciation and amortization                  |       | $                                      | 2,231      |   | $ | 2,753 |   |

 

Geographic segment revenues for the three-monthperiods ended March 31, 2010 and 2009 are as follows:

 
| ** **                 | ** ** | **Three  Months Ended March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| **(amounts in thousands)** | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Cambodia                   |       | $                                      | 2,003      |   | $ | 318 |   |
| Macau                      |       | 72                                     |       | — |   |
| Philippines                |       | 833                                    |       | 636 |   |
| Other  Asian countries     |       | 110                                    |       | 75 |   |
| Australia                  |       | 1,159                                  |       | 648 |   |
| Europe                     |       | 108                                    |       | — |   |
| Other                      |       | 83                                     |       | 25 |   |
|                       |       | $                                      | 4,368      |   | $ | 1,702 |   |

 

For the three-month periods ended March 31, 2010and 2009, in the gaming machine participation segment, one customer represented71% and 33%, respectively, of total participation revenue.  For the three-month periods ended March 31,2010 and 2009, in the table game products segment, the largest customerrepresented 58% and 0%, respectively, of total gaming chip product sales. Forthe three-month periods ended March 31, 2010 and 2009, within thenon-gaming products segment, one customer represented 27% and 37%,respectively, of total non-gaming product sales.

 

**Note 3.****                                 ****Inventories**

 

Inventories consist of the following:

 
| **(amounts in thousands)** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Raw  materials             |       | $                        | 607        |                        | $          | 369 |   |
| Finished  goods            |       | 349                      |       | 252                         |       |
|                       |       | $                        | 956        |                        | $          | 621 |   |

 

**Note 4.****                                 ****Prepaid Expenses and Other CurrentAssets**

 

Prepaid expenses and other current assets consist ofthe following:

 

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| **(amounts in thousands)**         | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Prepaid  taxes                     |       | $                        | 582        |                        | $          | 374 |   |
| Prepayments  to suppliers          |       | 171                      |       | 355                         |       |
| Deposits  on gaming machine orders |       | 299                      |       | 31                          |       |
| Other                              |       | 7                        |       | 10                          |       |
|                               |       | $                        | 1,059      |                        | $          | 770 |   |

 

**Note 5.****            ****Receivables**

 

Accounts and other receivables consist of thefollowing:

 
| **(amounts in thousands)**             | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Trade  accounts                        |       | $                        | 2,197      |                        | $          | 2,784 |   |
| Other                                  |       | 167                      |       | 195                         |       |
|                                   |       | 2,364                    |       | 2,979                       |       |
| Less:  allowance for doubtful accounts |       | (7                       | )          | (8                          | )          |
| Net                                    |       | $                        | 2,357      |                        | $          | 2,971 |   |
| Current  portion                       |       | 2,289                    |       | 2,865                       |       |
| Non-current  portion                   |       | $                        | 68         |                        | $          | 106 |   |

 

Bad debt expenses for the three-month periods ended March 31,2010 and 2009 were $NIL and $12,000, respectively, which were recorded inselling, general and administrative expenses in the consolidated statements ofoperations.

 

**Note 6.****            ****Gaming Equipment and Systems**

 

The major categories of gaming equipment and systemsand accumulated depreciation consist of the following:

 
| **(amounts in thousands)**      | ** ** | **Useful  Life  (years)** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------|------------|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | ** **                | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Gaming  equipment               |       | 3  – 5               |       | $                        | 40,757     |                        | $          | 39,730 |   |
| Systems                         |       | 5                         |       | 3,701                    |       | 3,520                       |       |
|                            |       |                      |       | 44,458                   |       | 43,250                      |       |
| Less:  accumulated depreciation |       |                      |       | (18,708                  | )          | (16,743                     | )          |
|                            |       |                      |       | $                        | 25,750     |                        | $          | 26,507 |   |

 

Depreciation expenses for the three-month periodsended March 31, 2010 and 2009 were approximately $1.9 million and $2.4million, respectively, which were recorded in cost of gaming machineparticipation in the consolidated statements of operations.

 

**Note 7.****            ****Property and Equipment**

 

Property and equipment consist of the following:

 
| **(amounts in thousands)**                      | ** ** | **Useful  Life  (years)** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **                | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Equipment  and vehicles, furniture and fixtures |       | 3  – 5               |       | 6,509                    |       | 6,349                       |       |
| Leasehold  improvements                         |       | 5                         |       | 833                      |       | 814                         |       |
|                                            |       |                      |       | 7,342                    |       | 7,163                       |       |
| Less  accumulated depreciation                  |       |                      |       | (4,178                   | )          | (3,841                      | )          |
|                                            |       |                      |       | $                        | 3,164      |                        | $          | 3,322 |   |
|                                                 |            |                           |            |                          |            |                             |            |  |  |

 

**Note 8.****            ****Intangible Assets, including Goodwill**

 

In accordance with ASC 350, *Intangibles—Goodwilland Other,* and ASC 360, *Property, Plant, andEquipment,* the Company reviews goodwill and intangibles forimpairment on an annual basis at December 31 or more frequently if eventsor circumstances indicate that the carrying values may not be recoverable. Nocircumstances during the three-month period ended March 31, 2010 indicatedany further impairment provisions were necessary.

 

The Company’s definite-life intangible assets aresubject to amortization as follows:

 
| **(amounts in thousands)**            | ** ** | **Useful  Life  (years)** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------|------------|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | ** **                | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Patents                               |       | 10                        |       | $                        | 2,577      |                        | $          | 2,577 |   |
| Less:   accumulated amortization |       |                      |       | (966                     | )          | (902                        | )          |
|                                  |       |                      |       |                     |       |                        |       |
| Customer  relationships               |       | 10-13                     |       | 1,684                    |       | 1,684                       |       |
| Less:   accumulated amortization |       |                      |       | (725                     | )          | (698                        | )          |
|                                  |       |                      |       |                     |       |                        |       |
| Trademarks                            |       | 10-13                     |       | 505                      |       | 505                         |       |
| Less:   accumulated amortization |       |                      |       | (150                     | )          | (140                        | )          |
| Total                                 |       |                      |       | $                        | 2,925      |                        | $          | 3,026 |   |

 

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At March 31, 2010 and December 31, 2009, theCompany’s goodwill was $84,210.

 

**Note 9.****            ****Prepaids, Deposits and Other Assets**

 

Deposits and other assetsconsist of the following:

 
| **(amounts in thousands)**        | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Office  equipment rental deposits |       | $                        | 57         |                        | $          | 74 |   |
| Sales  tax in dispute             |       | 84                       |       | 84                          |       |
| Restricted  cash                  |       | 114                      |       | 113                         |       |
| Prepaid  value-added tax          |       | 37                       |       | 136                         |       |
| Other                             |       | 1                        |       | 1                           |       |
| Total                             |       | $                        | 293        |                        | $          | 408 |   |

 

**Note 10.****          ****Accrued Expenses**

 

Accrued expenses consist ofthe following:

 
| **(amounts in thousands)** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Payroll  and related costs |       | $                        | 566        |                        | $          | 599 |   |
| Interest                   |       | 119                      |       | 128                         |       |
| Legal,  accounting and tax |       | 97                       |       | 146                         |       |
| Deposits  from customers   |       | —                   |       | 28                          |       |
| Accrued  tax expenses      |       | 755                      |       | 747                         |       |
| Deferred  rent             |       | 47                       |       | 46                          |       |
| Other                      |       | 178                      |       | 631                         |       |
| Total                      |       | $                        | 1,762      |                        | $          | 2,325 |   |

 

**Note 11.****          ****Debt and Capital Lease Obligations**

 

Debt and capital lease obligations consist of thefollowing:

 
| **(amounts in thousands)**                                                                                  | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                  | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| Note  payable to a related party with interest at 5% (Note 13)                                              |       | $                        | 9,507      |                        | $          | 9,393 |   |
| Capital  lease obligations to an Australian bank at various interest rates and  collateralized by equipment |       | 562                      |       | 599                         |       |
| Capital  lease obligations for furniture, tooling and equipment                                             |       | —                   |       | 2                           |       |
| Total                                                                                                       |       | 10,069                   |       | 9,994                       |       |
| Less  current portion                                                                                       |       | (4,894                   | )          | (3,315                      | )          |
| Long-term  portion                                                                                          |       | $                        | 5,175      |                        | $          | 6,679 |   |

 

On November 6, 2008, in accordance with theamended Trade Credit Facility Agreement, Elixir International Limited (“ElixirInternational”), a wholly-owned subsidiary of Elixir Group Limited, which isthe principal shareholder of the Company, surrendered its initial advance of$15.0 million to the Company in exchange for a new promissory note for theoutstanding principal amount of $12.1 million. The outstanding principal and the interest accrued (revised from 8% to5%) thereon was to be repaid in 24 equal monthly installments reset from January 1,2009. On July 24, 2009, the Company entered into Amendment No. 2 tothe Trade Credit Facility Agreement with Elixir International to defer therepayment of principal and interest on the outstanding principal balance of$9.2 million until July 2010. Interest continues to accrue at the rate of 5%.  Repayments in 18 equal monthly installmentswill resume on July 1, 2010.  (SeeNote 13).

 

**Note 12.****          ****Stock-Based Compensation**

 

**Options**

 

At the annual shareholders meeting on September 8,2008, a new stock option plan, the “2008 Stock Incentive Plan” (the “Plan”),was voted on and became effective January 1, 2009.

 

The Plan allows for incentive awards to eligiblerecipients consisting of:

 

·                  Options to purchase shares of common stock thatqualify as incentive stock options within the meaning of the Internal

 

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Revenue Code;

 

·                  Non-statutory stock options that do not qualify asincentive options;

 

·                  Restricted stock awards; and

 

·                  Performance stock awards, which are subject to futureachievement of performance criteria or be free of any performance or vesting.

