Table of Contents

** **

 

** **

**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the Quarterly Period Ended September 30, 2010**

 

**OR**

 

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

 

**For the transition period from            to            .**

 

**Commission file number: 001-32161**

 

**EntertainmentGaming Asia Inc.**

 (Exact name of registrant as specified in itscharter)

 

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

 

**Unit 3705, 37/F, The Centrium**

**60 Wyndham Street**

**Central, Hong Kong**

(Addressof principal executive offices, including zip code)

 

**+ 852-3151-3800**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company (as defined inRule 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

As of November 1, 2010,116,089,394 shares of common stock of Entertainment Gaming Asia Inc. wereoutstanding.

 

 

 

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Table ofContents

 

**Table of Contents**

 
| ** **                                    | ** **                                                                                      | **Page** |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                            |     |
| **PART I —  FINANCIAL INFORMATION** |
|                                          |                                                                                            |     |
| **Item 1.**                                   | **Financial Statements**                                                                        | 3        |
|                                          |                                                                                            |     |
|                                          | Consolidated  Balance Sheets                                                                    | 3        |
|                                          |                                                                                            |     |
|                                          | Consolidated  Statements of Operations                                                          | 4        |
|                                          |                                                                                            |     |
|                                          | Consolidated  Statements of Cash Flows                                                          | 5        |
|                                          |                                                                                            |     |
|                                          | Notes  to Consolidated Financial Statements                                                     | 6        |
|                                          |                                                                                            |     |
| **Item 2.**                                   | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 19       |
|                                          |                                                                                            |     |
|                                          | Overview                                                                                        | 19       |
|                                          |                                                                                            |     |
|                                          | Results of  Operations                                                                          | 22       |
|                                          |                                                                                            |     |
|                                          | Liquidity and  Capital Resources                                                                | 30       |
|                                          |                                                                                            |     |
|                                          | Critical  Accounting Policies and Estimates                                                     | 32       |
|                                          |                                                                                            |     |
| **Item 3.**                                   | **Quantitative  and Qualitative Disclosures about Market Risks**                                | 34       |
|                                          |                                                                                            |     |
| **Item 4.**                                   | **Controls and  Procedures**                                                                    | 35       |
|                                          |                                                                                            |     |
| **PART II  — OTHER INFORMATION**    |
|                                          |                                                                                            |     |
| **Item 1A.**                                  | **Risk Factors**                                                                                | 36       |
|                                          |                                                                                            |     |
| **Item 6.**                                   | **Exhibits**                                                                                    | 36       |

 

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**PART I — FINANCIALINFORMATION**

 

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

 

**ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                    | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                    | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                    |       |                             |       |                            |       |
| Current assets:                                                                                                               |       |                             |       |                            |       |
| Cash and cash equivalents                                                                                                     |       | $                                | 7,814      |                            | $          | 4,190 |   |
| Cash held in escrow                                                                                                           |       | 1,000                            |       | —                          |       |
| Accounts receivable, net                                                                                                      |       | 2,756                            |       | 2,670                           |       |
| Amounts due from a related party                                                                                              |       | —                           |       | 12                              |       |
| Other receivables                                                                                                             |       | 216                              |       | 195                             |       |
| Inventories                                                                                                                   |       | 867                              |       | 621                             |       |
| Assets held for sale                                                                                                          |       | 743                              |       | 930                             |       |
| Prepaid commitment fees                                                                                                       |       | —                           |       | 4,838                           |       |
| Deferred tax assets                                                                                                           |       | —                           |       | 90                              |       |
| Prepaid expenses and other current assets                                                                                     |       | 1,170                            |       | 770                             |       |
| Total current assets                                                                                                          |       | 14,566                           |       | 14,316                          |       |
|                                                                                                                          |       |                             |       |                            |       |
| Accounts receivable, net of current portion                                                                                   |       | —                           |       | 106                             |       |
| Gaming equipment and systems, net                                                                                             |       | 23,318                           |       | 26,507                          |       |
| Property and equipment, net                                                                                                   |       | 4,827                            |       | 3,322                           |       |
| Intangible assets, net                                                                                                        |       | 2,722                            |       | 3,026                           |       |
| Goodwill                                                                                                                      |       | 84                               |       | 84                              |       |
| Contract amendment fees                                                                                                       |       | 1,241                            |       | 688                             |       |
| Prepaids, deposits and other assets                                                                                           |       | 363                              |       | 408                             |       |
| Total assets                                                                                                                  |       | $                                | 47,121     |                            | $          | 48,457 |   |
|                                                                                                                          |       |                             |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                |       |                             |       |                            |       |
| Current liabilities:                                                                                                          |       |                             |       |                            |       |
| Accounts payable                                                                                                              |       | $                                | 1,204      |                            | $          | 1,125 |   |
| Amounts due to a related party                                                                                                |       | 15                               |       | 46                              |       |
| Accrued expenses                                                                                                              |       | 1,846                            |       | 2,325                           |       |
| Notes payable to a related party, current portion                                                                             |       | 1,525                            |       | 3,128                           |       |
| Capital lease obligations, current portion                                                                                    |       | 157                              |       | 187                             |       |
| Customer deposits and other current liabilities                                                                               |       | 245                              |       | 78                              |       |
| Total current liabilities                                                                                                     |       | 4,992                            |       | 6,889                           |       |
|                                                                                                                          |       |                             |       |                            |       |
| Notes payable to a related party, net of current  portion                                                                     |       | 7,678                            |       | 6,265                           |       |
| Capital lease obligations, net of current portion                                                                             |       | 332                              |       | 414                             |       |
| Other liabilities                                                                                                             |       | 777                              |       | 604                             |       |
| Deferred tax liability                                                                                                        |       | 686                              |       | 877                             |       |
| Total liabilities                                                                                                             |       | 14,465                           |       | 15,049                          |       |
|                                                                                                                          |       |                             |       |                            |       |
| Stockholders’ equity:                                                                                                    |       |                             |       |                            |       |
| Common stock, $.001 par value, 300,000,000 shares  authorized; 115,919,394 and 114,956,667 shares issued and outstanding |       | 116                              |       | 115                             |       |
| Additional paid-in-capital                                                                                                    |       | 415,543                          |       | 414,864                         |       |
| Accumulated other comprehensive income/(loss)                                                                                 |       | 395                              |       | (645                            | )          |
| Accumulated deficit                                                                                                           |       | (383,398                         | )          | (380,926                        | )          |
| Total stockholders’ equity                                                                                               |       | 32,656                           |       | 33,408                          |       |
| Total liabilities and stockholders’ equity                                                                               |       | $                                | 47,121     |                            | $          | 48,457 |   |

 

The notes to consolidated financial statements are an integral part ofthese consolidated statements.

 

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**ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Operations**

**(amounts inthousands, except per share data)**

**(Unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Gaming machine participation                                 |       | $                                                    | 4,108      |                                                | $          | 1,839 |   | $ | 10,482 |   | $ | 4,527 |   |
| Table game products                                          |       | 645                                                  |       | 572                                                 |       | 998 |   | 3,841 |   |
| Non-gaming products                                          |       | 1,882                                                |       | 1,201                                               |       | 4,587 |   | 2,719 |   |
|                                                         |       | 6,635                                                |       | 3,612                                               |       | 16,067 |   | 11,087 |   |
| Operating costs and expenses:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of gaming machine participation                         |       |                                                 |       |                                                |       |   |   |   |   |
| Machine depreciation                                         |       | 2,014                                                |       | 2,534                                               |       | 5,871 |   | 7,349 |   |
| Write-off of gaming assets                                   |       | 54                                                   |       | 117                                                 |       | 244 |   | 496 |   |
| Other operating costs                                        |       | 171                                                  |       | 370                                                 |       | 603 |   | 886 |   |
| Cost of table game products                                  |       | 381                                                  |       | 275                                                 |       | 643 |   | 2,148 |   |
| Cost of non-gaming products                                  |       | 1,685                                                |       | 1,204                                               |       | 4,406 |   | 2,955 |   |
| Selling, general and administrative                          |       | 1,466                                                |       | 1,791                                               |       | 4,944 |   | 6,664 |   |
| Impairment of assets                                         |       | —                                               |       | 425                                                 |       | — |   | 425 |   |
| Flood damage losses                                          |       | —                                               |       | 98                                                  |       | — |   | 98 |   |
| Product development expenses                                 |       | 64                                                   |       | 72                                                  |       | 520 |   | 201 |   |
| Depreciation and amortization                                |       | 221                                                  |       | 237                                                 |       | 679 |   | 802 |   |
| Restructuring charges                                        |       | 63                                                   |       | 4                                                   |       | 310 |   | 592 |   |
| Total operating costs and expenses                           |       | 6,119                                                |       | 7,127                                               |       | 18,220 |   | 22,616 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income/(loss) from operations                                |       | 516                                                  |       | (3,515                                              | )          | (2,153 | ) | (11,529 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Other income/(expense):                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense and finance fees                            |       | (116                                                 | )          | (146                                                | )          | (322 | ) | (394 | ) |
| Interest income                                              |       | 28                                                   |       | 10                                                  |       | 66 |   | 75 |   |
| Foreign currency gains/(losses)                              |       | 32                                                   |       | (16                                                 | )          | (28 | ) | (79 | ) |
| Legal settlement gain                                        |       | —                                               |       | —                                              |       | — |   | 656 |   |
| Loss on disposition of assets                                |       | (121                                                 | )          | —                                              |       | (117 | ) | (94 | ) |
| Other                                                        |       | 66                                                   |       | 61                                                  |       | 217 |   | 142 |   |
| Total other (expense)/income                                 |       | (111                                                 | )          | (91                                                 | )          | (184 | ) | 306 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income/(loss) before income tax and discontinued  operations |       | 405                                                  |       | (3,606                                              | )          | (2,337 | ) | (11,223 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax benefit/(expense)                                 |       | 320                                                  |       | (69                                                 | )          | (135 | ) | (368 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net income/(loss) from continuing operations                 |       | 725                                                  |       | (3,675                                              | )          | (2,472 | ) | (11,591 | ) |
| Net income from discontinued operations, net of  tax         |       | —                                               |       | 5                                                   |       | — |   | 1,547 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net income/(loss)                                            |       | $                                                    | 725        |                                                | $          | (3,670 | ) | $ | (2,472 | ) | $ | (10,044 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings/(loss) per share:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Income/(loss) from continuing operations                     |       | $                                                    | 0.01       |                                                | $          | (0.03 | ) | $ | (0.02 | ) | $ | (0.10 | ) |
| Income from discontinued operations                          |       | —                                               |       | —                                              |       | — |   | 0.01 |   |
| Basic earnings/(loss) per share                              |       | $                                                    | 0.01       |                                                | $          | (0.03 | ) | $ | (0.02 | ) | $ | (0.09 | ) |
| Diluted earnings/(loss) per share                            |       | $                                                    | 0.01       |                                                | $          | (0.03 | ) | $ | (0.02 | ) | $ | (0.09 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average common shares outstanding                   |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                        |       | 115,892                                              |       | 114,957                                             |       | 115,580 |   | 114,957 |   |
| Diluted                                                      |       | 117,801                                              |       | 114,957                                             |       | 115,580 |   | 114,957 |   |

 

The notes to consolidated financial statements are an integral part ofthese consolidated statements.

 

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**ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

**(amounts inthousands)**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities:**                                   |       |                                                    |       |   |   |
| Net loss                                                                     |       | $                                                       | (2,472     | ) | $ | (10,044 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                                    |       |   |   |
| Deferred income taxes                                                        |       | (101                                                    | )          | 300 |   |
| Foreign currency (gains)/losses                                              |       | (55                                                     | )          | 132 |   |
| Depreciation of gaming machines and systems and  property and equipment      |       | 6,600                                                   |       | 8,019 |   |
| Impairment of assets                                                         |       | —                                                  |       | 425 |   |
| Flood damage losses                                                          |       | —                                                  |       | 98 |   |
| Restructuring charges                                                        |       | —                                                  |       | 38 |   |
| Amortization of intangible assets                                            |       | 305                                                     |       | 376 |   |
| Stock-based compensation                                                     |       | 667                                                     |       | 775 |   |
| Gain on sale of shuffler business                                            |       | —                                                  |       | (1,962 | ) |
| Loss on disposition of assets                                                |       | 117                                                     |       | 94 |   |
| Write-off of gaming assets                                                   |       | 244                                                     |       | 496 |   |
| Provision for bad debt expense, net of recoveries                            |       | —                                                  |       | (66 | ) |
| Provision for tax receivables                                                |       | 35                                                      |       | — |   |
| Changes in operating assets and liabilities:                                 |       |                                                    |       |   |   |
| Cash held in escrow                                                          |       | (1,000                                                  | )          | — |   |
| Accounts receivable and other receivables                                    |       | 52                                                      |       | (635 | ) |
| Inventories                                                                  |       | (194                                                    | )          | 141 |   |
| Prepaid expenses and other current assets                                    |       | (201                                                    | )          | (5,190 | ) |
| Prepaids, deposits and other assets                                          |       | (15                                                     | )          | (1,183 | ) |
| Contract amendment fees                                                      |       | (554                                                    | )          | — |   |
| Prepaid commitment fees                                                      |       | 4,838                                                   |       | — |   |
| Accounts payable                                                             |       | 2                                                       |       | (65 | ) |
| Amounts due to a related party                                               |       | (18                                                     | )          | 562 |   |
| Deferred revenue                                                             |       | —                                                  |       | 149 |   |
| Income tax payable                                                           |       | 37                                                      |       | 68 |   |
| Accrued expenses and other current liabilities                               |       | (460                                                    | )          | (474 | ) |
| Net cash provided by/(used in) operating  activities                         |       | 7,827                                                   |       | (7,946 | ) |
|                                                                         |       |                                                    |       |   |   |
| **Cash flows from investing  activities:**                                   |       |                                                    |       |   |   |
| Acquisitions of property and equipment                                       |       | (295                                                    | )          | — |   |
| Sale of shuffler business                                                    |       | —                                                  |       | 2,800 |   |
| Purchases of gaming machines, systems and deposits  paid                     |       | (2,111                                                  | )          | (1,753 | ) |
| Purchase of land and other project costs                                     |       | (1,950                                                  | )          | — |   |
| Sales of gaming machines and systems                                         |       | 105                                                     |       | — |   |
| Sales of property and equipment                                              |       | 49                                                      |       | 79 |   |
| Net cash (used in)/provided by investing  activities                         |       | (4,202                                                  | )          | 1,126 |   |
|                                                                         |       |                                                    |       |   |   |
| **Cash flows from financing  activities:**                                   |       |                                                    |       |   |   |
| Repayment of short-term debt and leases                                      |       | (158                                                    | )          | (259 | ) |
| Repayment of notes payable                                                   |       | —                                                  |       | (2,905 | ) |
| Common stock issues                                                          |       | 15                                                      |       | — |   |
| Net cash used in financing activities                                        |       | (143                                                    | )          | (3,164 | ) |
|                                                                         |       |                                                    |       |   |   |
| Effect of exchange rate change on cash                                       |       | 142                                                     |       | 149 |   |
| Net increase/(decrease) in cash and cash  equivalents                        |       | 3,624                                                   |       | (9,835 | ) |
| Cash and cash equivalents at beginning of period                             |       | 4,190                                                   |       | 14,505 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                       | 7,814      |   | $ | 4,670 |   |
|                                                                         |       |                                                    |       |   |   |
| **Supplemental disclosure of cash  flows information:**                      |       |                                                    |       |   |   |
| Interest paid                                                                |       | $                                                       | 535        |   | $ | 320 |   |
| Income taxes paid                                                            |       | $                                                       | 66         |   | $ | — |   |

 

The notes to consolidated financial statements are an integral part ofthese consolidated statements.

 

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**ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

(Unaudited)

 

**Note 1.****                                 ****Description of Business and Significant Accounting Policies**

 

The principal businessactivities of Entertainment Gaming Asia Inc., formerly known as ElixirGaming Technologies, Inc., and its subsidiaries (the “Company”) are theowning and leasing of electronic gaming machines placed in premier hotels andother venues across certain countries in Asia and the development anddistribution of products related to the gaming and automotive industries.  These products include RFID casino chips andplaques and component parts for the automotive industry.

 

In May 2010, theCompany formed two legal entities in Cambodia for the purpose of acquiring aparcel of land and the development of a new casino project. The Companymaintains effective control of the landholding company through certainshareholders arrangements and the other entity is a wholly-owned subsidiary ofthe Company and, therefore their assets, liabilities and the results ofoperations are consolidated in the Company’s financial statements.

