Table ofContents

** **

 

** **

**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**x****          ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended March 31, 2009**

 

**OR**

 

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

 

**Forthe transition period from            to            .**

 

**Commissionfile number: 001-32161**

 

**ElixirGaming Technologies, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**Unit 2B,29/F, The Centrium**

**60Wyndham Street**

**Central,Hong Kong**

(Address ofprincipal executive offices, including zip code)

 

**+852-3151-3800**(Registrant’stelephone number, including area code)

 

**6650 Via Austi Parkway, Suite 170Las Vegas, NV  89119**

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No  ̈

 

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

 

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

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

 

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

 

As of May 11, 2009, 114,956,667 shares of commonstock of Elixir Gaming Technologies, Inc. were outstanding.

 

 

 

----

Tableof Contents

 

**Table of Contents**

 
| ** **                                    | ** **                                                                                      | **Page** |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                            |     |
| **PART I  — FINANCIAL INFORMATION** |
|                                          |                                                                                            |     |
| **Item  1.**                                  | **Financial  Statements**                                                                       | 1        |
|                                          |                                                                                            |     |
|                                          | Consolidated Balance Sheets                                                                     | 1        |
|                                          |                                                                                            |     |
|                                          | Consolidated Statements of  Operations                                                          | 2        |
|                                          |                                                                                            |     |
|                                          | Consolidated Statements of  Cash Flows                                                          | 3        |
|                                          |                                                                                            |     |
|                                          | Notes to  Consolidated Financial Statements                                                     | 4        |
|                                          |                                                                                            |     |
| **Item 2.**                                   | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 19       |
|                                          |                                                                                            |     |
|                                          | Overview                                                                                        | 20       |
|                                          |                                                                                            |     |
|                                          | Results of  Operations                                                                          | 22       |
|                                          |                                                                                            |     |
|                                          | Liquidity and Capital Resources                                                                 | 27       |
|                                          |                                                                                            |     |
|                                          | Critical Accounting Policies and Estimates                                                      | 29       |
|                                          |                                                                                            |     |
| **Item 3.**                                   | **Quantitative  and Qualitative Disclosures about Market Risk**                                 | 32       |
|                                          |                                                                                            |     |
| **Item 4.**                                   | **Controls and  Procedures**                                                                    | 33       |
|                                          |                                                                                            |     |
| **PART II — OTHER  INFORMATION**    |
|                                          |                                                                                            |     |
| **Item 6.**                                   | **Exhibits**                                                                                    | 34       |

 

# ****

# **Table of Contents**

 

# **PART I — FINANCIAL INFORMATION**

# ** **

# **Item1.            Financial Statements**

# ** **

**ELIXIR GAMINGTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

### **Consolidated Balance Sheets**

 
| ** **                                                                                                                     | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                     | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                     |       |                    |       |                       |       |
| Current assets:                                                                                                                |       |                    |       |                       |       |
| Cash and cash equivalents                                                                                                      |       | $                       | 12,881,331 |                       | $          | 14,504,433 |   |
| Accounts receivable, trade, net of allowance for  uncollectibles of  $660,540 in 2009 and $923,603 in 2008                |       | 1,889,861               |       | 1,336,261                  |       |
| Due from a related party                                                                                                       |       | 22,966                  |       | 531,109                    |       |
| Other receivables                                                                                                              |       | 165,817                 |       | 78,082                     |       |
| Assets held for sale                                                                                                           |       | 195,002                 |       | —                     |       |
| Inventories                                                                                                                    |       | 2,309,951               |       | 1,096,046                  |       |
| Prepaid expenses and other current assets                                                                                      |       | 668,062                 |       | 1,299,487                  |       |
| Total current assets                                                                                                           |       | 18,132,990              |       | 18,845,418                 |       |
|                                                                                                                           |       |                    |       |                       |       |
| Gaming equipment and systems, net of accumulated  depreciation of $9,305,899 in 2009 and $7,081,817 in 2008                    |       | 46,239,170              |       | 48,351,545                 |       |
| Property and equipment, net of accumulated  depreciation of $3,118,090 in 2009 and $2,917,153 in 2008                          |       | 3,429,791               |       | 3,724,467                  |       |
| Intangible assets, net of accumulated amortization  of $1,552,603 in 2009 and $2,356,271 in 2008                               |       | 3,779,001               |       | 4,123,403                  |       |
| Goodwill                                                                                                                       |       | 84,210                  |       | 84,210                     |       |
| Deposits and other assets                                                                                                      |       | 966,414                 |       | 1,284,679                  |       |
| Total assets                                                                                                                   |       | $                       | 72,631,576 |                       | $          | 76,413,722 |   |
|                                                                                                                           |       |                    |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                  |       |                    |       |                       |       |
| Current liabilities:                                                                                                           |       |                    |       |                       |       |
| Accounts payable                                                                                                               |       | $                       | 1,795,831  |                       | $          | 806,538 |   |
| Amount due to a related party                                                                                                  |       | 158,247                 |       | 27,672                     |       |
| Accrued expenses                                                                                                               |       | 3,178,688               |       | 2,712,758                  |       |
| Deferred revenue                                                                                                               |       | 180,260                 |       | —                     |       |
| Short-term debt                                                                                                                |       | 3,414                   |       | 29,372                     |       |
| Notes payable to a related party, current portion                                                                              |       | 5,957,906               |       | 5,884,049                  |       |
| Capital lease obligations, current portion                                                                                     |       | 205,469                 |       | 269,371                    |       |
| Advance for sale of assets                                                                                                     |       | 2,400,000               |       | —                     |       |
| Customer deposits                                                                                                              |       | 1,464,422               |       | 1,525,569                  |       |
| Total current liabilities                                                                                                      |       | 15,344,237              |       | 11,255,329                 |       |
|                                                                                                                           |       |                    |       |                       |       |
| Notes payable to a related party, net of current  portion                                                                      |       | 4,667,627               |       | 6,185,088                  |       |
| Capital lease obligations, net of current portion                                                                              |       | 417,695                 |       | 468,424                    |       |
| Other liabilities                                                                                                              |       | 649,396                 |       | 525,986                    |       |
| Deferred tax liability                                                                                                         |       | 461,413                 |       | 495,560                    |       |
| Total liabilities                                                                                                              |       | 21,540,368              |       | 18,930,387                 |       |
|                                                                                                                           |       |                    |       |                       |       |
| Stockholders’ equity:                                                                                                     |       |                    |       |                       |       |
| Common stock, $.001 par value, 300,000,000 shares  authorized;  114,956,671 and 114,956,671 shares issued and outstanding |       | 114,957                 |       | 114,957                    |       |
| Additional paid-in-capital                                                                                                     |       | 414,189,684             |       | 413,987,829                |       |
| Accumulated other comprehensive income/ (losses)                                                                               |       | (2,460,977              | )          | (2,107,842                 | )          |
| Accumulated deficit                                                                                                            |       | (360,752,456            | )          | (354,511,609               | )          |
| Total stockholders’ equity                                                                                                |       | 51,091,208              |       | 57,483,335                 |       |
| Total liabilities and stockholders’ equity                                                                                |       | $                       | 72,631,576 |                       | $          | 76,413,722 |   |

 

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

 

1

----

Table of Contents

 

**ELIXIR GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

### **Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Revenues:                                  | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Gaming machine participation               |       | $                                     | 945,735    |   | $ | 518,617 |   |
| Table game products                        |       | 158,479                               |       | 680,030 |   |
| Non-gaming products                        |       | 678,609                               |       | 1,732,876 |   |
|                                       |       | 1,782,823                             |       | 2,931,523 |   |
|                                       |       |                                  |       |   |   |
| Operating costs and expenses:              |       |                                  |       |   |   |
| Cost of gaming machine participation       |       |                                  |       |   |   |
| Machine depreciation                       |       | 2,390,465                             |       | 1,292,754 |   |
| Write-off of gaming assets                 |       | 378,980                               |       | — |   |
| Other operating costs                      |       | 341,005                               |       | 95,447 |   |
| Cost of table game products                |       | 178,967                               |       | 651,204 |   |
| Cost of non-gaming products                |       | 756,414                               |       | 1,532,485 |   |
| Selling, general and administrative        |       | 2,835,027                             |       | 5,141,588 |   |
| Research and development                   |       | 95,095                                |       | 323,721 |   |
| Depreciation and amortization              |       | 323,717                               |       | 231,120 |   |
| Restructuring charges                      |       | 509,071                               |       | 165,570 |   |
|                                       |       | 7,808,741                             |       | 9,433,889 |   |
|                                       |       |                                  |       |   |   |
| Loss from operations                       |       | (6,025,918                            | )          | (6,502,366 | ) |
|                                       |       |                                  |       |   |   |
| Other income/ (expense):                   |       |                                  |       |   |   |
| Interest expense and finance fees          |       | (135,938                              | )          | (54,287 | ) |
| Interest income                            |       | 38,388                                |       | 366,751 |   |
| Foreign currency gains/ (losses)           |       | (126,566                              | )          | 839,966 |   |
| Other                                      |       | 12,379                                |       | 80,527 |   |
|                                       |       | (211,737)                             |       | 1,232,957 |   |
|                                       |       |                                  |       |   |   |
| Net loss before income tax benefit         |       | (6,237,655                            | )          | (5,269,409 | ) |
|                                       |       |                                  |       |   |   |
| Income tax expense                         |       | (3,192                                | )          | (32,141 | ) |
|                                       |       |                                  |       |   |   |
| Net loss                                   |       | $                                     | (6,240,847 | ) | $ | (5,301,550 | ) |
|                                       |       |                                  |       |   |   |
| Basic and diluted loss per share           |       | $                                     | (0.05      | ) | $ | (0.05 | ) |
|                                       |       |                                  |       |   |   |
| Weighted average common shares outstanding |       | 114,956,671                           |       | 114,923,562 |   |

 

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

 

2

----

Table ofContents

 

**ELIXIR GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

### ** **

### **Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                    |       |                                  |       |   |   |
| Net loss                                                                     |       | $                                     | (6,240,847 | ) | $ | (5,301,550 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                  |       |   |   |
| Income tax expense                                                           |       | 3,192                                 |       | 32,141 |   |
| Foreign currency gains/losses                                                |       | 125,230                               |       | (839,966 | ) |
| Depreciation of gaming machines and systems and  property and equipment      |       | 2,660,845                             |       | 1,456,508 |   |
| Restructuring charges                                                        |       | 29,416                                |       | — |   |
| Amortization of intangible assets                                            |       | 149,400                               |       | 165,603 |   |
| Amortization of deferred interest                                            |       | 7,299                                 |       | 20,000 |   |
| Amortization of prepaid sales commission                                     |       | —                                |       | 4,529 |   |
| Stock-based compensation and warrant expense                                 |       | 201,855                               |       | 1,802,321 |   |
| Gain on disposition of assets                                                |       | 166                                   |       | 14,027 |   |
| Write-off of gaming assets                                                   |       | 378,980                               |       | — |   |
| Write-down of inventory                                                      |       | (106                                  | )          | 20,422 |   |
| Provision for bad debt expense                                               |       | 12,400                                |       | 70,361 |   |
| Changes in operating assets and liabilities:                                 |       |                                  |       |   |   |
| Accounts receivable and other receivables                                    |       | (433,123                              | )          | (998,281 | ) |
| Inventories                                                                  |       | (1,219,864                            | )          | 242,976 |   |
| Prepaid expenses and other current assets                                    |       | 317,534                               |       | 334,330 |   |
| Deposits and other assets                                                    |       | 308,145                               |       | (378,525 | ) |
| Accounts payable                                                             |       | 1,138,810                             |       | (327,453 | ) |
| Amount due from related parties                                              |       | 562,250                               |       | — |   |
| Deferred revenue                                                             |       | 180,260                               |       | — |   |
| Accrued expenses and other current liabilities                               |       | 470,480                               |       | (2,021,466 | ) |
| Net cash used in operating activities                                        |       | (1,347,678                            | )          | (5,704,023 | ) |
| ** **                                                                   |       |                                  |       |   |   |
| **Cash flows from investing activities:**                                    |       |                                  |       |   |   |
| Acquisition of property and equipment                                        |       | —                                |       | (203,772 | ) |
| Advance for sale of assets                                                   |       | 2,400,000                             |       | — |   |
| Purchase of gaming machines, systems and deposits  paid                      |       | (1,163,297                            | )          | (15,683,516 | ) |
| Sale of property and equipment                                               |       | 70,160                                |       | 2,129 |   |
| Net cash generated/ (used) in investing activities                           |       | 1,306,863                             |       | (15,885,159 | ) |
| ** **                                                                   |       |                                  |       |   |   |
| **Cash flows from financing activities:**                                    |       |                                  |       |   |   |
| Proceeds from sale of stock, warrants and options                            |       | —                                |       | 57,402 |   |
| Repayment of short-term debt and leases                                      |       | (86,838                               | )          | (89,329 | ) |
| Repayment of notes payable                                                   |       | (1,462,267                            | )          | — |   |
| Net cash (used in)/ provided by financing activities                         |       | $                                     | (1,549,105 | ) | $ | (31,927 | ) |
| Effect of exchange rate change on cash                                       |       | (33,182                               | )          | — |   |
| (Decrease)/ increase in cash and cash equivalents                            |       | (1,623,102                            | )          | (21,621,109 | ) |
| Cash and cash equivalents at beginning of period                             |       | 14,504,433                            |       | 68,286,820 |   |
| Cash and cash equivalents at end of period                                   |       | $                                     | 12,881,331 |   | $ | 46,665,711 |   |
| ** **                                                                   |       |                                  |       |   |   |
| **Non-cash investing and financing activities:**                             |       |                                  |       |   |   |
| Gaming machines purchased as related party payables                          |       | $                                     | —     |   | $ | 4,912,322 |   |
| ** **                                                                   |       |                                  |       |   |   |
| **Supplemental disclosure of cash flows  information**                       |       |                                  |       |   |   |
| Interest paid                                                                |       | $                                     | 169,320    |   | $ | 47,662 |   |
| Income tax paid                                                              |       | —                                |       | — |   |