 

The maximum number of shares reserved for issuanceunder the Plan is 5,000,000. The exercise price of options granted under thePlan shall not be less than 100% of the fair market value of one share ofcommon stock on the date of grant, unless the participant owns more than 10% ofthe total combined voting power of all classes of stock of the Company or anyparent or subsidiary corporation of the Company, in which case the exerciseprice of any incentive stock option granted under the Plan shall then be 110%of the fair market value.

 

During the three-month period ended March 31,2010, stock options for the purchase of 2,075,000 shares of common stock weregranted with a weighted average exercise price of $0.28 and weighted averagefair value of $0.23 per share and will vest from six-month and one day periodsto three-year periods.   During thethree-month period, 472,727 restricted stock awards with a fair value of $0.27per share were issued.  The shares ofrestricted stock shall vest, subject to and upon the recipient’s achievement ofkey operational/and financial performance milestones. For restricted stockawards with performance conditions, the Company evaluates if performanceconditions are probable in each reporting period. The compensation expense ofrestricted awards is recognized ratably over the implicit service period ifachieving performance conditions is probable. Cumulative catch-up adjustments arerequired in the event of change in assessment of probability.

 

In addition, during the first quarter of 2010, wegranted 450,000 performance stock awards with a fair value of $0.27 per share.

 

Prior to January 1, 2009, the Company had twostock options plans, the Amended and Restated 1999 Stock Option Plan and theAmended and Restated 1999 Directors’ Stock Option Plan (the “Stock Option Plans”),through which 15,000,000 shares and 300,000 shares were authorized,respectively.  Both Stock Option Plansexpired on December 31, 2008.

 

As of March 31, 2010, 8,269,913 stock optionswere exercisable with a weighted average exercise price of $1.74, a weightedaverage fair value of $0.22, and an aggregate intrinsic value of $408,000.

 
| ** **                                | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (in thousands)** | ** ** |
|-------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| Outstanding  as of December 31, 2009 |       | 10,737,065             |       | $                                     | 1.84       |                                                           | 4.32       |                                            | $          | 502 |   |
| Granted                                   |       | 2,997,727              |       | $                                     |       |                                                           |       |                                            | —     |   |
| Exercised                                 |       | (922,727               | )          | —                                |       | —                                                         |       | —                                          |       |
| Cancelled                                 |       | (153,799               | )          | $                                     | 2.24       |                                                           | —     |                                            | —     |   |
| Outstanding  as of March 31, 2010    |       | 12,658,266             |       | $                                     | 1.52       |                                                           | 5.13       |                                            | $          | 502 |   |
| Exercisable  as of March 31, 2010    |       | 8,269,913              |       | $                                     | 1.74       |                                                           | 3.86       |                                            | 408        |   |

 

**Warrants**

 

A summary of the status of the Company’s warrantsoutstanding at March 31, 2010 and changes during the three-month periodthen ended is presented in the table below.

 
| ** **                              | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------|------------|--------------|------------|----------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------|------------|
| Warrants,  as of December 31, 2009 |       | 13,125,000   |       | $                                      | 1.86       |                                                           | 1.12       |                            | —     |   |
| Grant/(exercise  or cancelled)          |       | —       |       | —                                 |       | —                                                         |       | —                          |       |
| Exercisable  as of March 31, 2010  |       | 13,125,000   |       | 1.86                                   |       | 0.87                                                           |       | —                          |       |
|                                         |            |              |            |                                        |            |                                                                |            |                                 |            |  |

 

There were no warrants granted, exercised or cancelledduring the three-month period ended March 31, 2010.  Outstanding and exercisable warrants have noaggregate intrinsic value as of March 31, 2010 due to the fair marketvalue of the Company’s stock as of that date.

 

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*Recognition and Measurement*

 

The fair value of each stock-based award to employeesand non-employee directors is estimated on the measurement date which generallyis the grant date while awards to non-employees are measured at the earlier ofthe performance commitment date or the service completion date using theBlack-Scholes-Merton option-pricing model. Option valuation models require the input of highly subjectiveassumptions, and changes in assumptions used can materially affect the fairvalue estimates.  The Company estimatesthe expected life of the award by taking into consideration the vesting period,contractual term, historical exercise data, expected volatility, blackoutperiods and other relevant factors. Volatility is estimated by evaluating theCompany’s historical volatility data. The risk-free interest rate on the measurement date is based on U.S.Treasury constant maturity rates for a period approximating the expected lifeof the award.  The Company historicallyhas not paid dividends and it does not expect to pay dividends in theforeseeable future.  Therefore, theexpected dividend rate is zero.

 

The following table summarizes the range ofassumptions utilized in the Black-Scholes-Merton option-pricing model for thevaluation of stock options and warrants granted during the three-month periodsended March 31, 2010 and 2009:

 
| ** **                | ** ** | **March  31,** | ** ** |
|---------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**       | ** ** | **2009** | ** ** |
| ** **                | ** ** | **Low**        | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Range  of values:         |       |           |       |   |   |   |   |   |   |
| Expected  volatility      |       | 129.51         | %          | 173.76 | % | 136.27 | % | 316.92 | % |
| Expected  dividends       |       | —         |       | — |   | — |   | — |   |
| Expected  term (in years) |       | 2.92           |       | 9.96 |   | 1.88 |   | 9.70 |   |
| Risk-free  rate           |       | 3.62           | %          | 3.85 | % | 0.81 | % | 2.71 | % |

 

For stock-based compensation accrued to employees andnon-employee directors, the Company recognizes stock-based compensation expensefor all service-based awards with graded vesting schedules on the straight-linebasis over the requisite service period for the entire award.  Initial accruals of compensation expense arebased on the estimated number of shares for which requisite service is expectedto be rendered.  Estimates are revised ifsubsequent information indicates that forfeitures will differ from previousestimates, and the cumulative effect on compensation cost of a change in theestimated forfeitures is recognized in the period of the change.

 

For non-employee awards, the Company remeasurescompensation costs each period until the service condition is complete andrecognizes compensation costs on the straight-line basis over the requisiteservice period.

 

The Company estimates forfeitures and recognizescompensation costs only for those awards expected to vest, assuming all awardswould vest, and reverses recognized compensation costs for forfeited awardswhen the awards are actually forfeited.

 

For awards with service conditions and graded vestingthat were granted prior to the adoption of ASC 718, the Company estimates therequisite service period and the number of shares expected to vest, andrecognizes compensation expense for each tranche on the straight-line basisover the estimated requisite service period.

 

**Note 13.****          ****Related Party Transactions**

 

At March 31, 2010 and December 31, 2009, thenotes payable to Elixir International relating to purchases of electronicgaming machines, casino management systems and other peripherals hadoutstanding principal amounts and additional accrued interest totaling $9.5million and $9.4 million, respectively.

 

On April 21, 2008, the Company entered into aTrade Credit Facility Agreement (the “Facility Agreement”) with Elixir International.  Pursuant to the Facility Agreement, ElixirInternational provided trade credits to the Company for its purchases ofelectronic gaming machines from Elixir International in exchange for theCompany’s issuance of unsecured notes to Elixir International bearing interestat a fixed rate of eight percent (8.0%) per annum.  Titles for any gaming machines offered inexchange for the notes passed to the Company upon issuance of the notes.

 

Upon entering into the Facility Agreement, the Companyimmediately issued the first note pursuant to the terms of the FacilityAgreement in the then principal amount of $15,000,000 (the “Initial Advance”).  The Initial Advance extinguished a then tradepayable of an equivalent amount to Elixir International with respect to gamingmachines previously acquired.

 

Pursuant to the Facility Agreement, the Company wasobligated to repay the principal, plus any accrued interest thereon, of theInitial Advance in 24 equal monthly installments after the date of issue.  The Initial Advance is subject to demand byElixir International for immediate payment only if there is either an event ofdefault or a change of control as defined in the Facility Agreement. Pursuantto an amendment to the Facility Agreement dated November 6, 2008 betweenthe parties, Elixir International surrendered the note of Initial Advance tothe Company in exchange for the issuance of a new promissory note for the thenoutstanding principal amount of $12.1 million with the following new repaymentterms: (a)  the outstanding principal amount and the interest accruedthereon shall be repaid in 24 equal monthly installments reset from January 1,2009; (b) interest shall be accrued on the outstanding principal at therate of five percent (5.0%)  per annumstarting from January 1, 2009; and no monthly repayments under the newnote were required for the months of October, November and December 2008.  On July 24, 2009, the 

 

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Company entered into another agreement with ElixirInternational to further amend the unsecured promissory note issued by theCompany. Under these recently amended note terms, which became effective as of July 1,2009, the Company is entitled to defer the repayment of principal and intereston the outstanding principal balance of the note of $9.2 million until July 2010with interest at the same rate of 5% continuing to accrue (See Note 11). On April 20,2010, in relation to the disposal of Elixir International by our principalshareholder, Elixir Group Limited, Elixir International assigned andtransferred all its rights and obligations under the Facility Agreement and thenote to Elixir Group Limited. The said assignment and transfer does not haveany impact on the note terms or the repayment obligations of the Company saveand except that when the repayment schedule resumed in July 2010, themonthly repayment of principal and interest under the note will be made to orat the direction of Elixir Group Limited instead of Elixir International (SeeNote 19).

 

Effective January 1, 2010, the Company sub-leasedoffice space from Melco Services Limited, a wholly-owned subsidiary of MelcoInternational Development Limited, which is also the parent of our principalshareholder, Elixir Group Limited. In addition, Melco Service Limited providedtechnical service to support network and hardware maintenance for the leasedoffice area. Other expenses that the Company paid on behalf of Melco ServiceLimited included network communication and travel expenses.