 

***Basis of Presentation***

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States (U.S.) forinterim financial information and with the instructions to Form 10-Q andRule 8-03 of Regulation S-X promulgated by the Securities and ExchangeCommission (“SEC”) and reflect all adjustments, consisting of normal recurringadjustments and other adjustments, which management believes are necessary to fairlypresent the financial position, results of operations and cash flows of theCompany, for the respective periods presented. The results of operations for aninterim period are not necessarily indicative of the results that may beexpected for any other interim period or the year as a whole. The accompanyingunaudited consolidated financial statements should be read in conjunction withthe consolidated 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 of Consolidation***

 

These consolidated financialstatements include the accounts of Entertainment Gaming Asia Inc. and itssubsidiaries. All intercompany accounts and transactions have been eliminated.

 

***Use of Estimates***

 

The Company is required tomake estimates, judgments and assumptions that it believes are reasonable basedon its historical experience, contract terms, observance of known trends in theCompany and the industry as a whole, and information available from otheroutside sources.  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 Cash Equivalents***

 

All highly-liquidinstruments with an original maturity of three months or less are consideredcash equivalents.  The Company places its cash with financialinstitutions.  At September 30, 2010, the Company had deposits withfinancial institutions in excess of FDIC insured limits by approximately $7.6million.

 

***Cash Held in Escrow***

 

The Company also has $1.0million cash held in escrow by a legal firm for a potential casino and tourismdevelopment project at a country in the Indo-China region. The amount is highlyliquid and the Company can demand its return from the escrow agent at any time.

 

***Accounts Receivable and Allowance for Doubtful Accounts***

 

Accounts receivable arestated at face value less any allowance for doubtful accounts.  Allowancefor doubtful accounts are maintained at levels determined by Company managementto adequately provide for uncollectible amounts.  In determining the 

 

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estimated uncollectedamounts, the Company evaluates a combination of factors, including, but notlimited to, activity in the related markets, financial conditions of customers,specific customer collection experience and history of write-offs andcollections.

 

***Inventories***

 

Inventories are stated atthe lower of cost, determined using the first-in, first-out method, ormarket.  Cost elements included in work-in-process and finished goodsinclude raw materials, direct labor and manufacturing overheads.

 

***Long-Lived Assets***

 

The Company accounts forimpairment of long-lived assets in accordance with Financial AccountingStandards Board (FASB) Accounting Standards Codification (ASC) 360, *Property, Plant and Equipment*.  Long-lived assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable.  Insuch instances, the Company estimates the undiscounted future cash flows thatresult from the use of the asset and its ultimate disposition.  If the sum of the undiscounted cash flows isless than the carrying value, the Company recognizes an impairment loss, measuredas the amount by which the carrying value exceeds the fair value of the asset,determined principally using discounted cash flows.  There were no impairment charges forlong-lived assets for the three months ended September 30, 2010 exceptfor the $54,000 write-off of gaming machines and accessories.

 

***Prepaids, Deposits and Other Current Assets***

 

Prepaids, deposits and othercurrent assets consist primarily of prepaid value-added taxes in foreigncountries, sales tax in dispute and deposits. The Company has restricted cash in the amount of $100,000 in the form ofa certificate of deposit as security on a lease.  The restriction for the security deposit willbe removed in February 2012 upon termination of the lease. Restricted cashhas been recorded in deposits and other assets in the accompanying consolidatedbalance sheets.

 

***Gaming Machines and Systems***

 

Gaming machines and systemsare stated at cost.  The Company depreciates new gaming machines andsystems over a five-year useful life and depreciates refurbished gamingmachines over a three-year useful life once placed in service. Depreciation ofgaming machines and systems of approximately $2.0 million and $2.5 million and$5.9 million and $7.3 million was included in cost of gaming machineparticipation in the consolidated statement of operations for the three-monthand nine-month periods ended September 30, 2010 and 2009, respectively.

 

***Flood Damage Losses***

 

Duringthe three-month period ended September 30, 2009, the Metro-Manila area ofthe Philippines was struck by numerous storms, which produced large typhoons inthe area.  During the strongest of the typhoons, certain casinos andvenues were flooded and the Company’s gaming machines placed in thesecasinos/venues were either damaged or destroyed entirely. The total cost of thedamage related to this event was approximately $146,000, the entire amount(less the policy deductible) of which was fully covered by the Company’sproperty insurance policy on the gaming machines. The Company recorded thedeductible amount of approximately $98,000 on the insurance policy andseparately presented this in the consolidated statements of operations. Therewere no such losses in the same period of 2010.

 

***Property and Equipment***

 

Property and equipment isstated at cost. Depreciation is computed using the straight-line method overthe useful lives of the assets currently estimated to be three to five years,which in the case of leasehold improvements, is limited to the life of thelease and throughout the renewal period so long as renewal is reasonablyassured. Depreciation of property and equipment of approximately $124,000 and$68,000 and $355,000 and $244,000 was included in cost of operations (tablegaming products or non-gaming products) in the consolidated statements ofoperations for the three-month and nine-month periods ended September 30,2010 and 2009, respectively.

 

***Goodwill and Intangible Assets***

 

Intangibleassets consist of patents, customer relationships, trademarks and goodwill.They are recorded at cost and are amortized, except goodwill, on thestraight-line basis over the period of time the asset is expected to contributedirectly or indirectly to future cash flows, which ranges from 10 to13 years. The straight-line amortization method is utilized because theCompany believes there is 

 

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nota more reliably determinable method of reflecting the pattern for which theeconomic benefits of the intangible assets are consumed or otherwise used.

 

TheCompany measures and tests goodwill and intangible assets for impairment inaccordance with ASC 350, *Intangible —Goodwill and Other*, and ASC 360, *Property,Plant and Equipment*, at least annually on December 31 or moreoften if there are indicators of impairment.

 

***Litigation and Other Contingencies***

 

TheCompany may be involved in legal matters, litigation and claims of varioustypes in the ordinary course of its business operations. The Company has regularlitigation reviews, including updates from corporate and outside counsel, toassess the need for accounting recognition or disclosure of thesecontingencies. The status of a significant legal matter is summarized inNote 17.

 

ASC450, *Contingencies,* requires thatliabilities for contingencies be recorded when it is probable that a liabilityhas been incurred and that the amount can be reasonably estimated. Significantmanagement judgment is required related to contingent liabilities and theoutcome of litigation because both are difficult to predict. For contingenciesfor which unfavorable outcomes are reasonably possible and which aresignificant, the Company discloses the nature of the contingency and, wherefeasible, estimates of the possible losses.

 

***Revenue Recognition***

 

The Company recognizesrevenue when all of the following have been satisfied:

 

·                  persuasive evidence of anarrangement exists;

 

·                  the price to the customer isfixed and determinable;

 

·                  delivery has occurred andany acceptance terms have been fulfilled;

 

·                  no significant contractualobligations remain; and

 

·                  collection is reasonablyassured.

 

*ParticipationRevenues*

 

The Company earns recurringrevenue by providing customers with electronic gaming machines and casinomanagement systems 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.

 

Commitmentfees paid to the venue operator where the agreement stipulates that such feeswill be recovered from the daily net win sharing are capitalized as assets. Asrequired by ASC 605-50, *Customer Paymentsand Incentives*, the cash consideration received for the portion ofnet winnings relating to the commitment fees is amortized as a reduction ofrevenue if the expected benefit from commitment fees cannot be separatelyidentified or reasonably estimated.  TheCompany had prepaid commitment fees of approximately $NIL and $4.8 million asof September 30, 2010 and December 31, 2009, respectively.

 

Commitmentfees paid to the venue operator relating to contract amendments are alsocapitalized as assets and amortized as a reduction of revenue fees over theterm of the amended contracts.   The Companyhad contract amendment fees of approximately $1.2 million and $688,000 as ofSeptember 30, 2010 and December 31, 2009, respectively.

 

*Table Gameand Non-Gaming Product Revenues*

 

The Company recognizesrevenue from the sale of its products to end users upon shipment againstcustomer contracts or purchase orders.

 

The Company recognizesrevenue from its sales to independent distributors upon shipments to thedistributors pursuant to distributor contracts or purchase orders forproducts.  The Company recognizes revenue on consignment inventory whenownership of product and title passes to the distributor, which occurs upon thedistributor’s use of the product in its service organization or sale to an enduser.

 

***Stock-Based Compensation***

 

Underthe fair value recognition provisions of ASC 718, Compensation-StockCompensation, 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.  Estimates are revised if subsequent information indicates that forfeitures willdiffer from previous estimates, and the cumulative effect on compensation cost 

 

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ofa change in the estimated forfeitures is recognized in the period of thechange.  For non-employee awards, the Company remeasures compensation costeach period until the service condition is complete and recognizes compensationcost on the straight-line basis over the requisite 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.  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 performance conditionsis probable. Cumulative catch-up adjustments are required in the event ofchanges in assessment of probability.

 

Stock-based compensationexpense totaled approximately $126,000 and $329,000 and $667,000 and $775,000for the three-month and nine-month periods ended September 30, 2010 and2009, respectively, and is included in selling, general and administrativeexpenses in the accompanying consolidated statements of operations.  SeeNote 12 for additional information regarding these assumptions.

 

***Product Development Expenses***

 

Product development expensesare charged to expense as incurred.  Employee related costs associatedwith product development are included in product development expenses.  The Company incurred approximately $64,000and $72,000 and $520,000 and $201,000 in product development expenses for thethree-month and nine-month periods ended September 30, 2010 and 2009,respectively.

 

***Income Taxes***

 

TheCompany is subject to income taxes in the U.S. (including federal and state)and several foreign jurisdictions in which it operates. Deferred income taxbalances reflect the effects of temporary differences between the carryingamounts of assets and liabilities and their tax bases and are stated at enactedtax rates expected to be in effect when taxes are actually paid or recovered.ASC 740, *Income Taxes*,requires that deferred tax assets be evaluated for future realization andreduced by a valuation allowance to the extent the Company believes a portionwill not be realized. The Company considers many factors when assessing thelikelihood of future realization of its deferred tax assets, including itsrecent cumulative earnings experience and expectations of future taxable incomeby taxing jurisdiction, the tax loss carry-forward periods available to theCompany for tax reporting purposes, and other relevant factors.

 

The Company accounts foruncertain tax positions in accordance with ASC 740, which contains a two-stepapproach to recognizing and measuring 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 which ismore than 50% likely of being realized upon ultimate settlement. TheCompany considers many factors when evaluating and estimating its tax positionsand tax benefits, which may require periodic****adjustmentsand which may not accurately anticipate actual outcomes.

 

***Earnings/(Loss) Per Share***

 

Basic earnings/(loss) pershare is computed by dividing the reported net earnings/(loss) by the weightedaverage number of shares of common stock outstanding during the year. Dilutedearnings per share is computed by dividing the net income by the weightedaverage number of shares of common stock and shares issuable from stock optionsduring the year. The computation of diluted earnings per share excludes theimpact of stock options and warrants that are anti-dilutive. For the threemonth-period ended September 30, 2009 and the nine month-periods endedSeptember 30, 2010 and 2009, all stock options and warrants were anti-dilutivedue to losses.

 

***Foreign Currency Translations and Transactions***

 

The functional currency ofthe Company’s international subsidiaries is the local currency.  For thesesubsidiaries, the Company translates the assets and liabilities at exchangerates in effect at the balance sheet date and income and expense accounts ataverage exchange rates during the year.  Resulting currency translation adjustmentsare recorded directly to accumulated other comprehensive income/(losses) withinstockholders’ equity.  Gains and losses resulting from transactions innon-functional currencies are recorded in operations.

 

***Fair Value Measurements***

 

Fair value is defined under *ASC 820 Fair Value Measurements and Disclosures*, as theexchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability 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 inputs and minimize the use of unobservableinputs. The standard establishes a fair value hierarchy based on three levelsof input, of which the first two are considered observable and the lastunobservable.

 

·                  Level 1 - Quoted prices inactive markets for identical assets or liabilities. These are typicallyobtained from real-time quotes for transactions in active exchange marketsinvolving identical assets.

 

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·                  Level 2 - Input, other thanquoted prices included within Level 1, which are observable for the asset orliability, either directly or indirectly. These are typically obtained fromreadily-available pricing sources for comparable instruments.

 

·                  Level 3 - Unobservableinput, where there is little or no market activity for the asset or liability.This input reflects the reporting entity’s own assumptions of the data thatparticipants would use in pricing the asset or liability, based on the bestinformation available in the circumstances.

 

The fair values of cash andcash equivalents, restricted cash, accounts receivable and accounts payableapproximate carrying values due to the short maturity of these items.

 

***Recently Issued Accounting Standards***

 

In January 2010, the FASB implemented *ASU 2010-06 Fair Value Measurements and Disclosures(Topic 820): Improving Disclosure about Fair Value Measurements.* Theamendment requires new fair value disclosures, including (1) separatedisclosure of significant transfers into and out of Level 3 and the reasons forthese transfers (2) the amount of transfers between Level 1 and Level 2and the reasons for such transfers. It clarifies existing disclosure regarding (1) levelof disaggregation for fair value disclosures and (2) disclosures aboutinputs and valuation techniques. These new disclosures and clarifications ofexisting disclosures are effective for interim and annual reporting periodsbeginning after December 15, 2009, except for the disclosures aboutpurchases, sales issuances, and settlements in the roll forward activity inLevel 3 fair value measurements. Those disclosures are effective for fiscalyears beginning after December 15, 2010, and for interim periods withinthose fiscal years. The Company adopted this amendment and there was no impacton the financial position, results of operations or cash flows.

 

In February 2010, the FASB implemented ASU2010-09 *Subsequent Events (Topic 855):Amendments to Certain Recognition and Disclosure Requirements.* ASecurities and Exchange Commission (“SEC”) filer**is required to evaluate subsequent events through the datethat the financial statements are available to be issued. An SEC filer is notrequired to disclose the date through which subsequent events have beenevaluated. The scope of the reissuance disclosure requirements is refined toinclude revised financial statements only. Revised financial statements includefinancial statements revised either as a result of correction of an error orretrospective application of U.S. generally accepted accounting standards. Theamendment is effective for interim or annual periods ending after June 15,2010. The Company adopted this amendment and there was no impact on thefinancial position, results of operations or cash flows.

 

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

 

TheCompany currently conducts business in three operating segments:(i) gaming machine participation operations; (ii) table game productoperations, which after the sale of the shuffler and deck checker assets thatwas completed in April 2009, consist exclusively of gaming chips andplaques; and (iii) non-gaming product operations, which consist primarilyof the Dolphin Advanced Technologies Pty Ltd (“Dolphin”) automotive components.The accounting policies of these segments are consistent with the Company’spolicies for the accompanying consolidated financial statements.  Thefollowing table presents the financial information for each of the Company’soperating segments.

 
| ** **                                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amounts in thousands)**                  | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Gaming  machine participation operations              |       | $                                                        | 4,108      |                                                    | $          | 1,839 |   | $ | 10,482 |   | $ | 4,527 |   |
| Table  game product operations                        |       | 645                                                      |       | 572                                                     |       | 998 |   | 3,841 |   |
| Non-gaming  product operations                        |       | 1,882                                                    |       | 1,201                                                   |       | 4,587 |   | 2,719 |   |
| Total  revenues                                       |       | $                                                        | 6,635      |                                                    | $          | 3,612 |   | $ | 16,067 |   | $ | 11,087 |   |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating  income/(loss):                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Gaming  machine participation operations gross margin |       | $                                                        | 1,869      |                                                    | $          | (1,182 | ) | $ | 3,764 |   | $ | (4,204 | ) |
| Table  game product operations gross margin           |       | 264                                                      |       | 297                                                     |       | 355 |   | 1,693 |   |
| Non-gaming  product operations gross margin           |       | 197                                                      |       | (3                                                      | )          | 181 |   | (236 | ) |
| Corporate  and other operating costs and expenses     |       | (1,814                                                   | )          | (2,627                                                  | )          | (6,453 | ) | (8,782 | ) |
| Total  operating income/(loss)                        |       | $                                                        | 516        |                                                    | $          | (3,515 | ) | $ | (2,153 | ) | $ | (11,529 | ) |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Depreciation  and amortization:                       |       |                                                     |       |                                                    |       |   |   |   |   |
| Gaming  machine participation operations              |       | $                                                        | 2,014      |                                                    | $          | 2,534 |   | $ | 5,871 |   | $ | 7,349 |   |
| Table  game product operations                        |       | 132                                                      |       | 158                                                     |       | 388 |   | 502 |   |
| Non-gaming  product operations                        |       | 93                                                       |       | 25                                                      |       | 272 |   | 67 |   |
| Corporate                                             |       | 120                                                      |       | 122                                                     |       | 374 |   | 477 |   |
| Total  depreciation and amortization                  |       | $                                                        | 2,359      |                                                    | $          | 2,839 |   | $ | 6,905 |   | $ | 8,395 |   |

 

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Geographic segment revenuesfor the three-month and nine-month periods ended September 30, 2010 and2009 are as follows:

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amount in thousands)** | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cambodia                            |       | $                                                        | 3,512      |                                                    | $          | 1,070 |   | $ | 8,134 |   | $ | 2,394 |   |
| Macau                               |       | 22                                                       |       | 338                                                     |       | 242 |   | 3,529 |   |
| Philippines                         |       | 877                                                      |       | 769                                                     |       | 2,629 |   | 2,133 |   |
| Other  Asian countries              |       | 300                                                      |       | 44                                                      |       | 503 |   | 169 |   |
| Australia                           |       | 1,741                                                    |       | 1,276                                                   |       | 4,038 |   | 2,698 |   |
| Other                               |       | 183                                                      |       | 115                                                     |       | 521 |   | 164 |   |
|                                |       | $                                                        | 6,635      |                                                    | $          | 3,612 |   | $ | 16,067 |   | $ | 11,087 |   |

 

For the three-month andnine-month periods ended September 30, 2010 and 2009, in the gamingmachine participation segment, one customer represented 79% and 54% and 75% and51%, respectively, of total participation revenue.  For the three-month and nine-month periodsended September 30, 2010 and 2009, in the table game products segment, onecustomer represented 44% and 38% and 28% and 86%, respectively, of total tablegame product sales. For the three-month and nine-month periods endedSeptember 30, 2010 and 2009, in the non-gaming products segment, onecustomer represented 20% and 26% and 25% and 31%, respectively, of total non-gamingproduct sales.

