Table of Contents

 

 

 

**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

| **x**                                                                                                                                                                                     | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                      |       |                                                                                                    |
| **For the Quarterly Period Ended  June 30, 2009**                                                                                                                                    |
|                                                                                                                                                                                      |
| **OR**                                                                                                                                                                                    |
|                                                                                                                                                                                      |       |                                                                                                    |
| **o**                                                                                                                                                                                     | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                      |       |                                                                                                    |
| **For the transition period from              to              .** |

 

**Commission file number: 001-32161**

 

**Elixir Gaming Technologies, Inc.**

(Exact name of registrant 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**

**60 Wyndham Street**

**Central, Hong Kong**

(Address of principal executive offices, including zip code)

 

**+ 852-3151-3800**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

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

 

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

 

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

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer or a smallerreporting 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 a shellcompany (as defined in Rule 12b-2 of the ExchangeAct).  Yes o  No x

 

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

 

 

 

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Table of Contents

 

**Table of Contents**

 
| ** **                                    | ** **                                                                                      | **Page** |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                            |     |
| **PART I —  FINANCIAL INFORMATION** |
|                                          |                                                                                            |     |
| **Item 1.**                                   | **Financial  Statements**                                                                       | 1        |
|                                          |                                                                                            |     |
|                                          | Consolidated Balance Sheets                                                                     | 1        |
|                                          |                                                                                            |     |
|                                          | Consolidated Statements of Operations                                                           | 2        |
|                                          |                                                                                            |     |
|                                          | Consolidated Statements of Cash Flows                                                           | 3        |
|                                          |                                                                                            |     |
|                                          | Notes to Consolidated Financial Statements                                                      | 4        |
|                                          |                                                                                            |     |
| **Item  2.**                                  | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 16       |
|                                          |                                                                                            |     |
|                                          | Overview                                                                                        | 17       |
|                                          |                                                                                            |     |
|                                          | Results of  Operations                                                                          | 18       |
|                                          |                                                                                            |     |
|                                          | Liquidity and  Capital Resources                                                                | 25       |
|                                          |                                                                                            |     |
|                                          | Critical  Accounting Policies and Estimates                                                     | 27       |
|                                          |                                                                                            |     |
| **Item  3.**                                  | **Quantitative  and Qualitative Disclosures about Market Risk**                                 | 29       |
|                                          |                                                                                            |     |
| **Item 4.**                                   | **Controls  and Procedures**                                                                    | 29       |
|                                          |                                                                                            |     |
| **PART II — OTHER  INFORMATION**    |
|                                          |                                                                                            |     |
| **Item 6.**                                   | **Exhibits**                                                                                    | 31       |

 

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Table ofContents

 

**PART I — FINANCIAL INFORMATION**

 

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

** **

**ELIXIR GAMING TECHNOLOGIES, INC. ANDSUBSIDIARIES**

 

**Consolidated Balance Sheets**

 
| ** **                                                                                                                     | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                                     | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                     |       |                   |       |                       |       |
| Current assets:                                                                                                                |       |                   |       |                       |       |
| Cash and cash equivalents                                                                                                      |       | $                      | 9,514,655  |                       | $          | 14,504,433 |   |
| Accounts receivable, trade,  net of allowance for uncollectible of $634,618 in 2009 and $923,603 in  2008                 |       | 2,682,369              |       | 1,336,261                  |       |
| Due from a related party                                                                                                       |       | 8,176                  |       | 531,109                    |       |
| Other receivables                                                                                                              |       | 329,297                |       | 78,082                     |       |
| Inventories                                                                                                                    |       | 454,375                |       | 1,096,046                  |       |
| Prepaid expenses and other  current assets                                                                                     |       | 967,194                |       | 1,299,487                  |       |
| Total current assets                                                                                                           |       | 13,956,066             |       | 18,845,418                 |       |
|                                                                                                                           |       |                   |       |                       |       |
| Gaming equipment and systems,  net of accumulated depreciation of $11,232,207 in 2009 and $7,081,817 in 2008                   |       | 44,144,417             |       | 48,351,545                 |       |
| Property and equipment, net  of accumulated depreciation of $3,241,840 in 2009 and $2,917,153 in 2008                          |       | 3,463,417              |       | 3,724,467                  |       |
| Intangible assets, net of  accumulated amortization of $1,669,326 in 2009 and $2,356,271 in 2008                               |       | 3,663,275              |       | 4,123,403                  |       |
| Goodwill                                                                                                                       |       | 84,210                 |       | 84,210                     |       |
| Deposits and other assets                                                                                                      |       | 966,649                |       | 1,284,679                  |       |
| Total assets                                                                                                                   |       | $                      | 66,278,034 |                       | $          | 76,413,722 |   |
|                                                                                                                           |       |                   |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                 |       |                   |       |                       |       |
| Current liabilities:                                                                                                           |       |                   |       |                       |       |
| Accounts payable                                                                                                               |       | $                      | 1,169,132  |                       | $          | 806,538 |   |
| Amount due to a related  party                                                                                                 |       | 4,490                  |       | 27,672                     |       |
| Accrued expenses                                                                                                               |       | 1,711,780              |       | 2,712,758                  |       |
| Deferred revenue                                                                                                               |       | 318,614                |       | —                     |       |
| Short-term debt                                                                                                                |       | —                 |       | 29,372                     |       |
| Notes payable to a related  party, current portion                                                                             |       | 6,032,691              |       | 5,884,049                  |       |
| Capital lease obligations,  current portion                                                                                    |       | 219,088                |       | 269,371                    |       |
| Customer deposits                                                                                                              |       | 40,172                 |       | 1,525,569                  |       |
| Total current liabilities                                                                                                      |       | 9,495,967              |       | 11,255,329                 |       |
|                                                                                                                           |       |                   |       |                       |       |
| Notes payable to a related  party, net of current portion                                                                      |       | 3,131,118              |       | 6,185,088                  |       |
| Capital lease obligations,  net of current portion                                                                             |       | 444,124                |       | 468,424                    |       |
| Other liabilities                                                                                                              |       | 775,495                |       | 525,986                    |       |
| Deferred tax liability                                                                                                         |       | 769,459                |       | 495,560                    |       |
| Total liabilities                                                                                                              |       | 14,616,163             |       | 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                                                                                                     |       | 414,434,000            |       | 413,987,829                |       |
| Accumulated other  comprehensive income/ (losses)                                                                              |       | (1,946,973             | )          | (2,107,842                 | )          |
| Accumulated deficit                                                                                                            |       | (360,940,113           | )          | (354,511,609               | )          |
| Total stockholders’ equity                                                                                                |       | 51,661,871             |       | 57,483,335                 |       |
| Total liabilities and  stockholders’ equity                                                                               |       | $                      | 66,278,034 |                       | $          | 76,413,722 |   |

 

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

 

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**ELIXIR GAMING TECHNOLOGIES, INC. ANDSUBSIDIARIES**

** **

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                  | ** ** | **Three  Months Ended June 30,** | ** **      | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|-----------------|-------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                              | ** **      | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                                   |       |                                  |            |                                |       |   |   |   |   |
| Table game products                                         |       |                                  |            |                                |       |   |   |   |   |
| Related party                                               |       | $                                     |  2,975,769 |                                | $          |  69,356 |   | $ |  2,975,769 |   | $ |  269,539 |   |
| Third party                                                 |       | 215,209                               |            | 167,486                             |       | 293,275 |   | 71,297 |   |
|                                                        |       | 3,190,978                             |            | 236,842                             |       | 3,269,044 |   | 340,836 |   |
| Gaming machine participation                                |       | 1,743,063                             |            | 768,911                             |       | 2,688,798 |   | 1,287,528 |   |
| Non-gaming products                                         |       | 838,685                               |            | 2,328,581                           |       | 1,517,294 |   | 4,061,458 |   |
|                                                        |       | 5,772,726                             |            | 3,334,334                           |       | 7,475,136 |   | 5,689,822 |   |
| Operating costs and expenses:                               |       |                                  |            |                                |       |   |   |   |   |
| Cost of gaming machine participation                        |       |                                  |            |                                |       |   |   |   |   |
| Machine depreciation                                        |       | 2,425,220                             |            | 2,095,892                           |       | 4,815,685 |   | 3,388,646 |   |
| Write-off of gaming assets                                  |       | —                                |            | —                              |       | 378,980 |   | — |   |
| Other operating costs                                       |       | 174,528                               |            | 113,849                             |       | 515,532 |   | 209,296 |   |
| Cost of table game products                                 |       | 1,890,800                             |            | 177,021                             |       | 1,873,061 |   | 264,776 |   |
| Cost of non-gaming products                                 |       | 994,470                               |            | 1,938,385                           |       | 1,750,884 |   | 3,470,870 |   |
| Selling, general and administrative                         |       | 2,075,218                             |            | 6,598,356                           |       | 4,872,914 |   | 11,600,107 |   |
| Impairment of assets                                        |       | —                                |            | 1,368,829                           |       | — |   | 1,368,829 |   |
| Research and development                                    |       | 74,658                                |            | 232,548                             |       | 129,547 |   | 467,822 |   |
| Depreciation and amortization                               |       | 255,417                               |            | 232,503                             |       | 564,771 |   | 456,850 |   |
| Restructuring charges                                       |       | 88,631                                |            | 2,706                               |       | 587,799 |   | 168,276 |   |
| Total operating costs and expense                           |       | 7,978,942                             |            | 12,760,089                          |       | 15,489,173 |   | 21,395,472 |   |
|                                                        |       |                                  |            |                                |       |   |   |   |   |
| Loss from operations                                        |       | (2,206,216                            | )               | (9,425,755                          | )          | (8,014,037 | ) | (15,705,650 | ) |
|                                                        |       |                                  |            |                                |       |   |   |   |   |
| Other income/(expense):                                     |       |                                  |            |                                |       |   |   |   |   |
| Interest expense and finance fees                           |       | (112,258                              | )               | (220,234                            | )          | (248,196 | ) | (274,520 | ) |
| Interest income                                             |       | 26,044                                |            | 155,436                             |       | 64,432 |   | 522,187 |   |
| Foreign currency gain/(loss)                                |       | 64,037                                |            | (198,439                            | )          | (62,529 | ) | 641,527 |   |
| Loss on disposition of assets                               |       | (93,868                               | )               | —                              |       | (93,698 | ) | — |   |
| Other                                                       |       | 725,642                               |            | 79,768                              |       | 737,850 |   | 160,294 |   |
| Total other income/(expense)                                |       | 609,597                               |            | (183,469                            | )          | 397,859 |   | 1,049,488 |   |
|                                                        |       |                                  |            |                                |       |   |   |   |   |
| Loss before income tax and discontinued operations          |       | (1,596,619                            | )               | (9,609,224                          | )          | (7,616,178 | ) | (14,656,162 | ) |
|                                                        |       |                                  |            |                                |       |   |   |   |   |
| Income tax benefit/(expense)                                |       | (295,902                              | )               | 9,643                               |       | (299,094 | ) | (22,498 | ) |
|                                                        |       |                                  |            |                                |       |   |   |   |   |
| Net loss from continuing operations                         |       | (1,892,521                            | )               | (9,599,581                          | )          | (7,915,272 | ) | (14,678,660 | ) |
| Net profit (loss) from discontinued operations, net  of tax |       | 1,759,914                             |            | 48,535                              |       | 1,541,817 |   | (173,937 | ) |
|                                                        |       |                                  |            |                                |       |   |   |   |   |
| Net loss                                                    |       | $                                     |  (132,607  | )                                   | $          |  (9,551,046 | ) | $ |  (6,373,455 | ) | $ |  (14,852,597 | ) |
|                                                        |       |                                  |            |                                |       |   |   |   |   |
| Loss per share:                                             |       |                                  |            |                                |       |   |   |   |   |
| Loss from continuing operations                             |       | (0.02                                 | )               | (0.08                               | )          | (0.07 | ) | (0.13 | ) |
| Income from discontinued operations                         |       | 0.02                                  |            | 0.00                                |       | 0.01 |   | 0.00 |   |
| Basic and diluted loss per share                            |       | $                                     |  (0.00     | )                                   | $          |  (0.08 | ) | $ |  (0.06 | ) | $ |  (0.13 | ) |
|                                                        |       |                                  |            |                                |       |   |   |   |   |
| Weighted average common shares outstanding                  |       | 114,956,671                           |            | 114,956,451                         |       | 114,956,671 |   | 114,940,007 |   |