 

Significant revenues,purchases and expenses arising from transactions with related parties for the three-monthperiods ended March 31, 2010 and 2009 are as follows:

 
| **(amounts in thousands)**                   | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| **Elixir  International Limited**            |       |     |       |     |       |
| Trade sales of gaming products               |       | $        | —     |     | $          | 52 |   |
|                                         |       |     |       |     |       |
| **Melco  Services Limited**                  |       |     |       |     |       |
| Technical services                           |       | $        | 10         |     | —     |   |
| Office rental                                |       | $        | 36         |     | —     |   |
| Expenses paid on behalf of the Company (net) |       | $        | (16        | )        | —     |   |
|                                              |            |          |            |          |            |  |  |

 

**Note 14.****          ****Income Taxes**

 

Reported income tax rates for the three-month periodsended March 31, 2010 and 2009 were (16.5)% and 0.05%, respectively. Forthe three-month period ended March 31, 2010, the Company recorded taxableincome from one of its foreign operations while it incurred a net loss fromoperations on a consolidated basis. Such foreign operation is expected tocontinue to be profitable for the full year of 2010 and, accordingly, taxexpense is recorded in the three-month period ended March 31, 2010resulting in a negative effective tax rate.

 

**Note 15.****          ****Restructuring Charges**

 

In accordance with ASC 420, *Exit and Disposal Cost Obligations*, the Company incurredrestructuring charges for the three-month periods ended March 31, 2010 and2009 of approximately $37,000 and $499,000, respectively.  The restructuring charge during thethree-month period ended March 31, 2010 was for severance wages andbenefits related to the termination of employees.

 

The restructuring charge during the three-month periodended March 31, 2009 was for the write-down of the remaining China plantequipment and the severance wages and benefits related to the termination ofemployees.  The amounts represent thecontractual and other agreements with employees, which only include charges fortermination benefits measured at the estimated fair value at the terminationdate. Restructuring expenses and related charges incurred at March 31,2009 were subsequently paid or settled.

 

**Note 16.****          ****Discontinued Operations**

 

On March 16, 2009, the Company entered into aPurchase and Settlement Agreement with Shuffle Master, Inc. (the “Purchaseand Settlement Agreement”) pursuant to which it sold to Shuffle Master itsportfolio of automated card verification machines and electronic card shufflingsystems, all related intellectual property, including but not limited to, thetrademarks of Random PlusTM, ShuffleProTM and Deck CheckerTM, and certaininventory of such products. The total consideration paid by Shuffle Masterunder the Purchase and Settlement Agreement was a base amount of $2.4 million withan additional $400,000 related to the purchase of inventories.  In April 2009, the Company delivered theinventory items and concluded the transaction, and this resulted in a gain onthe asset disposals of approximately $2.0 million.

 

In relation to this Purchase and Settlement Agreement,the Company terminated a distributorship arrangement of the relevant productswith a distributor in Europe and, pursuant to the termination arrangement theCompany was required to buy back certain inventories of the relevant productskept by the distributor. The estimated liability was approximately $248,000which was recorded as liabilities related to discontinued operations. Aftertaking into account such buy-back obligation, the Company recognized a gainrelating to the asset disposal of approximately $1.71 million in thethree-month period ended June 30, 2009.

 

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As a result of the sale to Shuffle Master, the Chinafacility became redundant and, therefore, was completely closed at the end of April 2009.This operation was part of the table game segment and the Company classifiedthe China facility as discontinued operations.

 

The following table details selected financialinformation for the discontinued operations in the consolidated statements ofoperations.

 
| ** **                                     | ** ** | **Three  Months Ended March 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| **(amounts in thousands)**                     | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Loss  from operations                          |       | $                                      | —     |   | $ | (218 | ) |
| Gain  on disposal                              |       | —                                 |       | — |   |
| Income  tax expense                            |       | —                                 |       | — |   |
| Loss  from discontinued operations, net of tax |       | $                                      | —     |   | $ | (218 | ) |

 

The estimated effective tax for discontinuedoperations is zero. Therefore, there is no income tax benefit associated with theloss from operations.

 

**Note 17.****          ****Commitments and Contingencies**

 

**Legal Matters**

 

The Company is a party to legal matters as discussedbelow.

 

*Sales Tax Audit*

 

In February 2004,the State of Nevada initiated a sales/use tax audit of our equipment lessors.As of the date of this filing, the State of Nevada has not made a determinationif there has been a double tax payment of the sales/use tax.  Based on the follow-up reviews with theNevada Department of Tax, the Company made a provision of $350,000.  As of March 31, 2010, we had a receivablebalance $84,000 relating to the possible refund. We will continue to assess thecollectability and make appropriate adjustments when necessary.

 

*Prime Mover/Strata Litigation*

 

On March 26, 2010, certain shareholders of theCompany including Prime Mover Capital Partners L.P., Strata Fund L.P., StrataFund Q.P. L.P., and Strata Offshore Fund, Ltd (collectively, the “Plaintiffs”)filed in the United States District Court for the Southern District of New Yorka complaint (the “Complaint”) against certain defendants including the Companyand certain other current and former directors and officers of theCompany.  Although the Complaint wasfiled on March 26, 2010, the Company was not made aware of it until March 31,2010, the date immediately after the Company’s filing of its Form 10-K forthe fiscal year ended December 31, 2009.

 

The Complaint alleges claims related to disclosuresconcerning the Company’s electronic gaming machine participation business (the “ParticipationBusiness”), including but not limited to the alleged violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, violations of Nevada Revised Statutes Sections 90.580(e) and90.660(3), breach of fiduciary duty, and negligent misrepresentations.  The Plaintiffs allege that the Company andcertain other defendants made false and misleading statements about theParticipation Business in filings with the SEC, press releases, and otherindustry and investor conferences and meetings during the period from June 13,2007 and August 13, 2008 and that the Plaintiffs then purchased thesecurities at the inflated prices and later suffered economic losses when theprice of the Company’s securities decreased.

 

The Plaintiffs seek unspecified damages, as well asinterest, costs and attorneys’ fees.  TheCompany has engaged legal counsel to consider the claims set forth in theComplaint and the Company intends to defend vigorously and respond to theComplaint in a time and manner consistent with applicable federal and state laws.As the litigation is at a very preliminary stage, it is not possible to predictthe likely outcome of the case or the probable loss, if any, and, accordingly,no accrual has been made for any possible losses in connection with thismatter.

 

**Note 18.****          ****Loss Per Share**

 

Basic loss per share is computed by dividing thereported net loss for the period by the weighted average number of commonshares outstanding during the period.  Loss per share is unchanged on adiluted basis since the assumed exercise of common stock equivalents would havean anti-dilutive effect.

 

**Note 19.           Subsequent Events**

 

On April 20, 2010,the Company entered into a Deed of Assignment and Novation and Consent (the “Deedof Assignment”) with Elixir International and Elixir Group Limited. Pursuant tothe Deed of Assignment, the Company agreed to the assignment and 

 

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transfer by ElixirInternational of all its rights and obligations under the Facility Agreementand the related promissory note (See Note 13) to Elixir Group Limited, ourprincipal shareholder, with immediate effect. The said assignment and transferwas made in relation to the disposal of Elixir International by Elixir GroupLimited and does not have any impact on the note terms or the repaymentobligations of the Company save and except that when the repayment scheduleresumes in July 2010, the monthly repayment of principal and interestunder the note will be made to or at the direction of Elixir Group Limitedinstead of Elixir International.

 

**Item 2.****            ****Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

***CAUTIONARYSTATEMENT***

 

The following discussion and analysis should be readin conjunction with our unaudited consolidated financial statements and therelated notes thereto contained elsewhere in this report. The informationcontained in this quarterly report on Form 10-Q is not a completedescription of our business or the risks associated with an investment in ourcommon stock. We urge you to carefully review and consider the variousdisclosures made by us in this report and in our other reports filed with theSecurities and Exchange Commission, or SEC, including our annual report on Form 10-Kfor the year ended December 31, 2009, filed with the SEC on March 30,2010 and subsequent reports on Form 8-K, which discuss our business ingreater detail.

 

In this report we make, and from time to time weotherwise make, written and oral statements regarding our business andprospects, such as projections of future performance, statements of management’splans and objectives, forecasts of market trends, and other matters that areforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. Statements containing the words or phrases “will likely result,” “areexpected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,”“expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should”or similar expressions identify forward-looking statements, which may appear indocuments, reports, filings with the Securities and Exchange Commission, newsreleases, written or oral presentations made by officers or otherrepresentatives made by us to analysts, stockholders, investors, newsorganizations and others, and discussions with management and other of ourrepresentatives.  For such statements, weclaim the protection of the safe harbor for forward-looking statementscontained in the Private Securities Litigation Reform Act of 1995.

 

Our future results, including results related toforward-looking statements, involve a number of risks and uncertainties. Noassurance can be given that the results reflected in any forward-lookingstatements will be achieved. Any forward-looking statement speaks only as ofthe date on which such statement is made. Our forward-looking statements are basedupon assumptions that are sometimes based upon estimates, data, communicationsand other information from suppliers, government agencies and other sourcesthat may be subject to revision. Except as required by law, we do not undertakeany obligation to update or keep current either (i) any forward-lookingstatement to reflect events or circumstances arising after the date of suchstatement, or (ii) the important factors that could cause our futureresults to differ materially from historical results or trends, resultsanticipated or planned by us, or which are reflected from time to time in anyforward-looking statement.

 

In addition to other matters identified or describedby us from time to time in filings with the SEC, there are several importantfactors that could cause our future results to differ materially fromhistorical results or trends, results anticipated or planned by us, or resultsthat are reflected from time to time in any forward-looking statement. Some ofthese important factors, but not necessarily all important factors, areincluded in the section “Risk Factors” in our annual report on Form 10-Kfor the year ended December 31, 2009 filed with the SEC on March 30,2010.

 

We own or have rights to certain trademarks that weused in connection with our business or products, including, but not limitedto, DolphinTM. Other than this trademark, this report also makes reference totrademarks and trade names of other companies.