 

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

 

Inventories consist of thefollowing:

 
| **(amount in thousands)** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Raw  materials                      |       | $                                | 610        |                            | $          | 369 |   |
| Finished  goods                     |       | 257                              |       | 252                             |       |
|                                |       | $                                | 867        |                            | $          | 621 |   |

 

**Note 4.****                                 ****Prepaid Expenses and Other Current Assets**

 

Prepaid expenses and othercurrent assets consist of the following:

 
| **(amount in thousands)** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Prepaid  taxes                      |       | $                                | 430        |                            | $          | 374 |   |
| Prepayments  to suppliers           |       | 512                              |       | 355                             |       |
| Deposits  on gaming machine orders  |       | 228                              |       | 31                              |       |
| Other                               |       | —                           |       | 10                              |       |
|                                |       | $                                | 1,170      |                            | $          | 770 |   |

 

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

 

Accounts and otherreceivables consist of the following:

 
| **(amount in thousands)**    | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Trade  accounts                        |       | $                                | 2,763      |                            | $          | 2,784 |   |
| Other                                  |       | 216                              |       | 195                             |       |
|                                   |       | 2,979                            |       | 2,979                           |       |
| Less:  allowance for doubtful accounts |       | (7                               | )          | (8                              | )          |
| Net                                    |       | $                                | 2,972      |                            | $          | 2,971 |   |
| Current  portion                       |       | 2,972                            |       | 2,865                           |       |
| Non-current  portion                   |       | $                                | —     |                            | $          | 106 |   |

 

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Bad debt expenses/(recoveries)for the three-month and nine-month periods ended September 30, 2010 and2009 were approximately $NIL and ($52,000) and $NIL and ($66,000),respectively, which were recorded in selling, general and administrativeexpenses in the consolidated statements of operations.

 

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

 

The major categories ofgaming equipment and systems and accumulated depreciation are presented below.

 
| **(amount in thousands)** | ** ** | **Useful Life  (years)** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | ** **                    | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Gaming equipment               |       | 3 – 5          |       | $                                | 42,700     |                            | $          | 39,730 |   |
| Systems                             |       | 5                             |       | 3,793                            |       | 3,520                           |       |
|                                |       |                          |       | 46,493                           |       | 43,250                          |       |
| Less:  accumulated depreciation     |       |                          |       | (23,175                          | )          | (16,743                         | )          |
|                                |       |                          |       | $                                | 23,318     |                            | $          | 26,507 |   |

 

Depreciation expenses forthe three-month and nine-month periods ended September 30, 2010 and 2009were approximately $2.0 million and $2.5 million and $5.9 million and $7.3million, respectively, which were recorded in cost of gaming machineparticipation in the consolidated statements of operations.

 

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

 

Property and equipmentconsist of the following:

 
| **(amount in thousands)**             | ** ** | **Useful Life  (years)** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | ** **                    | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Equipment  and vehicles, furniture and fixtures |       | 3 – 5          |       | $                                | 6,827      |                            | $          | 6,349 |   |
| Land  and other project costs                   |       | N/A                           |       | 1,950                            |       | —                          |       |
| Leasehold  improvements                         |       | 5                             |       | 623                              |       | 814                             |       |
|                                            |       |                          |       | 9,400                            |       | 7,163                           |       |
| Less:  accumulated depreciation                 |       |                          |       | (4,573                           | )          | (3,841                          | )          |
|                                            |       |                          |       | $                                | 4,827      |                            | $          | 3,322 |   |

 

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

 

In accordance with ASC350, *Intangibles—Goodwill and Other,*and ASC 360, *Property, Plant, and Equipment,*the Company reviews goodwill and intangibles for impairment on an annual basisat December 31 or more frequently if events or circumstances indicate thatthe carrying values may not be recoverable. No circumstances indicate anyfurther impairment provisions were necessary during the three-month andnine-month periods ended September 30, 2010.

 

The Company’s definite-lifeintangible assets are subject to amortization as follows:

 
| **(amounts in thousands)** | ** ** | **Useful Life  (years)** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **                    | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Patents                              |       | 10                            |       | $                                | 2,577      |                            | $          | 2,577 |   |
| Less:  accumulated amortization |       |                          |       | (1,095                           | )          | (902                            | )          |
|                                 |       |                          |       |                             |       |                            |       |
| Customer relationships               |       | 10-13                         |       | 1,684                            |       | 1,684                           |       |
| Less:  accumulated amortization |       |                          |       | (780                             | )          | (698                            | )          |
|                                 |       |                          |       |                             |       |                            |       |
| Trademarks                           |       | 10-13                         |       | 505                              |       | 505                             |       |
| Less:  accumulated amortization |       |                          |       | (169                             | )          | (140                            | )          |
| Total                                |       |                          |       | $                                | 2,722      |                            | $          | 3,026 |   |

 

AtSeptember 30, 2010 and December 31, 2009, the Company’s goodwill wasapproximately $84,000.

 

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

 

Prepaids,deposits and other assets consist of the following:

 
| **(amounts in thousands)** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Office equipment rental deposits     |       | $                                | 51         |                            | $          | 75 |   |
| Prepaid value-added tax              |       | 195                              |       | 136                             |       |
| Restricted cash                      |       | 117                              |       | 113                             |       |
| Sales tax in dispute                 |       | —                           |       | 84                              |       |
| Total                                |       | $                                | 363        |                            | $          | 408 |   |

 

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

 

Accruedexpenses consist of the following:

 
| **(amounts in thousands)** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Accrued tax expenses                 |       | $                                | 672        |                            | $          | 747 |   |
| Payroll and related costs            |       | 599                              |       | 599                             |       |
| Interest                             |       | 73                               |       | 128                             |       |
| Legal, accounting and tax fees       |       | 239                              |       | 146                             |       |
| Deposits from customers              |       | —                           |       | 28                              |       |
| Deferred rent                        |       | 52                               |       | 46                              |       |
| Other                                |       | 211                              |       | 631                             |       |
| Total                                |       | $                                | 1,846      |                            | $          | 2,325 |   |

 

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

 

Debtand capital lease obligations consist of the following:

 
| **(amounts in thousands)**                                                                       | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                 | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Note payable to a related party with interest at  5% (Note 13)                                             |       | $                                | 9,203      |                            | $          | 9,393 |   |
| Capital lease obligations to an Australian bank at  various interest rates and collateralized by equipment |       | 489                              |       | 599                             |       |
| Capital lease obligations for furniture, tooling and  equipment                                            |       | —                           |       | 2                               |       |
| Total                                                                                                      |       | 9,692                            |       | 9,994                           |       |
| Less: current portion                                                                                      |       | (1,682                           | )          | (3,315                          | )          |
| Long-term portion                                                                                          |       | $                                | 8,010      |                            | $          | 6,679 |   |

 

OnNovember 6, 2008, in accordance with the amended Trade Credit FacilityAgreement (the “Facility Agreement”), Elixir International Limited (“ElixirInternational”), a wholly-owned subsidiary of EGT Entertainment Holding Limited(“EGT Entertainment”) (formerly known as Elixir Group Limited), which is theprincipal shareholder of the Company, exchanged its promissory note issuedunder the Facility Agreement in the original principal amount advance of $15.0million for a new promissory note issued by the Company for the thenoutstanding principal amount of approximately $12.1 million.  Theoutstanding principal and the interest accrued (revised from 8% to 5%) thereonwere to be repaid in 24 equal monthly installments reset from January 1,2009.

 

On July 24, 2009, theCompany entered into a second amendment (the “Second Amendment”) to theFacility Agreement with Elixir International to defer the repayment ofprincipal and interest on the outstanding principal balance of approximately$9.2 million during the period from July 1, 2009 to June 30, 2010although interest at the rate of 5% per annum continued to accrue on theoutstanding principal balance of approximately $9.2 million (the “OutstandingPrincipal Balance”).  Repayments in 18equal monthly installments were to resume on July 1, 2010 (See Note 13).

 

OnApril 20, 2010, the Company entered into a Deed of Assignment and Novationand Consent (the “Deed of Assignment”) with Elixir International and EGTEntertainment. Pursuant to the Deed of Assignment, the Company agreed to theassignment and transfer by Elixir International of all its rights andobligations under the Facility Agreement and the related promissory note to EGTEntertainment, our principal shareholder, with immediate effect. The saidassignment and transfer was made in relation to the disposal of ElixirInternational by EGT Entertainment and does not have any impact on the noteterms or the repayment obligations of the

 

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Companysave and except that when the repayment schedule resumes, the monthly repaymentof principal and interest under the note will be made to or at the direction ofEGT Entertainment instead of Elixir International (See Note 13).

 

OnMay 25, 2010, the Company entered into a third amendment (“Third Amendment”)to the Facility Agreement with EGT Entertainment, pursuant to which therepayment schedule of the Outstanding Principal Balance and the interestaccrued thereon were further restructured in the following manner:(i) payment by the Company of the total interest accrued on theOutstanding Principal Balance during the period from July 1, 2009 toJune 30, 2010 in the amount of approximately $458,000 in a lump sumpayment on July 1, 2010; (ii)  on the first day of each calendarmonth during the period from August 1, 2010 to June 1, 2011, theCompany will pay interest in arrears on the Outstanding Principal Balance atthe same rate of 5% per annum for the preceding month; and (iii)   the Company will repay the OutstandingPrincipal Balance and interest accrued thereon at the rate mentioned above in18 equal monthly installments commencing on July 1, 2011. Pursuant to theterms of the Third Amendment, the Company paid a total of $458,000 onJuly 1, 2010 to EGT Entertainment.

 

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

 

**Options**

 

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

 

The Plan allows forincentive awards to eligible recipients consisting of:

 

·                  Options topurchase shares of common stock that qualify as incentive stock options withinthe meaning of the Internal Revenue Code;

 

·                  Non-statutorystock options that do not qualify as incentive options;

 

·                  Restrictedstock awards, which are subject to restrictions on transferability, futureachievement of performance criteria and/or risk of forfeiture that may beimposed by the Company’s Compensation Committee in accordance with the Plan ;and

 

·                  Performancestock awards, which are subject to future achievement of performance criteriaor be free of any performance or vesting as may be determined by the Company’sCompensation Committee in accordance with the Plan..

 

The maximum number of sharesreserved for issuance under the Plan was originally 5,000,000, and in July 2010the Company’s shareholders approved an increase in the number of share reservedfor issuance to 10,000,000 shares.  Theexercise price shall not be less than 100% of the fair market value of oneshare of common stock on the date of grant, unless the participant owns morethan 10% of the total combined voting power of all classes of stock of theCompany or any parent or subsidiary corporation of the Company, in which casethe exercise price shall then be 110% of the fair market value.

 

Duringthe nine-month period ended September 30, 2010, stock options for thepurchase of 2,850,000 shares of common stock were granted with a weightedaverage exercise price of $0.27 and weighted average fair value of $0.24 pershare and will vest from six-month and one day periods to three-yearperiods.   During the nine-month period ended September 30,2010, 472,727 restricted stock awards with a fair value of $0.27 per share wereissued.  The shares of restricted stock shall vest, subject to and uponthe recipient’s achievement of key operational and financial performancemilestones. For restricted stock awards with performance conditions, theCompany evaluates if performance conditions are probable in each reportingperiod. The compensation expense of restricted awards is recognized ratablyover the implicit service period if achieving performance conditions isprobable. Cumulative catch-up adjustments are required in the event of changesin the assessment of probability.

 

Duringthe nine-month period ended September 30, 2010, the Company granted450,000 performance stock awards with a fair value of $0.27 per share.

 

Inaddition, during the nine-month period ended September 30, 2010, theCompany issued 40,000 shares of common stock in connection with the exercise ofan outstanding stock option. On October 1 and October 6, 2010 respectively, theCompany issued an additional 150,000 and 20,000 shares of common stock inconnection with two other stock option exercises.

 

Priorto January 1, 2009, the Company had two stock options plans, the Amendedand Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’Stock Option Plan (the “1999 Stock Option Plans”), through which 15,000,000shares and 300,000 shares were authorized, respectively.  Both 1999 StockOption Plans expired on December 31, 2008, however options granted underthe 1999 Stock Option Plans that were outstanding as of the date of terminationremain outstanding and subject to termination according to their terms.

 

Asof September 30, 2010, 10,077,763 stock options were exercisable with aweighted average exercise price of $1.79, a weighted average fair value of$0.16, and an aggregate intrinsic value of $496,000.

 

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**StockOptions**

 
| ** **                                | ** ** | **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                                   |       | 2,850,000                  |       | $                                          | 0.27       |                                                                     | —     |                                                 | —     |   |
| Exercised                                 |       | (40,000                    | )          | $                                          | 0.08       |                                                                     | —     |                                                 | —     |   |
| Cancelled                                 |       | (799,301                   | )          | $                                          | 1.99       |                                                                     | —     |                                                 | —     |   |
| Outstanding as of September 30, 2010 |       | 12,747,764                 |       | $                                          | 1.49       |                                                                     | 4.18       |                                                 | $          | 590 |   |
| Exercisable as of September 30, 2010 |       | 10,077,763                 |       | $                                          | 1.79       |                                                                     | 2.86       |                                                 | $          | 496 |   |

 

**RestrictedStock**

 
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Fair Value at  Grant Date** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Unvested balance as of December 31, 2009  |       | —                     |       | $                                                               | —     |                                                                     | —     |   |
| Granted                                        |       | 922,727                    |       | $                                                               | 0.27       |                                                                     | —     |   |
| Vested                                         |       | (767,673                   | )          | $                                                               | 0.27       |                                                                     | —     |   |
| Unvested balance as of September 30, 2010 |       | 155,054                    |       | $                                                               | 0.27       |                                                                     | 0.25       |   |

 

**Warrants**

 

A summary of the status ofthe Company’s warrants outstanding at September 30, 2010 and changesduring the nine-month period then 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       |                            | —     |   |
| Granted/(exercised or cancelled)          |       | —       |       | —                                 |       | —                                                                   |       | —                          |       |
| Exercisable as of September 30, 2010 |       | 13,125,000   |       | 1.86                                   |       | 0.37                                                                     |       | —                          |       |
|                                           |            |              |            |                                        |            |                                                                          |            |                                 |            |  |

 

There were no warrantsgranted, exercised or cancelled during the three-month and nine-month periodsending September 30, 2010. Outstanding and exercisable warrants have no aggregate intrinsic valueas of September 30, 2010 due to the fair market value of the Company’sstock as of that date.

 

The table set forth aboveincludes warrants to purchase 10,000,000 common shares held by EGTEntertainment, all of which will expire on December 31, 2010.