 

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

 

3

----

Table of Contents

 

**ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

(Unaudited)

 

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

 

The principalbusiness activities of Elixir Gaming Technologies, Inc. and itssubsidiaries (the “Company”) is the owning and leasing of electronic gamingmachines placed in resorts, hotels, and other venues across certain countriesin Asia and the developing and distributing of products related to the gamingand automotive industries. These products include RFID casino chips andcomponent parts for the automotive industry.

 

***Basis of Presentation***

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States (U.S.) for interim financialinformation and with the instructions to Form 10-Q and Rule 8-03 ofRegulation S-X promulgated by the Securities and Exchange Commission (“SEC”)and reflect all adjustments, consisting of normal recurring adjustments andother adjustments, which management believes are necessary to fairly presentthe financial position, results of operations and cash flows of the Company,for the respective periods presented. The results of operations for an interimperiod are not necessarily indicative of the results that may be expected forany other interim period or the year as a whole. The accompanying unauditedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008, filed withthe SEC on March 30, 2009.

 

***Principles of Consolidation***

 

These consolidated financial statements includethe accounts of Elixir Gaming Technologies, Inc. and all its subsidiaries.

 

***Use of Estimates***

 

The Company is required to make estimates, judgments and assumptionsthat it believes are reasonable based on its historical experience, contractterms, observance of known trends in the Company and the industry as a whole,and information available from other outside sources.  These estimatesaffect the reported amounts of assets, liabilities, revenues and expenses andrelated disclosures of contingent assets and liabilities.  On a regularbasis, the Company evaluates its estimates, including those related to revenuerecognition, product returns, long-lived assets, inventory obsolescence,stock-based compensation, income taxes, bad debts, warranty obligations,long-term contracts, contingencies and litigation.  Actual results maydiffer from those estimates.

 

***Reclassifications***

 

Certain previously reported amounts have been reclassified to conformto the current period presentation.

 

***Cash and Cash Equivalents***

 

All highly liquid instruments with an original maturity of three monthsor less are considered cash equivalents.  The Company places its cash withfinancial institutions.  At March 31, 2009, the Company had depositswith financial institutions in excess of FDIC insured limits by $12.6 million.

 

4

----

Table ofContents

 

***Accounts Receivable and Allowance for DoubtfulAccounts***

 

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

 

***Inventories***

 

Inventories are stated at the lower of cost, determined using thefirst-in, first-out method, or market.  Cost elements included inwork-in-process and finished goods include raw materials, direct labor, and manufacturingoverheads.

 

***Long-Lived Assets***

 

The Company accounts for impairment of long-lived assets in accordancewith Statement of Financial Accounting Standard (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.  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,measured as the amount by which the carrying value exceeds the fair value ofthe asset, determined principally using discounted cash flows.  Except for the write-down of carrying valueof the equipment at the China facility (see Note 15 and 18), there are noimpairment charges for long-lived assets for the first quarter of 2009.

 

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

 

Prepaids, deposits and other current assets consist primarily ofprepaid value-added taxes in foreign countries, sales tax in dispute anddeposits.  The Company has restrictedcash in the amount of $100,000, in the form of a certificate of deposit assecurity on a lease.  The restriction forthe security deposit will be removed in February 2012 upon termination ofthe lease.  Restricted cash has beenrecorded in deposits and other assets in the accompanying consolidated balancesheets.

 

***Consignment Inventory***

 

As of March 31, 2009, the Company had consignment inventory,service supplies and parts of $235,218, net of a provision of obsolescence of$372,698.  Revenue is not recognized until ownership of the product andtitle passes to the distributor which occurs upon the distributor’s use of theproducts evidenced by a purchase order or sales to third-party customers.

 

***Gaming Machines and Systems***

 

Gaming machines and systems are stated at cost.  The Companydepreciates new gaming machines and systems over a five-year useful life anddepreciates refurbished gaming machines over a three-year useful life onceplaced in service. Depreciation of gaming machines and systems of $2,390,465and $1,292,754 are included in cost of gaming machine participation in theconsolidated statement of operations for the three-month periods ended March 31,2009 and 2008, respectively.

 

5

----

Table ofContents

 

***Property and Equipment***

 

Property and equipment is stated at cost. Depreciation is computedusing the straight-line method over the useful lives of the assets currentlyestimated to be 3-5 years, which in the case of leasehold improvements, islimited to the life of the lease and renewal period so long as renewal isreasonably assured. Depreciation of property and equipment of $96,063 and$98,236 are included in cost of operations (gaming products or non-gamingproducts) in the consolidated statements of operations for the three-monthperiods ended March 31, 2009 and 2008, respectively.

 

***Intangible Assets, including Goodwill***

 

Intangible assets consist of patents, customer relationships,trademarks and goodwill. They are recorded at cost and are amortized, exceptgoodwill, on the straight-line basis over the period of time the asset isexpected to contribute directly or indirectly to future cash flows, which rangefrom 10 to 13 years. The straight-line amortization method is utilizedbecause the Company believes there is not a more reliably determinable methodof reflecting the pattern in which the economic benefits of the intangibleassets are consumed or otherwise used up.

 

The Company measures and tests goodwill and intangible assets forimpairment in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other Intangible Assets*,(“SFAS No. 142”), and SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“SFAS No. 144”),at least annually on December 31 or more often if there are indicators ofimpairment.

 

***Litigation and Other Contingencies***

 

The Company is involved in various legal matters, litigation and claimsof various types in the ordinary course of its business operations. The Companyhas regular litigation reviews, including updates from corporate and outsidecounsel, to assess the need for accounting recognition or disclosure of thesecontingencies. The status of significant claims is summarized in Note 16.

 

SFAS No. 5, *Accounting forContingencies,* requires that liabilities for contingencies berecorded when it is probable that a liability has been incurred and that theamount can be reasonably estimated. Significant management judgment is requiredrelated to contingent liabilities and the outcome of litigation because bothare difficult to predict. For contingencies where unfavorable outcomes arereasonably possible and which are significant, the Company discloses the natureof the contingency and, where feasible, an estimate of the possible loss.

 

***Revenue Recognition***

 

The Company recognizes revenue when all of the following have beensatisfied:

 

·                  persuasiveevidence of an arrangement exists;

·                  theprice to the customer is fixed and determinable;

·                  deliveryhas occurred and any acceptance terms have been fulfilled;

·                  nosignificant contractual obligations remain; and

·                  collectionis reasonably assured.

 

6

----

Table ofContents

 

*Gaming and Non-Gaming Products Revenues*

 

The Company recognizes revenue from the sale of its products to endusers upon shipment against customer contracts or purchase orders. Revenue fromshuffler rentals is recorded at the first of each month in accordance withrental contract terms.

 

The Company recognizes revenue from its sales to independentdistributors upon shipments to the distributors against distributor contractsor purchase orders for products.  The Company recognizes revenue on consignmentinventory when ownership of the product and title passes to the distributorwhich occurs upon the distributor’s use of the product in its serviceorganization or sale to an end user.

 

The maintenancecomponents that are part of long-term sales contracts are recorded as deferredrevenue and are amortized over the remaining life of the sales agreement afterthe initial 90-day warranty as required by the Emerging Issues Task Force Issue(“EITF”) No. 00-21, *RevenueArrangements with Multiple Deliverables*. The Company provides forestimated warranty repair costs associated with sales contracts. Although thereare no extended warranties offered for its products, the Company provides formaintenance contracts that are billed and recognized on a monthly basis.Beginning January 1, 2009, the Company’s sales were through itsindependent distributors and it no longer offers long-term sales contracts orservice to customers.

 

*Participation Revenues*

 

The Company earns recurring revenue by providing customers withelectronic gaming machines and casino management systems which track gameperformance and provide statistics on installed electronic gaming machinesowned by the Company and leased to venue owners.  Revenues are recognized on the contractualterms of the participation agreements between the Company and the venue ownersand are based on the Company’s share of net winnings.

 

Revenues are recognized as incurred with the exception of one of ourvenues in which revenues are recognized as the payment for net winnings arereceived as collections from this venue were not reasonably assured.  Net winnings from this venue have beenrecorded as deferred revenue until the collections of such net winnings arereasonably assured.  Deferred revenueswere $180,260 and nil as of March 31, 2009 and December 31, 2008,respectively.

 

***Stock-Based Compensation***

 

The Company adopted SFAS No. 123R, *Share-BasedPayments*, to account for all its stock-based compensation beginning January 1,2006, and elected the modified prospective method of transition. Under the fairvalue recognition provisions of SFAS No. 123R, for stock-basedcompensation accrued to employees and non-employee directors, the Companyrecognizes stock-based compensation expense for all service-based awards withgraded vesting schedules on the straight-line basis over the requisite serviceperiod for the entire award.  Initialaccruals of compensation expense are based on the estimated number of sharesfor which requisite service is expected to be rendered.  Estimates are revised if subsequentinformation indicates that forfeitures will differ from previous estimates, andthe cumulative effect on compensation cost of a change in the estimatedforfeitures is recognized in the period of the change.  For non-employee awards, the Companyremeasures compensation cost each period until the service condition iscomplete and recognizes compensation cost on the straight-line basis over therequisite service period.  Optionvaluation models require the input of highly subjective assumptions, andchanges in the assumptions used can materially affect the fair value estimates.Judgment is required in estimating stock price volatility, forfeiture rates,expected dividends, and expected terms that options remain outstanding.  Stock-based compensation expense totaled$201,855 and $1,802,321 for the three-month 

 

7

----

Table ofContents

 

periods ended March 31, 2009 and 2008, respectively, and isincluded in selling, general and administrative expense in the accompanyingconsolidated statements of operations.  See Note 12 for additionalinformation regarding these assumptions.

 

***Research and Development Expenses***

 

Research and development costs are charged to expense asincurred.  Employee related costs associated with product development areincluded in research and development costs. The Company incurred $95,095 and $323,721 in research and developmentexpenses for the three-month periods ended March 31, 2009 and 2008,respectively.

 

***Income Taxes***

 

The Company is subject to income taxes in the U.S. (including federaland state) and several foreign jurisdictions in which it operates. Deferredincome tax balances reflect the effects of temporary differences between thecarrying amounts of assets and liabilities and their tax basis and are statedat enacted tax rates expected to be in effect when taxes are actually paid orrecovered. SFAS No. 109, *Accounting for IncomeTaxes*(“SFAS No. 109”), requires that deferred tax assets beevaluated for future realization and reduced by a valuation allowance to theextent the Company believes a portion will not be realized. The Companyconsiders many factors when assessing the likelihood of future realization ofits deferred tax assets, including its recent cumulative earnings experienceand expectations of future taxable income by taxing jurisdiction, thecarry-forward periods available to the Company for tax reporting purposes, andother relevant factors.