 

**Overview**

 

Elixir Gaming Technologies is a provider of gamingtechnology solutions, with a primary focus on leasing electronic gamingmachines on a revenue sharing basis to gaming establishments within Pan Asianmarkets.  We identify and secure venues for the placement of electronicgaming machines and casino management systems, which track game performance andprovide statistics on each installed electronic gaming machine owned and leasedby us.  We contract with the venue owners or operators for the placementof the electronic gaming machines on a revenue sharing basis. In addition, weacquire and install the gaming machines, casino management systems and othergaming peripherals at the relevant gaming venues.

 

As of March 31, 2010, our gaming machineparticipation operations were concentrated in two countries, Cambodia and thePhilippines. In Cambodia, we had 551 gaming machine seats in operation at onevenue, NagaWorld, a wholly-owned subsidiary of Hong Kong listed NagaCorp Ltd.(HKSE: 3918).  In the Philippines, we had833 gaming machine seats in operation at six venues.

 

Weremain focused on selectively growing our installed base through the additionof high-potential new venues in our target markets.  Pursuant to the Machines Operation and Participation ConsolidationAgreement entered into with NagaWorld dated December 30,2009, we are entitled to add a total of 200 gaming machines seats to ouroperations at NagaWorld. Subsequently, 

 

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weadded approximately 110 of these 200 contracted gaming machine seats inmid-February, and we anticipate the addition of the remaining gaming machineseats by the end of the second quarter of 2010. On April 9, 2010, we entered into a Machine Participation Agreement withGrand Golden Co. Ltd., to place approximately 60 electronic gaming machineseats on a participation basis at its new Grand Golden casino in Kampong ChamProvince, Cambodia near the Vietnam border. We anticipate the full deployment of the 60 gaming machines seats in November 2010following the completion of the renovations of the designated floor space bythe venue owner.

 

In addition, we continue to actively pursue expansionopportunities in new and existing markets, where we can leverage our expertise andrelationships.  Key markets ofinterest are border cities in Cambodia with strong feeder markets fromneighboring countries such as Thailand and Vietnam, as well as opportunities innew countries such as Vietnam and Laos. For such new potential projects, we are seeking an operator role.

 

In addition to our primary gaming machineparticipation business, our operations consist of table game products, whichfocus on the design, manufacture and distribution of RFID and traditional non-RFIDcasino chips and plaques, and non-gaming products, which focus on the design,manufacture and sale of component parts primarily for the automotive industry.

 

We believe that our gaming chip operations remain anunder-exploited asset for us.  We have focusedgreater resources on these operations in the form of marketing and productdevelopment to further strengthen our strong customer relationships and marketpenetration in our key existing markets of Macau and Australia and to expandour distribution channels into new markets. These efforts include the development of higher-margin plaques, whichwas completed during the fourth quarter of 2009.  Based on these initial efforts, we believe wehave better positioned ourselves to capitalize on the future growthopportunities for the global gaming chip and plaque market.  On April 8, 2010, we secured our firstorder from our new RFID gaming plaques from Melco Crown Entertainment’s City ofDreams casino resort in Macau.  The order, which also includes RFID gamingchips, is valued at approximately Australian $370,000 in revenue and isexpected to be recorded in the 2010 second quarter period.

 

With regard to our non-gaming operations, Dolphin autocomponent sales volumes were improving during the first quarter of 2010 as theautomotive parts industry has shown signs of stabilization.  As a qualified supplier to several majormanufacturers, we believe Dolphin is positioned to gain market share in thefuture based on the recent consolidation of competitors in the market.

 

During 2009, through thesuccessful reorganization of our operations and streamlined cost structure, wemade solid progress in refining our core participation model, and improving ourexecution capabilities and operational efficiency.  As a result, our financial performance hascontinued to improve during the first quarter of 2010.  Our consolidatedrevenue for the three months ended March 31, 2010 was $4.4 million, ofwhich revenue from our gaming machine participation, table games and non-gamingoperations comprised 65%, 3% and 32%, respectively, of consolidatedrevenue.  This compares to consolidated revenue of $1.7 million for thethree months ended March 31, 2009, of which revenue from our gamingmachine participation, table games and non-gaming operations comprised 55%, 5%and 40%, respectively, of consolidated revenue. The improvement in consolidated revenue was driven by strong growth inour gaming machine participation and increase in volumes in our non-gamingproduct sales.

 

Based on the solid revenue performance, particularlyfrom our operations at NagaWorld, and our continued strict cost controlefforts, we achieved positive Adjusted EBITDA (as defined below) ofapproximately $1.3 million for the three months ended March 31, 2010, up64% sequentially from prior quarter. Also, cash provided from operatingactivities amounted to $1.8 million. The higher cash flow from operations wasprimarily due to a decrease in working capital as we continue to recoup prepaidcommitment fees from NagaWorld.

 

In addition to our efforts to reorganize ouroperations and streamline our cost structure, we made progress in improving ourliquidity and financial flexibility to pursue selective growth opportunities inour core gaming machine participation business.  On July 24, 2009, weentered into an agreement with Elixir International, a wholly-owned subsidiaryof Elixir Group, to amend the unsecured promissory note issued by us in April 2008and as amended in November 2008 to Elixir International. This agreement, whichbecame effective July 1, 2009, provides for the deferment of the repaymentof principal and accrued interest payments until July 2010 and immediatecash flow benefits to Elixir Gaming by reducing cash outlays by approximately$1.6 million per quarter during the deferment period.

 

**Results of Operations for theThree-Month Periods Ended March 31, 2010 and 2009**

 

The following is a schedule showing summarizedoperating results on a consolidated basis and separately by each of our threebusiness segments for the three-month periods ended March 31, 2010 and2009, namely gaming machine participation, table game products and non-gamingproducts.

 

On March 16, 2009, we entered into a Purchase andSettlement Agreement with Shuffle Master, Inc. (the “Purchase andSettlement Agreement”) pursuant to which we sold Shuffle Master our portfolioof automated card verification machines and electronic card shuffling systems,all related intellectual property, including but not limited to, the trademarksof Random PlusTM, ShuffleProTM and Deck CheckerTM, and certain inventories of suchproducts.  All historical revenues andexpenses from these assets sold to Shuffle Master have been reclassified asdiscontinued operations.

 

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| ** **                                                   | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| **(amounts in thousands, except per  share data)**           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Total:                                                       |       |                                   |       |   |   |
| Revenues                                                     |       | $                                      | 4,368      |   | $ | 1,702 |   |
| Gross  profit/(loss)                                         |       | $                                      | 649        |   | $ | (2,146 | ) |
| Gross  margin percentage                                     |       | 15                                     | %          | (126 | )% |
| Adjusted  EBITDA/(LBITDA) (1)                                |       | $                                      | 1,326      |   | $ | (2,588 | ) |
| Operating  loss from continuing operations                   |       | $                                      | (1,415     | ) | $ | (5,808 | ) |
| Net  loss from continuing operations                         |       | $                                      | (1,663     | ) | $ | (6,023 | ) |
|                                                         |       |                                   |       |   |   |
| Basic  and diluted loss per share from continuing operations |       | $                                      | (0.01      | ) | $ | (0.05 | ) |
| Weighted  average shares outstanding                         |       | 114,967                                |       | 114,957 |   |
|                                                         |       |                                   |       |   |   |
| Gaming  machine participation:                               |       |                                   |       |   |   |
| Revenues                                                     |       | $                                      | 2,836      |   | $ | 946 |   |
| Gross  profit/(loss)                                         |       | $                                      | 608        |   | $ | (2,164 | ) |
| Gross  margin percentage                                     |       | 21                                     | %          | (229 | )% |
|                                                         |       |                                   |       |   |   |
| Table  game products:                                        |       |                                   |       |   |   |
| Revenues                                                     |       | $                                      | 121        |   | $ | 78 |   |
| Gross  profit                                                |       | $                                      | 31         |   | $ | 53 |   |
| Gross  margin percentage                                     |       | 26                                     | %          | 68 | % |
|                                                         |       |                                   |       |   |   |
| Non-gaming  products:                                        |       |                                   |       |   |   |
| Revenues                                                     |       | $                                      | 1,411      |   | $ | 678 |   |
| Gross  profit/(loss)                                         |       | $                                      | 10         |   | $ | (35 | ) |
| Gross  margin percentage                                     |       | 1                                      | %          | (5 | )% |

 

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(1)          “Adjusted EBITDA/(LBITDA)” is earnings beforeinterest, taxes, depreciation, amortization, stock-based compensation, andother non-cash operating income and expenses. Adjusted EBITDA/(LBITDA) ispresented exclusively as a supplemental disclosure because management believesthat it is widely used to measure the performance, and as a basis forvaluation, of gaming companies. Management uses Adjusted EBITDA/(LBITDA) as ameasure of the operating performance of its segments and to compare the operatingperformance of its operations with those of its competitors. The Company alsopresents Adjusted EBITDA/(LBITDA) because it is used by some investors as a wayto measure a company’s ability to incur and service debt, make capitalexpenditures and meet working capital requirements. Gaming companies havehistorically reported EBITDA/(LBITDA) as a supplement to financial measures inaccordance with generally accepted accounting principles in the United States (“GAAP”).Adjusted EBITDA/(LBITDA) should not be considered as an alternative tooperating income as an indicator of the Company’s performance, as analternative to cash flows from operating activities as a measure of liquidity,or as an alternative to any other measure determined in accordance with GAAP.Unlike net income/(loss), Adjusted EBITDA/(LBITDA) does not includedepreciation or interest expense and,  therefore, does not reflect currentor future capital expenditures or the cost of capital. The Company compensatesfor these limitations by using Adjusted EBITDA/(LBITDA) as only one of severalcomparative tools, together with GAAP measurements, to assist in the evaluationof operating performance. Such GAAP measurements include operating income, netincome/(loss), cash flows from operations and cash flow data. The Company hassignificant uses of cash flows, including capital expenditures, interestpayments, debt principal repayments, taxes and other non-recurring charges,which are not reflected in Adjusted EBITDA/(LBITDA). Elixir Gaming’s calculationof Adjusted EBITDA/(LBITDA) may be different from the calculation methods usedby other companies and, therefore, comparability may be limited.