 

*Recognitionand Measurement*

 

The fair value of eachstock-based award to employees and non-employee directors is estimated on themeasurement date which generally is the grant date while awards tonon-employees are measured at the earlier of the performance commitment date orthe service completion date using the Black-Scholes-Merton option-pricingmodel.  Option valuation models requirethe input of highly subjective assumptions, and changes in assumptions used canmaterially affect the fair value estimates. The Company estimates the expected life of the award by taking intoconsideration the vesting period, contractual term, historical exercise data,expected volatility, blackout periods and other relevant factors. Volatility isestimated by evaluating the Company’s historical volatility data.  The risk-free interest rate on themeasurement date is based on U.S. Treasury constant maturity rates for a periodapproximating the expected life of the award. The Company historically has not paid dividends, nor does it expect topay dividends in the foreseeable future and, therefore, the expected dividendrate is zero.

 

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Thefollowing table summarizes the range of assumptions utilized in theBlack-Scholes-Merton option-pricing model for the valuation of stock optionsand warrants granted during the nine-month periods ended September 30,2010 and 2009:

 
| ** **               | ** ** | **September 30,** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **               | ** ** | **Low**                | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Range of values:         |       |                   |       |   |   |   |   |   |   |
| Expected volatility      |       | 129.51                 | %          | 173.80 | % | 303.32 | % | 303.32 | % |
| Expected dividends       |       | —                 |       | — |   | — |   | — |   |
| Expected term (in years) |       | 1.88                   |       | 9.88 |   | 3.73 |   | 3.73 |   |
| Risk-free rate           |       | 0.58                   | %          | 2.94 | % | 2.75 | % | 2.75 | % |

 

For stock-based compensationaccrued to employees and non-employee directors, the Company recognizesstock-based compensation expense for all service-based awards with gradedvesting schedules on the straight-line basis over the requisite service periodfor the entire award.  Initial accrualsof compensation expense are based on the estimated number of shares for whichrequisite service is expected to be rendered. Estimates are revised if subsequent information indicates that forfeitureswill differ from previous estimates, and the cumulative effect on compensationcost of a change in the estimated forfeitures is recognized in the period ofthe change.

 

For non-employee awards, theCompany remeasures compensation costs each period until the service conditionis complete and recognizes compensation costs on the straight-line basis overthe requisite service period.

 

The Company estimatesforfeitures and recognizes compensation costs only for those awards expected tovest, assuming all awards would vest, and reverses recognized compensationcosts for forfeited awards when the awards are actually forfeited.

 

For awards with serviceconditions and graded vesting that were granted prior to the adoption of ASC718, the Company estimates the requisite service period and the number ofshares expected to vest, and recognizes compensation expense for each trancheon the straight-line basis over the estimated requisite service period.

 

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

 

AtSeptember 30, 2010 and December 31, 2009, the notes payable to EGTEntertainment (see Note 11) relating to purchases of electronic gamingmachines, casino management systems and other peripherals had outstandingprincipal amounts and additional accrued interest totaling approximately $9.2million and $9.4 million, respectively.

 

OnApril 21, 2008, the Company entered into a Trade Credit Facility Agreement(the “Facility Agreement”) with Elixir International.  Pursuant to theFacility Agreement, Elixir International provided trade credits to the Companyfor its purchases of electronic gaming machines from Elixir International inexchange for the Company’s issuance of unsecured notes to Elixir Internationalbearing interest at a fixed rate of eight percent (8.0%) per annum. Asdescribed further below, the notes were later assigned to EGT Entertainment.Titles for any gaming machines offered in exchange for the notes passed to theCompany upon issuance of the notes.

 

Uponentering into the Facility Agreement, the Company immediately issued the firstnote pursuant to the terms of the Facility Agreement in the then principalamount of $15.0 million (the “Initial Advance”).  The Initial Advanceextinguished a then trade payable of an equivalent amount to ElixirInternational with respect to gaming machines previously acquired.

 

Pursuantto the Facility Agreement, the Company was obligated to repay the principal,plus any accrued interest thereon, of the Initial Advance in 24 equal monthlyinstallments after the date of issue.  The Initial Advance is subject todemand by Elixir International for immediate payment only if there is either anevent of default or a change of control as defined in the Facility Agreement.Pursuant to an amendment to the Facility Agreement dated November 6, 2008between the parties, Elixir International surrendered the note of InitialAdvance to the Company in exchange for the issuance of a new promissory notefor the then outstanding principal amount of $12.1 million with the followingnew repayment terms: (i)  the outstanding principal amount and theinterest accrued thereon shall be repaid in 24 equal monthly installments resetfrom January 1, 2009; (ii) interest shall be accrued on theoutstanding principal at the rate 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 andDecember 2008.

 

OnJuly 24, 2009, the Company entered into another agreement with ElixirInternational to further amend the unsecured promissory note issued by theCompany. Under these amended note terms, which became effective as ofJuly 1, 2009, the Company was entitled to defer the repayment of principaland interest on the outstanding principal balance of the note of $9.2 millionuntil July 2010 with interest at the same rate of 5% continuing to accrue.(See Note 11)

 

OnApril 20, 2010, in relation to the disposal of Elixir International by ourprincipal shareholder, EGT Entertainment, Elixir International assigned andtransferred all its rights and obligations under the Facility Agreement and thenote to EGT Entertainment. The said assignment and transfer does not have anyimpact on the note terms or the repayment obligations of the Company save andexcept that when the repayment schedule resumes, the monthly repayment ofprincipal and interest under the note will be made to or at the direction ofEGT Entertainment instead of Elixir International. (See Note 11)

 

OnMay 25, 2010, the Company entered into a third amendment to the FacilityAgreement with EGT Entertainment, pursuant to which the repayment schedule ofthe Outstanding Principal Balance and the interest accrued thereon were furtherrestructured in the following manner: (i)   payment by the Company ofthe total interest accrued on the Outstanding Principal Balance during theperiod from July 1, 2009 to June 30, 2010 in the amount ofapproximately $458,000 in a lump sum payment on July 1, 2010; (ii) onthe first day of each calendar month during the period from August 1, 2010to June 1, 2011, the Company will pay interest in arrears on the 

 

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OutstandingPrincipal Balance at the same rate of 5% per annum for the preceding month; and(iii)  the Company will repay the Outstanding Principal Balance andinterest accrued thereon at the rate mentioned above in 18 equal monthlyinstallments commencing on July 1, 2011. Pursuant to the terms of theThird Amendment, the Company paid a total of $458,000 on July 1, 2010 toEGT Entertainment.

 

Significantrevenues, purchases and expenses arising from transactions with related partiesfor the three-month and nine-month periods ended September 30, 2010 and2009 are as follows:

 
| ** **                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amounts in thousands)**          | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Melco Crown Gaming (Macau) Limited**        |       |                                                     |       |                                                    |       |   |   |   |   |
| Trade  sales of gaming products               |       | $                                                        | 20         |                                                    | $          | — |   | $ | 60 |   | $ | 2,976 |   |
|                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| **Melco Services Limited**                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Technical  services                           |       | 8                                                        |       | —                                                  |       | 25 |   | 15 |   |
| Office  rental                                |       | 38                                                       |       | —                                                  |       | 110 |   | — |   |
| Expenses  paid on behalf of the Company (net) |       | (64                                                      | )          | (15                                                     | )          | (147 | ) | (15 | ) |
|                                               |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

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

 

The Company’s reportedincome tax rates for the three-month and nine-month periods endedSeptember 30, 2010 and 2009 were (79.0)% and (1.9)% and (5.8)% and (3.3)%,respectively. The Company recorded a one-time tax benefit of approximately$320,000 in the third quarter of 2010 related to the granting of a taxincentive arrangement for its Cambodia operations in September 2010.  The tax arrangement is effective for theperiod of January 1, 2010 through December 31, 2010.  Under this tax arrangement, the Company isrequired to pay only a fixed obligation tax to the Cambodian Government insteadof paying income tax based on the profits of the Company’s Cambodia operations.As the approval was obtained in September 2010, income tax of the Companyfor the first and second quarter of 2010 were computed with reference to theactual profits of the Cambodia operations and the income tax exempted by thetax arrangement was reversed entirely in the third quarter.  Since the Company reported consolidated netincome from operations while recording a one-time tax benefit, the result was anegative effective tax rate for the three-month period ended September 30,2010.

 

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

 

Inaccordance with ASC 420, *Exit and DisposalCost Obligations*, the Company incurred restructuring charges forthree-month and nine-month periods ended September 30, 2010 and 2009 ofapproximately $63,000 and $4,000 and $310,000 and $592,000, respectively. The restructuring charges during the three-month and nine-month periods endedSeptember 30, 2010 were for severance wages and benefits related to thetermination of employees. The restructuring charges during the three-month andnine-month periods ended September 30, 2009 were for the write-down of theremaining China plant equipment and the severance wages and benefits related tothe termination of employees.  The amounts represented contractual andother agreements with employees, which only included charges for terminationbenefits measured at the estimated fair value at the termination date.  Restructuring expenses and related chargesincurred were fully paid or settled as of September 30, 2010.

 

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

 

OnMarch 16, 2009, the Company entered into a Purchase and SettlementAgreement with Shuffle Master, Inc. (the “Purchase and SettlementAgreement”) pursuant to which it sold to Shuffle Master its portfolio ofautomated card verification machines and electronic card shuffling systems, allrelated intellectual property, including but not limited to, the trademarks ofRandom PlusTM, ShuffleProTM and Deck CheckerTM, and certain inventory of suchproducts. The total consideration paid by Shuffle Master under the Purchase andSettlement Agreement was a base amount of $2.4 million with an additional$400,000 related to the purchase of inventories.  In April 2009, theCompany delivered the inventory items and concluded the transaction, and thisresulted in a gain on the asset disposals of approximately $2.0 million.

 

Inrelation to this Purchase and Settlement Agreement, the Company terminated adistributorship arrangement of the relevant products with a distributor inEurope and, pursuant to the termination arrangement the Company was required tobuy back certain inventories of the relevant products kept by the distributor.The estimated liability was approximately $248,000, which was included in theincome/(loss) from operations. After taking into account such buy-backobligation, the Company reported a net income from discontinued operations ofapproximately $1.5 million in the nine-month period ended September 30,2009.

 

Asa result of the sale to Shuffle Master, the China facility became redundantand, therefore, was completely closed at the end of April 2009. Thisoperation was part of the table game segment and the Company classified theChina facility as discontinued operations.

 

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The following table detailsselected financial information for the discontinued operations in theconsolidated statements of operations.

 
| ** **                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amounts in thousands)**             | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income/(loss)  from operations                   |       | $                                                        | —     |                                                    | $          | 5 |   | $ | — |   | $ | (415 | ) |
| Gain  on disposal                                |       | —                                                   |       | —                                                  |       | — |   | 1,962 |   |
| Income  tax benefit/(expense)                    |       | —                                                   |       | —                                                  |       | — |   | — |   |
| Income  from discontinued operations, net of tax |       | $                                                        | —     |                                                    | $          | 5 |   | $ | — |   | $ | 1,547 |   |

 

Theestimated effective tax for discontinued operations is $NIL and therefore,there is no income tax benefit associated with the loss from operations.

 

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

 

**LegalMatters**

 

The Company is a party tocertain legal matters as discussed below.

 

*Sales Tax Audit*

 

InFebruary 2004, the State of Nevada initiated a sales/use tax audit of ourequipment lessors. In June 2010, the State of Nevada determined there hadbeen a double tax payment of the sales/use tax and a refund of approximately$56,000 was issued to the Company by the Nevada State Tax Department in September 2010and the sales tax audit was thereby fully settled and closed.

 

*Prime Mover/Strata Litigation*

 

OnMarch 26, 2010, a complaint (as subsequently amended on May 28, 2010)(the “Complaint”) was filed by certain shareholders of the Company includingPrime Mover Capital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., andStrata Offshore Fund, Ltd (collectively, the “Plaintiffs”) in the United StatesDistrict Court for the Southern District of New York against certain defendantsincluding the Company and certain other current and former directors andofficers of the Company.

 

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 Sections90.580(e) and 90.660(3), breach of fiduciary duty, and negligentmisrepresentations.  The Plaintiffs allege that the Company and certainother defendants made false and misleading statements about the ParticipationBusiness in filings with the SEC, press releases, and other industry andinvestor conferences and meetings during the period from June 13, 2007 toAugust 13, 2008 and that the Plaintiffs then purchased the securities atthe inflated prices and later suffered economic losses when the price of theCompany’s securities decreased.

 

ThePlaintiffs seek unspecified damages, as well as interest, costs and attorneyfees.  The Company has engaged legal counsel to consider the claims setforth in the Complaint and the Company intends to defend vigorously and respondto the Complaint in a time and manner consistent with applicable federal andstate laws. As the litigation is at a preliminary stage, it is not possible topredict the likely outcome of the case or the probable loss, if any, and,accordingly, no accrual has been made for any possible losses in connectionwith this matter.

 

The Company believes thatthe Plaintiffs’ claims against the Company and its present and former officersand directors are covered by the Company’s directors and officer insurancepolicies, which provide the covered parties with up to $15 million of potentialinsurance coverage, subject to a retention amount payable by the Company in theamount of $150,000. The Company paid the said retention amount in full in September 2010.

 

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**Item 2.             Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

***CAUTIONARY STATEMENT***

 

You should read thefollowing discussion and analysis in conjunction with our unauditedconsolidated financial statements and the related notes thereto containedelsewhere in this report. The information contained in this quarterly report onForm 10-Q is not a complete description of our business or the risksassociated with an investment in our common stock. We urge you to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the Securities and Exchange Commission, or SEC,including our annual report on Form 10-K for the year endedDecember 31, 2009, filed with the SEC on March 30, 2010 andsubsequent reports on Form 8-K, which discuss our business in greaterdetail.

 

In this report we make, andfrom time to time we otherwise make, written and oral statements regarding ourbusiness and prospects, such as projections of future performance, statementsof management’s plans and objectives, forecasts of market trends, and othermatters that are forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. 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 to forward-looking statements, involve a number ofrisks and uncertainties. No assurance can be given that the results reflectedin any forward-looking statements will be achieved. Any forward-lookingstatement speaks only as of the date on which such statement is made. Ourforward-looking statements are based upon assumptions that are sometimes basedupon estimates, data, communications and other information from suppliers,government agencies and other sources that may be subject to revision. Exceptas required by law, we do not undertake any obligation to update or keepcurrent either (i) any forward-looking statement to reflect events orcircumstances arising after the date of such statement, or (ii) theimportant factors that could cause our future results to differ materially fromhistorical results or trends, results anticipated or planned by us, or whichare reflected from time to time in any forward-looking statement.

 

In addition to other mattersidentified or described by us from time to time in filings with the SEC, thereare several important factors that could cause our future results to differmaterially from historical results or trends, results anticipated or planned byus, or results that are reflected from time to time in any forward-lookingstatement. Some of these important factors, but not necessarily all importantfactors, include those matters included in the section “Risk Factors” in ourannual report on Form 10-K for the year ended December 31, 2009 filedwith the SEC on March 30, 2010.

 

We own or have rights tocertain trademarks that we used in connection with our business or products,including, but not limited to, DolphinTM. Other than this trademark, this reportalso makes reference to trademarks and trade names of other companies.

 

**Overview**

 

We currently conductbusiness in three operating segments: (i) gaming machine participationoperations; (ii) table game product operations, which after the sale ofthe shuffler and deck checker assets that was completed in April 2009,consist exclusively of gaming chips and plaques; and (iii) non-gamingproduct operations, which consist primarily of the Dolphin AdvancedTechnologies Pty Ltd (“Dolphin”) automotive components.

 

Ourcurrent primary focus is on leasing electronic gaming machines on a revenuesharing basis to gaming establishments within Pan-Asian markets.  Weidentify and secure venues for the placement of electronic gaming machines andcasino management systems where warranted, 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 and other gaming systems andperipherals at the relevant gaming venues.

 

Asof September 30, 2010, our gaming machine participation operations wereconcentrated in two countries, Cambodia and the Philippines. In Cambodia, wehad a total of 679 gaming machine seats in operation in two venues.  In the Philippines, we had a total of 846gaming machine seats in operation in six venues.

 

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In Cambodia, our participation operations currently focus primarily onoperating a substantial portion of the gaming machine area in prime casinofloor locations at NagaWorld, a wholly-owned subsidiary of Hong Kong listedNagaCorp Ltd. (HKSE: 3918) and Cambodia’s premier luxury destination gamingresort and the only licensed full service casino around the capital city ofPhnom Penh.  Our gaming machineoperations at NagaWorld, which we brand as Dreamworld and jointly operate withNagaWorld, have provided us strong growth in participation revenues and cashflow.  Since our first machineinstallations in January 2009, we have dramatically grown our installedbase at this venue to 669 seats in operation as of November 1, 2010.