 

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

 

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**ELIXIR GAMING TECHNOLOGIES, INC. ANDSUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| **Cash flows  from operating activities:**                                   |       |                               |       |   |   |
| Net loss                                                                     |       | $                                  | (6,373,455 | ) | $ | (14,852,597 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                               |       |   |   |
| Income tax expense                                                           |       | 299,094                            |       | 22,498 |   |
| Foreign currency  (gains)/losses                                             |       | 126,569                            |       | (641,527 | ) |
| Impairment of assets                                                         |       | —                             |       | 1,368,829 |   |
| Depreciation of gaming  machines and systems and property and equipment      |       | 5,290,527                          |       | 3,732,343 |   |
| Restructuring charges                                                        |       | 38,207                             |       | — |   |
| Amortization of intangible  assets                                           |       | 265,125                            |       | 332,396 |   |
| Amortization of deferred  interest                                           |       | 7,315                              |       | 20,000 |   |
| Amortization of prepaid  sales commission                                    |       | —                             |       | 29,970 |   |
| Stock-based compensation  and warrant expense                                |       | 446,170                            |       | 4,367,579 |   |
| Gain on sale of shuffler  business                                           |       | (1,962,016                         | )          | — |   |
| Loss on disposition of  assets                                               |       | 93,698                             |       | 30,378 |   |
| Write-off of gaming assets                                                   |       | 378,980                            |       | — |   |
| Write-down of inventory                                                      |       | (106                               | )          | 16,708 |   |
| Provision for bad debt  expense                                              |       | 12,400                             |       | 150,121 |   |
| Changes in operating assets  and liabilities:                                |       |                               |       |   |   |
| Accounts receivable and  other receivables                                   |       | (1,859,912                         | )          | (1,555,337 | ) |
| Inventories                                                                  |       | 54,044                             |       | 104,739 |   |
| Prepaid expenses and other  current assets                                   |       | 334,105                            |       |  (5,146 | ) |
| Deposits and other assets                                                    |       | 327,833                            |       | (455,950 | ) |
| Accounts payable                                                             |       | 278,993                            |       | 182,999 |   |
| Amount due from related  parties                                             |       | 481,304                            |       | — |   |
| Deferred revenue                                                             |       | 318,614                            |       | — |   |
| Accrued expenses and other  current liabilities                              |       | (2,493,409                         | )          | (2,208,159 | ) |
| Net cash used in operating  activities                                       |       | (3,935,920                         | )          | (9,360,156 | ) |
| ** **                                                                   |       |                               |       |   |   |
| **Cash flows  from investing activities:**                                   |       |                               |       |   |   |
| Acquisition of property and  equipment                                       |       | —                             |       | (367,105 | ) |
| Sale of shuffler business                                                    |       | 2,800,000                          |       | — |   |
| Purchase of gaming  machines, systems and deposits paid                      |       | (1,235,838                         | )          | (29,904,010 | ) |
| Sale of property and  equipment                                              |       | 326,179                            |       | 30,465 |   |
| Net cash generated/(used)  in investing activities                           |       | 1,890,341                          |       | (30,240,650 | ) |
| ** **                                                                   |       |                               |       |   |   |
| **Cash flows  from financing activities:**                                   |       |                               |       |   |   |
| Proceeds from sale of  stock, warrants and options                           |       | —                             |       | 70,803 |   |
| Repayment of short-term  debt and leases                                     |       | (166,718                           | )          | (276,123 | ) |
| Repayment of notes payable                                                   |       | (2,905,327                         | )          | (1,160,674 | ) |
| Net cash used in financing  activities                                       |       | $                                  | (3,072,045 | ) | $ | (1,365,994 | ) |
|                                                                         |       |                               |       |   |   |
| Effect of exchange rate  change on cash                                      |       | 127,846                            |       | — |   |
| Decrease in cash and cash  equivalents                                       |       | (4,989,778                         | )          | (40,966,800 | ) |
| Cash and cash equivalents  at beginning of period                            |       | 14,504,433                         |       | 68,286,820 |   |
| Cash and cash equivalents  at end of period                                  |       | $                                  | 9,514,655  |   | $ | 27,320,020 |   |
| ** **                                                                   |       |                               |       |   |   |
| **Non-cash  investing and financing activities:**                            |       |                               |       |   |   |
| Gaming machines purchased  as related party payables                         |       | $                                  | —     |   | $ | 15,770,411 |   |
| Office equipment purchased  as related party payables                        |       | $                                  | —     |   | $ | 570,486 |   |
| Conversion of related party  payables to trade credit facility agreement     |       | $                                  | —     |   | $ | 15,000,000 |   |
| ** **                                                                   |       |                               |       |   |   |
| **Supplemental  disclosure of cash flows information**                       |       |                               |       |   |   |
| Interest paid                                                                |       | $                                  | 271,611    |   | $ | 196,144 |   |

 

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

 

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**ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

(Unaudited)

 

**Note1.****                                 ****Description of Businessand Significant Accounting Policies**

 

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

 

***Basis ofPresentation***

 

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

 

***Principles ofConsolidation***

 

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

 

***Use of Estimates***

 

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

 

***Reclassifications***

 

Certain previously reported amounts have beenreclassified to conform to the current period presentation.

 

***Cash and CashEquivalents***

 

All highly liquid instruments with an originalmaturity of three months or less are considered cash equivalents.  TheCompany places its cash with financial institutions.  At June 30,2009, the Company had deposits with financial institutions in excess of FDICinsured limits by $9.3 million.

 

***Accounts Receivableand Allowance for Doubtful Accounts***

 

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

 

***Inventories***

 

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

 

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***Long-Lived Assets***

 

The Company accounts for impairment of long-livedassets in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*.  Long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  In such instances, the Company estimates theundiscounted future cash flows that result from the use of the asset and itsultimate disposition.  If the sum of theundiscounted cash flows is less than the carrying value, the Company recognizesan impairment loss, measured as the amount by which the carrying value exceedsthe fair value of the asset, determined principally using discounted cashflows.  There are no impairment chargesfor long-lived assets for the three months ended June 2009.

 

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

 

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

 

During the second quarter of 2009, the Company paidcommitment fees of $1 million to a venue operator in Cambodia as aconsideration to place additional machines on the casino floor of that venue.The Company will be entitled to extra net win sharing until the amount is fullyrecouped. This amount is recorded as advance and will be amortized as areduction of participation revenue. As of June 30, 2009, the Company had acommitment fee balance of $397,997 included in prepaid expenses and othercurrent assets.

 

***ConsignmentInventory***

 

As of June 30, 2009 and December 31, 2008,the Company had consignment inventory, service supplies and parts of $NIL and$235,318, net of a provision of obsolescence of $NIL and $372,698,respectively.  Revenue is not recognized until ownership of products and titlespass to the distributor which occurs upon the distributor’s use of the productsevidenced by a purchase order or sales to third-party customers.

 

***Gaming Machines andSystems***

 

Gaming machines and systems are stated at cost. The Company depreciates new gaming machines and systems over a five-year usefullife and depreciates refurbished gaming machines over a three-year useful lifeonce placed in service. Depreciation of gaming machines and systems of$2,425,220 and $2,095,892 and $4,815,685 and $3,388,646 are included in cost ofgaming machine participation in the consolidated statement of operations forthe three-month and six-month periods ended June 30, 2009 and 2008,respectively.

 

***Property andEquipment***

 

Property and equipment is stated at cost. Depreciationis computed using the straight-line method over the useful lives of the assetscurrently estimated to be 3-5 years, which in the case of leaseholdimprovements, is limited to the life of the lease and throughout the renewalperiod so long as renewal is reasonably assured. Depreciation of property andequipment of $79,135 and $108,821 and $175,198 and $207,057 is included in costof operations (gaming products or non-gaming products) in the consolidatedstatements of operations for the three-month and six-month periods ended June 30,2009 and 2008, respectively.

 

***Intangible Assets,including Goodwill***

 

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

 

The Company measures and tests goodwill and intangibleassets for impairment in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*, (“SFASNo. 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.

 

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***Litigation andOther Contingencies***

 

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

 

SFAS No. 5, *Accountingfor Contingencies,* 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 thefollowing have been satisfied:

 

·                  persuasive evidence of an arrangementexists;

·                  the price to the customer is fixed anddeterminable;

·                  delivery has occurred and any acceptanceterms have been fulfilled;

·                  no significant contractual obligationsremain; and

·                  collection is reasonably assured.

 

*Gaming and Non-Gaming ProductsRevenues*

 

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

 

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

 

*Participation Revenues*

 

The Company earns recurring revenue by providingcustomers with electronic gaming machines and casino management systems whichtrack game performance and provide statistics on installed electronic gamingmachines owned 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 exceptionof one venue in which revenues are recognized as the payment for net winningsare received 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 $318,614 and $Nil as of June 30, 2009 and December 31, 2008,respectively.

 

***Stock-BasedCompensation***

 

The Company adopted SFAS No. 123R, *Share-Based Payments*, 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, 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 thechange.  For non-employee awards, theCompany remeasures 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$244,315 and $2,565,258 and $446,170 and $4,367,579 for the three-month andsix-month periods ended June 30, 2009 and 2008, respectively, and is includedin selling, general and administrative expense in the accompanying consolidatedstatements of operations.  See Note 12 for additional informationregarding these assumptions.

 

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***Research andDevelopment Expenses***

 

Research and development costs are charged to expenseas incurred.  Employee related costs associated with product developmentare included in research and development costs. The Company incurred $74,658 and $232,548 and $129,547 and $467,822 inresearch and development expenses for the three-month and six-month periodsended June 30, 2009 and 2008, respectively.

 

***Income Taxes***

 

The Company is subject to income taxes in the U.S.(including federal and state) and several foreign jurisdictions in which itoperates. Deferred income tax balances reflect the effects of temporarydifferences between the carrying amounts of assets and liabilities and theirtax basis and are stated at enacted tax rates expected to be in effect whentaxes are actually paid or recovered. SFAS No. 109, *Accounting for Income Taxes*(“SFAS No. 109”),requires that deferred tax assets be evaluated for future realization andreduced by a valuation allowance to the extent the Company believes a portionwill not be realized. The Company considers many factors when assessing thelikelihood of future realization of its deferred tax assets, including itsrecent cumulative earnings experience and expectations of future taxable incomeby taxing jurisdiction, the carry-forward periods available to the Company fortax reporting purposes, and other relevant factors.