 

The Company accounts for uncertain tax positions in accordance withFASB Interpretation No.48, *Accounting**for Uncertainty in Income Taxes and Interpretation of FASB Statement No. 109*(“FIN 48”), which contains a two-step approach to recognizing andmeasuring uncertain tax positions accounted for in accordance with SFAS No. 109.The first step is to evaluate the tax position for recognition by determiningif the weight of available evidence indicates it is more likely than not thatthe position will be sustained on audit, including resolution of relatedappeals or litigation processes, if any. The second step is to measure the taxbenefit as the largest amount which is more than 50% likely of being realizedupon ultimate settlement. The Company considers many factors whenevaluating and estimating its tax positions and tax benefits, which may requireperiodic****adjustments and which may notaccurately anticipate actual outcomes.

 

The Company is subject to income tax examinations by tax authorities inthe jurisdictions in which we operate. There are currently no income taxreturns under examination by the U.S. Internal Revenue Service or any othermajor tax authorities.

 

***Loss Per Share***

 

Basic loss per share is computed by dividing the reported net loss bythe weighted average number of shares of common stock outstanding during theyear. There is no difference in diluted loss per share from basic loss pershare as the assumed exercise of common stock equivalents would have ananti-dilutive effect due to losses.

 

***Foreign Currency Translations and Transactions***

 

The functional currency of the Company’s international subsidiaries isthe local currency.  For these subsidiaries, the Company translates theassets and liabilities at exchange rates in effect at the balance sheet dateand income and expense accounts at average exchange rates during theyear.  Resulting 

 

8

----

Table ofContents

 

currency translation adjustments are recorded directly to accumulatedother comprehensive income/ (losses) within stockholders’ equity.  Gainsand losses resulting from transactions in non-functional currencies arerecorded in operations.

 

***FairValue Measurements***

 

Fair value is defined under SFAS No. 157 as the exchange pricethat would be received for an asset or paid to transfer a liability (an exitprice) in the principal or most advantageous market for the asset or liabilityin an orderly transaction between market participants on the measurement date.Valuation techniques used to measure fair value under SFAS No. 157 mustmaximize the use of observable inputs and minimize the use of unobservableinputs. The standard established a fair value hierarchy based on three levelsof inputs, of which the first two are considered observable and the lastunobservable.

 

·      Level 1 - Quoted prices in active marketsfor identical assets or liabilities. These are typically obtained fromreal-time quotes for transactions in active exchange markets involvingidentical assets.

 

·      Level 2 - Inputs, other than quoted pricesincluded within Level 1, which are observable for the asset or liability,either directly or indirectly. These are typically obtained fromreadily-available pricing sources for comparable instruments.

 

·      Level 3 - Unobservable inputs, where thereis little or no market activity for the asset or liability. These inputsreflect the reporting entity’s own assumptions of the data that marketparticipants would use in pricing the asset or liability, based on the bestinformation available in the circumstances.

 

At March 31, 2009, cash and cash equivalent include $2.2 millionin bank deposits which are reported at fair value.  At March 31, 2009, the Company does nothave liabilities that are measured at fair value on a recurring basis.

 

During the first quarter of 2009, the Company has undertaken variousrestructuring activities (see Note 15and Note 18). The restructuring activities required the Company toperform a fair value measurement, on a non-recurring basis, on the Chinafacility to test for potential impairments. The fair value measurementindicated that the carrying value of the equipment at the China facilityexceeds the fair value and, therefore, the equipment was written down to fairvalue. At March 31, 2009, in accordance with the provisions of SFAS No. 144and SFAS No. 146, the equipment at the China facility with a carryingamount of $41,334 was written down to fair value of $11,918 which representsthe estimated remaining useful life until disposed of and abandoned (a “Level3” of the fair value hierarchy as described above), resulting in a write-downof $29,416, which was included as a restructuring charge in earnings for theperiod.

 

***Recently Issued AccountingStandards***

 

In December 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), *Business Combinations* (“SFAS No. 141(R)”). SFAS No. 141(R) replacesSFAS No. 141, *Business Combinations*(“SFASNo. 141”), but retains the requirement that the purchase method ofaccounting for acquisitions be used for all business combinations. SFAS No. 141(R) expandson the disclosures previously required by SFAS No. 141 (“SFAS 141”),better defines the acquirer and the acquisition date in a business combination,and establishes principles for recognizing and measuring the assets acquired(including goodwill), the liabilities assumed and any non-controlling interestsin the acquired business. SFAS No. 141(R) also requires an acquirerto record an adjustment to income tax expense for changes in valuationallowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) iseffective for all business combinations with an acquisition date in the firstannual period following December 15, 2008; early adoption is notpermitted. The Company adopted this statement as of January 1, 2009 andthe adoption has had no impact to the consolidated financial statements.

 

In December 2007, theFASB issued SFAS No. 160, *Non-Controlling Interestin Consolidated Financial Statements,*an Amendment of ARB No. 51(“SFAS No. 160”). This statement establishes accounting and reportingstandards for ownership interest in subsidiaries held by parties other than theparent and for the deconsolidation of a subsidiary. It also clarifies that anon-controlling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. SFAS No. 160 changes the way the consolidated incomestatement is presented by requiring consolidated net income to be reported atamounts that include the amount attributable to both the parent and thenon-controlling interests. The statement also establishes reportingrequirements that provide sufficient disclosure that clearly identify anddistinguish between the interest of the parent and those of the non-controllingowners. The Company adopted this statement as of January 1, 2008 and theadoption has no impact on the financial position, results of operations or cashflows.

 

In May 2008, the FASBissued SFAS No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*. This statement identifies the sources of accounting principles and theframework for selecting the principles to be used in the preparation offinancial statements of non-governmental entities that are presented in theconformity with generally accepted accounting principles (GAAP) in the UnitedStates.  It clarifies the order whichsources of accounting principles have priority. The Company adopted thisstatement as of June 1, 2008 and the adoption has had no impact on thefinancial position, results of operations or cash flows.

 

In February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-2,*Effective Date of FASB Statement No. 157,*that deferred the effective date of SFAS No. 157 for one year for certainnon-financial assets and non-financial liabilities. The Company adopted thisstatement as of January 1, 2009 and the adoption has had no impact on theCompany’s financial position and results of operations.

 

9

----

Table ofContents

 

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

 

The Company currently operates in three operating segments: (i) gamingmachine participation operations (ii) table game product operations and (iii) non-gamingproducts operations, consisting primarily of the Dolphin Advanced TechnologiesPty Ltd (“Dolphin”) automotive sector. The accounting policies of thesesegments are consistent with the Company’s policies for the accompanyingconsolidated financial statements.  Thefollowing table presents the financial information for each of the Company’soperating segments:

 
| ** **                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Revenues:                                                                 |       |                                  |       |   |   |
| Gaming machine participation operations                                   |       | $                                     | 945,735    |   | $ | 518,617 |   |
| Table game product operations                                             |       | 158,479                               |       | 680,030 |   |
| Non-gaming product operations                                             |       | 678,609                               |       | 1,732,876 |   |
| Total revenues                                                            |       | $                                     | 1,782,823  |   | $ | 2,931,523 |   |
|                                                                      |       |                                  |       |   |   |
| Operating loss:                                                           |       |                                  |       |   |   |
| Gaming machine participation operations gross margin                      |       | $                                     | (2,164,715 | ) | $ | (869,584 | ) |
| Table game product operations gross margin                                |       | (20,488                               | )          | 28,826 |   |
| Non-gaming product operations gross margin                                |       | (77,805                               | )          | 200,391 |   |
| Corporate and other operating costs and expenses  including restructuring |       | (3,762,910                            | )          | (5,861,999 | ) |
| Total operating loss                                                      |       | $                                     | (6,025,918 | ) | $ | (6,502,366 | ) |
|                                                                      |       |                                  |       |   |   |
| Total depreciation and amortization:                                      |       |                                  |       |   |   |
| Gaming machine participation                                              |       | $                                     | 2,390,465  |   | $ | 1,292,754 |   |
| Table game products                                                       |       | 186,265                               |       | 188,364 |   |
| Non-gaming products                                                       |       | 19,285                                |       | 71,066 |   |
| Corporate                                                                 |       | 214,230                               |       | 69,926 |   |
| Total depreciation and amortization(1)                                    |       | $                                     | 2,810,245  |   | $ | 1,622,110 |   |

 

----

(1)          Includes $2,486,528 and$1,390,990 for the three-month ended March 31, 2009 and 2008,respectively, that was      reported inthe respective cost of operations on the consolidated statements of operations(see Note 1).

 

Geographic segment revenues for the three-month periods ended March 31,2009 and 2008 are as follows:

 
| ** **    | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
|---------------|------------|-------------------------|------------|-------------------------|------------|
| Asia          |       | $                       | 953,785    |                    | $          | 618,397 |   |
| United States |       | 80,414                  |       | 553,456                 |       |
| Australia     |       | 748,624                 |       | 1,756,820               |       |
| Other         |       | —                  |       | 2,850                   |       |
|          |       | $                       | 1,782,823  |                    | $          | 2,931,523 |   |

 

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

 

Inventories consist of the following:

 
| ** **                          | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Raw materials                       |       | $                       | 926,466    |                       | $          | 1,309,765 |   |
| Work-in-progress                    |       | 148,188                 |       | 202,837                    |       |
| Finished goods                      |       | 2,644,353               |       | 1,001,108                  |       |
|                                |       | 3,719,007               |       | 2,513,710                  |       |
| Less: allowances and other reserves |       | (1,409,056              | )          | (1,417,664                 | )          |
|                                |       | $                       | 2,309,951  |                       | $          | 1,096,046 |   |

 

10

----

Table ofContents

 

**Note 4.****                                      ****Prepaid Expenses and OtherCurrent Assets**

 

Prepaid expenses and other current assets consist of the following:

 
| ** **                        | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Prepaid taxes                     |       | $                       | 279,009    |                       | $          | 276,042 |   |
| Prepayments to suppliers          |       | 223,935                 |       | 172,500                    |       |
| Deposits on gaming machine orders |       | 97,143                  |       | 740,209                    |       |
| Other                             |       | 67,975                  |       | 110,736                    |       |
|                              |       | $                       | 668,062    |                       | $          | 1,299,487 |   |

 

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

 

Accounts and other receivable consist of the following:

 
| ** **                            | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Trade accounts                        |       | $                       | 2,550,401  |                       | $          | 2,259,864 |   |
| Other                                 |       | 165,817                 |       | 78,082                     |       |
|                                  |       | 2,716,218               |       | 2,337,946                  |       |
| Less: allowance for doubtful accounts |       | (660,540                | )          | (923,603                   | )          |
| Net                                   |       | $                       | 2,055,678  |                       | $          | 1,414,343 |   |

 

Bad debt expensesfor the three-month ended period ended March 31, 2009 and 2008 were$12,400 and $70,361, respectively, which were recorded in selling, general andadministrative expenses in the consolidated statement of operations.

 

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

 

The major categories of gaming equipment and systems and accumulateddepreciation are presented below.

 
| ** **                    | ** ** | **Useful Life  (years)** | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------|------------|--------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | ** **               | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Gaming equipment              |       | 3 - 5                    |       | $                       | 49,766,906 |                       | $          | 49,282,197 |   |
| Systems                       |       | 5                        |       | 5,778,163               |       | 6,151,165                  |       |
|                          |       |                     |       | 55,545,069              |       | 55,433,362                 |       |
| Less accumulated depreciation |       |                     |       | (9,305,899              | )          | (7,081,817                 | )          |
|                          |       |                     |       | $                       | 46,239,170 |                       | $          | 48,351,545 |   |

 

Depreciation expenses for the three-month periods ended March 31,2009 and 2008 were $2,390,465 and $1,292,754, respectively, which were recordedin cost of gaming machine participation in the consolidated statements ofoperations.