 

A reconciliationof EBITDA/(LBITDA), as adjusted, to the net loss is provided below:

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| **(amounts in thousands)**              | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net  loss — GAAP basis             |       | $                                      | (1,663     | ) | $ | (6,241 | ) |
| Loss  from discontinued operations      |       | —                                 |       | 218 |   |
| Interest  expense                       |       | 122                                    |       | 136 |   |
| Interest  income                        |       | (12                                    | )          | (38 | ) |
| Income  tax expenses                    |       | 235                                    |       | 3 |   |
| Depreciation  and amortization          |       | 2,231                                  |       | 2,753 |   |
| Stock  option expenses                  |       | 294                                    |       | 202 |   |
| Impairment/write-down  of gaming assets |       | 116                                    |       | 379 |   |
| EBITDA/(LBITDA),  as adjusted           |       | $                                      | 1,323      |   | $ | (2,588 | ) |

 

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Total revenues for the three-month period ended March 31,2010 increased approximately $2.7 million to $4.4 million from $1.7 million inthe corresponding period in the prior year due to revenue increases in allsegments, i.e. gaming machine participation, table game products, andnon-gaming product.  Revenue from gamingmachine participation increased as a result of an increase in the number ofmachines in operation and higher average net win per machine.  Table game product sales increased as aresult of higher gaming chip sales to existing customers.  Non-gaming product sales increased as aresult of increased orders from major customers as compared with same periodlast year.

 

Gross profit increased approximately $2.8 million to a profitof $0.6 million for the three-month period ended March 31, 2010 comparedto a gross loss of $2.2 million in the same period of the prior year primarilyas a result of higher gross margin for our gaming machine participation asaverage net win per machine and number of machines in operation increasedsubstantially and gaming machine depreciation expense decreased as a result ofimpairment charges at year end 2009.

 

Operating loss from continuing operations declined$4.4 million to $1.4 million for the three-month period ended March 31,2010 compared to an operating loss of $5.8 million in the same period of theprior year.  Net loss from continuingoperations declined $4.4 million to $1.6 million compared to a net loss of $6.0million for the same period in the prior year. The decline in operating and net loss from continuing operations wasprimarily the result of higher gaming participation revenue and significantlyreduced operating expenses.

 

**Gaming Machine Participation**

 

In September 2007, we began our electronic gamingmachine participation operations in Asia as part of our primary focus onplacing gaming machines on a revenue sharing basis. Revenue from our gamingmachine participation operations during the three months ended March 31,2010 increased $1.9 million to $2.8 million compared to revenue of $0.9 millionfor the same period in the prior year. The increase in revenue was primarilythe result of a higher number of machines in operation and higher average netwin per machine compared to the prior year when our gaming machineparticipation operations were less mature.

 

Gross profit from gaming machine participationoperations increased $2.8 million to $0.6 million for the three months ended March 31,2010 compared to a gross loss of $2.2 million for the same period in the prioryear as revenue from our gaming machine participation operations increasedsignificantly and the related depreciation expenses were reduced as a result ofrecent impairment charges. Cost of goods sold for the three months ended March 31,2010 included $1.9 million depreciation of electronic gaming machines and $0.3million of other expenses, which include approximately $0.1 million for thewrite-down of infrastructure costs due to the closure of one under-performingvenue in the Philippines.

 

As of March 31, 2010, we had a total of 1,764gaming machine seats of which 380 were held in inventory and 1,384 were inoperation.  Of the 1,384 gaming machine seats in operation, 551 were inoperation in one venue in one location in Cambodia and 833 were in operation insix venues in the Philippines.

 
| ** **                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **(amounts in thousands)**                | ** ** | **Units**          | ** ** | **Carrying  Value**   | ** ** | **Units** | ** ** | **Carrying  Value** | ** ** |
| Machines  and systems used in operations  |       | 1,384              |       | $                     | 19,467     |   | 1,299 |   | $ | 19,248 |   |
| Machines  and systems held for future use |       | 380                |       | 6,283                 |       | 403 |   | 7,259 |   |
| Total  gaming machines and systems        |       | 1,764              |       | $                     | 25,750     |   | 1,702 |   | $ | 26,507 |   |

 

In Cambodia, regulatory changes at the end of 2008 andearly 2009 impacted the competitive landscape of gaming operations in thismarket.  Due to directives issued by the Cambodian government in December 2008and February 2009, all slot clubs in the Phnom Penh area, including ourthen contracted venues, were closed with the exception of the slot operationswithin NagaWorld.  In December 2008,we established a relationship to place electronic gaming machines on aparticipation basis at NagaWorld hotel casino resort in the capital city ofPhnom Penh.  NagaWorld operates under anexclusive casino license in Phnom Penh and our operations within NagaWorld arecurrently our only operations in Cambodia.

 

During the fiscal year ended December 2009, weplaced 440 gaming machine seats in prime locations of NagaWorld’s casino resortpursuant to three contracts between us and NagaWorld.  On December 30, 2009, we entered intoanother contract with NagaWorld entitled Machines Operation andParticipation Consolidation Agreement (the “Consolidation Agreement”).  The Consolidation Agreement: (a) providesfor our exercise of the option granted by NagaWorld pursuant to an option deeddated July 25, 2009 to place an additional 200 electronic gaming machineson a participation basis at NagaWorld’s casino resort; and (b) with effectfrom the date of the Consolidation Agreement, supersedes and replaces the threeprevious agreements executed with NagaWorld dated December 13, 2008 (“December 08Agreement”), June 15, 2009 (“June 09 Agreement”) and July 25,2009 

 

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(“July 09 Agreement”) (collectively, the “PreviousAgreements”) which covered the operation of 440 electronic gaming machines atthe NagaWorld Casino.

 

Under the PreviousAgreements: (i) we and NagaWorld shared the win per unit per day from theexisting 440 machines and certain operating costs related to marketing andfloor staff at a weighted average of 22.4% / 77.6% split, respectively; (ii) winper unit per day from only 200 out of 440 existing machines was settled anddistributed daily to us; and (iii) both the term of the December 08Agreement and the June 09 Agreement were to expire in the first quarter of2014 while the term of the July 09 Agreement was to expire at the end ofthe third quarter of 2014.

 

Pursuant to the terms ofthe Consolidation Agreement, we and NagaWorld will have joint control over theoperation of a total of 640 electronic gaming machines (comprising the 200additional machines and the existing 440 machines placed and in operationpursuant to the Previous Agreements), including floor staff and respectiveaudit rights. We and NagaWorld will share the win per unit per day from all the640 machines and certain operating costs related to marketing and floor staffat a 25% / 75% split, respectively (subject to our right to receive 100% of thewin per unit per day from certain machines during certain period of time asdescribed below). Win per unit per day from all the 640 machines will besettled and distributed daily to us. The Consolidation Agreement is for a termof six years commencing March 1, 2010.

 

In consideration forentering into the Consolidation Agreement with NagaWorld, we paid to NagaWorlda $1.38 million one-time non-refundable contract amendment fee and a commitmentfee of $4.1 million. Both the one-time contract amendment fee and commitmentfee were to be paid in three installments. The first 50% installment was dueand paid by us on December 30, 2009, the second 25% installment was dueand paid by us on January 15, 2010, and the third and final 25%installment was due and paid by us on January 28, 2010.

 

Below is a table showingvarious agreements with NagaWorld and respective commitment fees paid andremaining on the balance sheet as of March 31, 2010:

** **
| **Agreement**           | ** ** | **Number  of  Machines** | ** ** | **Prepaid  Commitment  Fee Paid (in millions)** | ** ** | **Prepaid  Commitment Fee  Remaining on the Balance Sheet  as of March 31, 2010** | ** ** |
|-------------------------|------------|--------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| December 08        |       | 200                      |       | $                                               | —     |                                                                                   | $          | — |   |
| June 09            |       | 40                       |       | 1.00                                            |       | —                                                                                 |       |
| July 09            |       | 200                      |       | 5.84                                            |       | —                                                                                 |       |
| Previous Agreements     |       | 440                      |       | 6.84                                            |       | —                                                                                 |       |
| Consolidation Agreement |       | 200                      |       | 4.10                                            |       | 3.36                                                                                   |       |
|                    |       | 640                      |       | $                                               | 10.94      |                                                                                   | $          | 3.36 |   |

 

While we and NagaWorldwill share the win per unit per day from the 640 machines at a 25% / 75% split,respectively, we will be entitled to 100% of the win per unit per day from the200 existing machines placed under the July 09 Agreement until we havereceived a total accumulated win per unit per day of $7.3 million from the said200 machines and 100% of the win per unit per day from the additional machinesuntil we have received a total accumulated win per unit per day of $5.47million from the additional machines under the December 30, 2009 contract(representing the $4.1 million commitment fee plus our 25% share of the win perunit per day from the additional machines).

 

During the three months ended March 31, 2010, inCambodia we added approximately 110 of the contracted 200 gaming machines atNagaWorld pursuant to the Consolidation Agreement dated December 30, 2009and we expect to add the remaining 90 seats during the second quarter period of2010.   In the Philippines, we continueto implement our strategic initiative to reallocate our gaming assets to focuson higher-performing venues. As a result, in January 2010 we closed oneunder-performing venue and redeployed certain gaming assets tohigher-performing venues.