 

The Company accounts for uncertain tax positions inaccordance with FASB Interpretation No.48, *Accounting**for Uncertainty in Income Taxes andInterpretation of FASB Statement No. 109*(“FIN 48”), whichcontains a two-step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109. The first step isto evaluate the tax position for recognition by determining if the weight ofavailable evidence indicates it is more likely than not that the position willbe sustained on audit, including resolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit as the largestamount which is more than 50% likely of being realized upon ultimatesettlement. The Company considers many factors when evaluating andestimating its tax positions and tax benefits, which may require periodic****adjustments and which may not accuratelyanticipate actual outcomes.

 

The Company is subject to income tax examinations bytax authorities in the jurisdictions in which it operates. There are currentlyno income tax returns under examination by the U.S. Internal Revenue Service orany other major tax authorities.

 

***Loss Per Share***

 

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

 

***Foreign CurrencyTranslations and Transactions***

 

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

 

***Fair ValueMeasurements***

 

Fair value is defined under SFAS No. 157 as theexchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date. Valuation techniques used to measure fair value under SFAS No. 157must maximize the use of observable inputs and minimize the use of unobservableinputs. The standard establishes a fair value hierarchy based on three levelsof input, of which the first two are considered observable and the lastunobservable.

 

·                  Level 1 - Quoted prices in active markets foridentical assets or liabilities. These are typically obtained from real-timequotes for transactions in active exchange markets involving identical assets.

 

·                  Level 2 - Input, other than quoted prices includedwithin Level 1, which are observable for the asset or liability, eitherdirectly or indirectly. These are typically obtained from readily-availablepricing sources for comparable instruments.

 

·                  Level 3 - Unobservable input, where there is little orno market activity for the asset or liability. This input reflects thereporting entity’s own assumptions of the data that participants would use inpricing the asset or liability, based on the best information available in thecircumstances.

 

At June 30, 2009, cash and cash equivalentinclude $135,668 in bank deposits which are reported at fair value.  At June 30, 2009, the Company does nothave liabilities that are measured at fair value on a recurring basis.

 

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***Recently IssuedAccounting Standards***

 

In December 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 141(R), *Business Combinations* (“SFAS No. 141(R)”).SFAS No. 141(R) replaces SFAS No. 141, *Business Combinations*(“SFAS No. 141”),but retains the requirement that the purchase method of accounting foracquisitions 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 February 2008, the FASB issued FASB StaffPosition (FSP) SFAS No. 157-2,*Effective Date of FASB Statement No. 157,* that deferred theeffective date of SFAS No. 157 for one year for certain non-financialassets and non-financial liabilities. The Company adopted this statement as of January 1,2009 and the adoption has had no impact on the Company’s financial position andresults of operations.

 

In April 2009, the FASB issued FASB StaffPosition (FSP) Financial Accounting Standard (FAS) 157-4, “Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly.”Based on the guidance, if an entity determines that the level of activity foran asset or liability has significantly decreased and that a transaction is notorderly, further analysis of transactions or quoted prices is needed, and asignificant adjustment to the transaction or quoted prices may be necessary toestimate fair value in accordance with SFAS No. 157, “Fair ValueMeasurements.” The company adopted this FSP in the quarter ended June 30,2009, and there was no material impact on the financial position, results ofoperations or cash flows.

 

In April 2009, the FASB issued FSP FAS 107-1 andAccounting Principles Board (APB) 28-1, “Interim Disclosures about Fair Valueof Financial Instruments.” The FSP amends SFAS No. 107, “Disclosures aboutFair Value of Financial Instruments” to require an entity to provide disclosuresabout fair value of financial instruments in interim financial information.This FSP is to be applied prospectively and is effective for interim and annualperiods ending after June 15, 2009 with early adoption permitted forperiods ending after March 15, 2009. The company adopted this FSP in thequarter ended June 30, 2009. There was no impact on the financialposition, results of operations or cash flows.

 

In May 2009, the FASB issued SFAS No. 165, “SubsequentEvents.”  This Statement sets forth: 1) the period after the balance sheetdate during which management of a reporting entity should evaluate events ortransactions that may occur for potential recognition or disclosure in thefinancial statements; 2) the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements; and 3) the disclosures that an entity should make aboutevents or transactions that occurred after the balance sheet date. ThisStatement is effective for interim and annual periods ending after June 15,2009. The Company adopted this Statement in the quarter ended June 30,2009. There was no impact on the financial position, results of operations orcash flows.

 

**Note2.****                                 ****Segments**

 

The Company currently operates in three operatingsegments: (i) gaming machine participation operations; (ii) tablegame product operations, which after the sale of the shuffler and deck checkerassets in April 2009, consist exclusively of gaming chips; and (iii) non-gamingproduct operations, which consist primarily of the Dolphin AdvancedTechnologies Pty Ltd (“Dolphin”) automotive sector. The accounting policies ofthese segments 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:

 

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| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                             |       |                                 |       |                               |       |   |   |   |   |
| Gaming machine  participation operations              |       | $                                    | 1,743,063  |                               | $          | 768,911 |   | $ | 2,688,798 |   | $ | 1,287,528 |   |
| Table game  product operations                        |       | 3,190,978                            |       | 236,842                            |       | 3,269,044 |   | 340,836 |   |
| Non-gaming  product operations                        |       | 838,685                              |       | 2,328,581                          |       | 1,517,294 |   | 4,061,458 |   |
| Total revenues                                        |       | $                                    | 5,772,726  |                               | $          | 3,334,334 |   | $ | 7,475,136 |   | $ | 5,689,822 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Operating loss:                                       |       |                                 |       |                               |       |   |   |   |   |
| Gaming machine  participation operations gross margin |       | $                                    | (856,684   | )                                  | $          | (1,440,830 | ) | $ | (3,021,399 | ) | $ | (2,310,414 | ) |
| Table game  product operations gross margin           |       | 1,300,178                            |       | 59,821                             |       | 1,395,983 |   | 76,060 |   |
| Non-gaming  product operations gross margin           |       | (155,785                             | )          | 390,196                            |       | (233,590 | ) | 590,588 |   |
| Corporate and  other operating costs and expenses     |       | (2,493,925                           | )          | (8,434,942                         | )          | (6,155,031 | ) | (14,061,884 | ) |
| Total operating  loss                                 |       | $                                    | (2,206,216 | )                                  | $          | (9,425,755 | ) | $ | (8,014,037 | ) | $ | (15,705,650 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Depreciation and  amortization:                       |       |                                 |       |                               |       |   |   |   |   |
| Gaming machine  participation operations              |       | $                                    | 2,425,220  |                               | $          | 2,095,892 |   | $ | 4,815,685 |   | $ | 3,388,646 |   |
| Table game  product operations                        |       | 158,123                              |       | 240,383                            |       | 344,388 |   | 428,747 |   |
| Non-gaming  product operations                        |       | 22,819                               |       | 60,310                             |       | 42,104 |   | 131,376 |   |
| Corporate                                             |       | 139,245                              |       | 46,043                             |       | 353,475 |   | 115,970 |   |
| Total  depreciation and amortization                  |       | $                                    | 2,745,407  |                               | $          | 2,442,628 |   | $ | 5,555,652 |   | $ | 4,064,739 |   |

 

Geographic segment revenues for the three-month andsix-month periods ended June 30, 2009 and 2008 are as follows:

 
|   |       |       |                                 |            |                               |       |      |       |      |       |   |   |      |
|--------|------------|------------|--------------------------------------|-----------------|------------------------------------|------------|-----------|------------|-----------|------------|--------|--------|-----------|
|   | ** ** | ** ** | **Three Months Ended June 30,** | ** **      | **Six Months Ended June 30,** | ** ** |
|   | ** ** | ** ** | **2009**                             | ** **      | **2008**                           | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|   | Asia       |       | $                                    | 4,931,270       |                               | $          | 1,079,470 |       | $         | 5,877,005  |   | $      | 1,678,138 |   |
|   | Australia  |       | 841,456                              |            | 2,254,864                          |       | 1,598,131 |       | 4,011,684 |       |
|   |       |       | $                                    |  5,772,726 |                               | $          | 3,334,334 |       | $         | 7,475,136  |   | $      | 5,689,822 |   |
|        |            |            |                                      |                 |                                    |            |           |            |           |            |        |        |           |  |

 

For the three-month and six-month periods ended June 30,2009, in the table game products segment, one customer represented 93% and 93%,respectively, of total gaming chip product sales. For the three-month andsix-month periods ended June 30, 2008, within the non-gaming productssegment, one customer represented 35% and 34%, respectively, of totalnon-gaming product sales. For the three-month and six-month periods ended June 30,2009, in the gaming machine participation segment, one customer represented 57%and 49%, respectively, of total participation revenue.

 

**Note3.****                                 ****Inventories**

 

Inventories consist of the following:

 
| ** **                           | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Raw materials                        |       | $                       | 241,249    |                        | $          | 1,309,765 |   |
| Work-in-progress                     |       | —                  |       | 202,837                     |       |
| Finished goods                       |       | 227,630                 |       | 1,001,108                   |       |
|                                 |       | 468,879                 |       | 2,513,710                   |       |
| Less: allowances  and other reserves |       | (14,504                 | )          | (1,417,664                  | )          |
|                                 |       | $                       | 454,375    |                        | $          | 1,096,046 |   |

 

**Note4.****                                 ****Prepaid Expenses andOther Current Assets**

 

Prepaid expenses and other current assets consist ofthe following:

 
| ** **                         | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Prepaid taxes                      |       | $                       | 298,121    |                        | $          | 276,042 |   |
| Prepayments to  suppliers          |       | 163,234                 |       | 172,500                     |       |
| Deposits on  gaming machine orders |       | 37,970                  |       | 740,209                     |       |
| Commitment fees                    |       | 397,997                 |       | —                      |       |
| Other                              |       | 69,872                  |       | 110,736                     |       |
|                               |       | $                       | 967,194    |                        | $          | 1,299,487 |   |

 

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

 

Accounts and other receivables consist of thefollowing:

 
|                                   |   |   |   | **June 30,  2009** |      | **December 31,  2008** |   |
|----------------------------------------|--------|--------|--------|-------------------------|-----------|-----------------------------|--------|
|                                   |   |   |   | **(Unaudited)**         |      |                        |   |
| Trade accounts                         |   |   |   | $                       | 3,316,987 |                        | $      | 2,259,864 |   |
| Other                                  |   |   |   | 329,297                 |      | 78,082                      |   |
|                                   |   |   |   | 3,646,284               |      | 2,337,946                   |   |
| Less: allowance for  doubtful accounts |   |   |   | (634,618                | )         | (923,603                    | )      |
| Net                                    |   |   |   | $                       | 3,011,666 |                        | $      | 1,414,343 |   |

 

Bad debt expenses for the three-month and six-monthperiods ended June 30, 2009 and 2008 were $NIL and $79,760 and $12,400 and$150,121, respectively, which were recorded in selling, general andadministrative expenses in the consolidated statements of operations.