 

11

----

Tableof Contents

 

**Note 7.****                                      ****Propertyand Equipment**

 

Property and equipment consists of thefollowing at March 31, 2009 and December 31, 2008:

 
| ** **                                     | ** ** | **Useful Life  (years)** | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | ** **               | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Equipment rented by customers                  |       | 3 – 5               |       | $                       | 14,606     |                       | $          | 14,606 |   |
| Equipment and vehicles, furniture and fixtures |       | 3 – 5               |       | 5,706,499               |       | 5,789,631                  |       |
| Leasehold improvements                         |       | 5                        |       | 826,776                 |       | 837,383                    |       |
|                                           |       |                     |       | 6,547,881               |       | 6,641,620                  |       |
| Less accumulated depreciation                  |       |                     |       | (3,118,090              | )          | (2,917,153                 | )          |
|                                           |       |                     |       | $                       | 3,429,791  |                       | $          | 3,724,467 |   |

 

At March 31, 2009 and December 31,2008, the Company’s rented property and equipment by customers that representedassets held under capital leases was $14,606.

 

**Note 8.****                                      ****IntangibleAssets, including Goodwill**

** **

In accordance with SFAS No. 142 and SFASNo. 144, the Company reviews goodwill and intangibles for impairment on anannual basis (December 31) or more frequently if events or circumstancesindicate that the carrying value may not be recoverable.  No circumstances indicate any furtherimpairment provisions are necessary during the three-month period ended March 31,2009.

 

The Company’s definite-life intangible assetsare subject to amortization as follows:

 
| ** **                           | ** ** | **Useful Life  (years)** | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------|------------|--------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | ** **               | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Patents                              |       | 10                       |       | 3,143,503               |       | 4,986,316                  |       |
| Less:  impairment provision     |       |                     |       | —                  |       | (695,743                   | )          |
| Less:  accumulated amortization |       |                     |       | (826,731                | )          | (1,666,533                 | )          |
|                                 |       |                     |       |                    |       |                       |       |
| Customer relationships               |       | 10-13                    |       | 1,684,101               |       | 1,684,101                  |       |
| Less:  accumulated amortization |       |                     |       | (615,688                | )          | (588,292                   | )          |
|                                 |       |                     |       |                    |       |                       |       |
| Trademarks                           |       | 10-13                    |       | 505,000                 |       | 505,000                    |       |
| Less:  accumulated amortization |       |                     |       | (111,184                | )          | (101,446                   | )          |
| Total                                |       |                     |       | $                       | 3,779,001  |                       | $          | 4,123,403 |   |
|                                      |            |                          |            |                         |            |                            |            |  |  |

 

The Company’sgoodwill was $84,210 at March 31, 2009 and December 31, 2008.

 

**Note 9.****                                      ****Depositsand Other Assets**
|                             |       |                    |       |                       |       |      |   |   |   |   |
|----------------------------------|------------|-------------------------|------------|----------------------------|------------|-----------|--------|--------|--------|--------|
| ** **                       | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| ** **                       | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Office equipment rental deposits |       | 82,594                  |       | 83,613                     |       |
| Sales tax in dispute             |       | 433,513                 |       | 433,513                    |       |
| Restricted cash                  |       | 109,794                 |       | 419,256                    |       |
| Prepaid value-added tax          |       | 339,534                 |       | 346,213                    |       |
| Other                            |       | 979                     |       | 2,084                      |       |
| Total                            |       | $                       | 966,414    |                       | $          | 1,284,679 |   |
|                                  |            |                         |            |                            |            |           |        |        |        |        |

 

12

----

Tableof Contents

 

**Note 10.****                               ****AccruedExpenses**

 
| ** **                        | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Payroll and related costs         |       | $                       | 704,552    |                       | $          | 724,450 |   |
| Interest                          |       | 117,011                 |       | 150,864                    |       |
| Legal, accounting and tax         |       | 397,234                 |       | 23,141                     |       |
| Litigation (Note 16)              |       | 1,064,562               |       | 1,066,190                  |       |
| Restructuring and severance costs |       | 285,486                 |       | —                     |       |
| Other                             |       | 609,843                 |       | 748,113                    |       |
| Total                             |       | $                       | 3,178,688  |                       | $          | 2,712,758 |   |

 

**Note 11.****                               ****Debtand Capital Lease Obligations**

** **

Debt and capital lease obligations consist ofthe following:

 
| ** **                                                                                                | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| Note payable to a related party at interest of 5%  (Notes 13)                                             |       | $                       | 10,625,533 |                       | $          | 12,069,137 |   |
| Short-term line of credit at an Australian bank                                                           |       | 3,414                   |       | 29,372                     |       |
| Capital lease obligation to an Australian bank at  various interest rates and collateralized by equipment |       | 567,432                 |       | 663,400                    |       |
| Capital lease obligations for furniture, tooling and  equipment                                           |       | 55,732                  |       | 74,395                     |       |
| Total                                                                                                     |       | 11,252,111              |       | 12,836,304                 |       |
| Less current portion                                                                                      |       | (6,166,789              | )          | (6,182,792                 | )          |
| Long-term portion                                                                                         |       | $                       | 5,085,322  |                       | $          | 6,653,512 |   |

 

On September 30, 2008, in accordancewith the amended Trade Credit Facility Agreement, Elixir International Limited(“Elixir International”), a wholly owned subsidiary of Elixir Group Limitedwhich is the principal shareholder of the Company, surrendered its initialadvance of $15.0 million to the Company in exchange for a new promissory notefor the outstanding principal amount of $12.1 million.  The outstanding principal and the interestaccrued (revised from 8% to 5%) thereon so to be repaid in 24 equal monthly installmentsreset from January 1, 2009 (Note 13).

 

**Note 12.****                               ****Stock-BasedCompensation**

** **

**Options**

** **

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

 

The Plan allows for incentive awards toeligible 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; and

 

·                 Performancestock awards, which are subject to future achievement of performance criteriaor be free of any performance or vesting.

 

13

----

Tableof Contents

 

The maximum number of shares reserved forissuance under the Plan is 5,000,000 and the exercise price shall not be lessthan 100% of the fair market value of one share of common stock on the date ofgrant, unless the participant owns more than 10% of the total combined votingpower of all classes of stock of the Company or any parent or subsidiarycorporation of the Company, in which case the exercise price shall then be 110%of the fair market value.

 

During the three-month period ended March 31,2009, stock options for the purchase of 500,000 shares of common stock weregranted with a weighted average exercise price of $0.13 and weighted averagefair value of $0.11 and will vest over a six-month and one day period.

 

Prior to January 1, 2009, the Companyhad two stock options plans, the Amended and Restated 1999 Stock Option Planand the Amended and Restated 1999 Directors’ Stock Option Plan (the “StockOption Plans”), through which 15,000,000 shares and 300,000 shares wereauthorized, respectively.  Both StockOption Plans expired on December 31, 2008.

 

In May 2007, stock options for thepurchase of 5,000,000 shares of common stock were granted by the board of directorsoutside of the Stock Option Plans pursuant to the initial closing of thetransactions under the Purchase and Product Participation Agreement (“ProductParticipation Agreement”) with Elixir Group Limited (“Elixir Group”), tocertain employees and non-employees of Elixir Group and their parent MelcoInternational Development Limited.  Each option had an exercise price of$2.90 per share and vested over three-year and five-year terms.

 

Options for the purchase of 14,189,005 sharesof common stock issued and outstanding under the Plan and Stock Option Plansand stock options for purchases of common stock granted under the ProductParticipation Agreement have a weighted average exercise price of $1.99, aweighted average fair value of $0.50 and an aggregate intrinsic value of$54,700 as of March 31, 2009.

 

As of March 31, 2009, 5,560,658 stockoptions were exercisable and have a weighted average exercise price of $2.86and a weighted average fair value of $0.97. They have no aggregate intrinsic value due to the fair market value ofthe Company’s stock as of that date.

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding as of December 31, 2008 |       | 15,246,267            |       | $                                     | 2.28       |                                                           | 5.09       |                            | $          | 94,500 |   |
| Granted                                  |       | 500,000               |       | $                                     | 0.13       |                                                           | —     |                            | —     |   |
| Exercised                                |       | —                |       | —                                |       | —                                                         |       | —                          |       |
| Cancelled                                |       | (1,557,262            | )          | $                                     | 4.30       |                                                           | —     |                            | $          | 2,000 |   |
| Outstanding as of March 31, 2009    |       | 14,189,005            |       | $                                     | 1.99       |                                                           | 4.68       |                            | $          | 54,700 |   |
| Exercisable as of March 31, 2009    |       | 5,560,658             |       | $                                     | 2.86       |                                                           | 2.72       |                            | —     |   |

 

14

----

Tableof Contents

 

**Warrants**

** **

A summary of the status of the Company’swarrants outstanding at March 31, 2009 and changes during the three-monthperiod 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, 2008 and  March 31, 2009 |       | 13,125,000   |       | $                                      | 1.86       |                                                           | 3.59       |                            | —     |   |
| Exercisable as of March 31, 2009                           |       | 13,125,000   |       | —                                 |       | —                                                         |       | —                          |       |
|                                                                 |            |              |            |                                        |            |                                                                |            |                                 |            |  |

 

There were no warrants granted, exercised orcancelled during the three-month period ending March 31, 2009.  Outstanding and exercisable warrants have noaggregate intrinsic value as of March 31, 2009 due to the fair marketvalue of the Company’s stock as of these dates.

 

*Recognition and Measurement*

 

The fair value of each stock-based award toemployees and non-employee directors is estimated on the measurement date whichgenerally is the grant date while awards to non-employees are measured at theearlier of the performance commitment date or the service completion date usingthe Black-Scholes-Merton option-pricing model. Option valuation models require the input of highly subjectiveassumptions, and changes in assumptions used can materially affect the fairvalue estimates.  The Company estimatesthe expected life of the award by taking into consideration the vesting period,contractual term, historical exercise data, expected volatility, blackoutperiods and other relevant factors. Volatility is estimated by evaluating theCompany’s historical volatility data. The risk-free interest rate on the measurement date is based on U.S.Treasury constant maturity rates for a period approximating the expected lifeof the award.  The Company historicallyhas not paid dividends, nor does it expect to pay dividends in the foreseeablefuture and, therefore, the expected dividend rate is zero.

 

The following table summarizes the range ofassumptions utilized in the Black-Scholes-Merton option-pricing model for thevaluation of stock options and warrants granted during the three-month periodsended March 31, 2009 and 2008:

 
| ** **               | ** ** | **March 31,** | ** ** |
|--------------------------|------------|--------------------|------------|
| ** **               | ** ** | **2009**           | ** ** | **2008** | ** ** |
| ** **               | ** ** | **Low**            | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Range of values:         |       |               |       |   |   |   |   |   |   |
| Expected volatility      |       | 136.27             | %          | 316.92 | % | 60.00 | % | 60.00 | % |
| Expected dividends       |       | —             |       | — |   | — |   | — |   |
| Expected term (in years) |       | 1.88               |       | 9.70 |   | 3.13 |   | 10.00 |   |
| Risk free rate           |       | 0.81               | %          | 2.71 | % | 2.72 | % | 3.72 | % |

 

For stock-based compensation accrued toemployees and non-employee directors, the Company recognizes stock-basedcompensation expense for all service-based awards with graded vesting scheduleson the straight-line basis over the requisite service period for the entireaward.  Initial accruals of compensationexpense are based on the estimated number of shares for which requisite serviceis expected to be rendered.  Estimatesare revised if subsequent information indicates that forfeitures will differfrom previous estimates, and the cumulative effect on compensation cost of achange in the estimated forfeitures is recognized in the period of the change.

 

15

----

Tableof Contents

 

For non-employee awards,the Company remeasures compensation costs each period until the servicecondition is complete and recognizes compensation costs on the straight-linebasis over the requisite service period.

 

The Companyestimates forfeitures and recognizes compensation costs only for those awardsexpected to vest, assuming all awards would vest, and reverses recognizedcompensation costs for forfeited awards when the awards are actually forfeited.

 

For awards with service conditions and gradedvesting that were granted prior to the adoption of SFAS No. 123R, theCompany estimates the requisite service period and the number of sharesexpected to vest, and recognizes compensation expense for each tranche on thestraight-line basis over the estimated requisite service period.

 

**Note 13.****                               ****RelatedParty Transactions**

** **

At March 31, 2009 and December 31,2008, the Company had a note payable of $10.6 million and $12.1 million,respectively, to Elixir International relating to purchases of electronicgaming machines, casino management systems and other peripherals.