 

In April 2010, weentered into a Machine Participation Agreement (“Agreement”) with Grand GoldenCo. Ltd. (“Grand Golden”), to place approximately 60 electronic gaming machineseats on a participation basis at its new Grand Golden casino in Kampong ChamProvince, Cambodia near the Vietnam border. We anticipate the full deployment of the 60 gaming machines seats in November 2010following the completion of the renovations of the designated floor space bythe venue owner.  Under the terms of theAgreement, we will have joint control over the operation of all our electronicgaming machine seats, including full audit rights. We and Grand Golden willshare the revenue and marketing costs, at a 30% / 70% split, respectively, andwe will receive on a monthly basis our relevant portion of the daily win incash. The contract duration is five years commencing once the 60 gaming machineseats become operational.

 

In addition, we are actively pursuing potential new projectsin the Indo-China region, where there is gaming development and we can take anoperator role.  However, totalcompany-wide machine placements can fluctuate due to our strategic efforts tooptimize average daily net wins.  In the event gaming machine performanceat our contracted venues does not meet expectations, we may discuss with therelevant venue owner withdrawing all or a portion of our gaming machines fromsuch venues for future redeployment in new or existing venues with better performanceprospects.

 

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**Table Game Products**

 

Table game products revenue increased approximately$43,000 to $121,000 for the three-month period ended March 31, 2010compared to $78,000 in the corresponding period of the prior year.  The increase was a result of additionalgaming chip reorders from our existing customers.

 

Gross profit on gaming chips products decreased approximately$22,000 to $31,000 in the three-month period ended March 31, 2010 comparedto $53,000 in the corresponding period of the prior year due to lowerproduction volumes during the three-month period ended March 31, 2010 ascompared to a large gaming chip order being produced during the three-monthperiod ended March 31, 2009.

 

**Non-Gaming Products**

 

Non-gaming products revenue, which consists ofautomotive tooling and parts, increased by approximately $733,000 to $1.4million in the three-month period ended March 31, 2010 compared to$678,000 in the corresponding period of the prior year.  This was due to anincrease in sales to our largest customer as they increased their productionfor the year.

 

Gross profit increased approximately $45,000 to a profitof $10,000 for the three-month period ended March 31, 2010 compared to agross loss of $35,000 in the corresponding period of the prior year due to theincrease in sales orders from our major customer.

 

**Operating Expenses**

 

The following is a schedule of expenses on aconsolidated basis:

 
| ** **                           | ** ** | **Three  Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| **(amounts in thousands)**           | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Selling,  general and administrative |       | $                                       | 1,422      |   | $ | 2,597 |   |
| Stock-based  compensation expense    |       | 294                                     |       | 202 |   |
| Research  and development            |       | 85                                      |       | 55 |   |
| Depreciation  and amortization       |       | 229                                     |       | 309 |   |
| Restructuring  charges               |       | 37                                      |       | 499 |   |
|                                 |       | $                                       | 2,067      |   | $ | 3,662 |   |

 

**Selling, General and AdministrativeExpenses**

 

Selling, general and administrative expenses decreasedapproximately $1.2 million to $1.4 million for the three-month period ended March 31,2010 compared to $2.6 million in the prior year period due to our costreduction initiatives.  Salaries andwages expense declined $493,000 as a result of headcount reductions.  Legal expense and external consultancy andaccounting fees declined $262,000 due to greater reliance of related projectson in-house personnel.  Travel decreasedby $132,000 due to concerted efforts to reduce employee travel to the bareminimum. Rent, office supplies and other expenses decreased by $288,000 due tovarious cost reduction initiatives.

 

Based on our cost reduction plans and our currentscale of operations, we anticipate recurring selling, general, andadministrative expenses can be maintained in the approximate range of $1.5million to $1.8 million per quarter.

 

**Stock-Based Compensation Expense**

 

Stock-based compensation expense increasedapproximately $92,000 to $294,000 for the three-month period ended March 31,2010 compared to $202,000  in thecorresponding period of the prior year primarily due to new stock compensationgranted to senior management during the first quarter of 2010.

 

**Research and Development Expenses**

 

Research and development expenses increasedapproximately $30,000 to $85,000 for the three-month period ended March 31,2010 compared to $55,000 in the prior year period as a result of increasedactivities for new product development for the table game business.

 

As a result of the sale to Shuffle Master of ourportfolio of automated card verification machines and electronic card shufflingsystems, all related intellectual property, and certain inventory of suchproducts pursuant to the Purchase and Settlement Agreement as set out abovehave been written off.

 

It is anticipated that future research and developmentwill be focused on potential gaming and/or non-gaming product 

 

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enhancements.

 

**Depreciation and AmortizationExpenses**

 

Total depreciation and amortization expenses decreasedapproximately $80,000 to $229,000 for the three-month period ended March 31,2010 compared to $309,000 in the prior year period.  The decrease was a result of the closure ofour U.S. office and our China table game product manufacturing facility.

 

**Restructuring Charges**

 

During the three-month period ended March 31,2010, we incurred restructuring charges of approximately $37,000 for severancewages and benefits.  The restructuringcharge during the three-month period ended March 31, 2010 was for theseverance wages and benefits related to the termination of employees. Duringthe three-month period ended March 31, 2009, as part of our cost reductioninitiatives, we incurred restructuring charges of approximately $499,000 for severancewages and benefits related to the termination of employees and write-down ofremaining plant equipment.  The amount represents the contractual andother agreements with employees including a former executive, which onlyincludes charges for termination benefits measured at the estimated fair valueat the termination date.  It did not include charges for services yet tobe rendered.

 

**OtherIncome/(Expenses)**

 
| ** **                         | ** ** | **Three  Months Ended  March 31,** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|
| **(amounts in thousands)**         | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Interest  expense and finance fees |       | $                                       | (122       | ) | $ | (136 | ) |
| Interest  income                   |       | 12                                      |       | 38 |   |
| Foreign  currency gains/(losses)   |       | 9                                       |       | (127 | ) |
| Other                              |       | 91                                      |       | 13 |   |
| Total                              |       | $                                       | (10        | ) | $ | (212 | ) |

 

**Interest Expense and Finance Fees**

 

Interest expense and finance fees decreasedapproximately $14,000 to $122,000 for the three-month period ended March 31,2010 compared to $136,000 in the same period of the prior year due to lowerdebt levels on the Elixir International note in the first quarter of 2010 ascompared with prior year.

 

**Interest Income**

 

Interest income decreased $26,000 to $12,000 for thethree-month period ended March 31, 2010 compared to $38,000 in the sameperiod of the prior year as a result of the decrease in cash and cashequivalents held in overnight money market accounts and the general decrease ininterest rates.  Cash in bank decreasedby $7.8 million to $5.1 million from March 31, 2009 to March 31,2010, mainly due to payments for the expansion of our operations at NagaWorld,gaming machine purchases, and operating expenses.

 

**Foreign Currency Transactions**

 

Foreign currency gains were approximately $9,000 forthe three-month period ended March 31, 2010 compared to losses of $127,000for the same period in the prior year. The gains in the three-month periodended March 31, 2010 resulted primarily from the depreciating value of theU.S. dollar denominated payables from our Philippines operations, whosefunctional currency is the Philippine peso.

 

**Other**

 

Other income increased approximately $78,000 to$91,000  for the three-month period endedMarch 31, 2010 compared to $13,000 in the prior year period primarily dueto an increase in grants received from the Australian government.

 

**Income Tax Provisions**

 

Our effective tax rate for the three-month periodended March 31, 2010 was approximately (16.5)%.  We continue to review the treatment of taxlosses and income generated in the future by our foreign subsidiaries tominimize taxation implication/costs.

 
| ** **                 | ** ** | **Three  Months Ended March 31,** | ** ** | **Increase/(Decrease)** | ** ** |
|----------------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | ** **                             | ** ** | **Dollar**              | ** ** |
| **(amounts in thousands)** | ** ** | **2010**                               | ** ** | **2009**                | ** ** | **Amount** | ** ** |
| Income  tax provisions     |       | $                                      | 235        |                    | $          | 3 |   | $ | 232 |   |
|                            |            |                                        |            |                         |            |  |  |  |  |  |

 

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**FINANCIAL CONDITION**

 

**Liquidity and Capital Resources**

 

On April 21, 2008, we entered into a Trade CreditFacility Agreement (the “Facility Agreement”) with Elixir International. Uponentering into the Agreement, we immediately issued the first note pursuant tothe terms of the Facility Agreement in the then principal amount of $15,000,000(the “Initial Advance”).  The InitialAdvance extinguished a then trade payable of an equivalent amount to ElixirInternational with respect to gaming machines previously acquired.

 

Under the terms as amended on November 6, 2008(the “New Note”), we were obligated to repay the then principal of $12.1million, plus any accrued interest thereon, in equal monthly installments ofapproximately $530,000 from January 1, 2009 to December 1, 2010.  The advances under the Facility Agreement aresubject to demand by Elixir International for immediate payment only if thereis either an event of default or a change of control defined in the FacilityAgreement.

 

We began paying our monthly installments ofapproximately $530,000 under the New Note on January 1, 2009 and paid orsettled six installments during the six-month period ended June 30,2009.  As at June 30, 2009, the thenunpaid principal balance under the New Note was approximately $9.2 million (the“Outstanding Principal”).On July 24, 2009, for the purpose of improvingour financial flexibility to enable us to capitalize on potential growth andinvestment opportunities such as expansion of slot machine placements andoperations in new venues, at our request, Elixir International entered into anAmendment No. 2 to the Trade Credit Facility Agreement and Related Notewith us (the “Second Facility Amendment Agreement”).  Pursuant to the Second Facility AmendmentAgreement, Elixir International agreed to restructure the payment schedule ofthe Outstanding Principal. Under the revised payment schedule, we are notrequired to make any repayments of principal or interest under the FacilityAgreement until July 1, 2010 provided that interest at the rate of 5%continues to accrue on the Outstanding Principal balance. The repayment of theOutstanding Principal balance and interest accrued thereon shall be repaid in18 equal monthly installments commencing on July 1, 2010.