 

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

 

The major categories of gaming equipment and systemsand accumulated depreciation are presented below.

 
| ** **                     | ** ** | **Useful  Life  (years)** | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------|------------|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | ** **                | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Gaming equipment               |       | 3 – 5                |       | $                       | 49,591,406 |                        | $          | 49,282,197 |   |
| Systems                        |       | 5                         |       | 5,785,218               |       | 6,151,165                   |       |
|                           |       |                      |       | 55,376,624              |       | 55,433,362                  |       |
| Less accumulated  depreciation |       |                      |       | (11,232,207             | )          | (7,081,817                  | )          |
|                           |       |                      |       | $                       | 44,144,417 |                        | $          | 48,351,545 |   |

 

Depreciation expenses for the three-month andsix-month periods ended June 30, 2009 and 2008 were $2,425,220 and$2,095,892 and $4,815,685 and $3,388,646, respectively, which were recorded incost of gaming machine participation in the consolidated statements ofoperations.

 

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

 

Property and equipment consist of the following at June 30,2009 and December 31, 2008:

 
| ** **                                      | ** ** | **Useful  Life  (years)** | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **                | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Equipment rented by  customers                  |       | 3 – 5                |       | $                       | 14,606     |                        | $          | 14,606 |   |
| Equipment and vehicles,  furniture and fixtures |       | 3 – 5                |       | 5,912,424               |       | 5,789,631                   |       |
| Leasehold improvements                          |       | 5                         |       | 778,227                 |       | 837,383                     |       |
|                                            |       |                      |       | 6,705,257               |       | 6,641,620                   |       |
| Less accumulated  depreciation                  |       |                      |       | (3,241,840              | )          | (2,917,153                  | )          |
|                                            |       |                      |       | $                       | 3,463,417  |                        | $          | 3,724,467 |   |

 

At June 30, 2009 and December 31, 2008, theCompany’s rented property and equipment by customers that represented assetsheld under capital leases was $14,606.

 

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

 

In accordance with SFAS No. 142 and SFAS No. 144,the Company reviews goodwill and intangibles for impairment on an annual basis(December 31) or more frequently if events or circumstances indicate thatthe carrying values may not be recoverable. No circumstances indicate any further impairment provisions werenecessary during the three-month and six-month periods ended June 30,2009.

 

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

 
| ** ** | ** **                            | ** ** | **Useful  Life  (years)** | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------|---------------------------------------|------------|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** ** | ** **                            | ** ** | ** **                | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
|       | Patents                               |       | 10                        |       | 3,143,500               |       | 4,986,316                   |       |
|       | Less:  impairment  provision     |       |                      |       | —                  |       | (695,743                    | )          |
|       | Less:  accumulated  amortization |       |                      |       | (905,317                | )          | (1,666,533                  | )          |
|       |                                  |       |                      |       |                    |       |                        |       |
|       | Customer relationships                |       | 10-13                     |       | 1,684,101               |       | 1,684,101                   |       |
|       | Less:  accumulated  amortization |       |                      |       | (643,083                | )          | (588,292                    | )          |
|       |                                  |       |                      |       |                    |       |                        |       |
|       | Trademarks                            |       | 10-13                     |       | 505,000                 |       | 505,000                     |       |
|       | Less:  accumulated  amortization |       |                      |       | (120,926                | )          | (101,446                    | )          |
|       | Total                                 |       |                      |       | $                       | 3,663,275  |                        | $          | 4,123,403 |   |
|            |                                       |            |                           |            |                         |            |                             |            |  |  |

 

The Company’s goodwill was $84,210 at June 30,2009 and December 31, 2008.

 

**Note 9.****            ****Deposits and Other Assets**
|                              |   |   |   |                    |    |                        |   |      |   |   |
|-----------------------------------|--------|--------|--------|-------------------------|---------|-----------------------------|--------|-----------|--------|--------|
|                              |   |   |   | **June 30,  2009** |    | **December 31,  2008** |   |
|                              |   |   |   | **(Unaudited)**         |    |                        |   |
| Office equipment rental  deposits |   |   |   | 80,218                  |    | 83,613                      |   |
| Sales tax in dispute              |   |   |   | 433,513                 |    | 433,513                     |   |
| Restricted cash                   |   |   |   | 110,914                 |    | 419,256                     |   |
| Prepaid value-added tax           |   |   |   | 340,314                 |    | 346,213                     |   |
| Other                             |   |   |   | 1,690                   |    | 2,084                       |   |
| Total                             |   |   |   | $                       | 966,649 |                        | $      | 1,284,679 |   |

 

**Note 10.****          ****Accrued Expenses**
|                       |   |   |   |                    |      |                        |    |      |   |   |
|----------------------------|--------|--------|--------|-------------------------|-----------|-----------------------------|---------|-----------|--------|--------|
|                       |   |   |   | **June 30,  2009** |      | **December 31,  2008** |    |
|                       |   |   |   | **(Unaudited)**         |      |                        |    |
| Payroll and related  costs |   |   |   | 502,969                 |      | $                           | 724,450 |      |
| Interest                   |   |   |   | 87,250                  |      | 150,864                     |    |
| Legal, accounting and  tax |   |   |   | 96,133                  |      | 23,141                      |    |
| Deposits from customers    |   |   |   | 137,049                 |      | 117,834                     |    |
| Accrued tax expenses       |   |   |   | 166,174                 |      | 9,518                       |    |
| Deferred rent              |   |   |   | 118,883                 |      | 47,790                      |    |
| Litigation (Note 17)       |   |   |   | —                  |      | 1,066,190                   |    |
| Other                      |   |   |   | 603,322                 |      | 572,971                     |    |
| Total                      |   |   |   | $                       | 1,711,780 |                        | $       | 2,712,758 |   |

 

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

 

Debt and capital lease obligations consist of thefollowing:
|   |                                                                                                        |   |   |   |                    |      |                        |       |      |   |
|--------|-------------------------------------------------------------------------------------------------------------|--------|--------|--------|-------------------------|-----------|-----------------------------|------------|-----------|--------|
|   |                                                                                                        |   |   |   | **June 30,  2009** |      | **December 31,  2008** |       |
|   |                                                                                                        |   |   |   | **(Unaudited)**         |      |                        |       |
|   | Note payable to a  related party at interest of 5% (Notes 13)                                               |   |   |   | 9,163,809               |      | $                           | 12,069,137 |      |
|   | Short-term line of  credit at an Australian bank                                                            |   |   |   | —                  |      | 29,372                      |       |
|   | Capital lease  obligations to an Australian bank at various interest rates and  collateralized by equipment |   |   |   | 625,263                 |      | 663,400                     |       |
|   | Capital lease  obligations for furniture, tooling and equipment                                             |   |   |   | 37,949                  |      | 74,395                      |       |
|   | Total                                                                                                       |   |   |   | 9,827,021               |      | 12,836,304                  |       |
|   | Less current portion                                                                                        |   |   |   | (6,251,779              | )         | (6,182,792                  | )          |
|   | Long-term portion                                                                                           |   |   |   | $                       | 3,575,242 |                        | $          | 6,653,512 |   |

 

On September 30, 2008, in accordance with theamended Trade Credit Facility Agreement, Elixir International Limited (“ElixirInternational”), a wholly-owned subsidiary of Elixir Group Limited which is theprincipal shareholder of the Company, surrendered its initial advance of $15.0million to the Company in exchange for a new promissory note for theoutstanding principal amount of $12.1 million. The outstanding principal and the interest accrued (revised from 8% to5%) thereon is to be repaid in 24 equal monthly installments reset from January 1,2009. On July 24, 2009, the Company entered into Amendment No. 2 tothe Trade Credit Facility Agreement with Elixir International to defer therepayment of principal and interest on the outstanding principal balance of$9.2 million until July 2010 (see Notes 13 & 19).

 

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

 

**Options**

 

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

 

The Plan allows for incentive awards to eligiblerecipients consisting of:

 

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

 

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

 

·                  Restricted stock awards; and

 

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

 

The maximum number of shares reserved for issuanceunder the Plan is 5,000,000 and the exercise price shall not be less than 100%of the fair market value of one share of common stock on the date of grant,unless the participant owns more than 10% of the total combined voting power ofall classes of stock of the Company or any parent or subsidiary corporation ofthe Company, in which case the exercise price shall then be 110% of the fairmarket 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 $0.12 and will vest over a six-month and one day period. Therewere no stock options granted during the three month period ended June 30,2009.

 

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

 

In May 2007, stock options for the purchase of5,000,000 shares of common stock were granted by the board of directors outsideof the Stock Option Plans pursuant to the initial closing of the transactionsunder the Purchase and Product Participation Agreement (“Product ParticipationAgreement”) with Elixir Group Limited (“Elixir Group”), to certain employeesand non-employees of Elixir Group and their parent Melco InternationalDevelopment Limited.  Each option had an exercise price of $2.90 per shareand vested over three-year and five-year terms.

 

Options for the purchase of 13,123,629 shares ofcommon stock issued and outstanding under the Plan and Stock Option Plans andstock options for purchases of common stock granted under the ProductParticipation Agreement have a weighted average exercise price of $1.88, aweighted average fair value of $0.45 and an aggregate intrinsic value of$146,467 as of June 30, 2009.

 

As of June 30, 2009, 7,043,608 stock options wereexercisable and have a weighted average exercise price of $2.48 and a weightedaverage fair value of $0.67.  They haveno aggregate intrinsic value due to the fair market value of the Company’sstock 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                                 |       | (2,622,638             | )          | $                                     | 3.92       |                                                           | —     |                            | $          | 19,733 |   |
| Outstanding as of  June 30, 2009     |       | 13,123,629             |       | $                                     | 1.88       |                                                           | 4.41       |                            | $          | 146,467 |   |
| Exercisable as of  June 30, 2009     |       | 7,043,608              |       | $                                     | 2.48       |                                                           | 3.18       |                            | —     |   |

 

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**Warrants**

 

A summary of the status of the Company’s warrantsoutstanding at June 30, 2009 and changes during the six-month period thenended 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 June 30, 2009 |       | 13,125,000   |       | $                                      | 1.84       |                                                           | 0.86       |                            | —     |   |
| Exercisable as of  June 30, 2009                          |       | 13,125,000   |       | —                                 |       | —                                                         |       | —                          |       |
|                                                                |            |              |            |                                        |            |                                                                |            |                                 |            |  |

 

There were no warrants granted, exercised or cancelledduring the three-month and six-month periods ending June 30, 2009.  Outstanding and exercisable warrants have noaggregate intrinsic value as of June 30, 2009 due to the fair market valueof the Company’s stock as of that date.