 

Inaddition, we have continued to selectively pursue expansion opportunities innew and existing markets where we can leverage our expertise andrelationships.  In April 2010, we entered into a machineparticipation agreement with a new partner to place approximately 60 gamingmachine seats on a participation basis at its new casino in the Kampong Champrovince of Cambodia (north east of Phnom Penh) near the Vietnam border.  This is an attractive opportunity for us asit not only provides us the ability to expand with minimal capital expenditureas we anticipate using machines from existing inventory but also enables us toenter a new and well-trafficked location in Cambodia with partners that areestablished gaming operators in the region. In September 2010, 10 gaming machine seats were installed and fulldeployment of the remaining 50 gaming machine seats is expected inNovember 2010.

 

Inthe Philippines, we have strategically managed our machine placements to focuson growing win per day at our most promising venues and, with the support ofour venue partners, are implementing targeted marketing programs to acceleratenet win per machine growth. We believe this strategy positions us for long-termgrowth in this market.

 

Inaddition to our core gaming business, we are focused on deriving greater valuefrom our gaming chip and plaque operations.  We have directed furtherresources to these operations in the form of marketing and product developmentto further strengthen our strong customer relationships and penetration in ourkey existing markets of Macau and Australia and to expand our distributionchannels into new markets.  Based on these marketing efforts, we believewe have better positioned ourselves to capitalize on the future growthopportunities for the global gaming chip and plaque market.

 

Withregard to our non-gaming operations, Dolphin auto component sales volumescontinue to modestly strengthen driven by the improvement in the automotiveparts industry in Australia for the first nine months of 2010 compared to thesame period in 2009.  As a designated tier1 and tier 2 supplier to several major manufacturers, we believe Dolphin isbetter positioned to gain market share and increase sales orders in the futureas the Australian automotive parts industry continues to improve.  Inaddition, we are pursuing opportunities to leverage our existing operations toalso serve the military and mining industries with a goal to further strengthenand diversify this business in the future.

 

We also have implementeddramatic cost reduction initiatives, which resulted in a 27% decline incash-based selling, general, and administrative expenses for the first ninemonths of 2010 compared to the same period in 2009.  We continue to exercise strict cost controlmeasures and, as a result, cash-based selling, general and administrativeexpenses were $1.3 million for the three months ended September 30, 2010,below our targeted range of $1.5 to $1.8 million for the quarter.  Importantly, we have effected thesereductions without hindering our operational capabilities and while remainingflexible enough to act on our growth plans.

 

Withour refined operations and streamlined cost structure, we have significantlyimproved our execution capabilities, operational efficiency and financialperformance.  Our consolidated revenue for the three months endedSeptember 30, 2010 was approximately $6.6 million, of which revenue fromour gaming machine participation, table games and non-gaming operationscomprised 62%, 10% and 28%, respectively, of consolidated revenue.  Thiscompares to consolidated revenue of approximately $3.6 million for the threemonths ended September 30, 2009, of which revenue from our gaming machineparticipation, table games and non-gaming operations comprised 51%, 16% and33%, respectively, of consolidated revenue.

 

Revenuefrom our gaming machine participation operations was approximately $4.1 millionfor the three months ended September 30, 2010, more than doubling from$1.8 million in the same period in the prior year.  Gross margin for the gaming participationbusiness improved to 45% in the three months ended September 30, 2010compared to negative gross margin of 64% in the same period in the prioryear.  Excluding non-cash items such asmachine depreciation and asset write-downs, gross margin for the gamingparticipation business improved to 96% from 80%, respectively.

 

Basedon the solid revenue performance, particularly from our operations atNagaWorld, and our continued strict cost control efforts, we have achievedpositive GAAP earnings for the three months ended September 30, 2010, thefirst profitable quarter since effecting our new business model in September 2007,and have significantly improved our ability to generate and grow positive cashflow.  We achieved positive AdjustedEBITDA (as defined below) of approximately $3.0 million for the three monthsended September 30, 2010 up from approximately $1.4 million for the threemonths ended June 30, 2010.  Cashflow provided from operations amounted to approximately $7.8 million for thenine months ended September 30, 2010 compared with cash used in operationsof approximately $7.9 million in the same period in the prior year.

 

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Inaddition, we have improved our liquidity and financial flexibility.  InMay 2010, we entered into another agreement with EGT Entertainment tofurther amend the unsecured promissory note originally issued inApril 2008.  Under these new terms,which became effective July 1, 2010, we have deferred the repayment ofprincipal on the outstanding principal balance of the note of approximately$9.2 million until July 2011 and we make interest only payments on amonthly basis at a rate of 5% per annum. In July 2011, we will resume monthly payments of principal andinterest for a period of 18 months.  Theamended terms also required that we pay all the accrued interest for the periodof July 1, 2009 to June 30, 2010, which had accrued at a rate of 5%per annum on the principal amount of approximately $9.2 million, in the totalamount of approximately $458,000 on July 1, 2010 and we made such paymenton that date.

 

Withour improved financial performance and flexibility and enhanced operationalefficiency, we believe we are better positioned to invest in our existingoperations and pursue growth opportunities that enable us to leverage ourexisting market presence and relationships and capitalize on what we perceiveto be attractive economic and socio demographic trends in our target markets.

 

InMay 2010, we announced we intend to expand our gaming operations andbecome an owner and operator of regional casinos under the Dreamworld brand inselected emerging gaming markets in Pan Asia. We believe this expanded business strategy will allow us the potentialfor higher long-term incremental returns on our operations given the ability tocollect 100% of the net win compared to a percentage as per our existingparticipation contracts.  In addition, itprovides us greater long-term control over our operations.

 

Pursuantto this growth strategy, on May 26, 2010, we formed a new company inCambodia, Dreamworld (Takeo) Investment Holding Limited (“Dreamworld Holding”),which entered into a Land Sale & Purchase Agreement (the “S&PAgreement”) for the acquisition of a parcel of land in Takeo Province ofCambodia (the “Land”) with the owner of the Land (the “Seller”).

 

TheLand has a total area of approximately seven acres (30,000 square meters) andis located in the Takeo province, a border area of Cambodia and Vietnam, whichis approximately 125 miles (200 kilometers) south of Cambodia’s capital cityPhnom Penh and connects the major cities of southern Vietnam and Phnom Penh.The total consideration for the Land was $1.76 million, of which $850,000 waspaid to the Seller in May 2010 as a deposit. The registration of the titlefor the Land under the name of Dreamworld Holding by the land office and therelevant authorities in Cambodia was completed on June 28, 2010 and,accordingly, we paid the balance of $910,000 to the Seller inmid-July 2010.

 

OnMay 21, 2010, a license to build and open a casino hotel in the Takeo provinceof Cambodia (“Takeo Project”) was granted by the Government of the Kingdom ofCambodia to Dreamworld Leisure (Cambodia) Limited (“Dreamworld Leisure”),another new wholly-owned subsidiary of the Company. Pursuant to the License,Dreamworld Leisure is allowed to construct and open a casino hotel for tablegames and slot machines with the proposed name of Dreamworld Casino and Resort(“Dreamworld Casino”). It is anticipated that Dreamworld Casino will beconstructed on the Land and upon its completion, a formal casino license willbe granted to Dreamworld Leisure, which will be the operating company ofDreamworld Casino.

 

To-date, we have assembled a projectmanagement team for our casino development operations and have been working onconceptual project designs with architects for the Takeo Project.  We intend to develop Dreamworld Casino inphases, as detailed in the table below, subject to demand and the availabilityof capital.  Capital expenditures forPhase 1 include $1.76 million for the purchase of the land.

 
| ** ** | ** ** | **Casino**                            | ** ** | ** **         | ** ** | **Incremental**      | ** ** |
|------------|------------|---------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** ** | ** ** | **Approx. Area  (sq. ft.)** | ** ** | **Slot  Machines** | ** ** | **Table Games** | ** ** | **Hotel Rooms** | ** ** | **Investment********USD Millions** | ** ** |
| Phase 1    |       | 54,000                                |       | 150                |       | 20                   |       | 50 |   | $ | 8-10 |   |
| Phase 2    |       | —                                |       | 150                |       | 20                   |       | 50 |   | 2 |   |
| Phase 3    |       | 32,000                                |       | 150                |       | 20                   |       | 100 |   | 5 |   |
| Total      |       | 86,000                                |       | 450                |       | 60                   |       | 200 |   | $ | 15-17 |   |

 

Asa border casino, Dreamworld Casino will cater to players residing in the nearbymajor southern Vietnamese cities as well as the growing number of expatriatesand tourists in the greater Phnom Penh area. We intend to leverage our marketing expertise and the Dreamworld brandfrom our existing operations to eventually make Dreamworld Casino a destinationlocation for players in the area.

 

Wecontinue to actively pursue casino development projects with a focus on theIndo-China region.  We are currently infinal stages of discussions on another significant new project.  While there is no guarantee we willsuccessfully conclude these negotiations, given our constrained capitalresources, we are re-evaluating the project timeline for the Takeo Project inorder to divert certain capital to this potential new project, which we believeoffers greater short- and medium-term return potential.   Should an adjustment to the Takeo Project developmenttimeline be required, it would not place our gaming license or any rights toown and 

 

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operatea casino in the Takeo province at risk. We intend to provide more information on the Company’s casinodevelopment plans at such time as the plans for the new project become moredefinite.

 

 

**Results ofOperations for the Three-Month and Nine-Month Periods Ended September 30,2010 and 2009**

 

The following is a scheduleshowing summarized operating results on a consolidated basis and separately byeach of our three business segments for the three-month and nine-month periodsended September 30, 2010 and 2009, namely gaming machine participation,table game products and non-gaming products.

 

OnMarch 16, 2009, we entered into a Purchase and Settlement Agreement withShuffle Master, Inc. (the “Purchase and Settlement Agreement”) pursuant towhich we sold Shuffle Master our portfolio of automated card verificationmachines and electronic card shuffling systems, all related intellectualproperty, including but not limited to, the trademarks of Random PlusTM,ShuffleProTM and Deck CheckerTM, and certain inventories of such products. All historical revenues and expenses from these assets sold to Shuffle Masterwere reclassified as discontinued operations.

 
| ** **                                                                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amounts in thousands, except per share data)** | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total:                                                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                                                        |       | $                                                        | 6,635      |                                                    | $          | 3,612 |   | $ | 16,067 |   | $ | 11,087 |   |
| Gross  profit/(loss)                                                            |       | $                                                        | 2,330      |                                                    | $          | (888 | ) | $ | 4,300 |   | $ | (2,747 | ) |
| Gross  margin percentage                                                        |       | 35                                                       | %          | (25                                                     | )%         | 27 | % | (25 | )% |
| Adjusted  EBITDA/(LBITDA)(1)                                                    |       | $                                                        | 3,032      |                                                    | $          | 338 |   | $ | 5,735 |   | $ | (776 | ) |
| Operating  income/(loss) from continuing operations                             |       | $                                                        | 516        |                                                    | $          | (3,515 | ) | $ | (2,153 | ) | $ | (11,529 | ) |
| Net  income/(loss) from continuing operations                                   |       | $                                                        | 725        |                                                    | $          | (3,675 | ) | $ | (2,472 | ) | $ | (11,591 | ) |
|                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings/(loss)  per share                                                      |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Basic                                                                           |       | $                                                        | 0.01       |                                                    | $          | (0.03 | ) | $ | (0.02 | ) | $ | (0.09 | ) |
| Diluted                                                                         |       | $                                                        | 0.01       |                                                    | $          | (0.03 | ) | $ | (0.02 | ) | $ | (0.09 | ) |
|                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Weight  average common shares outstanding                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                                           |       | 115,892                                                  |       | 114,957                                                 |       | 115,580 |   | 114,957 |   |
| Diluted                                                                         |       | 117,801                                                  |       | 114,957                                                 |       | 115,580 |   | 114,957 |   |
|                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Gaming  machine participation:                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                                                        |       | $                                                        | 4,108      |                                                    | $          | 1,839 |   | $ | 10,482 |   | $ | 4,527 |   |
| Gross  profit/(loss)                                                            |       | $                                                        | 1,869      |                                                    | $          | (1,182 | ) | $ | 3,764 |   | $ | (4,204 | ) |
| Gross  margin percentage                                                        |       | 45                                                       | %          | (64                                                     | )%         | 36 | % | (93 | )% |
|                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Table  game products:                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                                                        |       | $                                                        | 645        |                                                    | $          | 572 |   | $ | 998 |   | $ | 3,841 |   |
| Gross  profit                                                                   |       | $                                                        | 264        |                                                    | $          | 297 |   | $ | 355 |   | $ | 1,693 |   |
| Gross  margin percentage                                                        |       | 41                                                       | %          | 52                                                      | %          | 36 | % | 44 | % |
|                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Non-gaming  products:                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                                                        |       | $                                                        | 1,882      |                                                    | $          | 1,201 |   | $ | 4,587 |   | $ | 2,719 |   |
| Gross  profit/(loss)                                                            |       | $                                                        | 197        |                                                    | $          | (3 | ) | $ | 181 |   | $ | (236 | ) |
| Gross  margin percentage                                                        |       | 10                                                       | %          | (0                                                      | )%         | 4 | % | (9 | )% |

----

(1)          “Adjusted EBITDA/(LBITDA)” is earnings/(losses)before interest, taxes, depreciation, amortization, stock-based compensation,and other 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 theoperating performance of its operations with those of its competitors. TheCompany also presents Adjusted EBITDA/(LBITDA) because it is used by someinvestors as a way to measure a company’s ability to incur and service debt,make capital expenditures and meet working capital requirements. Gamingcompanies have historically reported EBITDA/(LBITDA) as a supplement tofinancial measures in accordance with generally accepted accounting principlesin the United States (“GAAP”). Adjusted EBITDA/(LBITDA) should not beconsidered as an alternative to operating income as an indicator of the Company’sperformance, as an alternative to cash flows from operating activities as ameasure of liquidity, or as an alternative to any other measure determined inaccordance with GAAP. Unlike net income/(loss), Adjusted EBITDA/(LBITDA) doesnot 

 

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                        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). Entertainment Gaming Asia’scalculation of Adjusted EBITDA/(LBITDA) may be different from the calculationmethods used by other companies and, therefore, comparability may be limited.

 

Areconciliation of EBITDA/(LBITDA), as adjusted, to the net loss is providedbelow:

 
| ** **                                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(amounts in thousands, except per share data)** | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income/(loss) — GAAP                                                  |       | $                                                    | 725        |                                                | $          | (3,670 | ) | $ | (2,472 | ) | $ | (10,044 | ) |
| Income  from discontinued operations                                            |       | —                                               |       | (5                                                  | )          | — |   | (1,547 | ) |
| Interest  expense and finance fees                                              |       | 116                                                  |       | 146                                                 |       | 322 |   | 394 |   |
| Interest  income                                                                |       | (28                                                  | )          | (10                                                 | )          | (66 | ) | (75 | ) |
| Income  tax (benefit)/expense                                                   |       | (320                                                 | )          | 69                                                  |       | 135 |   | 368 |   |
| Depreciation  and amortization                                                  |       | 2,359                                                |       | 2,839                                               |       | 6,905 |   | 8,334 |   |
| Stock  option expense                                                           |       | 126                                                  |       | 329                                                 |       | 667 |   | 775 |   |
| Impairment/Write-down  of gaming assets                                         |       | 54                                                   |       | 542                                                 |       | 244 |   | 921 |   |
| Flood  damages                                                                  |       | —                                               |       | 98                                                  |       | — |   | 98 |   |
| EBITDA/(LBITDA),  as adjusted                                                   |       | $                                                    | 3,032      |                                                | $          | 338 |   | $ | 5,735 |   | $ | (776 | ) |

 

Total revenue increasedapproximately $3.0 million to approximately $6.6 million for the three-monthperiod ended September 30, 2010 compared to approximately $3.6 million inthe same period in the prior year due to increases in all businessdivisions.  Revenue from gaming machineparticipation increased as a result of higher average net win per machine andnumber of machine seats in operation. Revenue from table game products increased as a result of higher chipvolumes. Revenue from non-gaming products increased as a result of increasedorders from major customers.

 

Gross profit increasedapproximately $3.2 million to approximately $2.3 million for the three-monthperiod ended September 30, 2010 compared to a gross loss of approximately$888,000 in the same period in the prior year as a result of higher revenue andgross margin from the gaming machine participation and non-gaming operationspartially offset by lower gross margin from the table games products division.Gross profit from gaming machine participation operations increased due tohigher revenue for this business segment and lower depreciation expense on thegaming machines, which is recorded in cost of operations, as a result ofimpairment charges recorded at the end of 2009. Gross profit from non-gaming products increased primarily due to higherrevenue and improved production efficiencies resulting from higher salesvolumes during the three-month period ended September 30, 2010 compared tothe prior year period.  Gross profit fromtable game products decreased primarily due to higher production and salescosts during the three-month period ended September 30, 2010 compared tothe prior year period.