 

As of March 31, 2010, we had total cash and cashequivalents of $5.1 million and a working capital balance of $5.8 million. Ourworking capital during the three months ended March 31, 2010 waspositively impacted by the repayment deferral of principal and interest on theTrade Credit Facility until July 2010 and the cash received from ouroperations at NagaWorld. Working capital during the three months ended March 31,2010 was negatively impacted by the payment of $0.7 million to NagaWorld forthe one-time non-refundable contract amendment fee under the contract dated December 30,2009.   The $0.7 million paymentrepresented the remaining two installment payments or 50% of the total one-timenon-refundable contract amendment fee under the December 30, 2009 contractand was paid in January 2010. Working capital was also negatively impacted by the purchase of gamingmachines for our expansion at NagaWorld under the December 30, 2009contract.

 

Our cash position during the three months ended March 31,2010 was impacted by the above mentioned factors that impacted working capitalas well as the payment of a commitment fee of $2.0 million to NagaWorld underthe contract dated December 30, 2009. The $2.0 million payment representedthe remaining two installments or 50% of the total the commitment fee under theDecember 30, 2009 contract and was paid in January 2010.

 

During 2010, we expect to purchase additional gaming machines tosupplement existing inventory and source future targeted deployment plans.Given our current and projected future cash flow generation capability from ouroperations at NagaWorld (including the recoupment of commitment fees paid andour share of net wins from our machine installed base at NagaWorld), the stateof the previously-owned gaming machine market, and our strong relationshipswith gaming equipment manufacturers, we anticipate funding our 2010 gamingmachine purchases for our existing project pipeline from cash on hand andexpected net cash flow from operations. Based on our existing rollout plans, we anticipate capital expenditureswill be approximately $3.0 to $5.0 million for the remainder of 2010.

 

We anticipate our available working capital, alongwith cash expected to be generated from operations, will allow us to meet ourworking capital needs to support ongoing future operations over the next 12 months,based on:

 

·                  our extensive cost cutting measures,which involve, among other initiatives, the closure of our China factory andMacau office and significant reductions in professional fees, traveling andentertainment expenses and based on our current quarterly run-rate, shouldprovide us with annualized selling, general and administrative cash expenses ofapproximately $6.0 to $7.2 million, a decline of 5% to 21% compared to 2009levels;

 

·                  our ability to collect on a daily basis100% of the win per unit from NagaWorld for the additional 200 gamingmachines under our contract dated December 30, 2009 until such timeas the commitment fee of $4.1 million plus Elixir Gaming’s 25% share of the winper day on these machines is recouped; and

 

·                  our assumption that we will be successfulin our endeavors to ramp up the revenue base by focusing our placement ofgaming machines in strong performing venues and plans to provide value-addedservices, such as promotion and marketing advisory services, to certain venueswith a goal to improving net win per machine.

 

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However, should we endeavor to commit to any futurelarge projects to expand our gaming participation operations, we may requireadditional funding at such time. In this case, we will look into the optionsfor raising additional funds through various financing sources, including theprocurement of commercial debt financing and/or vendor financing and/or thesale of debt or equity securities.  However, there can be no guaranteesthat such funds will be available on commercially reasonable terms, if at all.If such financing is not available on satisfactory terms, we may be unable toexpand or continue our business as desired and operating results may beadversely affected.  Any debt financing will increase expenses and must berepaid regardless of operating results and may involve restrictions limitingour operating flexibility and any equity financing will be dilutive to ourpresent stockholders.

 

**CashFlows Summary**

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| **(amount in thousands)**    | ** ** | **2010**                                             | ** ** | **2009**   | ** ** | **Increase (Decrease)** | ** ** |
| Cash provided by/ (used in):           |       |                                                 |       |       |       |   |   |
| Operations                             |       | $                                                    | 1,783      |       | $          | (1,348 | ) | $ | 3,131 |   |
| Investing                              |       | (862                                                 | )          | 1,307      |       | (2,169 | ) |
| Financing                              |       | (57                                                  | )          | (1,549     | )          | 1,492 |   |
| Effect of exchange rate change in cash |       | 40                                                   |       | (33        | )          | 73 |   |
|                                   |       | $                                                    | 904        |       | $          | (1,623 | ) | $ | 2,527 |   |

 

**Operations**

 

Cash provided byoperations amounted to $1.8 million in the first three months of 2010 ascompared with cash used in operations of $1.3 million for the same period lastyear. The increase in cash provided by operations was primarily due tosignificant reduction in operating losses before depreciation and amortizationas a result of the increase in game participation revenue and reduction inoperating expenses.

 

**Investing**

 

Cash used in investingactivities increased as a result of the purchase of electronic gaming machinesfor our expansion at NagaWorld under the contract dated December 30, 2009.During the three-month period ended March 31, 2009, cash was positivelyimpacted as a result of the sale of assets to Shuffle Master.

 

**Financing**

 

Cash used in financingactivities decreased as a result of the repayment deferral of principal andinterest on the Trade Credit Facility until July 2010.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our consolidatedfinancial statements were prepared in conformity with accounting principlesgenerally accepted in the United States. Accordingly, we are required to makeestimates incorporating judgments and assumptions we believe are reasonable basedon our historical experience, contract terms, observance of known trends in ourCompany and the industry as a whole, as well as information available fromother outside sources. Our estimates affect amounts recorded in the financialstatements and actual results may differ from initial estimates.

 

We consider the followingaccounting estimates to be the most critical to fully understanding andevaluating our reported financial results. They require us to make subjectiveor complex judgments about matters that are inherently uncertain or variable.Senior management have discussed the development, selection and disclosure ofthe following accounting estimates, considered most sensitive to changes fromexternal factors, with the audit committee of our board of directors.

 

**IntangibleAssets, including Goodwill**

 

Intangible assetsconsist of patents, customer relationships, trademarks and goodwill. They arerecorded at cost and are amortized, except for goodwill, on the straight-linebasis over the period of time the asset is expected to contribute directly orindirectly to future cash flows, which range from 10 to 13 years. Thestraight-line amortization method is utilized because we believe there is not amore reliably determinable method of reflecting the pattern in which theeconomic benefits of the intangible assets are consumed or otherwise used up.

 

We apply ASC 350, *Intangibles- Goodwilland Other* and ASC 360, *Property,Plant and Equipment*.  Under ASC 350, goodwill is no longeramortized but is subject to periodic impairment tests. Other intangible assetswith finite lives, such as patents, customer relationships and trademarks willcontinue to be amortized over their useful lives.

 

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**Inventory**

 

The determination ofobsolete or excess inventory requires us to estimate the future demand for ourproducts within specific time horizons, generally one year or less. If weexperience a significant unexpected decrease in demand for our products or ahigher occurrence of inventory obsolescence because of changes in technology orcustomer requirements, we could be required to increase our inventoryprovisions.

 

**GamingMachines and Systems**

 

Gaming machines andsystems are stated at cost.  We depreciate new gaming machines and systemsover a five-year useful life and depreciate refurbished gaming machines over athree-year useful life once placed in service. Trends in market demand and technological obsolescence may require us toreview and evaluate the recoverability of our investment, as well as theestimated useful lives used to depreciate these assets.

 

**Propertyand Equipment**

 

We are required toestimate salvage values and useful lives for our property and equipment. Trends in market demand and technological obsolescence may require us to recordimpairment charges in accordance with the provisions of ASC 360.

 

**RevenueRecognition**

 

We recognize revenue whenall of the following have been satisfied:

 

·                  persuasive evidence of an arrangement exists;

 

·                  the price to the customer is fixed and determinable;

 

·                  delivery has occurred and any acceptance terms have been fulfilled;

 

·                  no significant contractual obligations remain; and

 

·                  collection is reasonably assured.

 

*GamingMachine Participation Revenues*

 

We earn recurring revenueby providing customers with electronic gaming machines and casino managementsystems which track game performance and provide statistics on installed electronicgaming machines owned by us and leased to venue owners.  Revenues are recognized on the contractualterms of the participation agreements between ourselves and the venue ownersand are based on our share of net winnings.

 

Commitment fees paid to the venue operator where theagreement stipulates that the fees will be recovered from the daily net winsharing are capitalized as assets. As required by ASC 605-50, *Customer Payments and Incentives*, the cash considerationreceived for the portion of net winnings relating to the commitment fees isamortized as a reduction of revenue if the expected benefit from commitmentfees cannot be separately identified or reasonably estimated. We had prepaidcommitment fees of approximately $3.4 million and $4.8 million as of March 31,2010 and December 31, 2009, respectively.

 

Commitment fees paid tothe venue operators relating to contract amendments are also capitalized asassets and amortized as a reduction of revenue fees over the term of theamended contracts. We had contract amendment fees of approximately $1.4 millionand $688,000 as of March 31, 2010 and December 31, 2009,respectively.

 

*Gamingand Non-Gaming Product Revenues*

 

We recognize revenue fromthe sale of our products to end users upon shipments against customer contractsor purchase orders.

 

We recognize revenue fromour sales to independent distributors upon shipments to the distributor againstdistributor contracts or purchase orders of our product.  We recognizerevenue on consignment inventory when ownership of the product and title passesto the distributor which occurs upon the distributor’s use of the product inits service organization or to an end user.

 

**Stock-BasedCompensation**

 

We apply ASC 718, *Compensation-Stock Compensation*, toaccount for stock-based compensation. Under the fair value recognitionprovisions of ASC 718, for stock-based compensation accrued to employeesand non-employee directors, we recognize stock-based compensation expense forall service-based awards with graded vesting schedules on the straight-linebasis over the requisite service period for the entire award.  For restricted stock awards with performanceconditions, the Company evaluates if performance conditions are probable ineach reporting period. The compensation expense of restricted awards isrecognized ratably over the implicit service period if achieving performanceconditions is probable. Initial accruals of 

 

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compensation expense arebased on the estimated number of shares for which requisite service is expectedto be rendered.  Estimates are revised ifsubsequent information indicates that forfeitures will differ from previousestimates, and the cumulative effect on compensation costs of a change in theestimated forfeitures is recognized in the period of the change.  For non-employee awards, we remeasurecompensation costs each period until the service condition is complete andrecognize compensation costs on the straight-line basis over the requisiteservice period.  Option valuation modelsrequire the input of highly subjective assumptions, and changes in theassumptions used can materially affect the fair value estimate. Judgment isrequired in estimating stock price volatility, forfeiture rates, expecteddividends, and expected terms that options remain outstanding.  Stock-based compensation expense totaled$294,000 and $202,000 for the three-month periods ended March 31, 2010 and2009, respectively, and is included in selling, general and administrativeexpense in the accompanying consolidated statements of operations.