 

*Recognition and Measurement*

 

The fair value of each stock-based award to employeesand non-employee directors is estimated on the measurement date which generallyis the grant date while awards to non-employees are measured at the earlier ofthe performance commitment date or the service completion date using theBlack-Scholes-Merton option-pricing model. Option valuation models require the input of highly subjectiveassumptions, and changes in assumptions used can materially affect the fairvalue estimates.  The Company estimatesthe expected life of the award by taking into consideration the vesting period,contractual term, historical exercise data, expected volatility, blackoutperiods and other relevant factors. Volatility is estimated by evaluating theCompany’s historical volatility data.  Therisk-free interest rate on the measurement date is based on U.S. Treasuryconstant maturity rates for a period approximating the expected life of theaward.  The Company historically has notpaid dividends, nor does it expect to pay dividends in the foreseeable futureand, 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 six-month periodended June 30, 2009 and 2008:

 
| ** **                | ** ** | **June 30,** | ** ** |
|---------------------------|------------|-------------------|------------|
| ** **                | ** ** | **2009**          | ** ** | **2008** | ** ** |
| ** **                | ** ** | **Low**           | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Range of values:          |       |              |       |   |   |   |   |   |   |
| Expected volatility       |       | 303.32            | %          | 303.32 | % | 60.00 | % | 63.59 | % |
| Expected dividends        |       | —            |       | — |   | — |   | — |   |
| Expected term (in  years) |       | 3.73              |       | 3.73 |   | 3.13 |   | 10.00 |   |
| Risk free rate            |       | 2.75              | %          | 2.75 | % | 2.72 | % | 4.01 | % |

 

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

 

For non-employee awards, the Company remeasures compensationcosts each period until the service condition is complete and recognizescompensation costs on the straight-line basis over the requisite serviceperiod.

 

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

 

For awards with service conditions and graded vestingthat were granted prior to the adoption of SFAS No. 123R, the Companyestimates the requisite service period and the number of shares expected tovest, and recognizes compensation expense for each tranche on the straight-linebasis over the estimated requisite service period.

 

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

 

At June 30, 2009 and December 31, 2008, thenote payable to Elixir International relating to purchases of electronic gamingmachines, casino management systems and other peripherals had outstandingprincipal amounts of $9.2 million and $12.1 million, respectively.

 

On April 21, 2008, the Company entered into aTrade 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 Companyimmediately issued the first note pursuant to the terms of the FacilityAgreement in the then principal amount of $15,000,000 (the “InitialAdvance”).  The Initial Advanceextinguished a then trade payable of an equivalent amount to ElixirInternational in respect to gaming machines previously acquired.

 

Pursuant to the Facility Agreement, the Company wasobligated to repay the principal, plus any accrued interest thereon, of theInitial Advance in 24 equal monthly installments after the date of issue.  The Initial Advance is subject to demand byElixir International for immediate payment only if there is either an event ofdefault or a change of control as defined in the Facility Agreement. Pursuantto an amendment to the Facility Agreement dated November 6, 2008 betweenthe parties, Elixir International surrendered the note of Initial Advance tothe Company in exchange for the issuance of a new promissory note for the thenoutstanding principal amount of $12.1 million with the following new repaymentterms: (a)  the outstanding principal amount and the interest accruedthereon shall be repaid in 24 equal monthly installments reset from January 1,2009; (b) interest shall be accrued on the outstanding principal at therate of five percent (5.0%)  per annumstarting from January 1, 2009; and no monthly repayment under the New Noteis required for the months of October, November and December 2008.  On July 24, 2009, the Company enteredinto another agreement with Elixir International to further amend the unsecuredpromissory note issued by the Company. Under recently amended note terms, whichare effective as of July 1, 2009, the Company is entitled to defer therepayment of principal and interest on the outstanding principal balance of thenote of $9.2 million until July 2010 with interest at the same rate of 5%continuing to accrue (see Notes 11 & 19).

 

For the three-month and six-month periods ended June 30,2009 and 2008, the Company recorded sales of table game products to ElixirInternational of $Nil and $304,021 and $Nil and $373,377, respectively.

 

In addition, during the second quarter of 2009, theCompany recorded sales of gaming chip product of $2,975,769 to Melco CrownGaming (Macau) Limited.

 

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

 

The Company’s reported income tax rate for the sixmonths ended June 30, 2009 and June 30, 2008, was (3.93)% as and(0.15)%, respectively. For the current period, the Company recorded taxableincome from one of its foreign operations while the company incurred net lossfrom operations on a consolidated basis. Such foreign operation is expected tobe continually profitable for the full year of 2009; accordingly, a tax expenseis recorded in current period and resulted in a negative effective tax rate.

 

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

 

Classified in accordance with SFAS No. 146, *Accounting for Cost Associated with Exit or DisposalActivities*, the Company incurred restructuring charges of $88,631and $2,706 and $587,779 and $168,276 for the three-month and six-month periodsended June 30, 2009 and 2008, respectively, for severance wages andbenefits related to the termination of employees and facility operating leasesthat the Company vacated.  The amountrepresents the contractual and other agreements with employees which only includecharges for termination benefits measured at the estimated fair value at thetermination date. It does not include charges for services to be provided afterthe termination date.

 

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

 

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

 

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In relation to thisPurchase and Settlement Agreement, the Company terminated a distributorshiparrangement of the relevant products with a distributor in Europe and pursuantto the termination arrangement; the Company is required to buy back certaininventory of the relevant products kept by the distributor. After taking intoaccount of such buy-back obligation, the Company recognized a gain relating tothe asset disposal of approximately $1.71 million in the second quarter 2009.

 

As a result of the saleto Shuffle Master, the China facility became redundant and, therefore, wascompletely closed at the end of April 2009. This operation was part of thetable game segment and the Company classified the China facility asdiscontinued operations.

 

The following tabledetails selected financial information for the discontinued operations in theconsolidated statements of operations.

 
| ** **                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Income/(loss) from  operations                          |       | $                                    | 45,507     |                               | $          | 48,535 |   | $ | (172,590 | ) | $ | (173,937 | ) |
| Gain on Disposal                                        |       | 1,714,407                            |       | —                             |       | 1,714,407 |   | — |   |
| Income tax benefit/(expense)                            |       | —                               |       | —                             |       | — |   | — |   |
| Income/(loss) from  discontinued operations, net of tax |       | $                                    | 1,759,914  |                               | $          | 48,535 |   | $ | 1,541,817 |   | $ | (173,937 | ) |

 

The estimated effective tax for discontinuedoperations is zero, therefore there is no income tax expense associated withthe gain on disposal and income (loss) from operations.

 

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

 

**Legal Matters**

 

The Company was a party to certain claims and/or legalactions as discussed below.

 

*Purton Litigation*

 

On October 5, 2007, William Purton filed an actionagainst the Company in the Supreme Court of Victoria at Melbourne, Australiaclaiming he is owed monies under the July 2006 share sale agreement bywhich the Company acquired Dolphin.  In addition, Mr. Purton isclaiming he is owed money for an independent contractor agreement that heclaims he was offered.  The Company has subsequently filed acounterclaim.    After consideringexternal legal counsel’s advice on an amicable settlement of this litigation,on June 17, 2009, the Company entered into a deed of release with WilliamPurton and the other plaintiffs in which he has control (collectively, the“Purton Parties”), for the settlement of all legal claims, disputes andproceedings between the parties. Pursuant to the terms of the release, on awithout admission basis, the Company paid to Purton Parties a lump sum of$550,000. The remaining reserve for the Purton litigation of $655,506 wasreversed from accrued expenses and reported as other income in the consolidatedstatements of operations. With the notification of discontinuance of litigationfiled with the Supreme Court of Victoria at Melbourne, Australia on June 24,2009, this litigation matter has been settled.

 

*Sales Tax Audit*

 

In February 2004, the State of Nevada initiated asales/use tax audit of the Company’s equipment lessors. As of the date of thisfiling, the State of Nevada has not made a determination if there has been adouble tax payment of the sales/use tax. If the State of Nevada determines thatthere was a double tax payment, the outcome would be a refund. However, thematter is still under review by the Nevada Department of Tax. As of June 30,2009, the Company had a receivable balance $433,513 relating to the possiblerefund. The company will continue to assess the collectability and makeappropriate adjustments when necessary.

 

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

 

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

 

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**Note 19.****          ****Subsequent Events**

 

*Supporting arrangement from ElixirInternational Limited*

 

According to the terms of the Trade Credit FacilityAgreement entered into between Elixir International and the Company dated April 21,2008 (the “Facility Agreement”), Elixir International provided trade credits tothe Company for purchases of electronic gaming machines from ElixirInternational in exchange for the Company’s issuance of an unsecured note for athen principal amount of $15 million to Elixir International bearing interestat a fixed rate of eight percent (8.0%) per annum. Pursuant to an amendment tothe Facility Agreement dated November 6, 2008 between the parties, ElixirInternational surrendered such note to the Company in exchange for the issuanceof a new promissory note for the then outstanding principal amount of $12.1million (the “New Note”) with the following new repayment terms: (a)  theoutstanding principal amount and the interest accrued thereon shall be repaidin 24 equal monthly installments reset from January 1, 2009; (b) interestshall be accrued on the outstanding principal at the rate of five percent(5.0%)  per annum starting from January 1,2009; and no monthly repayments under the New Note are required for the monthsof October, November and December 2008.

 

On January 1, 2009, the Company began paying itsmonthly installments of approximately $530,000 under the New Note and paid orsettled six installments during the six-month period ended June 30,2009.  As at June 30, 2009, theunpaid principal balance under the New Note was approximately $9.2 million (the“Outstanding Principal”).On July 24, 2009, for the purpose of improvingthe Company’s financial flexibility to capitalize on potential growth andinvestment opportunities, such as expansion of its placements and operation ofelectronic gaming machines on a participations basis in new venues, at therequest of the Company, Elixir International entered into Amendment No.2 to theTrade Credit Facility Agreement and Related Note with the Company (the “SecondFacility Amendment Agreement”).  Pursuantto the Second Facility Amendment Agreement, Elixir International has agreed torestructure the payment schedule of the Outstanding Principal. Under therevised payment schedule, the Company is not required to make any repayments ofprincipal or interest under the Facility Agreement until July 1, 2010provided that interest at the rate of 5% will continue to accrue on theOutstanding Principal balance. The repayment of the Outstanding Principalbalance and interest accrued thereon shall be repaid in 18 equal monthlyinstallments commencing on July 1, 2010.

 

*Further placement of machines atNagaWorld*

 

Pursuant to the two contracts entered into in December 2008and June 2009, the Company currently has approximately 240 machines inoperation in the Premier Club at NagaWorld, a luxury casino resort in Cambodiaand the only licensed full service casino in and around the capital city ofPhnom Penh. On July 25, 2009, the Company entered into a further agreementand an option deed with NagaWorld Limited to place an additional 200 electronicgaming machines on a participation basis at NagaWorld casino resort with an optionto place a further maximum of 200 machines by the end of 2009.

 

Under the terms of the agreement, the Company willplace 200 additional electronic gaming machines (the “Additional Machines”) ina prescribed area of NagaWorld’s public casino floor of the casino wing andwill share in the gross revenue generated by each of these machines. TheCompany and NagaWorld will have joint control over the operation of theelectronic gaming machines, including floor staff and respective audit rights.In consideration for placement of the Additional Machines, the Company has paida commitment fee of $5.84 million to NagaWorld. The Company and NagaWorld willshare the win per unit per day (WUD) from the Additional Machines and certainoperating costs related to marketing and floor staff at a 20% / 80% split,respectively provided that the Company will be entitled to 100% of the WUD fromthe Additional Machines until it has received the total accumulated WUD of $7.3million (representing $5.84 million plus the Company’s 20% share of the WUD).WUD from the Additional Machines will be settled and collected daily by theCompany.