 

On April 21, 2008, the Company enteredinto a Trade Credit Facility Agreement (the “Facility Agreement”) with ElixirInternational.  Pursuant to the FacilityAgreement, Elixir International provided trade credits to the Company for itspurchases of electronic gaming machines from Elixir International in exchangefor the Company’s issuance of unsecured notes to Elixir International bearinginterest at a fixed rate of eight percent (8.0%) per annum.  Titles for any gaming machines offered inexchange for the notes passes to the Company upon issuance of the notes.

 

Upon entering into the Facility Agreement,the Company immediately issued the first note pursuant to the terms of theFacility Agreement in the principal amount of $15,000,000 (the “Initial Advance”).  The Initial Advance extinguished an existingcurrent trade payable of an equivalent amount to Elixir International inrespect to gaming machines previously acquired.

 

The Company is obligated to repay theprincipal, plus any accrued interest thereon, of the Initial Advance in 24equal monthly installments after the date of issue.  The Initial Advance is subject to demand byElixir International for immediate payment only if there is either an event ofdefault or a change of control as defined in the Facility Agreement.  As of November 6, 2008, the FacilityAgreement was amended to include new payment terms (see Note 11).

 

For the three-month periods ended March 31,2009 and 2008, the Company recorded sales of table game products of $52,625 and$69,356, respectively, to Elixir International.

 

**Note 14.****                               ****IncomeTaxes**

** **

The Company’s reported income tax rate forthe three months ended March 31, 2009 and March 31, 2008, was 0.05%and 0.61%, respectively.  The reportedincome tax rate for the three months ended March 31, 2009, was lower thanthe three months ended March 31, 2008, due to significant losses incurredfor the U.S. operations which offset against operating income generated inother foreign jurisdictions.

 

16

----

Tableof Contents

 

**Note 15.****                               ****RestructuringCharges**

** **

Classified in accordance with SFAS No. 146,*Accounting for Cost Associated with Exit or DisposalActivities*, the Company incurred restructuring charges of $509,071during the first quarter of 2009 for severance wages and benefits related tothe termination of employees and the write-down of remaining China plantequipment.  The amount represents thecontractual and other agreements with employees which only include charges fortermination benefits measured at the estimated fair value at the terminationdate. It does not include charges for services to be provided after thetermination date. During the first quarter of 2008, the Company incurredrestructuring charges of $165,570 for facility operating leases that theCompany vacated.  The liability wascalculated based upon the remaining lease rentals, reduced by a combination ofactual sublease rentals and estimated sublease rentals and recorded at fairvalue.

 

**Note 16.****                               ****Commitmentsand Contingencies**

** **

**Legal Matters**

** **

The Company is a party to certain claims,legal actions, and complaints, including a patent infringement action betweenthe Company and one of its main competitors and the sales tax dispute, asdiscussed below. The Company cannot estimate the probable loss is, if any, orpredict the likely outcomes of any such matters, and, accordingly, no accrualhas been made for them.

 

*Shuffle Master Litigation*

* *

On March 16, 2009, the Company enteredinto a Purchase and Settlement Agreement with Shuffle Master, Inc. (“ShuffleMaster”) pursuant to which the Company settled it long-running patentlitigation with Shuffle Master and sold to Shuffle Master intellectual propertyand inventory related to the Company’s card shuffling and card deck checkingequipment, including the RandomPlus Shuffler, the ShufflePro Shuffler and theDeckChecker.  See Note 18 for moredetails in respect of the Purchase and Settlement Agreement.

 

*Purton Litigation*

* *

On October 5, 2007, William Purton filedan action against the Company in the Supreme Court of Victoria at Melbourne,Australia claiming he is owed monies under the July 2006 Share SaleAgreement by which the Company acquired Dolphin.  In addition, Mr. Purtonis claiming he is owed money for an independent contractor agreement that heclaims he was offered.  The Company has filed a counterclaim.  Thematter is now in the discovery phase and is proceeding toward trial.  While the Company is optimistic regarding thematter, it is not possible to predict the likely outcome of this case.

 

*Sales Tax Audit*

* *

In February 2004, the State of Nevadainitiated a sales/use tax audit of the Company’s equipment lessors. As of thedate of this filing, the State of Nevada has not made a determination if therehas been a shortfall in the payment of the sales/use tax. If the State ofNevada determines that the sales of the products to the equipment lessors is atthe level at which sales/use tax should have been collected, the liability isof the leasing companies could be passed on to the Company and may not berecoverable. The outcome could range from a refund to a potential liabilitywith interest and penalties. However, no probable loss, if any can be estimatedat this time.  Accordingly, no accrual has been made for any possiblelosses in connection with this matter.

 

17

----

Tableof Contents

 

*Lombino Litigation*

* *

On October 9, 2008, Charles Lombino, anattorney who was contracted by the Company to do legal work in 2005 and 2006filed suit against the Company claiming he had performed services during thattime period for which he was not paid, and demanding $180,000 in payment forsuch services.  On March 12, 2009, the Clark CountyDistrict Court dismissed the case without prejudice due to Lombino’s failure to****serve the Company on a timely basis.

** **

**Note 17.****                               ****LossPer Share**

** **

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

 

**Note 18.****                               ****SubsequentEvents**

** **

On March 16, 2009, the Company entered into a Purchase andSettlement Agreement with Shuffle Master, Inc. (the “Purchase andSettlement Agreement”) pursuant to which it sold to Shuffle Master itsportfolio of automated card verification machines and electroniccard shuffling systems,all related intellectual property, including but not limited to, the trademarksof Random PlusTM,ShuffleProTM and Deck CheckerTM, and certain inventory of such products.

 

In addition, Shuffle Master and the Company have settled alloutstanding patent infringement litigation with respect to U.S. Patent No. 6,665,684dealing with automated shuffler technology. The total consideration paid by Shuffle Master under the Purchase andSettlement Agreement is a base amount of $2.4 million, subject to an adjustmentof up to an additional $400,000 related to inventory, subject to an inspectionof the condition and final selection of the inventory items to be delivered bythe Company. The base amount of $2.4 million was received in March 2009and the remaining $400,000 was received in April 2009 upon the conclusionof the Purchase and Settlement Agreement. The Company will recognize a gain relating to the asset disposal ofapproximately $2.0 million in the second quarter 2009.

 

As a result of the transactions under thePurchase and Settlement Agreement, which was completed in April 2009, theChina facility became redundant and, therefore, was completely closed at theend of April 2009.  At March 31,2009, the Company incurred a restructuring charge of $29,416 relating to thewrite-down of its remaining plant equipment.

 

18

----

Tableof Contents

 

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

 

***CAUTIONARY STATEMENT***

 

You should read the following discussion and analysisin conjunction with our unaudited consolidated financial statements and therelated notes thereto contained elsewhere in this report. The informationcontained in this quarterly report on Form 10-Q is not a completedescription of our business or the risks associated with an investment in ourcommon stock. We urge you to carefully review and consider the variousdisclosures made by us in this report and in our other reports filed with theSecurities and Exchange Commission, or SEC, including our annual report on Form 10-Kfor the year ended December 31, 2008, filed with the SEC on March 30,2009 and subsequent reports on Form 8-K, which discuss our business ingreater detail.

 

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

 

Our future results, including results relatedto forward-looking statements, involve a number of risks and uncertainties. Noassurance can be given that the results reflected in any forward-lookingstatements will be achieved. Any forward-looking statement speaks only as ofthe date on which such statement is made. Our forward-looking statements arebased upon assumptions that are sometimes based upon estimates, data,communications and other information from suppliers, government agencies andother sources that may be subject to revision. Except as required by law, we donot undertake any obligation to update or keep current either (i) anyforward-looking statement to reflect events or circumstances arising after thedate of such statement, or (ii) the important factors that could cause ourfuture results to differ materially from historical results or trends, resultsanticipated or planned by us, or which are reflected from time to time in anyforward-looking statement.

 

In addition to other 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, 2008 filedwith the SEC on March 30, 2009.

 

During thefirst quarter of 2009, we owned or had rights to certain trademarks that we usedin connection with the sale of our products, including, but not limited to, thefollowing: VendingDataTM, Deck CheckerTM, Random EjectionTM, Random PlusTM,PokerOneTM, ChipWasherTM, ShuffleProTM, DeckSetter® and DolphinTM. However,pursuant to the Purchase and Settlement Agreement entered into between ShuffleMaster, Inc. and the Company on March 16, 2009, we have sold ShuffleMaster our portfolio of automated card verification machines and electroniccard shuffling systems, all related intellectual 

 

19

----

Table of Contents

 

property, andcertain inventory of such products. As a result of this agreement, we ceased toown the relevant trademarks of Random PlusTM, ShuffleProTM, and Deck CheckerTM.Other than the aforesaid trademarks, this report also makes reference totrademarks and trade names of other companies.

 

**Overview**

 

Elixir Gaming Technologiesis a provider of gaming technology solutions, with a primary focus on leasingelectronic gaming machines on a revenue sharing basis to gaming establishmentswithin Pan Asian markets.

 

Our revenues for the three-month period endedMarch 31, 2009 were $1.8 million and our operations consisted of threesegments:

 

·                 Gaming machineparticipation, which focuses on our ownership of electronic gaming machines andgaming management systems placed in hotels and other venues in emerging marketsin Asia on a revenue sharing basis;

 

·                 Table game products, whichfocus on the design, manufacture and distribution of table game products,including traditional and RFID casino chips, automated shuffling devices, cardscanners and chip washers; and

 

·                 Non-gaming products, whichfocus on the design, manufacture and sale of component parts primarily for theautomotive industry.

 

For the three-month period ended March 31,2009, revenue from gaming machine participation operations, our primarybusiness, comprised 53% of our total revenues.

 

In September 2007, wecommenced our gaming machine participation operations pursuant to a SecuritiesPurchase and Product Participation Agreement (the “Product ParticipationAgreement”) dated June 12, 2007 between ourselves and Elixir Group Limited (“ElixirGroup”), our principal shareholder. Since then our primary business focus has been on the ownership andleasing of electronic gaming machines and gaming management systems placed withvenue owners on a revenue share basis across several countries in Asia where weor our affiliates have established a strategic presence.

 

On November 6, 2008, the SecuritiesPurchase and Product Participation Agreement was terminated between ourselvesand Elixir Group (details of the termination are set out in our Forms 10-Qfiled November 15, 2008 and 10-K filed March 30, 2009).  As a result, we now identify and secure byourselves venues for the placement of electronic gaming machines and casinomanagement systems, which track game performance and provide statistics on eachinstalled electronic gaming machine owned and leased by us.  We contractwith the venue owners or operators for the placement of the electronic gamingmachines on a revenue sharing basis. In addition, we acquire and install byourselves, the gaming machines, casino management systems and other gamingperipherals at the relevant gaming venues.

 

During the first quarter, we continued to make progress in our effortsto reorganize our operations.  On March 16,2009, we entered into a Purchase and Settlement Agreement with Shuffle Master, Inc.(the “Purchase and Settlement Agreement”) pursuant to which we sold to ShuffleMaster our portfolio of automated card verification machines and electroniccard shuffling systems,all related intellectual property, and certain inventory of such products andsettled all outstanding litigation between Shuffle Master and the Company, which traced back to October 5,2004.   The totalconsideration paid by Shuffle Master was $2.8 million, of which $2.4 millionwas received in March 2009 and $400,000 was received in April 2009.  We will recognize a gain relating to theasset disposal of approximately $2.0 million in the second quarter 2009. As aresult of the transactions under the Purchase and Settlement Agreement, whichwas completed in April 2009, the China facility became redundant and,therefore, was completely closed at the end of April 2009. At March 31, 2009,we incurred a restructuring charge of $29,416 relating to the write-down of itsremaining plant equipment. We believe that this transaction providedsignificant financial benefits to us as it improves 

 

20

----

Tableof Contents

 

our cash position and frees up our resourcesto focus on addressing market opportunities that further our strategy ofexpanding our core electronic gaming machine participation business.

 

We are currently operating in a difficultglobal environment. However, we anticipate that we will be able to turnadjusted EBITDA (earnings before interest, taxes, depreciation, andamortization, and non-cash stock compensation expense) positive in the third orfourth quarter of 2009.

 

Weare dependent on the success of our gaming machine participation operations andour ability to execute our cost reduction initiatives in order to remain viableand grow.

 

Ourgaming machine operations are currently concentrated in two countries, thePhilippines and Cambodia.