 

Operating income fromcontinuing operations increased approximately $4.0 million to approximately$516,000 for the three-month period ended September 30, 2010 compared toan operating loss of approximately $3.5 million in the same period in the prioryear primarily as a result of higher gross profit and reduced operatingexpenses.  Net income from continuingoperations increased approximately $4.4 million to approximately $725,000compared to a net loss of approximately $3.7 million for the same period in theprior year primarily due to the improvement in operating income and a one-timetax benefit in the amount of $320,000 related to the implementation of a newtax structure for our Cambodia operations during the three-month period ended September 30, 2010 compared toa tax expense in the prior year period.

 

Total revenue increasedapproximately $5.0 million to approximately $16.1 million for the nine-monthperiod ended September 30, 2010 compared to approximately $11.1 million inthe same period in the prior year due to increases in gaming machineparticipation revenue and non-gaming product sales, partially offset by adecrease in table game products sales. Revenue from gaming machine participation revenue increasedsignificantly as a result of higher average net win per machine and number ofgaming machine seats in operation. Revenue from non-gaming products increased as a result of increasedorders from major customers due to a recovery in the Australian automotiveindustry.  Revenue from table gameproducts decreased as a result of lower sales volumes compared to the prioryear period, which included a large RFID gaming chip order for a new casino inMacau during the three-month period ended June 30, 2009.

 

Gross profit increasedapproximately $7.0 million to approximately $4.3 million for the nine-monthperiod ended September 30, 2010 compared to a gross loss of approximately$2.7 million in the same period in the prior year primarily as a result of thehigher gross 

 

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margin for our gamingmachine participation and non-gaming products operations, partially offset bylower gross margin for our table game products operations. Gross profit from gamingmachine participation operations increased due to higher revenue for thisbusiness segment and lower depreciation expense on the gaming machines as aresult of impairment charges recorded at the end of 2009.   Gross profit from non-gaming products increasedprimarily due to higher revenues and gross margin due to productionefficiencies resulting from higher sales volumes during the nine-month periodended September 30, 2010 compared to the prior year period.  Gross profit from table game products decreasedprimarily due to lower sales volumes and reduced production efficienciesrelating to the sales volumes during the nine-month period endedSeptember 30, 2010 compared to the prior year period, which included alarge RFID gaming chip order for a new casino in Macau during the three-monthperiod ended June 30, 2009.

 

Operating loss fromcontinuing operations decreased approximately $9.3 million to approximately$2.2 million for the nine-month period ended September 30, 2010 comparedto an operating loss of approximately $11.5 million in the same period in theprior year primarily as a result of higher gross profit and reduced operatingexpenses.  Net loss from continuingoperations decreased approximately $9.1 million to approximately $2.5 millionfor the nine-month period ended September 30, 2010 compared to a net lossof approximately $11.6 million in the same period in the prior year primarilydue to the improvement in operating income and lower tax expense compared tothe prior year period partially offset by a legal settlement gain ofapproximately $656,000 in the prior year period.

 

**GamingMachine Participation**

 

Our electronic gamingmachine participation operations primarily focus on placing gaming machines ona revenue sharing basis in Asia.

 
| ** **                                                                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amounts in thousands, except per unit data)** | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009 (1)** | ** ** |
| Net revenue to the Company                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Cambodia                                                                       |       | $                                                        | 3,230      |                                                    | $          | 1,069 |   | $ | 7,853 |   | $ | 2,393 |   |
| Philippines                                                                    |       | 878                                                      |       | 770                                                     |       | 2,629 |   | 2,134 |   |
| Consolidated total                                                             |       | $                                                        | 4,108      |                                                    | $          | 1,839 |   | $ | 10,482 |   | $ | 4,527 |   |
| Average net win per unit per day(1)                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Cambodia                                                                       |       | $                                                        | 219        |                                                    | $          | 187 |   | $ | 204 |   | $ | 161 |   |
| Philippines                                                                    |       | $                                                        | 56         |                                                    | $          | 53 |   | $ | 57 |   | $ | 56 |   |
| Consolidated total                                                             |       | $                                                        | 125        |                                                    | $          | 86 |   | $ | 116 |   | $ | 82 |   |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |   |   |
|                                                                           |       | **September 30,**                                   |       |                                                    |       |   |   |   |   |
|                                                                           |       | **2010**                                                 | ** ** | **2009**                                                |       |   |   |   |   |   |   |
| Machine seats in operation                                                     |       |                                                     |       |                                                    |       |   |   |   |   |   |   |
| Cambodia                                                                       |       | 679                                                      |       | 385                                                     |       |   |   |   |   |   |   |
| Philippines                                                                    |       | 846                                                      |       | 742                                                     |       |   |   |   |   |   |   |
| Consolidated total                                                             |       | 1,525                                                    |       | 1,127                                                   |       |   |   |   |   |   |   |

----

(1)          Average net win figures exclude gaming machine seatsin operation during venues’ soft launch opening periods, if applicable, andgaming machine seats in venues where revenues are recognized on a cash basis.  During the three and nine-month periods endedSeptember 30, 2010, one venue in Cambodia operated during a soft launch fromSeptember 19, 2010 to September 30, 2010 with a total of 10 gaming machineseats.  For the three and nine-monthperiods ended September 30, 2009, one venue in the Philippines operated duringa soft launch from July 3, 2009 to September 30, 2009 with 150 gaming machineseats as of September 30, 2009 and one venue in the Philippines recognizedrevenue on a cash basis from January 1, 2009 to September 30, 2009 with 164gaming machine seats as of September 30, 2009.

 

Revenue from gaming machineparticipation operations increased approximately $2.3 million to approximately$4.1 million for the three-month period ended September 30, 2010 comparedto revenue of approximately $1.8 million in the same period in the prior yearprimarily as a result of higher average net win per machine and number ofmachine seats in operation compared to the three-month period endedSeptember 30, 2009.

 

Gross profit from gamingmachine participation operations increased approximately $3.1 million toapproximately $1.9 million for the three-month period ended September 30,2010 compared to a gross loss of approximately $1.2 million in the same periodin the prior year primarily due to the increase in gaming machine participationrevenue and a decrease in depreciation expense for our gaming machine participationoperations as a result of impairment charges recorded at the end of 2009. Costof goods sold for the three-month period ended September 30, 2010 includedapproximately $2.0 million of depreciation of electronic gaming machines,approximately $171,000 of other expenses and approximately $54,000 inwrite-offs of gaming assets.

 

Revenue from gaming machineparticipation operations increased approximately $6.0 million to approximately$10.5 million for the nine-month period ended September 30, 2010 comparedto revenue of approximately $4.5 million in same period in the prior year. 

 

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The increase in revenue wasprimarily a result of higher average net win per machine and number of machineseats in operation compared to the nine-month period ended September 30,2009.

 

Gross profit from gamingmachine participation operations increased approximately $8.0 million toapproximately $3.8 million for the nine-month period ended September 30,2010 compared to a gross loss of approximately $4.2 million in the same periodin the prior year primarily due to an increase in gaming machine participationrevenue and a decrease in gaming machine depreciation as a result of impairmentcharges recorded at the end of 2009. Cost of goods sold for the nine-month period ended September 30,2010 included approximately $5.9 million of depreciation expense on electronicgaming machines, approximately $603,000 of other expenses and approximately$244,000 in write-offs of gaming assets.

 

Asof September 30, 2010, we had a total of 1,901 gaming machine seats ofwhich 376 were held in inventory and 1,525 were in operation.  Of the1,525 gaming machine seats in operation, 679 were in operation in two venues inCambodia and 846 were in operation in six venues in the Philippines.

 
| ** **                               | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(amounts in thousands)**     | ** ** | **Seats**                        | ** ** | **Carrying Value**         | ** ** | **Seats** | ** ** | **Carrying Value** | ** ** |
| Machines and systems used in operations  |       | 1,525                            |       | $                               | 17,795     |   | 1,299 |   | $ | 19,248 |   |
| Machines and systems held for future use |       | 376                              |       | 5,523                           |       | 403 |   | 7,259 |   |
| Total gaming machines and systems        |       | 1,901                            |       | $                               | 23,318     |   | 1,702 |   | $ | 26,507 |   |

 

InCambodia, regulatory changes at the end of 2008 and early 2009 impacted thecompetitive landscape of gaming operations in this market.  Due todirectives issued by the Cambodian government in December 2008 andFebruary 2009, all slot clubs in the Phnom Penh area, including our thencontracted venues, were closed with the exception of the slot operations withinNagaWorld.  In December 2008, we established a relationship to placeelectronic gaming machines on a participation basis at NagaWorld hotel casinoresort in the capital city of Phnom Penh.  NagaWorld operates under anexclusive casino license in Phnom Penh and our operations within NagaWorld arecurrently our principal operations in Cambodia.

 

Duringthe fiscal year ended December 2009, we placed 440 gaming machine seats inprime locations of NagaWorld’s casino resort pursuant to three contractsbetween us and NagaWorld.  On December 30, 2009, we entered intoanother contract with NagaWorld entitled Machines Operation andParticipation Consolidation Agreement (the “Consolidation Agreement”).  TheConsolidation Agreement: (a) provided for our exercise of the optiongranted by NagaWorld pursuant to an option deed dated July 25, 2009 toplace an additional 200 electronic gaming machines on a participation basis atNagaWorld’s casino resort; and (b) with effect from the date of theConsolidation Agreement, superseded and replaced the three previous agreementsexecuted with NagaWorld dated December 13, 2008 (“December 08Agreement”), June 15, 2009 (“June 09 Agreement”) and July 25,2009 (“July 09 Agreement”) (collectively, the “Previous Agreements”) whichcovered the operation of 440 electronic gaming machines at the NagaWorldCasino.

 

Underthe Previous Agreements: (i) we and NagaWorld shared the win per unit perday from the existing 440 machines and certain operating costs related tomarketing and floor staff at a weighted average of 22.4% / 77.6% split,respectively; (ii) win per unit per day from only 200 out of 440 existingmachines was settled and distributed daily to us; and (iii) both the term ofthe December 08 Agreement and the June 09 Agreement were to expire inthe first quarter of 2014 while the term of the July 09 Agreement was toexpire at the end of the third quarter of 2014.

 

Pursuantto the terms of the Consolidation Agreement, we and NagaWorld have jointcontrol over the operation of a total of 640 electronic gaming machines(comprising the 200 additional machines and the existing 440 machines placedand in operation pursuant to the Previous Agreements), including floor staffand respective audit rights. We and NagaWorld share the win per unit per dayfrom all the 640 machines and certain operating costs related to marketing andfloor staff at a 25% / 75% split, respectively (subject to our right to receive100% of the win per unit per day from certain machines during a certain periodof time as described below). Win per unit per day from all the 640 machines aresettled and distributed daily to us. The Consolidation Agreement is for a termof six years commencing March 1, 2010.

 

Inconsideration for entering into the Consolidation Agreement with NagaWorld, wepaid to NagaWorld a $1.38 million one-time non-refundable contract amendmentfee and a commitment fee of $4.1 million. Both the one-time contract amendmentfee and commitment fee were to be paid in three installments. The first 50%installment was due and paid by us on December 30, 2009, the second 25%installment was due and paid by us on January 15, 2010, and the third andfinal 25% installment was due and paid by us on January 28, 2010.

 

OnMay 25, 2010, we entered into a supplemental agreement (“SupplementalAgreement”) with NagaWorld to place an additional 30 electronic gaming machineson a participation basis at NagaWorld casino resort.  Pursuant to the terms of the SupplementalAgreement, our area of operation on the lobby gaming floor of NagaWorld wasexpanded to include two new areas and the maximum 

 

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numberof machines that we are permitted to operate and manage in this operation areawas increased by 30 seats from 640 seats to 670 seats. Save for certainmodifications in relation to the aforesaid expansion of the operation area andincrease in the machines number, all the existing operation terms under theConsolidation Agreement continue to apply to the 670 machines including thenewly added 30 seats.  In considerationfor entering into the Supplemental Agreement, we paid NagaWorld a commitmentfee of $1.0 million on June 15, 2010.

 

Whilewe and NagaWorld share the win per unit per day from the 670 machines at a25%/75% split, respectively, we were entitled to 100% of the win per unit perday from the recently added 30 machines and the 200 machines placed under theConsolidation Agreement until we had received a total accumulated win per unitper day of $6.8 million from these 230 machines (representing the aggregate ofthe $4.1 million commitment fee paid for the 200 machines under theConsolidation Agreement, the $1.0 million commitment fee under the SupplementalAgreement and our 25% share of win per unit per day from these 230machines).  We received the totalaccumulated win per unit per day of $6.8 million from these 230 machines in August 2010.

 

Belowis a table showing various agreements with NagaWorld and the respectivecommitment fees paid. As of September 30, 2010, all commitment fees werefully recouped.

** **

| **Agreement**           | ** ** | **Number of  Machine Seats** | ** ** | **Prepaid Commitment  Fees (in millions)** | ** ** |
|-------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------|------------|
| December 08        |       | 200                                    |       | $                                                         | —     |   |
| May 09             |       | 40                                     |       | 1.00                                                      |       |
| August 09          |       | 200                                    |       | 5.84                                                      |       |
| Previous Agreements     |       | 440                                    |       | $                                                         | 6.84       |   |
| Consolidation Agreement |       | 200                                    |       | 4.10                                                      |       |
| Supplemental Agreement  |       | 30                                     |       | 1.00                                                      |       |
|                    |       | 670                                    |       | $                                                         | 11.94      |   |

 

InApril 2010, we entered into a Machine Participation Agreement with GrandGolden Co. Ltd. (“Grand Golden”), to place approximately 60 electronic gamingmachine seats on a participation basis at its new Grand Golden casino in theKampong Cham province of Cambodia near the Vietnam border.  Under theterms of this agreement, we will have joint control over the operation of allour electronic gaming machine seats, including full audit rights. We and GrandGolden will share the revenue and marketing costs, at a 30% / 70% split,respectively, and we will receive on a monthly basis our relevant portion ofthe daily win in cash. The contract duration is five years, commencing once the60 gaming machine seats become operational.

 

Asof November 1, 2010, we had 679 gaming machine seats in operation in Cambodia,which consisted of 669 seats at NagaWorld and 10 seats in operation at GrandGolden Casino.  The 10 seats at GrandGolden were installed in September 2010 as part of the soft launch of thisnew casino and we expect to install the remaining contracted 50 gaming machineseats in November 2010 following the completion of the renovations to thedesignated floor space by the venue owner.  As of November 1, 2010,in the Philippines, we had 886 gaming machine seats in operation and wecontinue to reallocate our gaming assets within this market to focus onhigher-performing venues.

 

Inaddition, we will selectively pursue potential new projects for our gamingparticipation operations in the Indo-China region.  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 owners withdrawing all or a portion of our gaming machines fromsuch venues for future redeployment in new or existing venues with betterperformance prospects.

 

**Table GameProducts**

 

Revenue from table gameproducts, which consists of RFID and traditional non-RFID gaming chips andplaques, increased approximately $73,000 to approximately $645,000 for thethree-month period ended September 30, 2010 compared to revenue ofapproximately $572,000 in the same period in the prior year.  The increase was the result of higher reordersfrom existing customers compared to the prior year period.

 

Gross profit from table gameproducts decreased approximately $33,000 to approximately $264,000 for thethree-month period ended September 30, 2010 compared to a gross profit ofapproximately $297,000 in the same period in the prior year.  The decrease was primarily a result of higherproduction costs due to shorter lead times compared to the three-month periodended September 30, 2009.

 

Revenue from table gameproducts decreased approximately $2.8 million to approximately $1.0 million forthe nine-month month period ended September 30, 2010 compared toapproximately $3.8 million in the same period in the prior year.  The decrease was the 

 

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result of lower salesvolumes compared to the prior year period, which included a large RFID gamingchip order to a new casino in Macau during the nine-month period ended September 30,2009.

 

Gross profit from table gameproducts decreased approximately $1.3 million to approximately $355,000 in thenine-month period ended September 30, 2010 compared to a gross profit ofapproximately $1.7 million in the same period in the prior year due to lowerrevenue and sales volume for our RFID gaming chips resulting in reducedproduction efficiencies.

 

**Non-GamingProducts**

 

Revenue from non-gamingproducts, which consists of automotive tooling and parts, increased approximately$681,000 to approximately $1.9 million for the three-month period endedSeptember 30, 2010 compared to approximately $1.2 million in the sameperiod in the prior year due to an increase in sales to our largest customer,which increased production for the year due to an overall improvement in thelocal economy and the automotive industry.