 

The Company anticipates the Additional Machines, whichwill be predominantly sourced from the Company’s existing inventory, to be inoperation within the third quarter of 2009. This new agreement is for a term offive years from October 1, 2009 and if upon any termination of thisagreement, the Company has not received a total accumulated WUD of $7.3million, then NagaWorld shall pay, within seven days after termination, thedifference between $5.84 million and 80% of the WUD actually collected andreceived by the Company from the said 200 machines during the period from themachines operation date up to the date of termination.

 

**Item2.****            ****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

***CAUTIONARYSTATEMENT***

 

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.

 

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In this report we make, and from time to time weotherwise make, written and oral statements regarding our business andprospects, such as projections of future performance, statements ofmanagement’s plans and objectives, forecasts of market trends, and othermatters that are forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. Statements containing the words or phrases “will likely result,”“are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,”“believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,”“objective,” “should” or similar expressions identify forward-lookingstatements, which may appear in documents, reports, filings with the Securitiesand Exchange Commission, news releases, written or oral presentations made byofficers or other representatives made by us to analysts, stockholders,investors, news organizations and others, and discussions with management andother of our representatives.  For suchstatements, we claim the protection of the safe harbor for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995.

 

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

 

In addition to other matters identified or describedby us from time to time in filings with the SEC, there are several importantfactors that could cause our future results to differ materially fromhistorical results or trends, results anticipated or planned by us, or resultsthat are reflected from time to time in any forward-looking statement. Some ofthese important factors, but not necessarily all important factors, includethose matters included in the section “Risk Factors” in our annual report on Form 10-Kfor the year ended December 31, 2008 filed with the SEC on March 30,2009.

 

We own or have rights to certain trademarks that weused in connection with our business or products, including, but not limitedto, the following: VendingDataTM, Random EjectionTM, ChipWasherTM, DeckSetter® andDolphinTM. Other than the aforesaid trademarks, this report also makes referenceto trademarks and trade names of other companies.

 

**Overview**

 

Elixir Gaming Technologies is a provider of gamingtechnology solutions, with a primary focus on leasing electronic gamingmachines on a revenue sharing basis to gaming establishments within Pan Asianmarkets.  We identify and secure venuesfor the placement of electronic gaming machines and casino management systems,which track game performance and provide statistics on each installedelectronic gaming machine owned and leased by us.  We contract with thevenue owners or operators for the placement of the electronic gaming machineson a revenue sharing basis. In addition, we acquire and install the gamingmachines, casino management systems and other gaming peripherals at therelevant gaming venues.

 

In addition to ourprimary gaming machine participation business, our operations also consist oftable game products, which focus on the design, manufacture and distribution oftraditional and RFID casino chips and non-gaming products, which focus on thedesign, manufacture and sale of component parts primarily for the automotiveindustry.

 

In the first half of 2009, we have undergone a majorreorganization of our operations and streamlined our cost structure.

 

On March 16, 2009, we entered into a Purchase andSettlement Agreement with Shuffle Master, Inc. (the “Purchase andSettlement Agreement”) pursuant to which we sold to Shuffle Master ourportfolio of automated card verification machines and electronic card shufflingsystems, all related intellectual property, and certain inventory of suchproducts and settled all outstanding litigation between Shuffle Master and theCompany, which traced back to October 5, 2004.  The total consideration paid by ShuffleMaster was $2.8 million, of which $2.4 million was received in March 2009and $400,000 was received in April 2009. In relation to this Purchase and Settlement Agreement, we haveterminated a distributorship arrangement of the relevant products with ourdistributor in Europe. Pursuant to the termination arrangement, we are requiredto buy back certain inventory of the relevant products kept by the distributor.After taking into account of such buy-back obligation, we recognized a gainrelating to the asset disposal of approximately $1.71 million in the secondquarter 2009. As a result of the transactions under the Purchase and SettlementAgreement, which were completed in April 2009, the China facility becameredundant and, therefore, was closed at the end of April 2009. At March 31,2009, we incurred a restructuring charge of $29,416 relating to the write-downof the remaining plant equipment. We believe that the above transactionprovided significant financial benefits to us as it improved our cash positionand frees resources to focus on addressing market opportunities that furtherour strategy of expanding our core electronic gaming machine participationbusiness.

 

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We have successfully executed various cost reductioninitiatives. Such reductions are critical given the current economic climateand provide a much leaner cost structure to expand our core gaming machineparticipation operations and derive greater benefits from the leverage inherentin our operating model.  During thethree-month and six-month periods ended June 30, 2009, we reduced cashselling, general and administrative expenses by $2.2 million and $2.8 million,respectively compared to the prior year periods.  Based on our current run-rate, we are ontrack to reduce selling, general and administrative expenses to approximately$1.8 million for the three-month period ending September 30, 2009.

 

As a result of our efforts, our financial performancehas improved materially during the three-month and six-month periods ended June 30,2009.  Our consolidated revenues for thethree-month and six-month periods ended June 30, 2009 were $5.8 millionand $7.5 million, of which revenue from our gaming machine participation operations,our primary business, comprised 30% and 36%, respectively of our totalrevenues.  This compares to $3.3 millionand $5.7 million for the respective periods in 2008, of which revenue from ourgaming machine participation operations comprised 23% and 23%, respectively, ofour total revenues.

 

During the three-month period ended June 30, 2009we achieved positive adjusted EBITDA (as defined below)  for the first quarterly period since our newbusiness model was enacted in September 2007.  Despite the difficult global environment, wewere able to achieve this important milestone as a result of the strength ofour core gaming machine participation operations, the benefit of anon-recurring large gaming chip order in our table game product operations, andthe successful execution of our aggressive cost reduction initiatives.

 

In addition to ourefforts to reorganize our operations and streamline our cost structure, wecontinue to make progress in improving our liquidity and financial flexibilityto pursue growth opportunities in our core gaming machine participationbusiness.  On July 24, 2009, weentered into an agreement with Elixir International (ELI), a wholly-ownedsubsidiary of Elixir Group, to amend the unsecured promissory note issued bythe Company in April 2008 and as amended in November 2008 to ElixirInternational. This agreement, which became effective July 1, 2009,provides for the deferment of the repayment of principal and accrued interestpayments until July 2010 and immediate cash flow benefits to Elixir Gamingby reducing cash outlays by approximately $1.6 million per quarter during thedeferment period.

 

As of June 30, 2009, our gaming machineoperations were concentrated in two countries, the Philippines and Cambodia.

 

In the Philippines, we had 797 machines in operationat five venues and contracts for additional placements of approximately 350machines in three venues, which are anticipated to be deployed by mid-October 2009.   We have been proactively working with ourvenue owner partners to develop more targeted marketing and promotionalstrategies to accelerate growth in net wins. We remain encouraged in our ability to improve performance in thismarket and are seeking to expand our operations.

 

In Cambodia, we had 240 machines in operation in onelocation, Premier Club at NagaWorld, a wholly-owned subsidiary of Hong Konglisted NagaCorp Ltd. (HKSE:3918). NagaWorld is the only licensed full service casino in the capital cityof Phnom Penh.  Premier Club at NagaWorldhas been a strong contributor to our gaming machine participation revenue sinceour machines were first deployed at the end of January 2009 and our experiencethere has enabled us to demonstrate our expertise in operations, thereby,enhancing our competitive positioning in this market.  Based, in part, on our strong performance atPremier Club, on July 25, 2009 we signed a contract with NagaWorld toplace an additional 200 electronic gaming machines on a participation basis ina prime location at its NagaWorld casino resort with the option to place afurther maximum of 200 machines by the end of the year.  We expect that we will have the additional200 machines in operation during the third quarter increasing our totaloperating installed base at NagaWorld to approximately 440 machines by September 30,2009.

 

**Resultsof Operations for the Three-Month and Six-Month Periods Ended June 30,2009 and 2008**

 

The following is a schedule showing summarizedoperating results on a consolidated basis and separately by each of our three businesssegments for the three-month and six-month periods ended June 30, 2009 and2008, namely gaming machine participation, table game products and non-gamingproducts.

 

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| ** **                                 | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total:                                     |       |                                  |       |                                |       |   |   |   |   |
| Revenues                                   |       | $                                     | 5,772,726  |                                | $          | 3,334,334 |   | $ | 7,475,136 |   | $ | 5,689,822 |   |
| Gross (loss)/ profit                       |       | $                                     | 287,709    |                                | $          | (990,813 | ) | $ | (1,859,006 | ) | $ | (1,643,766 | ) |
| Gross margin percentage                    |       | 5                                     | %          | (30                                 | )%         | (25 | )% | (29 | )% |
| Adjusted EBITDA (1)                        |       | $                                     | 1,505,361  |                                | $          | (3,012,275 | ) | $ | (987,180 | ) | $ | (4,580,495 | ) |
| Operating loss from  continuing operations |       | $                                     | (2,206,216 | )                                   | $          | (9,425,755 | ) | $ | (8,014,038 | ) | $ | (15,705,650 | ) |
| Net loss from  continuing operations       |       | $                                     | (1,892,521 | )                                   | $          | (9,599,581 | ) | $ | (7,915,272 | ) | $ | (14,678,660 | ) |
|                                       |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted loss  per share          |       | $                                     | (0.02      | )                                   | $          | (0.08 | ) | $ | (0.07 | ) | $ | (0.13 | ) |
| Weighted average shares  outstanding       |       | 114,956,671                           |       | 114,956,451                         |       | 144,956,671 |   | 114,940,007 |   |
|                                       |       |                                  |       |                                |       |   |   |   |   |
| Gaming machine  participation:             |       |                                  |       |                                |       |   |   |   |   |
| Revenues                                   |       | $                                     | 1,743,063  |                                | $          | 768,911 |   | $ | 2,688,798 |   | $ | 1,287,528 |   |
| Gross loss                                 |       | $                                     | (856,684   | )                                   | $          | (1,440,830 | ) | $ | (3,021,399 | ) | $ | (2,310,414 | ) |
| Gross margin percentage                    |       | (49                                   | )%         | (187                                | )%         | (112 | )% | (179 | )% |
|                                       |       |                                  |       |                                |       |   |   |   |   |
| Table game products:                       |       |                                  |       |                                |       |   |   |   |   |
| Revenues                                   |       | $                                     | 3,190,978  |                                | $          | 236,842 |   | $ | 3,269,044 |   | $ | 340,836 |   |
| Gross (loss)/profit                        |       | $                                     | 1,300,178  |                                | $          | 59,812 |   | $ | 1,395,983 |   | $ | 76,060 |   |
| Gross margin percentage                    |       | 41                                    | %          | 25                                  | %          | 43 | % | 22 | % |
|                                       |       |                                  |       |                                |       |   |   |   |   |
| Non-gaming products:                       |       |                                  |       |                                |       |   |   |   |   |
| Revenues                                   |       | $                                     | 838,685    |                                | $          | 2,328,581 |   | $ | 1,517,294 |   | $ | 4,061,458 |   |
| Gross (loss)/profit                        |       | $                                     | (155,785   | )                                   | $          | 390,196 |   | $ | (233,590 | ) | $ | 590,588 |   |
| Gross margin percentage                    |       | (19                                   | )%         | 17                                  | %          | (15 | )% | 15 | % |

 

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(1)          “Adjusted EBITDA” is earnings before interest, taxes,depreciation, amortization, stock-based compensation, and other non-cashoperating income and expenses. Adjusted EBITDA is presented exclusively as asupplemental disclosure because management believes that it is widely used tomeasure the performance, and as a basis for valuation, of gaming companies.Management uses Adjusted EBITDA as a measure of the operating performance ofits segments and to compare the operating performance of its operations withthose of its competitors. The Company also presents Adjusted EBITDA because itis used by some investors as a way to measure a company’s ability to incur andservice debt, make capital expenditures and meet working capital requirements.Gaming companies have historically reported EBITDA as a supplement to financialmeasures in accordance with generally accepted accounting principles in theUnited States (“GAAP”). Adjusted EBITDA should not be considered as analternative to operating income as an indicator of the Company’s performance,as an alternative to cash flows from operating activities as a measure ofliquidity, or as an alternative to any other measure determined in accordancewith GAAP. Unlike net income (loss), Adjusted EBITDA does not includedepreciation or interest expense and therefore does not reflect current orfuture capital expenditures or the cost of capital. The Company compensates forthese limitations by using Adjusted EBITDA as only one of several comparativetools, together with GAAP measurements, to assist in the evaluation ofoperating performance. Such GAAP measurements include operating income, netincome (loss), cash flows from operations and cash flow data. The Company hassignificant uses of cash flows, including capital expenditures, interestpayments, debt principal repayments, taxes and other non-recurring charges,which are not reflected in Adjusted EBITDA. Elixir Gaming’s calculation ofAdjusted EBITDA may be different from the calculation methods used by othercompanies and, therefore, comparability may be limited.