 

Inthe Philippines, we currently have 817 machines in operation at 5 venues.  We have been proactively working with ourvenue owner partners to develop more targeted marketing and promotionalstrategies to accelerate growth in net wins and implementation of theseinitiatives is planned for the current quarter. We remain encouraged by our improving performance in this market and areseeking to expand our operations.  Weanticipate opening three to four additional venues in the Philippines in theremainder of 2009, adding approximately 400 machines to our operatinginstallation base.

 

InCambodia, we currently have 240 machines in operation in one location, PremierClub at NagaWorld, a wholly-owned subsidiary of Hong Kong listed NagaCorp Ltd.(HKSE:3918). During the first quarter 2009 periods, we closed all of ouroperating venues in Cambodia with the exception of Premier Club at NagaWorlddue to regulatory changes. Despite these venue closures, we achieved quarterlysequential revenue growth for our gaming machines participation operations inCambodia for the first quarter 2009. This was a direct result of our contract with NagaWorld to place electronic gaming machines on aparticipation basis in a designated section of NagaWorld’s gaming floor calledPremier Club.  Under this contract, weand NagaWorld jointly manage the operations at Premier Club.  NagaWorld is the only licensed full servicecasino in Phnom Penh and one of a very few gaming establishments currently inoperation after the widespread closures of gaming clubs in the Phnom Penh area.  Premier Club at NagaWorld has been a strongcontributor to our gaming machine participation revenue since machines werefirst deployed at the end of January 2009 and has enabled us todemonstrate our expertise in operations enhancing our competitive positioningin this market.

 

Simultaneous with our efforts to grow thegaming machine participation business, we have made progress during the firstquarter 2009 in executing our cost reduction initiatives and have continued toidentify additional cost saving opportunities. Such reductions are critical given the current economic climate and the needto provide a much leaner cost structure to derive greater benefits from theleverage inherent in our operating model. During the three-month period ended March 31, 2009, we reduced cashoperating expenses by $0.7 million compared to the prior quarter period.  We are on track to reduce cash selling,general and administrative expenses to under $2.0 million by the end of the three-monthperiod ending September 31, 2009 ahead of our previous target of $2.5million of cash selling, general and administrative expenses for the sameperiod.

 

21

----

Tableof Contents

 

**Results of Operations for the Three-Month Periods Ended March 31,2009 and 2008**

 

The following is a scheduleshowing summarized operating results on a consolidated basis and separately byeach of our three segments for the three-month periods ended March 31,2009 and 2008, namely gaming machine participation, table game products andnon-gaming products.

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase/(Decrease)** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **2009**                               | ** ** | **2008**                | ** ** | **Dollar  Amount** | ** ** | **%  Amount** | ** ** |
| Total:                              |       |                                   |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                      | 1,782,823  |                    | $          | 2,931,523 |   | $ | (1,148,700 | ) | (39 | )% |
| Gross loss                          |       | $                                      | (2,263,008 | )                       | $          | (640,367 | ) | $ | (1,622,641 | ) | 253 | % |
| Gross margin percentage             |       | (127                                   | )%         | (22                     | )%         | — |   | (105 | )% |
| Operating loss                      |       | $                                      | (6,025,918 | )                       | $          | (6,502,366 | ) | $ | 476,448 |   | (7 | )% |
| Net loss                            |       | $                                      | (6,240,847 | )                       | $          | (5,301,550 | ) | $ | (939,297 | ) | 18 | % |
|                                |       |                                   |       |                    |       |   |   |   |   |
| Basic and diluted loss per share    |       | $                                      | (0.05      | )                       | $          | (0.05 | ) | $ | — |   | — |   |
| Weighted average shares outstanding |       | 114,956,671                            |       | 114,923,562             |       |   |   |   |   |
|                                |       |                                   |       |                    |       |   |   |   |   |
| Gaming machine participation:       |       |                                   |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                      | 945,735    |                    | $          | 518,617 |   | $ | 427,118 |   | 82 | % |
| Gross loss                          |       | $                                      | (2,164,715 | )                       | $          | (869,584 | ) | $ | (1,295,131 | ) | 149 | % |
| Gross margin percentage             |       | (229                                   | )%         | (168                    | )%         | — |   | (61 | )% |
|                                |       |                                   |       |                    |       |   |   |   |   |
| Table game products:                |       |                                   |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                      | 158,479    |                    | $          | 680,030 |   | $ | (521,551 | ) | (77 | )% |
| Gross (loss)/profit                 |       | $                                      | (20,488    | )                       | $          | 28,826 |   | $ | (49,314 | ) | (171 | )% |
| Gross margin percentage             |       | (13                                    | )%         | 4                       | %          | — |   | (17 | )% |
|                                |       |                                   |       |                    |       |   |   |   |   |
| Units sold:                         |       |                                   |       |                    |       |   |   |   |   |
| Shufflers                           |       | 13                                     |       | 103                     |       | (90 | ) | (87 | )% |
| DeckCheckers                        |       | 2                                      |       | —                  |       | 2 |   | — |   |
| Chip washers                        |       | 1                                      |       | 1                       |       | — |   | — |   |
| RFID chips                          |       | —                                 |       | 53,400                  |       | (53,400 | ) | (100 | )% |
|                                |       |                                   |       |                    |       |   |   |   |   |
| Non-gaming products:                |       |                                   |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                      | 678,609    |                    | $          | 1,732,876 |   | $ | (1,054,267 | ) | (61 | )% |
| Gross (loss)/profit                 |       | $                                      | (77,805    | )                       | $          | 200,391 |   | $ | (278,196 | ) | (139 | )% |
| Gross margin percentage             |       | (11                                    | )%         | 12                      | %          | — |   | 23 | % |

 

Total revenues for thethree-month period ended March 31, 2009 decreased from the correspondingperiod in the prior year due to a decrease in non-gaming and table game productsales, partially offset by an increase in participation revenues. Revenue fromnon-gaming products declined as a result of decreased orders from our majorcustomers.  Revenue from table gameproduct sales declined as a result of reduced RFID chip and DeckChecker sales.In the prior year period, table game product sales benefited from a RFID chiporder for a new casino in Macau.  Thedecrease in table game product and non-gaming revenues was partly offset by anincrease in gaming machine participation revenue as a result of higher averagenet win per machine.

 

Gross margin has decreasedprimarily as a result of higher depreciation expenses for our gaming machineparticipation operations.  Revenues haveyet to cover the cost of machine depreciation which is recorded in costs ofoperations.

 

22

----

Table of Contents

 

Operating loss and loss pershare for the three-month period ended March 31, 2009 was impacted by ournegative gross margin.

 

**GamingMachine Participation**

 

In September 2007, we began ourelectronic gaming machine participation operations in Asia as part of ourprimary focus on placing gaming machines on a revenue sharing basis. Revenuefrom our gaming machine participation operations during the three-month periodended March 31, 2009 was $945,735 compared to revenue of $518,617 for sameperiod in 2008. The increase in revenue was primarily the result of higheraverage net win per machine compared to the three-month period ended March 31,2008 when our gaming machines participation operations were still in theirinfancy.

 

Our gross loss from gaming machineparticipation operations for the three-month period ended March 31, 2009was $2,164,715 compared to a gross loss of $869,584 for the same period in2008. Our costs of goods sold for the three-month period ended March 31,2009 included $2.4 million of depreciation of electronic gaming machines andapproximately $379,000 of write-down of venue set-up costs related to our venueclosures in Cambodia.  After giving noeffect to depreciation expenses or write-downs, we had gross income of $0.6million for the three-month period ended March 31, 2009.

 

As of March 31, 2009, we had a totalnumber of gaming machines of 2,175 of which 1,107 machines were held ininventory and 1,068 machines were in operation. Of the 1,068 gaming machines in operation, 831 machines were in operationin five venues in the Philippines and 237 machines were in operation in onevenue in Cambodia. Of our 831 gaming machines in operation in the Philippines,we recognized revenue on gaming activities occurring on 633 machines anddeferred revenues for the remaining 198 machines in one venue because thecollection from this venue was not reasonably assured.

 

On December 2,2008, Cambodia’s Prime Minister issued a directive which requires slot machineoperators in the country to obtain licenses issued by the Ministry of Economyand Finance and to operate only in hotels certified by the Ministry ofTourism.  According to the directive, existing slot machine operators havesix months to comply.  In addition, the directive seeks strict compliancewith the foreigners-only rule that permits only foreigners or Cambodianswith foreign passports to gamble in the country.

 

On January 5, 2009,we entered into a contract with NagaWorld, a wholly-owned subsidiary of HongKong listed NagaCorp Ltd. (HKSE:3918), to place electronic gaming machines on aparticipation basis at its NagaWorld, a five-star hotel casino resort inCambodia and the only licensed full service casino in Phnom Penh.

 

Under the terms of theagreement, we are contracted to place electronic gaming machines in PremierClub, an assigned area of NagaWorld, and share in the gross revenue generatedby each machine placed.  We have jointcontrol with NagaWorld over the operation of the electronic gaming machines,including floor staff and respective audit rights. We are entitled to 25% ofthe revenue generated by the machines placed by us and NagaWorld are entitledto 75% of such revenue. Most of the costs and expenses related to the operationof the machines placed by us, such as marketing funds, staff costs and staffmeal expenses, is shared 25% by us and 75% by NagaWorld.  This agreement is valid for a term of fiveyears commencing from the live commercial launch of the operation of ourmachines in NagaWorld on January 26, 2009.

 

23

----

Table of Contents

 

OnFebruary 24, 2009, Cambodia’s Prime Minister called for the closure of thecountry’s sole bookmaker, Cambo Six and said the government would not renew itslicense upon expiration in 2011.  Subsequent to this action, all slotclubs in Cambodia’s Phnom Penh area, including ours, were either temporarily orpermanently closed, with the exception of those operated within NagaWorld.NagaWorld operates under an exclusive casino license within a 200 kilometerradius of the capital city of Phnom Penh and the Premier Club at NagaWorld isour sole venue in operation in Cambodia.

 

As of May 11, 2009, we had 1,057 gamingmachines in operation and approximately 1,100 gaming machines in inventory. Inthe Philippines, we had 817 machines in operation in 5 venues. In Cambodia, wehad 240 machines in operation reflecting additional machines added to ourPremier Club at NagaWorld.

 

We anticipate approximately 400 additionalmachine placements in 2009 through the rollout of new contracts in thePhilippines.  However, in the eventgaming machine performance at our contracted venues does not meet expectations,we may choose to withdraw all or a portion of our gaming machines from suchvenues for future redeployment in new or existing venues with betterperformance prospects.

 

**TableGame Products**

 

On March 16, 2009, we entered into aPurchase and Settlement Agreement with Shuffle Master, Inc. (the “Purchaseand Settlement Agreement”) pursuant to which we sold to Shuffle Master ourportfolio of automated card verification machines and electronic card shufflingsystems, all related intellectual property, including but not limited to, thetrademarks of Random PlusTM, ShuffleProTM and Deck CheckerTM, and certaininventory of such products.

 

Table game products revenue decreased$521,551 to $158,479 for the three months ended March 31, 2009 compared tothe corresponding period in the prior year. The decline was a result of decreases in Shuffler, ChipWasher, RFID chipand service revenue as well as the sale of all of the automated cardverification machines and electronic card shuffling systems during the firstquarter 2009 period.

 

Our gross margin on tablegame products decreased in the three-month period ended March 31, 2009over the corresponding period of the prior year due to decreased volumesresulting in production inefficiencies and decreased margins to ourdistributor.

 

**Non-GamingProducts**

 

Non-gaming products revenue,which consists of automotive tooling and parts, decreased in the three-monthperiod ended March 31, 2009 by $1,054,267 to $678,609 compared to$1,732,876 in the corresponding period of the prior year.  The decrease isrelated to sales reduction from our largest customer as they decreased theirproduction for the year.

 

Gross margins decreased by$278,000 to a loss of $78,000 due to the reduction in sales orders from ourmajor customer.