 

**IncomeTaxes**

 

We are subject to incometaxes in the U.S. (including federal and state) and several foreignjurisdictions in which we operate. Deferred income tax balances reflect theeffects of temporary differences between the carrying amounts of assets andliabilities and their tax bases and are stated at enacted tax rates expected tobe in effect when taxes are actually paid or recovered. ASC 740, *Income Taxes*, requires that deferred taxassets be evaluated for future realization and reduced by a valuation allowanceto the extent we believe a portion will not be realized. We consider manyfactors when assessing the likelihood of future realization of our deferred taxassets, including our recent cumulative earnings experience and expectations offuture taxable income by taxing jurisdiction, the carry-forward periodsavailable to us for tax reporting purposes, and other relevant factors.

 

Significant judgment isrequired in evaluating our tax positions and determining our provision forincome taxes. During the ordinary course of business, there are manytransactions and calculations for which the ultimate tax determination isuncertain. Effective January 1, 2007, we adopted the provisions ofASC 740, which contains a two-step approach to recognizing and measuringuncertain tax positions. The first step is to evaluate the tax position forrecognition by determining if the weight of available evidence indicates it ismore likely than not that the position will be sustained on audit, includingresolution of related appeals or litigation processes, if any. The second stepis to measure the tax benefit as the largest amount which is more than 50%likely of being realized upon ultimate settlement. We consider manyfactors when evaluating and estimating our tax positions and tax benefits,which may require periodic adjustments and which may not accurately anticipateactual outcomes.

 

We are subject to incometax examination by tax authorities from 2003 through the present period injurisdictions in which we operate. There are currently no income tax returnsunder examination by the U.S. Internal Revenue Service or any other major taxauthorities.

 

**RecentlyIssued Accounting Standards**

 

For a description ofaccounting changes and recent accounting pronouncements, including the dates ofadoption and estimated effects, if any, on our consolidated condensed financialstatements, see “Note 1: “Description of Business and Significant AccountingPolicies” in the Notes to Consolidated Financial Statements of this Form 10-Q.

 

**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet financing arrangements.

 

**Item 3.            Quantitative and Qualitative Disclosures about MarketRisk**

 

Not applicable.

 

## **Item 4.            Controlsand Procedures**

##  

(a)*   Evaluation of Disclosure Controls andProcedures*.

 

Ourmanagement, with the participation of our chief executive officer and chiefaccounting officer, has evaluated the effectiveness of the design and operationof the Company’s disclosure controls and procedures pursuant to Rule 13a-15of the Securities Exchange Act of 1934. Based on this evaluation, ourmanagement concluded that our disclosure controls and procedures were effectiveas of March 31, 2010.

 

(b)   *Changes inInternal Control Over Financial Reporting.*

 

There were no changes inour internal control over financial reporting that occurred during thethree-month period ended March 31, 2010 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

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# **PART II — OTHER INFORMATION**

# ** **

## **Item 1.         LegalProceedings**

##  

*PrimeMover/Strata Litigation*

 

OnMarch 26, 2010, certain shareholders of the Company including Prime MoverCapital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., and StrataOffshore Fund, Ltd (collectively, the “Plaintiffs”) filed in the United StatesDistrict Court for the Southern District of New York a complaint (the “Complaint”)against certain defendants including the Company and certain other current andformer directors and officers of the Company. Although the Complaint was filed on March 26, 2010, the Company wasnot made aware of it until March 31, 2010, the date immediately after theCompany’s filing of its Form 10-K for the fiscal year ended December 31,2009.

 

TheComplaint alleges claims related to disclosures concerning the Company’selectronic gaming machine participation business (the “Participation Business”),including but not limited to the alleged violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, violations of Nevada Revised Statutes Sections 90.580(e) and90.660(3), breach of fiduciary duty, and negligent misrepresentations.  The Plaintiffs allege that the Company andcertain other defendants made false and misleading statements about theParticipation Business in filings with the SEC, press releases, and otherindustry and investor conferences and meetings during the period from June 13,2007 and August 13, 2008 and that the Plaintiffs then purchased thesecurities at the inflated prices and later suffered economic losses when theprice of the Company’s securities decreased.

 

ThePlaintiffs seek unspecified damages, as well as interest, costs and attorneys’fees.  The Company has engaged legalcounsel to consider the claims set forth in the Complaint and the Companyintends to defend vigorously and respond to the Complaint in a time and mannerconsistent with applicable federal and state laws. As the litigation is at avery preliminary stage, it is not possible to predict the likely outcome of thecase or the probable loss, if any, and, accordingly, no accrual has been madefor any possible losses in connection with this matter.

 

## **Item 1A.      RickFactors**

##  

A description of our riskfactors can be found in Item 1A of our Annual Report on Form 10-K for theyear ended December 31, 2009. Except as set forth below, there were nomaterial changes to those risk factors during the three months ended March 31,2010.

 

***Weare a defendant in a litigation matter that could result in substantial costsand divert management’s attention and resources.***

 

OnMarch 26, 2010, certain shareholders of the Company including Prime MoverCapital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., and StrataOffshore Fund, Ltd (collectively, the “Plaintiffs”) filed in the United StatesDistrict Court for the Southern District of New York a complaint (the “Complaint”)against certain defendants including the Company and certain other current andformer directors and officers of the Company. Although the Complaint was filed on March 26, 2010, the Company wasnot made aware of it until March 31, 2010, the date immediately after theCompany’s filing of its Form 10-K for the fiscal year ended December 31,2009.

 

TheComplaint alleges claims related to disclosures concerning the Company’selectronic gaming machine participation business (the “Participation Business”),including but not limited to the alleged violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, violations of Nevada Revised Statutes Sections 90.580(e) and90.660(3), breach of fiduciary duty, and negligent misrepresentations.  The Plaintiffs allege that the Company andcertain other defendants made false and misleading statements about theParticipation Business in filings with the SEC, press releases, and otherindustry and investor conferences and meetings during the period from June 13,2007 and August 13, 2008 and that the Plaintiffs then purchased thesecurities at the inflated prices and later suffered economic losses when theprice of the Company’s securities decreased.

 

ThePlaintiffs seek unspecified damages, as well as interest, costs and attorneys’fees.

 

We intend to vigorouslydefend ourselves against these claims. However, no assurances can be made thatwe will be successful in our defense of the pending claims. If we are notsuccessful in our defense of such claims, we could be forced to, among otherthings, make significant payments to resolve these claims or post significantbonds to pursue appeals, and such payments and/or bonds could have a materialadverse effect on our business, financial condition and results of operations.Further, regardless of the outcome of the foregoing matters, these litigationmatters themselves may result in substantial costs and divert management’sattention and resources, all of which could adversely affect our business.

 

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Table ofContents

 

**Item 2.**            **Unregistered Sales of Equity Securities and Use of Proceeds**

 

During the three monthsended March 31, 2010, we granted stock awards totaling 922,727 shares ofour common stock to an employee. The shares were issued pursuant to theexemption from registration set forth at Section 4(2) of theSecurities Act of 1933.

 

## **Item 6.            Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                               | ** ** | **Method of Filing**                                                                                    |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                          |       |                                                                                                              |
| 10.1             |       | Restricted Stock  Agreement between Registrant and Clarence Chung dated as of January 22,  2010 *                                                                        |       | Filed as an Exhibit 10.61 to Registrant’s Annual  Report on Form 10-K filed on March 30, 2010 |
|             |       |                                                                                                                                                                          |       |                                                                                                              |
| 10.2             |       | Machines Operation and Participation Agreement dated  July 25, 2009 between Registrant, Elixir Gaming Technologies (Hong Kong)  Limited and NagaWorld Limited **         |       | Filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on February 11, 2010         |
|             |       |                                                                                                                                                                          |       |                                                                                                              |
| 31.1             |       | Certifications  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                               |       | Filed  electronically herewith                                                                                    |
|             |       |                                                                                                                                                                          |       |                                                                                                              |
| 31.2             |       | Certifications  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                               |       | Filed  electronically herewith                                                                                    |
|             |       |                                                                                                                                                                          |       |                                                                                                              |
| 32.1             |       | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  Section 1350). |       | Filed  electronically herewith                                                                                    |

 

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* Indicates management compensatory plan, contract or arrangement.

**Certain portions of theexhibit have been omitted pursuant to Registrant’s confidential treatmentrequest filed with the Commission pursuant to Rule 24b-2 under theSecurities Exchange Act of 1934.  The omitted text has been filedseparately with the Commission.

 

**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| ** ** | ** **         | **ELIXIR  GAMING TECHNOLOGIES, INC.** |
|------------|--------------------|---------------------------------------|
|       |               | (Registrant)                          |
|       |               |                                  |
|       |               |                                  |
| Date:      | May 14,  2010 | By:                                   | /s/ Clarence  Chung |
|       |               |                                  | Clarence Chung |
|       |               | Its:                                  | President and  Chief Executive Officer |
|       |               |                                  |   |
|       |               |                                  |   |
| Date:      | May 14,  2010 | By:                                   | /s/ Andy Tsui |
|       |               |                                  | Andy Tsui |
|       |               | Its:                                  | Chief Accounting  Officer |

 

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