 

A reconciliation ofEBITDA, as adjusted, to our net loss is provided below:

 
| ** **                              | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2009**                               | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss from  continuing operations    |       | $                                      | (1,892,521 | )                                    | $          | (9,599,581 | ) | $ | (7,915,272 | ) | (14,678,660 | ) |
| Depreciation and amortization           |       | 2,745,407                              |       | 2,442,628                            |       | 5,555,652 |   | 4,064,739 |   |
| Interest expenses                       |       | 112,258                                |       | 220,234                              |       | 248,196 |   | 274,520 |   |
| Income tax expenses                     |       | 295,902                                |       | (9,643                               | )          | 299,094 |   | 22,498 |   |
| Stock option expenses                   |       | 244,315                                |       | 2,565,258                            |       | 446,170 |   | 4,367,579 |   |
| Impairment/write down  of gaming assets |       | —                                 |       | 1,368,829                            |       | 378,980 |   | 1,368,829 |   |
| EBITDA, as adjusted                     |       | $                                      | 1,505,361  |                                 | $          | (3,012,275 | ) | $ | (987,180 | ) | (4,580,495 | ) |

 

Total revenues for the three-month period ended June 30,2009 increased $2,438,392 from the corresponding period in the prior year dueto increases in gaming machine participation and table game products revenue,partially offset by a decrease in non-gaming product sales.  Revenue from gaming machine participationincreased as a result of higher average net win per machine.  Table game product sales increased as aresult of a large RFID gaming chip order delivered during the three-monthperiod ended June 30, 2009 for a new casino in Macau.  Revenue from non-gaming products declined asa result of decreased orders from major customers.

 

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Gross profit increased $1,278,522 to $287,709 for thethree-month period ended June 30, 2009 compared to a gross loss of$990,813 in the same period the prior year primarily as a result of highergross margins for our gaming machine participation and table game productsoperations, partially offset by a lower gross margin for our non-gamingoperations.  Revenue from gaming machineparticipation increased disproportionately greater than depreciation expensesfor our gaming machine participation operations. However, revenues have yet tocover the cost of machine depreciation, which is recorded in cost ofoperations.  The table game productsgross margin improved primarily due to production efficiencies resulting from alarge RFID gaming chip order delivered during the period ended June 30,2009.

 

Operating loss from continuing operations declined$7,219,539 to $2,206,216 for the three-month period ended June 30, 2009compared to an operating loss of $9,425,755 in the same period in the prioryear primarily as a result of higher gross profits and significantly reducedoperating expenses.   Net loss fromcontinuing operations declined $7,707,060 to $1,892,521 compared to a net lossof $9,599,581 for the same period in the prior year due to reductions in theoperating loss, a gain resulting from the settlement of the legacy lawsuit, aforeign currency exchange gain compared to a loss in the prior year period, andreduced interest expense, all of which were partly offset by higher income taxexpense compared to a benefit in the prior year period and a loss on thedisposition of assets compared to no effect from the disposition of assets inthe prior year period.

 

Total revenues increased $1,785,314 to $7,475,136 forthe six-month period ended June 30, 2009 compared to $5,689,822 in thesame period in the prior year due to increases in gaming machine participationrevenue as a result of improving average win per machine and table gameproducts sale as a result of a large RFID gaming chip order delivered duringthe three-month period ended June 30, 2009. The increase was partiallyoffset by a decrease in non-gaming product sales due to decreased orders fromour major customers.

 

Gross loss increased $215,240 to $1,859,006 for thesix-month period ended June 30, 2009 compared to a gross loss of$1,643,766 in the same period the prior year primarily as a result of lowergross margin for our gaming machine participation and non-gaming productsoperations, partially offset by a higher gross margin for our table gameproducts operations. Table game products gross margin improved primarily due toproduction efficiencies resulting from a large RFID gaming chip order deliveredduring the period ended June 30, 2009. Revenues from gaming machine participation increased, but have yet tocover the cost of depreciation during the start up period.

 

Net loss from continuing operations decreased$6,763,388 to $7,915,272 for the six-month period ended June 30, 2009compared to a net loss of $14,678,660 in the same period in the prior year. Theoperating and net profit losses were positively impacted by higher grossprofits, significantly reduced operating expenses, stock option expense, gainsrelated to the settlement of the legacy lawsuits with Purton and ShuffleMaster, reduced interest expense, and a gain in foreign currency exchangecompared to a loss in the prior year period.

 

**Gaming Machine Participation**

 

In September 2007, we began our electronic gamingmachine participation operations in Asia as part of our primary focus onplacing gaming machines on a revenue sharing basis. Revenue from our gamingmachine participation operations during the three-month period ended June 30,2009 increased $974,152 to $1,743,063 compared to revenue of $768,911 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 June 30,2008.

 

Our gross loss from gaming machine participationoperations decreased $584,146 to $856,684 for the three-month period ended June 30,2009 compared to a gross loss of $1,440,830 for the same period in 2008 asrevenue from gaming machine participation increased disproportionately greaterthan depreciation expenses for our gaming machine participation operations.However, revenues have yet to cover the cost of machine depreciation, which isrecorded in cost of operations.  Our costof goods sold for the three-month period ended June 30, 2009 included$2,425,220 depreciation of electronic gaming machines and $174,528 of otherexpenses.

 

Revenue from our gaming machine participationoperations increased $1,401,270 to $2,688,798 during the six-month period endedJune 30, 2009 compared to revenue of $1,287,528 for same period in 2008.The increase in revenue was primarily a result of higher average net win permachine compared to the six-month period ended June 30, 2008 when ourgaming machines participation operations were still in their infancy.

 

Our gross loss from gaming machine participationoperations increased $710,985 to $3,021,399 for the six-month period ended June 30,2009 compared to a gross loss of $2,310,414 for the same period in 2008 as costof goods sold increased at a greater rate than revenues due to higherdepreciation expense, higher gaming machine operating costs, and the write-downof gaming assets during the first quarter of 2009.  Our cost of goods sold for the six-monthperiod ended June 30, 2009 included $4,815,685 depreciation of electronicgaming machines and $515,532 of other expenses and $378,980 in write-downs ofgaming assets.

 

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As of June 30, 2009, we had a total number of2,175 gaming machines of which 1,138 machines were held in inventory and 1,037machines were in operation.  Of the 1,037gaming machines in operation, 797 machines were in operation in five venues inthe Philippines and 240 machines were in operation in one venue in Cambodia. Ofour 797 gaming machines in operation in the Philippines, we recognized revenueon gaming activities occurring on 617 machines and deferred revenues for theremaining 180 machines in one venue because the collection from this venue isnot yet reasonably assured.

 

In Cambodia, recent regulatory changes have impactedthe competitive landscape of gaming operations in this market.  Due to directives issued by the Cambodiangovernment in December 2008 and February 2009, all slot clubs in thePhnom Penh area, including ours, were either temporarily or permanently closed,with the exception of those operated within NagaWorld. NagaWorld operates underan exclusive casino license within a 200 kilometer radius of the capital cityof Phnom Penh and the Premier Club at NagaWorld is now our sole venue inoperation in Cambodia.

 

On December 13, 2008, we entered into a contractwith NagaWorld, a wholly-owned subsidiary of Hong Kong listed NagaCorp Ltd.(HKSE:3918), to place electronic gaming machines on a participation basis atits NagaWorld, luxury hotel casino resort in Cambodia and the only licensedfull service casino in Phnom Penh.

 

Under the terms of the agreement, we are contracted toplace electronic gaming machines in Premier Club, an assigned area ofNagaWorld, and share in the gross revenue generated by each machineplaced.  We have joint control with NagaWorldover the operation of the electronic gaming machines, including floor staff andaudit rights. We are entitled to 25% of the revenue generated by the machinesplaced in that assigned area and NagaWorld are entitled to 75% of such revenue.Most of the costs and expenses related to the operation of the machines placedin the relevant assigned area, 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 24, 2009.

 

In February, 2009, we entered into another contractwith NagaWorld, which was subsequently rationalized by another contract withNagaWorld dated June 15, 2009, for placement of an additional 58 machinesat another assigned area within NagaWorld casino resort and in consideration ofsuch additional placements, a commitment fee of $1 million was deemed to havebeen paid by the Company by off-setting against accounts receivable fromNagaWorld. Pursuant to the terms of this contract, we are entitled to receive100% of the revenue generated by such additional machines in full unless anduntil we have received an amount equal to the commitment fee of $1 million and,thereafter, we are entitled to 20% of the relevant revenue and NagaWorld shallbe entitled to 80% thereof.

 

On July 25, 2009, we entered into a furtheragreement and an option deed with NagaWorld to place another additional 200electronic gaming machines on a participation basis at NagaWorld casino resortwith an option to place a further maximum of 200 machines by the end of thisyear.

 

Under the terms of the agreement, we will place 200additional electronic gaming machines (the “Additional Machines”) in aprescribed area of NagaWorld’s public casino floor of the casino wing and willshare in the gross revenue generated by each of these machines. We andNagaWorld will have joint control over the operation of the electronic gamingmachines, including floor staff and audit rights. In consideration for theplacement of the Additional Machines, we have paid a commitment fee of $5.84million to NagaWorld. We and NagaWorld will share the win per unit per day(WUD) from the Additional Machines and certain operating costs related tomarketing and floor staff at a 20% / 80% split, respectively, provided that weare entitled to 100% of the WUD from the Additional Machines until we havereceived a total accumulated WUD of $7.3 million (representing $5.84 millionplus 20% of our anticipated share of the WUD). WUD from the Additional Machineswill be settled and collected daily by us.