 

Gross profit increasedapproximately $200,000 to approximately $197,000 for the three-month periodended September 30, 2010 compared to a gross loss of approximately $3,000in the same period in the prior year due to the increased sales to our largestcustomer and resulting improvements in production efficiencies.

 

Revenue from non-gamingproducts increased approximately $1.9 million to approximately $4.6 million forthe nine-month period ended September 30, 2010 compared to approximately$2.7 million in the same period in the prior year due to an increase in salesto our largest customer as they increased their production for the year.

 

Gross profit increasedapproximately $417,000 to approximately $181,000 for the nine-month periodended September 30, 2010 compared to a gross loss of approximately$236,000 in the same period in the prior year due to the increase in salesorders from our major customer and resulting improvements in productionefficiencies.

 

**OperatingExpenses**

 

The following is a scheduleof expenses on a consolidated basis:

 
| ** **                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amount in thousands)**       | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cash  selling, general and administrative |       | $                                                        | 1,340      |                                                    | $          | 1,462 |   | $ | 4,277 |   | $ | 5,889 |   |
| Stock-based  compensation expense         |       | 126                                                      |       | 329                                                     |       | 667 |   | 775 |   |
| Impairment  of assets                     |       | —                                                   |       | 425                                                     |       | — |   | 425 |   |
| Flood  damage losses                      |       | —                                                   |       | 98                                                      |       | — |   | 98 |   |
| Product  development expenses             |       | 64                                                       |       | 72                                                      |       | 520 |   | 201 |   |
| Depreciation  and amortization            |       | 221                                                      |       | 237                                                     |       | 679 |   | 802 |   |
| Restructuring  charges                    |       | 63                                                       |       | 4                                                       |       | 310 |   | 592 |   |
|                                      |       | $                                                        | 1,814      |                                                    | $          | 2,627 |   | $ | 6,453 |   | $ | 8,782 |   |

 

**Cash Selling,General and Administrative Expenses**

 

Cash selling, general andadministrative expenses decreased approximately $122,000 to approximately $1.3million for the three-month period ended September 30, 2010 compared toapproximately $1.5 million in the same period in the prior year period due toour cost reduction initiatives.  Salariesand wages expense declined approximately $129,000 as a result of headcountreductions.  Board of directors’ fees,rent and other expenses decreased approximately $204,000 due to concertedefforts to reduce expenses to the bare minimum. However, external consultancyand accounting fees, insurance and advertising increased approximately $211,000primarily due to higher insurance fees associated with current litigationmatters and increased marketing campaigns with regard to the table gamesbusiness.

 

Cash selling, general andadministrative expenses decreased approximately $1.6 million to approximately$4.3 million for the nine-month period ended September 30, 2010 comparedto approximately $5.9 million in the same period in the prior year due to ourcost reduction initiatives.  Salaries andwages expense declined approximately $926,000 as a result of headcountreductions.  Rent and office expensesdecreased approximately $210,000 mainly due to closure of the U.S. and Chinaoffices. Travel, marketing, board of directors’ fees and other expensesdecreased approximately $805,000 due to concerted efforts to reduce expenses tothe bare minimum. However, external consultancy and accounting fees and otherexpenses increased by approximately $341,000 primarily due to the incorporationof new entities in Cambodia and payment of our insurance deductible associatedwith current litigation matters.

 

Basedon our cost reduction plans and our current scale of operations, we anticipaterecurring cash selling, general, and administrative expenses can be maintainedin the approximate range of $1.5 million to $1.8 million per quarter.

 

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**Stock-BasedCompensation Expense**

 

Stock-based compensationexpense decreased approximately $203,000 to approximately $126,000 for thethree-month period ended September 30, 2010 compared to approximately$329,000 in the same period in the prior year primarily due to the departure ofcertain employees in 2009 and 2010 and the complete vesting of certain stockoptions granted in 2007 and 2008, net of an increase due to the issuance of newstock compensation granted during the same period.

 

Stock-based compensationexpense decreased approximately $108,000 to approximately $667,000 for thenine-month period ended September 30, 2010 compared to approximately$775,000 in the same period in the prior year for the same reason as describedabove.

 

**Impairmentof Assets**

 

Followingthe closure of our China manufacturing facility in mid-2009, we decided to exitthe chip washer business after evaluating the market opportunity for thisproduct.  Due to lack of future demand,we determined the carrying value of related patents may not be recoverable.During the three-month period ended September 30, 2009, we recorded animpairment loss of approximately $425,000, which related to a write-down of anintangible asset associated with the chip washer patents.

 

**FloodDamage Losses**

 

Flood damage losses duringthe three-month period ended September 30, 2009 related to damages to ourmachines in certain of our venues in the Philippines due to flooding fromsevere typhoons in the Metro-Manila area.  While our property insurancepolicy covered the related damages on our gaming machines, we recorded thedeductible amount of approximately $98,000 during the period  (See Note 1).

 

**ProductDevelopment Expenses**

 

Productdevelopment expenses decreased approximately $8,000 to approximately $64,000for the three-month period ended September 30, 2010 compared toapproximately $72,000 in the same period in the prior year primarily as aresult of fewer development projects during the quarter.

 

Product development expensesincreased approximately $319,000 to approximately $520,000 for the nine-monthperiod ended September 30, 2010 compared to approximately $201,000 for thesame period in the prior year as a result of additional costs incurredassociated with the development of new plaques for the table game business.

 

Asa result of the completed sale to Shuffle Master of our portfolio of automatedcard verification machines and electronic card shuffling systems inApril 2009, all related intellectual property and certain inventory ofsuch products pursuant to the Purchase and Settlement Agreement were writtenoff.

 

Itis anticipated that future product development will focus on potential gamingand/or non-gaming product enhancements.

 

**Depreciationand Amortization Expenses**

 

Depreciation andamortization expenses decreased approximately $16,000 to approximately $221,000for the three-month period ended September 30, 2010 compared toapproximately $237,000 in the same period in the prior year.  The decrease was a result of the closure ofour U.S. office and our China table games product manufacturing facility.

 

Depreciation andamortization expenses decreased approximately $123,000 to approximately$679,000 for the nine-month period ended September 30, 2010 compared toapproximately $802,000 in the same period in the prior year for the samereasons described above.

 

**RestructuringCharges**

 

During the three-monthperiod ended September 30, 2010, we incurred restructuring charges ofapproximately $63,000 for severance wages and benefits related to thetermination of employees. During the three-month period endedSeptember 30, 2009, we incurred restructuring charges of approximately$4,000 for vacated facility operating leases.

 

During the nine-month periodended September 30, 2010, we incurred restructuring charges ofapproximately $310,000 for severance wages and benefits related to the terminationof employees. During the nine-month period ended September 30, 2009, weincurred restructuring charges of approximately $592,000 for severance wagesand benefits related to the termination of employees and vacated facilityoperating leases.  The amount representsthe contractual and other agreements with employees which only includes chargesfor termination benefits measured at the estimated fair value at thetermination date.

 

 

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**OtherIncome/(Expenses)**

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amount in thousands)** | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest  expense and finance fees  |       | $                                                        | (116       | )                                                       | $          | (146 | ) | $ | (322 | ) | $ | (394 | ) |
| Interest  income                    |       | 28                                                       |       | 10                                                      |       | 66 |   | 75 |   |
| Foreign  currency gains/(losses)    |       | 32                                                       |       | (16                                                     | )          | (28 | ) | (79 | ) |
| Legal  settlement gain              |       | —                                                   |       | —                                                  |       | — |   | 656 |   |
| Loss  on disposition of assets      |       | (121                                                     | )          | —                                                  |       | (117 | ) | (94 | ) |
| Other                               |       | 66                                                       |       | 61                                                      |       | 217 |   | 142 |   |
| Total                               |       | $                                                        | (111       | )                                                       | $          | (91 | ) | $ | (184 | ) | $ | 306 |   |

 

**InterestExpense and Finance Fees**

 

Interest expense and financefees decreased approximately $30,000 to approximately $116,000 for thethree-month period ended September 30, 2010 compared to approximately$146,000 in the same period in the prior year primarily due to the eliminationof interest on withholding tax and capitalizing certain interest expense to thecasino development project in the third quarter of 2010.

 

Interest expense and financefees decreased approximately $72,000 to approximately $322,000 for thenine-month period ended September 30, 2010 compared to approximately$394,000 in the same period in the prior year primarily due to the same reasonsdescribed above and a favorable settlement on accrued interest expense relatedto the withholding tax.

 

**InterestIncome**

 

Interest income increasedapproximately $18,000 to approximately $28,000 for the three-month period endedSeptember 30, 2010 compared to approximately $10,000 in the same period inthe prior year as a result of interest imposed on customers’ overdue amounts.

 

Interest income decreasedapproximately $9,000 to approximately $66,000 for the nine-month period endedSeptember 30, 2010 compared to approximately $75,000 in the same period inthe prior year as a result of a lower weighted average balance of cash and cashequivalents held and the general decrease in interest rates.

 

**ForeignCurrency Transactions**

 

Foreign currency gainsincreased approximately $48,000 to approximately $32,000 for the three-monthperiod ended September 30, 2010 compared to losses of approximately$16,000 in the same period in the prior year. The gain for the three-monthperiod ended September 30, 2010 resulted primarily from the depreciatingvalue of the U.S. dollar denominated payables from our Philippines operations,whose functional currency is the Philippine Peso.

 

Foreign currency lossesdecreased approximately $51,000 to approximately $28,000 for the nine-monthperiod ended September 30, 2010 compared to losses of approximately$79,000 in the same period in the prior year. The decrease in foreign currencylosses for the nine-month periods ended September 30 was for the samereason described above.

 

**LegalSettlement Gain**

 

We recorded a settlementgain of approximately $656,000 from the Purton litigation during the nine-monthperiod ended September 30, 2009.  OnJune 17, 2009, we entered into a deed of release with William Purton andother plaintiffs over which he had control for the settlement of all legalclaims, disputes and proceedings between the parties.

 

**Loss on Disposition of Assets**

 

Loss on disposition of assets was approximately $121,000 for thethree-month period ended September 30, 2010 compared to a loss of $NIL inthe same period in the prior year. The loss in the three-month period ended September 30,2010 was primarily due to write downs of leasehold improvement with regard tothe office relocations.

 

Loss on disposition of assets increased approximately $23,000 to$117,000 for the nine-month period ended September 30, 2010 compared to aloss of $94,000 in the same period in the prior year primarily due to the samereason described above.

 

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**Other**

 

Other income increasedapproximately $5,000 to approximately $66,000 for the three-month period endedSeptember 30, 2010 compared to approximately $61,000 in the same period inthe prior year due to a slight increase in grants received from the Australiangovernment.

 

Other income increasedapproximately $75,000 to approximately $217,000 for the nine-month period endedSeptember 30, 2010 compared to approximately $142,000 in the same periodin the prior year primarily due to an increase in grants received from theAustralian government.

 

**Income TaxProvisions**

 

Effective tax rates for thethree-month period and nine-month period ended September 30, 2010 and 2009were approximately (79.0)%, (1.9)%, (5.8)% and (3.28)% respectively.  We recorded a one-time tax benefit ofapproximately $320,000 in the third quarter of 2010 related to the granting ofa tax incentive arrangement for the Cambodia operations in September 2010.  The tax arrangement is effective for theperiod of January 1, 2010 through December 31, 2010.  Under this tax arrangement, we are requiredto pay only a fixed obligation tax to the Cambodian government instead ofpaying income tax based on the profits of our Cambodia operations. As theapproval was obtained in September 2010, income tax of the Company for thefirst and second quarter of 2010 were computed with reference to the actualprofits of the Cambodia operations and the income tax exempted by the taxarrangement was reversed entirely in the third quarter of 2010. Since itreported consolidated net income from operations while recording a one-time taxbenefit, the result was a negative effective tax rate for the three-monthperiod ended September 30, 2010.  Wewill endeavor to obtain a similar tax arrangement for our Cambodia operationswith the Cambodian government in 2011 subject to an annual review andnegotiations.

 
| ** **                          | ** ** | **Three Months Ended**** ****September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(amount in thousands)** | ** ** | **2010**                                                         | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income  tax (recovery)/provisions   |       | $                                                                | (320       | )                                                       | $          | 69 |   | $ | 135 |   | $ | 368 |   |
|                                     |            |                                                                  |            |                                                         |            |  |  |  |  |  |  |  |  |

 

**Discontinued Operations**

 

Net income from discontinuedoperations was approximately $5,000 for the three-month period ended September 30,2009, which related to residual income from the closure of the discontinuedoperations. The sale of our portfolio of automated card verification machinesand electronic card shuffling systems, all related intellectual property, andcertain inventories of such products to Shuffle Master was completed in April 2009.All historical revenues and expenses from these assets sold to Shuffle Masterwere reclassified as discontinued operations. There was no net income or lossfrom discontinued operations during the three-month period ended September 30,2010.

 

Net income from discontinuedoperations was approximately $1.5 million for the nine-month period ended September 30,2009 primarily related to the sale of our portfolio of automated cardverification machines and electronic card shuffling systems as discussedabove.  There was no net income or lossfrom discontinued operations during the nine-month period ended September 30,2010.

 

**FINANCIALCONDITION**

 

**Liquidity and Capital Resources**

 

OnApril 21, 2008, we entered into a Trade Credit Facility Agreement (the “FacilityAgreement”) with Elixir International. Upon entering into the Agreement, weimmediately 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 trade payable of an equivalent amountto Elixir International with respect to gaming machines previously acquired.The advances under the Facility Agreement are subject to demand by ElixirInternational for immediate payment only if there is either an event of defaultor a change of control 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 (the “FirstAmended Note”) for the then outstanding principal amount of $12.1 million withthe following new repayment terms: (i)  the outstanding principal amountand the interest accrued thereon shall be repaid in 24 equal monthlyinstallments reset from January 1, 2009; (ii) interest shall beaccrued on the outstanding principal at the rate of five percent (5.0%) per annum starting from January 1, 2009; and (iii) no monthly repaymentsunder the new note were required for the months of October, November andDecember 2008.

 

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Webegan paying our monthly installments of approximately $530,000 under the FirstAmended Note on January 1, 2009 and paid or settled six installmentsduring the six-month period ended June 30, 2009.  As at June 30,2009, the then unpaid principal balance under the First Amended Note was approximately$9.2 million (the “Outstanding Principal”). On July 24, 2009, for thepurpose of improving our financial flexibility to enable us to capitalize onpotential growth and investment opportunities such as expansion of slot machineplacements and operations in new venues, at our request, Elixir Internationalentered into an Amendment No. 2 to the Trade Credit Facility Agreement andRelated Note with us (the “Second Amendment”).  Pursuant to the SecondAmendment, Elixir International agreed to restructure the payment schedule ofthe Outstanding Principal and we issued to Elixir International a new note (the“Second Amended Note”) to replace the First Amended Note. Under the revisedpayment schedule of the Second Amended Note, we are relieved from making anyactual repayments of principal or interest under the Facility Agreement untilJuly 1, 2010 although interest at the rate of 5% continues to accrue onthe Outstanding Principal balance. The repayment of the Outstanding Principalbalance and interest accrued thereon would be repaid in 18 equal monthlyinstallments commencing on July 1, 2010.

 

On April 20, 2010, in relation to thedisposal of Elixir International by our principal shareholder, EGTEntertainment, Elixir International assigned and transferred all its rights andobligations under the Facility Agreement and the note to EGT Entertainment. Thesaid assignment and transfer does not have any impact on the note terms or therepayment obligations of the Company save and except that when the repayment scheduleresumes, the monthly repayment of principal and interest under the note will bemade to or at the direction of EGT Entertainment instead of ElixirInternational.

 

OnMay 25, 2010, the Company entered into Amendment No.3 to the FacilityAgreement with EGT Entertainment (the “Third Amendment”), pursuant to which weissued another new note (the “Third Amended Note) to replace the Second AmendedNote.  Under the payment schedule of theThird Amended Note, the Outstanding Principal Balance and the interest accruedthereon were further restructured in the following manner: (a)  the totalinterest accrued on the Outstanding Principal Balance during the period fromJuly 1, 2009 to June 30, 2010 in the amount of $458,000 to be paid bythe Company in a lump sum payment on July 1, 2010; (b) on the firstday of each calendar month during the period from August 1, 2010 toJune 1, 2011, the Company will pay interest in arrears on the OutstandingPrincipal Balance at the same rate of 5% per annum for the preceding month; and(c)  the Company will repay the Outstanding Principal Balance and interestaccrued thereon at the rate mentioned above in 18 equal monthly installmentscommencing on July 1, 2011. Pursuant to the terms of the Third Amendment,the Company paid a total interest of $535,000 to EGT Entertainment during thethird quarter of 2010 including $458,000 on accrued interest.