 

24

----

Table of Contents

 

**OperatingExpenses**

 

The following is a scheduleof expenses on a consolidated basis:

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** **      | **Increase/(Decrease)** | ** ** |
|-------------------------------------|------------|----------------------------------------|-----------------|-------------------------|------------|
| ** **                          | ** ** | **2009**                               | ** **      | **2008**                | ** ** | **Dollar  Amount** | ** ** | **%  Amount** | ** ** |
| Selling, general and administrative |       | $                                      | 2,633,172       |                    | $          | 3,339,267 |   | $ | (706,095 | ) | (21 | )% |
| Stock-based compensation expense    |       | 201,855                                |            | 1,802,321               |       | (1,600,466 | ) | (89 | )% |
| Research and development            |       | 95,095                                 |            | 323,721                 |       | (228,626 | ) | (71 | )% |
| Depreciation and amortization       |       | 323,717                                |            | 231,120                 |       | 92,597 |   | 40 | % |
| Restructuring charges               |       | 509,071                                |            | 165,570                 |       | 343,501 |   | 207 | % |
|                                |       | $                                      |  3,762,910 |                    | $          | 5,861,999 |   | $ | (2,099,089 | ) | (36 | )% |

 

**Selling,General and Administrative Expenses**

 

During the three-monthperiod ended March 31, 2009, selling, general and administrative expensesdecreased by $706,095 compared to the prior year period due to our costreduction initiatives.  Salaries andwages expense declined $130,107 as a result of headcount reductions andvoluntary senior management pay reductions. Legal expense and external consultancy and accounting fees declined$249,322 due to greater reliance of related projects on in-housepersonnel.  Travel decreased by $103,987due to concerted efforts to reduce employee travel to the bare minimum.Investor relations declined $73,346 due to participation in fewer investorevents during the period.  Advertisingexpense decreased by $34,926 due to rebranding of our new company image in theprior year period and office supplies decreased by $50,665 due to various costreduction initiatives.  Based on our costreduction plans, we anticipate further reductions in selling, general, andadministrative expenses over the next two quarters.

 

**Stock-BasedCompensation Expense**

 

Stock-based compensationexpense decreased by $1.6 million to $201,855 for the three-month period ended March 31,2009, compared to $1,802,321 in the corresponding period of the prior yearprimarily due to re-measurement of non-employee awards at fair market value andsenior executives who have departed and their stock options were forfeited.

 

**Research and Development Expenses**

 

Research and development expenses for thethree-month period ended March 31, 2009 decreased $228,631 compared to theprior year period as a result of reduced expenses related to the development ofShufflePro and Chip Washer products. As a result of our sale to Shuffle Master of our portfolio of automated cardverification machines and electronic card shuffling systems, all related intellectual property, andcertain inventory of such products pursuant to the Purchase and SettlementAgreement as set out above, it is anticipated that our future research anddevelopment will be focused on non-gaming product enhancements.

 

**Depreciationand Amortization Expenses**

 

The total depreciation and amortizationexpenses increased $92,597 for the three-month period ended March 31, 2009compared to the prior year period.  Theincrease was the result of additional depreciation for office equipment andleasehold improvements.

 

25

----

Tableof Contents

 

**Restructuring Charges**

 

During the three-month period ended March 31,2009, as part of our cost reduction initiatives, we incurred restructuringcharges of $509,071 for severance wages and benefits related to the terminationof employees and write-down of remaining plant equipment.  The amount represents the contractual andother agreements with employees including a former executive, which onlyincludes charges for termination benefits measured at the estimated fair valueat the termination date.  It does not include charges for services yet tobe rendered.

 

**OtherIncome/(Expenses)**

 
| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase/(Decrease)** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **2009**                               | ** ** | **2008**                | ** ** | **Dollar  Amount** | ** ** | **% Amount** | ** ** |
| Interest expense and finance fees |       | $                                      | (135,938   | )                       | $          | (54,287 | ) | (81,651 | ) | 150 | % |
| Interest income                   |       | 38,388                                 |       | 366,751                 |       | (328,363 | ) | (90 | )% |
| Foreign currency gains/(losses)   |       | (126,566                               | )          | 839,966                 |       | (966,532 | ) | (115 | )% |
| Other                             |       | 12,379                                 |       | 80,527                  |       | (68,148 | ) | (85 | )% |
| Total                             |       | $                                      | (211,737   | )                       | $          | 1,232,957 |   | $ | (1,444,694 | ) | (117 | )% |
|                                   |            |                                        |            |                         |            |  |  |  |  |  |  |  |

 

**InterestExpense and Finance Fees**

 

Interest expense and financefees increased $81,651 for the three-month period ended March 31, 2009compared to the same period in 2008 due to higher debt level principallyrelating to the issuance of notes from Elixir International.  In April 2008, we signed a noteagreement for $15.0 million with Elixir International accruing 8% interest andin November 2008, the agreement was amended and the interest rate wasreduced to 5%.

 

**InterestIncome**

 

Interest income decreased$328,363 for the three-month period ended March 31, 2009 compared to thesame period in 2008 as a result of the decrease in our cash and cashequivalents held in overnight money market accounts.  Cash in bank decreased by $33.78 million to$12.88 million from March 31, 2008 to March 31, 2009. Our cashbalance as of March 31, 2008 was high due to funding received on theprivate placement of our common stock in the fourth quarter of 2007.

 

**ForeignCurrency Transactions**

 

The Company incurred foreigncurrency losses of $126,566 for the three-month period ended March 31,2009 compared to gains of $839,966 for the same period in 2008. The current periodlosses resulted from the appreciating value of the U.S. dollar denominatedpayables at our Philippine operations, whose functional currency is thePhilippine peso. In the first quarter of 2008, the Philippine affiliaterecorded foreign currency transaction gains mainly due to settlement of U.S.dollar denominated payables as a result of the appreciating value of thePhilippine peso.

 

**Other**

 

In the three-month periodended March 31, 2009, we recorded $53,151 income related to a grant fromthe Australian Federal Government and netted this off against other expenses of$40,772.

 

26

----

Table of Contents

 

**Income Tax Provisions**

 

Our effective tax rate for the three-month period ended March 31,2009 was approximately 0.05%.  We willcontinue to review the tax losses and income generated in the future by ourforeign subsidiaries to evaluate whether they should be reflected as a benefitor provision in our consolidated financial statements.

 
| ** **            | ** ** | **Three Months Ended  March  31,** | ** ** | **Increase/(Decrease)** | ** ** |
|-----------------------|------------|-----------------------------------------|------------|-------------------------|------------|
| ** **            | ** ** | **2009**                                | ** ** | **2008**                | ** ** | **Dollar  Amount** | ** ** | **%  Amount** | ** ** |
| Income tax provisions |       | $                                       | (3,192     | )                       | $          | (32,141 | ) | $ | 28,949 |   | (90 | )% |
|                       |            |                                         |            |                         |            |  |  |  |  |  |  |  |

 

**FINANCIAL CONDITION**

 

**Liquidityand Capital Resources**

 

On April 21, 2008, we entered into a Trade Credit FacilityAgreement (the “Facility Agreement”) with Elixir International.  Titles on any gaming machines offered inexchange for the notes passes to the Company upon issuance of the notes.

 

Upon entering into the Agreement, we immediately issued the first notepursuant to the terms of the Facility Agreement in the principal amount of$15,000,000 (the “Initial Advance”).  TheInitial Advance extinguished an existing current trade payable of an equivalentamount to Elixir International in respect to gaming machines previouslyacquired.

 

Under the terms as amended on November 6, 2008, we are obligatedto repay the current principal of $10.6 million, plus any accrued interestthereon, in equal monthly installments of $529,489 through December 1,2010.  The advances under the FacilityAgreement are subject to demand by Elixir International for immediate paymentonly if there is either an event of default or a change of control defined inthe Facility Agreement.

 

As of March 31, 2009, we had total cash andcash equivalents of $12.9 million and a working capital balance of $2.8million.  Our working capital waspositively impacted by the sale of our Deckchecker and card shuffler assets forwhich we received the base payment of $2.4 million in cash in March 2009. However,working capital was negatively impacted by the repayment of the note payabledue to Elixir International and operating losses.

 

During the three-month period ended March 31,2009, we incurred negative cash flow from operations of approximately $1.3million.  Our current gaming machine inventory level is approximately 1,100,which we will seek to re-deploy into new projects and existing sites.  We intend to purchase a limited number ofgaming machines during 2009 to augment our existing inventory of machines andenhance game floor mix to better optimize performance at anticipated new andexisting venues. With limited exceptions, we believe we will be able topurchase second-hand machines at significantly discounted prices.  We willalso purchase casino management systems during 2009 for placement in previouslypurchased or new gaming machines depending upon our business plan’sexecution.  Based on our existing growthplans, we anticipate capital expenditures will be limited to approximately $2.0to $3.0 million for the remainder of 2009.

 

Based on:

 

·                  ourextensive cost cutting measures, which involve, amongst other initiatives, theclosure of our China factory and Macau office and significant reductions intraveling and entertainment expenses, 

 

27

----

Table of Contents

 

oncefully implemented in the third quarter of 2009 should result in annualizedselling, general and administrative cost savings of approximately 49% comparedto 2008 levels;

 

·                  thereceipt of the sale proceeds from the sale of our portfolio of automated cardverification machines and electronic card shuffling systems, all relatedintellectual property, and certain inventories of such products to ShuffleMaster, Inc. in March and April of 2009; and

 

·                  ourassumption that we will be successful in our endeavors to ramp up the revenuebase by focusing our placement of gaming machines in better performing venuesand plans to provide value-added services, such as promotion and marketingadvisory services, to certain venues with a view to improving net win permachine.

 

We believe our available working capital, alongwith cash expected to be generated from operations, will allow us to meet ourworking capital needs through March of 2010.

 

We may require additional funding in 2009, inwhich case, we will look into the options for raising additional funds throughvarious financing sources, including the sale of debt or equity securities andthe procurement of commercial debt financing and vendor financing.  However, there can be no guarantees that suchfunds will be available on commercially reasonable terms, if at all. If suchfinancing is not available on satisfactory terms, we may be unable to expand orcontinue our business as desired and operating results may be adverselyaffected.  Any debt financing willincrease expenses and must be repaid regardless of operating results and mayinvolve restrictions limiting our operating flexibility and any equityfinancing will be dilutive to our present stockholders.

 

**Cash Flows Summary**

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** **       | ** **  | ** ** |
|----------------------------------------|------------|----------------------------------------|------------------|-------------|------------|
| ** **                             | ** ** | **2009**                               | ** **       | **2008**    | ** ** | **Increase (Decrease)** | ** ** |
| Cash provided by/ (used in):           |       |                                   |             |        |       |   |   |
| Operations                             |       | $                                      | (1,347,678       | )           | $          | (5,704,023 | ) | $ | 4,356,345 |   |
| Investing                              |       | 1,306,863                              |             | (15,885,159 | )          | 17,192,022 |   |
| Financing                              |       | (1,549,105                             | )                | (31,927     | )          | (1,517,178 | ) |
| Effect of exchange rate change in cash |       | (33,182                                | )                | —      |       | (33,182 | ) |
|                                   |       | $                                      |  (1,623,102 | )           | $          | (21,621,109 | ) | $ | (19,998,007 | ) |

 

**Operations**

 

Cash used in operations decreased as a result of the decrease inworking capital as well as outlays for operating expenses such as salary,travel, rent and professional fees.

 

**Investing**

 

Cash used in investingactivities decreased as a result of the advance payment received for the saleof assets and significant reductions in purchasing of gaming machines andsystems after the first year of operation.  Electronic gaming machines andproperty, plant and equipment of $1.2 million were purchased in the three-monthperiod ended March 31, 2009.

 

**Financing**

 

Cash used in financingactivities increased as a result of repayment of the note payable to ElixirInternational.

 

28

----

Table of Contents

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

Our consolidated financialstatements were prepared in conformity with accounting principles generallyaccepted in the United States. Accordingly, we are required to make estimatesincorporating judgments and assumptions we believe are reasonable based on ourhistorical experience, contract terms, observance of known trends in ourcompany and the industry as a whole, as well as information available fromother outside sources. Our estimates affect amounts recorded in the financialstatements and actual results may differ from initial estimates.

 

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

 

**Intangible Assets, includingGoodwill**

 

Intangible assets consist ofpatents, customer relationships, trademarks and goodwill. They are recorded atcost and are amortized, except for goodwill, on the straight-line basis overthe period of time the asset is expected to contribute directly or indirectlyto future cash flows, which range from 10 to 13 years. The straight-lineamortization method is utilized because we believe there is not a more reliablydeterminable method of reflecting the pattern in which the economic benefits ofthe intangible assets are consumed or otherwise used up.