 

Asof September 30, 2010, we had total cash and cash equivalents ofapproximately $7.8 million and a working capital balance of approximately $9.6million, which included $1 million cash held in escrow by a legal firm for theintended investment in a potential casino and tourism development project in acountry in the Indo-China region. The amount is highly liquid and we can demandits return from the escrow agent at any time. Our cash and working capitalduring the three months ended September 30, 2010 was positively impactedby the cash received from our operations at NagaWorld and by the repaymentdeferral of principal and interest on the Trade Credit Facility. Workingcapital during the three months ended September 30, 2010 was negativelyimpacted by the final payment of $910,000 toward the purchase of land inCambodia for the development of our new Dreamworld Casino project in Takeo(“Takeo Project”), the purchase of gaming machines for our expansion atNagaWorld under the December 30, 2009 and May 25, 2010 contracts, andthe payment of $535,000 interest expense pursuant to Amendment Three asdiscussed above.

 

In2011, as part of our incremental growth strategy for our gaming operations, weintend to incur initial planning and construction costs related to our casinodevelopment plans.  In addition, weexpect to purchase gaming machines to supplement existing inventory and sourcefuture targeted deployment plans.  Ourcasino development plans include our previously announced Takeo Project, forwhich we have acquired the relevant land, assembled a project management team andcommenced development of architectural designs. We believe that Phase 1 of theTakeo Project will require our expenditure of approximately $6 million to $8million of capital, which is in addition to approximately $2 million we havespent to date to acquire the relevant land and other project relatedexpenditures. We are also currently in late stage discussions on a significantnew casino project. While there is no guarantee we will successfully concludethese negotiations, given our constrained capital resources, should wesuccessfully conclude those negotiations we expect to divert our availablecapital from the Takeo Project to the potential new project, which we believewill offer greater short- and medium-term return potential.   Should an adjustment to the Takeo Project developmenttimeline be required, it would not place our gaming license or any rights toown and operate a casino in the Takeo province at risk. We intend to providemore information on our casino development plans, including the timeline forthe Takeo Project, at such time as the plans for the new casino project becomemore definite.

 

Wepresently expect that our capital expenditures for the Takeo Project andpurchase of gaming machines for 2011 will be approximately $11 to $13 million.Given our current and projected future cash flow generation capability from ouroperations at NagaWorld, our ability to source previously-owned gaming machinesat attractive prices relative to new gaming machines, and our strong relationshipswith gaming equipment manufacturers, we anticipate funding our capitalexpenditures for the Takeo Project and purchase of gaming machines for 2011from cash on hand and expected net cash flow from operations.

 

Weanticipate our available working capital, along with cash expected to begenerated from operations, will allow us to meet our capital expenditure forthe Takeo Project and purchase of gaming machines for 2011, based on:

 

·                  our strict costcontrol efforts, which should enable us to maintain annualized selling, generaland administrative cash expenses of approximately $6.0 to $7.2 million;

 

·                  strong cashflow from NagaWorld operations given a higher installed base of gaming machineseats in operation and average WUD of over $200 from this venue; and

 

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·                  our assumptionthat we will be successful in our endeavors to improve the revenue base byfocusing our placement of gaming machines in strong performing venues and plansto provide value-added services, such as promotion and marketing advisoryservices, to certain venues with a goal to improving net win per machine.

 

Asnoted above, however, we are also currently in late stage discussions on asignificant new casino project. While there is no guarantee we willsuccessfully conclude these negotiations, given our constrained capitalresources, should we successfully conclude those negotiations we expect todivert our available capital from the Takeo Project to the potential newproject, which we believe will offer greater short- and medium-term returnpotential. While we are unable to estimate at this time the amount of capitalwe would need in order to pursue the new casino project, we may requireadditional capital from external sources to fund the new casino project. Wewill endeavor to obtain any required additional capital from various financingsources including commercial debt financing and the sale of our debt or equitysecurities.

 

**Cash Flows Summary**

 
| ** **                             | ** ** | **Nine Months Ended September 30,** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| **(amounts in thousands)**   | ** ** | **2010**                                                | ** ** | **2009**   | ** ** | **Increase (Decrease)** | ** ** |
| Cash provided by/ (used in):           |       |                                                    |       |       |       |   |   |
| Operations                             |       | $                                                       | 7,827      |       | $          | (7,946 | ) | $ | 15,773 |   |
| Investing                              |       | (4,202                                                  | )          | 1,126      |       | (5,328 | ) |
| Financing                              |       | (143                                                    | )          | (3,164     | )          | 3,021 |   |
| Effect of exchange rate change in cash |       | 142                                                     |       | 149        |       | (7 | ) |
|                                   |       | $                                                       | 3,624      |       | $          | (9,835 | ) | $ | 13,459 |   |

 

**Operations**

 

Cashprovided by operations was approximately $7.8 million for the nine-month periodended September 30, 2010 as compared with cash used in operations ofapproximately $7.9 million in the same period in the prior year. The increasein cash provided by operations was primarily due to a significant improvementin operating income before depreciation and amortization as a result of theincrease in game participation revenue as well as improvement in net workingcapital including the recoupment of commitment fees and a reduction inoperating expenses. Cash provided by operations was negatively impacted by the$1.0 million cash held in escrow by a legal firm for the intended investment ina potential casino and tourism development project in Indo-China.

 

**Investing**

 

Cashused in investing activities was approximately $4.2 million for the nine-monthperiod ended September 30, 2010 compared to cash provided by investingactivities of approximately $1.1 million in the same period in the prioryear.   The increase in cash used ininvesting activities was a result of the purchase of land for the Cambodiacasino project and electronic gaming machines for our expansion at NagaWorldunder the contracts dated December 30, 2009 and May 25, 2010.   During the nine-month period endedSeptember 30, 2009, cash was positively impacted as a result of the saleof assets to Shuffle Master and partly offset by the purchases of gamingmachines.

 

**Financing**

 

Cashused in financing activities was approximately $143,000 for the nine-monthperiod ended September 30, 2010 compared with cash used by financing activitiesof approximately $3.2 million in the same period in the prior year.  The decrease was a result of the deferral ofthe repayment of principal and interest on the Trade Credit Facility untilJuly 2011.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Ourconsolidated financial statements were prepared in conformity with accountingprinciples generally accepted in the United States. Accordingly, we arerequired to make estimates incorporating judgments and assumptions we believeare reasonable based on our historical experience, contract terms, observanceof known trends in our Company and the industry as a whole, as well asinformation available from other outside sources. Our estimates affect amountsrecorded in the financial statements and actual results may differ from initialestimates.

 

Weconsider the following accounting estimates to be the most critical to fullyunderstanding and evaluating our reported financial results. They require us tomake subjective or complex judgments about matters that are inherentlyuncertain or variable. Senior management have discussed the development,selection and disclosure of the following accounting estimates, particularlythose considered most sensitive to changes from external factors, with theaudit committee of our board of directors.

 

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**Intangible Assets, including Goodwill**

 

Intangibleassets consist of patents, customer relationships, trademarks and goodwill.They are recorded at cost and are amortized, except for goodwill, on thestraight-line basis over the period of time the asset is expected to contributedirectly or indirectly to future cash flows, which range from 10 to13 years. The straight-line amortization method is utilized because webelieve there is not a more reliably determinable method of reflecting thepattern in which the economic benefits of the intangible assets are consumed orotherwise used up.

 

Weapply ASC 350, *Intangibles-Goodwill and Other* and ASC 360, *Property, Plant and Equipment*.  Under ASC 350,goodwill is no longer amortized but is subject to periodic impairment tests.Other intangible assets with finite lives, such as patents, customer relationshipsand trademarks will continue to be amortized over their useful lives.

 

**Inventory**

 

Thedetermination of obsolete or excess inventory requires us to estimate thefuture demand for our products within specific time horizons, generally oneyear or less. If we experience a significant unexpected decrease in demand forour products or a higher occurrence of inventory obsolescence because ofchanges in technology or customer requirements, we could be required toincrease our inventory provisions.

 

**Gaming Machines and Systems**

 

Gamingmachines and systems are stated at cost.  We depreciate new gamingmachines and systems over a five-year useful life and depreciate refurbishedgaming machines over a three-year useful life once placed in service. Trends in market demand and technological obsolescence may require us to reviewand evaluate the recoverability of our investment, as well as the estimateduseful lives used to depreciate these assets.

 

**Property and Equipment**

 

Weare required to estimate salvage values and useful lives for our property andequipment.  Trends in market demand and technological obsolescence mayrequire us to record impairment charges in accordance with the provisions ofASC 360.

 

**Revenue Recognition**

 

Werecognize revenue when all of the following have been satisfied:

 

·                  persuasiveevidence of an arrangement exists;

 

·                  the price tothe customer is fixed and determinable;

 

·                  delivery hasoccurred and any acceptance terms have been fulfilled;

 

·                  no significantcontractual obligations remain; and

 

·                  collection isreasonably assured.

 

*Gaming Machine Participation Revenues*

 

Weearn recurring revenue by providing customers with electronic gaming machinesand casino management systems which track game performance and providestatistics on installed electronic gaming machines owned by us and leased tovenue owners.  Revenues are recognized on the contractual terms of theparticipation agreements between ourselves and the venue owners and are basedon our share of net winnings.

 

Commitmentfees paid to the venue operator where the agreement stipulates that the feeswill be recovered from the daily net win sharing are capitalized as assets. Asrequired by ASC 605-50, *Customer Paymentsand Incentives*, the cash consideration received for the portion ofnet winnings relating to the commitment fees is amortized as a reduction ofrevenue if the expected benefit from commitment fees cannot be separatelyidentified or reasonably estimated. We had prepaid commitment fees of $NIL andapproximately $4.8 million as of September 30, 2010 and December 31,2009, respectively.

 

Commitmentfees paid to the venue operators relating to contract amendments are alsocapitalized as assets and amortized as a reduction of revenue over the term ofthe amended contracts.  We had commitmentfees related to contract amendment fees of approximately $1.2 million and$688,000 as of September 30, 2010 and December 31, 2009,respectively.

 

*Gaming and Non-Gaming Product Revenues*

 

Werecognize revenue from the sale of our products to end users upon shipmentsagainst customer contracts or purchase orders.

 

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Werecognize revenue from our sales to independent distributors upon shipments tothe distributors against distributor contracts or purchase orders for ourproducts.  We recognize revenue on consignment inventory when ownership ofthe product and title passes to the distributor which occurs upon thedistributor’s use of the product in its service organization or to an end user.

 

**Stock-Based Compensation**

 

Weapply ASC 718, *Compensation-StockCompensation*, to account for stock-based compensation. Under thefair value recognition provisions of ASC 718, for stock-based compensationaccrued to employees and non-employee directors, we recognize stock-basedcompensation expense for all service-based awards with graded vesting scheduleson the straight-line basis over the requisite service period for the entireaward.  For restricted stock awards with performance conditions, theCompany evaluates if performance conditions are probable in each reportingperiod. The compensation expense of restricted awards is recognized ratablyover the implicit service period if achieving performance conditions isprobable. Initial accruals of compensation expense are based on the estimatednumber of shares for which requisite service is expected to be rendered. Estimates are revised if subsequent information indicates that forfeitures willdiffer from previous estimates, and the cumulative effect on compensation costsof a change in the estimated forfeitures is recognized in the period of thechange.  For non-employee awards, we remeasure compensation costs eachperiod until the service condition is complete and recognize compensation costson the straight-line basis over the requisite service period.  Optionvaluation models require the input of highly subjective assumptions, andchanges in the assumptions used can materially affect the fair value estimate.Judgment is required in estimating stock price volatility, forfeiture rates,expected dividends, and expected terms that options remain outstanding. Stock-based compensation expense totaled approximately $126,000 and $329,000and $667,000 and $775,000 for the three-month and nine-month periods endedSeptember 30, 2010 and 2009, respectively, and is included in selling,general and administrative expense in the accompanying consolidated statementsof operations.

 

**Income Taxes**

 

Weare subject to income taxes in the U.S. (including federal and state) andseveral foreign jurisdictions in which we operate. Deferred income tax balancesreflect the effects of temporary differences between the carrying amounts ofassets and liabilities and their tax bases and are stated at enacted tax ratesexpected to be in effect when taxes are actually paid or recovered.ASC 740, *Income Taxes*,requires that deferred tax assets be evaluated for future realization andreduced by a valuation allowance to the extent we believe a portion will not berealized. We consider many factors when assessing the likelihood of futurerealization of our deferred tax assets, including our recent cumulativeearnings experience and expectations of future taxable income by taxingjurisdiction, the tax loss carry-forward periods available to us for taxreporting purposes, and other relevant factors.

 

Significantjudgment is required in evaluating our tax positions and determining ourprovision for income taxes. During the ordinary course of business, there aremany transactions and calculations for which the ultimate tax determination isuncertain. We applied the provisions of ASC 740, which contains a two-stepapproach to recognizing and measuring uncertain tax positions. The first stepis to evaluate the tax position for recognition by determining if the weight ofavailable evidence indicates it is more likely than not that the position willbe sustained on audit, including resolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit as the largestamount which is more than 50% likely of being realized upon ultimatesettlement. We consider many factors when evaluating and estimating ourtax positions and tax benefits, which may require periodic adjustments andwhich may not accurately anticipate actual outcomes.

 

Weare subject to income tax examinations by tax authorities from 2003 through thepresent period in jurisdictions in which we operate. There are currently noincome tax returns under examination by the U.S. Internal Revenue Service orany other major tax authorities.

 

**Recently Issued Accounting Standards**

 

Fora description of accounting changes and recent accounting pronouncements,including the dates of adoption and estimated effects, if any, on ourconsolidated condensed financial statements, see “Note 1: “Description ofBusiness and Significant Accounting Policies” in the Notes to ConsolidatedFinancial 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 MarketRisks**

 

Notapplicable.

 

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** **

**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 toRule 13a-15 of the Securities Exchange Act of 1934.  Based on this evaluation, our managementconcluded that our disclosure controls and procedures were effective as ofSeptember 30, 2010.

 

(b)  *Changes in Internal Control Over FinancialReporting.*

 

Therewere no changes in our internal control over financial reporting that occurredduring the nine-month period ended September 30, 2010 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

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**PART II— OTHER INFORMATION**

 

**Item 1A.         Risk Factors**

 

Adescription of our risk factors can be found in Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2009. Except as set forthbelow, there were no material changes to those risk factors during the threemonths ended September 30, 2010.

 

***We are a defendant in a litigation matterthat could result in substantial costs and divert management’s attention andresources.***

 

OnMarch 26, 2010, and as amended on May 28, 2010, certain shareholdersof the Company including Prime Mover Capital Partners L.P., Strata Fund L.P.,Strata Fund 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 was filed on March 26, 2010, theCompany was not made aware of it until March 31, 2010, the dateimmediately after the Company’s filing of its Form 10-K for the fiscalyear 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 Sections90.580(e) and 90.660(3), breach of fiduciary duty, and negligentmisrepresentations.  The Plaintiffs allege that the Company and certainother defendants made false and misleading statements about the ParticipationBusiness in filings with the SEC, press releases, and other industry andinvestor conferences and meetings during the period from June 13, 2007 andAugust 13, 2008 and that the Plaintiffs then purchased the securities atthe inflated prices and later suffered economic losses when the price of theCompany’s securities decreased.

 

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

 

Weintend to vigorously defend ourselves against these claims. However, noassurances can be made that we will be successful in our defense of the pendingclaims. If we are not successful in our defense of such claims, we could beforced to, among other things, make significant payments to resolve theseclaims or post significant bonds to pursue appeals, and such payments and/orbonds could have a material adverse effect on our business, financial conditionand results of operations. Further, regardless of the outcome of the foregoingmatters, these litigation matters themselves may result in substantial costsand divert management’s attention and resources, all of which could adverselyaffect our business.

 

**Item 6.            Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                              | ** ** | **Method of Filing** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                   | ** ** | ** **                     |
| 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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**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| ** ** | ** **              | **ENTERTAINMENT GAMING ASIA INC.** |
|------------|-------------------------|------------------------------------|
|       |                    | (Registrant)                       |
|       |                    |                               |   |
|       |                    |                               |   |
| Date:      | November 10,  2010 | By:                                | /s/  Clarence Chung |
|       |                    |                               | Clarence  Chung |
|       |                    | Its:                               | President  and Chief Executive Officer |
|       |                    |                               |   |
|       |                    |                               |   |
| Date:      | November 10,  2010 | By:                                | /s/  Andy Tsui |
|       |                    |                               | Andy  Tsui |
|       |                    | Its:                               | Chief  Accounting Officer |

 

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