 

We adopted SFAS No. 142,*Goodwill and Other Intangible Assets*(“SFASNo. 142”) and SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* (“SFAS No. 144”),effective January 1, 2002.  Under SFAS No. 142, goodwill is nolonger amortized but is subject to periodic impairment tests. Other intangibleassets with finite lives, such as patents, customer relationships andtrademarks will continue to be amortized over their useful lives.

 

**Inventory**

 

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

 

**Consignment Inventory**

 

As of March 31, 2009,we had consignment inventory, service supplies and parts of $235,218, net of aprovision of obsolescence of $372,698. Revenue is not recognized, and theinventory remains ours, until ownership of the product and title passes to thedistributor, which occurs upon the distributor’s use of the products or salesto third-party customers.

 

**Gaming Machines and Systems**

 

Gaming machines and systemsare stated at cost.  We depreciate gaming machines and systems over afive-year useful life to a minimal salvage value once placed in service.  Trends in market demand and technologicalobsolescence may require us to review and evaluate the recoverability of ourinvestment, as well as the estimated useful lives used to depreciate theseassets.

 

29

----

Table of Contents

 

**Property and Equipment**

 

We are required to estimatesalvage values and useful lives for our property and equipment.  Trends inmarket demand and technological obsolescence may require us to recordimpairment charges in accordance with the provisions of SFAS No. 144.

 

**Revenue Recognition**

 

We recognize revenue when all of the following have been satisfied:

 

·                  persuasive evidence of an arrangement exists;

 

·                  the price to the customer is fixed anddeterminable;

 

·                  delivery has occurred and any acceptanceterms have been fulfilled;

 

·                  no significant contractual obligationsremain; and

 

·                  collection is reasonably assured.

 

*Gaming and Non-Gaming Product Revenues*

 

We recognize revenue from the sale of our products to end users uponshipment against customer contracts or purchase orders. Revenue from shufflerrentals is recorded at the first of each month in accordance with rentalcontract terms.  We completed our transition to outsourcing all futuresales to third-party distributors during the fourth quarter 2007 and will nolonger record rental revenue on our table game products.

 

We recognize revenue from our sales to independent distributors uponshipment to the distributor against distributor contracts or purchase orders ofour product.  We recognize revenue on consignment inventory when ownershipof the 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.

 

The maintenancecomponents that are part of long-term sales contracts are recorded as deferredrevenue and are amortized over the remaining life of the sales agreement afterthe initial 90-day warranty as required by the Emerging Issues Task Force Issue(“EITF”) No. 00-21, *RevenueArrangements with Multiple Deliverables*. We provide for estimatedwarranty repair costs associated with sales contracts. Although there are no extendedwarranties offered for its products, we provide for maintenance contracts thatare billed and recognized on a monthly basis. Beginning January 1, 2009, our sales were being made through itsindependent distributors and we no longer offer long-term sales contracts orservice to customers.

 

*Participation Revenues*

 

We earn recurring revenue by providing customers with electronic gamingmachines and casino management systems which track game performance and providestatistics on installed electronic gaming machines owned by us and leased tovenue owners.  Revenues are recognized onthe contractual terms of the participation agreements between ourselves and thevenue owners and are based on our share of net winnings.

 

Revenues are recognized as incurred with the exception of one of ourvenues in which revenues are recognized as the payment for net winnings arereceived as the collections from this venue were not reasonably assured.  Net winnings from this venue have beenrecorded as deferred revenue until the 

 

30

----

Table ofContents

 

collections of such net winnings are reasonably assured.  Deferred revenue was $180,260 and nil as of March 31,2009 and December 31, 2008, respectively.

 

**Stock-Based Compensation**

 

We adopted SFAS No. 123R,*Share-Based Payment*, to account for allits stock-based compensation beginning January 1, 2006, and elected themodified prospective method of transition. Under the fair value recognitionprovisions of SFAS No. 123R, for stock-based compensation accrued toemployees and non-employee directors, we recognize stock-based compensationexpense for all service-based awards with graded vesting schedules on the straight-linebasis over the requisite service period for the entire award.  Initial accruals of compensation expense arebased on the estimated number of shares for which requisite service is expectedto be rendered.  Estimates are revised ifsubsequent information indicates that forfeitures will differ from previousestimates, and the cumulative effect on compensation costs of a change in theestimated forfeitures is recognized in the period of the change.  For non-employee awards, we remeasurecompensation costs each period until the service condition is complete andrecognizes compensation costs on the straight-line basis over the requisiteservice period.  Option valuation modelsrequire the input of highly subjective assumptions, and changes in the assumptionsused can materially affect the fair value estimate. Judgment is required inestimating stock price volatility, forfeiture rates, expected dividends, andexpected terms that options remain outstanding. Stock-based compensation expense totaled $201,855 and $1,802,321 for thethree-month periods ended March 31, 2009 and 2008, respectively, and isincluded in selling, general and administrative expense in the accompanyingconsolidated statements of operations.

 

**Income Taxes**

 

We are subject to income taxesin the U.S. (including federal and state) and several foreign jurisdictions inwhich we operate. Deferred income tax balances reflect the effects of temporarydifferences between the carrying amounts of assets and liabilities and theirtax bases and are stated at enacted tax rates expected to be in effect whentaxes are actually paid or recovered. SFAS No. 109, *Accountingfor Income Taxes* (“SFAS No. 109”), requires that deferred taxassets be evaluated for future realization and reduced by a valuation allowanceto the extent we believe a portion will not be realized. We consider manyfactors when assessing the likelihood of future realization of our deferred taxassets, including our recent cumulative earnings experience and expectations offuture taxable income by taxing jurisdiction, the carry-forward periodsavailable to us for tax reporting purposes, and other relevant factors.

 

Significant judgment isrequired in evaluating our tax positions and determining our provision forincome taxes. During the ordinary course of business, there are manytransactions and calculations for which the ultimate tax determination isuncertain. Effective January 1, 2007, we adopted the provisions of FIN No. 48,*Accounting for Uncertainty in Income Taxes*and Interpretation of FASB Statement No. 109, which contains a two-stepapproach to recognizing and measuring uncertain tax positions accounted for inaccordance with SFAS No. 109. 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 is morethan 50% likely of being realized upon ultimate settlement. We considermany factors when evaluating and estimating our tax positions and tax benefits,which may require periodic adjustments and which may not accurately anticipateactual outcomes.

 

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

 

31

----

Table of Contents

 

**Recently Issued AccountingStandards**

 

In December 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), *Business Combinations* (“SFAS No. 141(R)”). SFAS No. 141(R) replacesSFAS No. 141, *Business Combinations*(“SFASNo. 141”), but retains the requirement that the purchase method ofaccounting for acquisitions be used for all business combinations. SFAS No. 141(R) expandson the disclosures previously required by SFAS No. 141 (“SFAS 141”),better defines the acquirer and the acquisition date in a business combination,and establishes principles for recognizing and measuring the assets acquired(including goodwill), the liabilities assumed and any non-controlling interestsin the acquired business. SFAS No. 141(R) also requires an acquirerto record an adjustment to income tax expense for changes in valuationallowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) iseffective for all business combinations with an acquisition date in the firstannual period following December 15, 2008; early adoption is notpermitted. We adopted this statement as of January 1, 2009 and theadoption has had no impact on our consolidated financial statements.

 

In December 2007, theFASB issued SFAS No. 160, *Non-Controlling Interestin Consolidated Financial Statements,*an Amendment of ARB No. 51(“SFAS No. 160”). This statement establishes accounting and reportingstandards for ownership interest in subsidiaries held by parties other than theparent and for the deconsolidation of a subsidiary. It also clarifies that anon-controlling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. SFAS No. 160 changes the way the consolidated incomestatement is presented by requiring consolidated net income to be reported atamounts that include the amount attributable to both the parent and thenon-controlling interests. The statement also establishes reportingrequirements that provide sufficient disclosure that clearly identify anddistinguish between the interest of the parent and those of the non-controllingowners. We adopted this statement as of January 1, 2008 and the adoptionhas had no impact on our financial position, results of operations or cashflows.

 

In May 2008, the FASBissued SFAS No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*. This statement identifies the sources of accounting principles and theframework for selecting the principles to be used in the preparation offinancial statements of non-governmental entities that are presented in theconformity with generally accepted accounting principles (GAAP) in the UnitedStates.  It clarifies the order whichsources of accounting principles have priority. We adopted this statement as of June 1, 2008 and the adoption hashad no impact on our financial position, results of operations or cash flows.

 

In February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-2,*Effective Date of FASB Statement No. 157,*that deferred the effective date of SFAS No. 157 for one year for certainnon-financial assets and non-financial liabilities. We adopted this statementas of January 1, 2009 for non-financial assets and non-financialliabilities and the adoption has had no impact on our financial position andresults of operations. See Note 1 in the Notes to Consolidated FinancialStatements for additional disclosures.

 

**Item 3.            Quantitative and QualitativeDisclosures about Market Risk**

 

Not applicable.

 

32

----

Table ofContents

 

## **Item 4.            Controlsand Procedures**

## ** **

*(a)  Evaluation of Disclosure Controls and Procedures*.

 

Our management, with the participation of our chief executive officerand chief accounting officer, has evaluated the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15 under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Based on thisevaluation, our management concluded that our disclosure controls andprocedures were not effective as of March 31, 2009 due to materialweakness as identified at December 31, 2008.  While we have implemented additional controlprocedures to mitigate the risks associated with these material weaknesses,these controls have not been tested as of March 31, 2009.  Thus, our material weaknesses will not beconsidered remediated until testing hasbeen completed and provides management a basis to conclude that these controls are properly designed andoperating effectively.

 

As previously reported in our Annual Report on Form 10-K, as filedwith the Securities and Exchange Commission on March 30, 2009, inconnection with our assessment of the effectiveness of our internal controlover financial reporting at the end of its last fiscal year, managementidentified four material weaknesses (i) tracking and accounting ofelectronic gaming machines (EGMs), (ii) foreign currency transaction andtranslation, (iii) calculation and recording of stock-based compensation,and (iv) valuation of inventory, receivables and intangible assets, in ourinternal control over financial reporting as of December 31, 2008. Thissection of Item 4,”Controls and Procedures,” should be read in conjunction withItem 9A,”Controls and Procedures,” included in our Form 10-K for the yearended December 31, 2008, for additional information on Management’s Reporton Internal Controls Over Financial Reporting. Management is committed toremediate the material weaknesses as timely as possible and has implemented thefollowing additional control procedures during the first quarter of 2009 whenpreparing the unaudited quarterly consolidated financial statements inaccordance with generally accepted accounting principles in the United States.

 

·                  In order to ensure our EGMs balance wascorrect as of March 31, 2009, a physical count of EGMs at March 31,2009 was conducted with no material discrepancies noted.

 

·                  Management performed a thorough review of there-measurement of foreign currency balances at March 31, 2009.

 

·                  Management performed a thorough review of thecalculation and recording of stock-based compensation for the three-monthperiod ended March 31, 2009.

 

·                  Management performed thorough reviews of andmore robust analyses on certain critical estimates and account balances at March 31,2009.

 

(b)  *Changes in internal control over financial reporting.*

 

Except as indicated in section (a) above, there were no otherchanges in our internal controls over financial reporting that occurred duringthe first quarter of 2009 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

33

----

Table ofContents

 

# **PART II — OTHERINFORMATION**

# ** **

## **Item6.            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 |

 

34

----

Table ofContents

 

**SIGNATURES**

** **

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| ** ** | ** **        | **ELIXIR GAMING TECHNOLOGIES, INC.** |
|------------|-------------------|--------------------------------------|
|       |              | (Registrant)                         |   |
|       |              |                                 |   |
|       |              |                                 |   |
| Date:      | May 15, 2009 | By:                                  | /s/ Clarence Chung |
|       |              |                                 | Clarence Chung |
|       |              | Its:                                 | President and Chief Executive Officer |
|       |              |                                 |   |
|       |              |                                 |   |
| Date:      | May 15, 2009 | By:                                  | /s/ Andy Tsui |
|       |              |                                 | Andy Tsui |
|       |              | Its:                                 | Vice President Finance and Chief Accounting Officer |
|            |                   |                                      |  |  |

 

----