 

This new agreement is for a term of five years from October 1,2009 and if upon any termination of this agreement, we have not received atotal accumulated WUD of $7.3 million, then NagaWorld shall pay, within sevendays after termination, the difference between $5.84 million and 80% of the WUDactually collected and received by us from the said 200 machines during theperiod from the machines operation date up to the date of termination.

 

As of August 2, 2009, we had eight venues inoperation with a total operating machine base of 1,216, comprised of sevenvenues in the Philippines with a total of 976 installed units and one venue inCambodia with a total of 240 installed units. This includes two new recently opened venues in the Philippines with atotal of 179 units.  These 179 placementsinclude one new venue with 44 machines, which is now fully deployed under thecurrent contract, and 135 machines of a total contracted 150 in another venue,which is currently operating as a soft open until the remainder of the machinesare deployed in August. We have approximately 365 additional machines currentlyunder contract, which we expect will be in operation within the next twomonths.  These installations includeapproximately 165 machines at two venues in the Philippines and 200 additionalmachines in a prominent location on the casino floor at NagaWorld inCambodia.  However, total placements canfluctuate due to our strategic efforts to optimize average WUD.  In the event gaming machine performances atour contracted venues does not meet expectations, we may choose to withdraw allor a portion of our gaming machines from such venues for future redeployment innew or existing venues with better performance prospects.

 

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**Table Game Products**

 

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

 

Table game products revenue increased $2,954,136 to$3,190,978 for the three-month period ended June 30, 2009 compared to thecorresponding period in the prior year. The increase was the result of a large gaming chip order to a new casinoin Macau.

 

Our gross profit on gaming chips products increased$1,240,357 to $1,300,178 in the three month period ended June 30, 2009compared to a gross profit of $59,812 in the corresponding period of the prioryear due to increased revenue and volumes in our RFID gaming chips resulting inproduction efficiencies.

 

Table game products revenue increased $2,928,208 to$3,269,044 for the six-month month period ended June 30, 2009 compared tothe corresponding period in the prior year. The increase was the result of a large gaming chip order to a new casinoin Macau.

 

Our gross margin on gaming chips products increased$1,319,923 to $1,395,983 in the six-month period ended June 30, 2009compared to $76,060 in the corresponding period of the prior year due toincreased revenue and volume in our RFID gaming chips resulting in productionefficiencies.

 

**Non-Gaming Products**

 

Non-gaming products revenue, which consists ofautomotive tooling and parts, decreased in the three-month period ended June 30,2009 by $1,489,896 to $838,685 compared to $2,328,581 in the correspondingperiod of the prior year.  The decrease is related to sales reductions toour largest customer as they decreased their production for the year.

 

Gross loss increased $545,981 to a loss of $155,785for the three-month period ended June 30, 2009 compared to a gross profitof $390,196 in the corresponding period in the prior year due to the reductionin sales orders from our major customer and resulting loss of productionefficiencies.

 

Non-gaming products revenue decreased $2,544,164 to$1,517,294 in the six-month period ended June 30, 2009 compared to$4,061,458 in the corresponding period of the prior year.  The decrease isrelated to sales reductions to our largest customer as they decreased theirproduction for the year.

 

Gross loss increased $824,178 to a loss of $233,590for the six-month period ended June 30, 2009 compared to a gross profit of$590,588 in the corresponding period in the prior year due to the reduction insales orders from our major customer and resulting loss of productionefficiencies.

 

**Operating Expenses**

 

The following is a schedule of expenses on aconsolidated basis:

 
| ** **                           | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2009**                               | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Selling, general and  administrative |       | $                                      | 1,830,903  |                                 | $          | 4,033,098 |   | $ | 4,426,744 |   | 7,232,528 |   |
| Stock-based  compensation expense    |       | 244,315                                |       | 2,565,258                            |       | 446,170 |   | 4,367,579 |   |
| Impairment of assets                 |       | —                                 |       | 1,368,829                            |       | — |   | 1,368,829 |   |
| Research and  development            |       | 74,658                                 |       | 232,548                              |       | 129,547 |   | 467,822 |   |
| Depreciation and  amortization       |       | 255,417                                |       | 232,503                              |       | 564,771 |   | 456,850 |   |
| Restructuring charges                |       | 88,631                                 |       | 2,706                                |       | 587,799 |   | 168,276 |   |
|                                 |       | $                                      | 2,493,924  |                                 | $          | 8,434,942 |   | $ | 6,155,031 |   | 14,061,884 |   |

 

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**Selling, General and AdministrativeExpenses**

 

Selling, general and administrative expenses decreased$2,202,195 for the three-month period ended June 30, 2009, compared to$4,033,098 in the prior year period due to our cost reduction initiatives.  Salaries and wages expense declined $0.9million as a result of headcount reductions and voluntary senior management payreductions.  Legal expense and externalconsultancy and accounting fees declined $0.6 million due to greater relianceof related projects on in-house personnel. Travel decreased by $0.4 million due to concerted efforts to reduceemployee travel to the bare minimum. Office supplies and other expenses decreased by $0.3 million due tovarious cost reduction initiatives.

 

Selling, general and administrative expenses decreasedby $2,805,784 for the six-month period ended June 30, 2009, compared tothe prior year period due to our cost reduction initiatives.  Salaries and wages expense declined $1.1million as a result of headcount reductions and voluntary senior management payreductions.  Legal expense and externalconsultancy and accounting fees declined $0.9 million due to greater relianceof related projects on in-house personnel. Travel decreased by $0.5 million due to concerted efforts to reduceemployee travel to the bare minimum. Office supplies and other expenses decreased by $0.3 million due tovarious cost reduction initiatives.

 

Based on our cost reduction plans, we anticipateselling, general, and administrative expenses can be maintained atapproximately $1.8 million per quarter.

 

**Stock-Based Compensation Expense**

 

Stock-based compensation expense decreased by$2,320,943 to $244,315 for the three-month period ended June 30, 2009,compared to $2,565,258  in thecorresponding period of the prior year primarily due to re-measurement ofnon-employee awards at fair market value and senior executives who havedeparted and their stock options forfeited.

 

Stock-based compensation expense decreased by$3,921,409 to $446,170 for the six-month period ended June 30, 2009compared to $4,367,579 in the corresponding period of the prior year due tore-measurement of non-employee awards at fair market value and seniorexecutives who have departed and their stock options forfeited.

 

**Impairment of Assets**

 

On January 25, 2007, we issued warrants topurchase up to 16,000,000 shares of our common stock (the “2006 Warrants”) toElixir Group, which at the time was our Asian distributor of table gameproducts, as an incentive to meet certain sales targets.  These warrantswere accounted for in accordance with the EITF No. 96-18.  The 2006Warrants were classified in our balance sheet as prepaid commissions subject toamortization to commission expense at a rate of 8% of the gross revenuegenerated by the distributor.

 

For the first half of 2008, table game revenue did notmeet sales targets.  In addition, futureorder placements indicated the remaining value on June 30, 2008 of$1,368,829 may not be recoverable.  PerSFAS No. 144, a long-lived asset (asset group) shall be tested forrecoverability whenever events or changes in circumstances indicate that itscarrying amount may not be recoverable including an accumulation of costssignificantly in excess of the amount originally expected for the acquisition.

 

We estimated fair value using present value techniquesbased on estimates of cash flows.  In accordance with SFAS No. 144,an impairment loss shall be recognized if the carrying amount of an intangibleasset is not recoverable and its carrying amount exceeds its fair value. Afteran impairment loss is recognized, the adjusted carrying amount of theintangible asset shall be its new accounting basis.  Based upon the above,we recorded an impairment to the asset of $1,368,829 and included the amount inloss from operations in our consolidated statements of operations and deficit.

 

**Research and Development Expenses**

 

Research and development expenses decreased $157,890to $74,658 for the three-month period ended June 30, 2009 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 Masterof our portfolio of automated card verification machines and electronic cardshuffling systems, all related intellectual property, and certain inventory ofsuch products pursuant to the Purchase and Settlement Agreement as set outabove have been written off.

 

Research and development expenses decreased $338,275to $129,547 for the six-month period ended June 30, 2009 compared to$467,822 for the prior year period for the same reason as described above.

 

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

 

**Depreciation and AmortizationExpenses**

 

The total depreciation and amortization expensesincreased $22,914 to $255,417 for the three-month period ended June 30,2009 compared to $232,503 in the prior year period.  The increase was a result of additionaldepreciation for office equipment and leasehold improvements.

 

The total depreciation and amortization expensesincreased $107,921 to $564,771for the six-month period ended June 30, 2009compared to $456,850 in the prior year period. The increase was a result of additional depreciation for officeequipment and leasehold improvements.

 

**Restructuring Charges**

 

During the three-month period ended June 30,2009, as part of our cost reduction initiatives we incurred restructuringcharges of $88,631 for facility operating leases that we vacated.

 

During the six -month period ended June 30, 2009,as part of our cost reduction initiatives we incurred restructuring charges of$587,799 for severance wages and benefits related to the termination ofemployees and the facility operating leases that we vacated.  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 and does not include charges for services yet to berendered.

 

**Other Income/(Expenses)**

 
| ** **                         | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2009**                               | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest expense and  finance fees |       | $                                      | (112,258   | )                                    | $          | (220,234 | ) | (248,196 | ) | (274,520 | ) |
| Interest income                    |       | 26,044                                 |       | 155,436                              |       | 64,432 |   | 522,187 |   |
| Foreign currency  gains/(losses)   |       | 64,037                                 |       | (198,439                             | )          | (62,529 | ) | 641,527 |   |
| Loss on dispositions of  assets    |       | (93,868                                | )          | —                               |       | (93,698 | ) | — |   |
| Other                              |       | 725,642                                |       | 79,768                               |       | 737,850 |   | 160,294 |   |
| Total                              |       | $                                      | 609,597    |                                 | $          | (183,469 | ) | $ | 397,859 |   | 1,049,488 |   |
|                                    |            |                                        |            |                                      |            |  |  |  |  |  |  |  |

 

**Interest Expense and Finance Fees**

 

Interest expense and finance fees decreased $107,976to $112,258 for the three-month period ended June 30, 2009 compared to$220,234 in the same period in 2008 principally due to lower debt levels andthe reduced interest rate on the Elixir International notes.  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%.

 

Interest expense and finance fees decreased $26,324 to$248,196 for the six-month period ended June 30, 2009 compared to $274,520in the same period in 2008 principally due to lower debt levels and the reducedinterest rate on notes from Elixir International.  Also, since the note was issued in April 2008,the six-month period ended June 30, 2009 reflects six months of interestexpense compared to three months of interest expense for the six-month periodended June 30, 2008.

 

**Interest Income**

 

Interest income decreased $129,392 to $26,044 for thethree-month period ended June 30, 2009 compared to $155,436 in the sameperiod in 2008 as a result of the decrease in cash and cash equivalents held inovernight money market accounts and the general decrease in interestrates.  Cash in bank decreased by $17.8million to $9.5 million from June 30, 2008 to June 30, 2009 mainlydue to payments for gaming machine purchases and operating expenses.

 

Interest income decreased $457,755 to $64,432 for thesix-month period ended June 30, 2009 compared to $522,187 in the sameperiod in 2008. We received funding from the private placement of common stockin the fourth quarter of 2007 and, as a result, the average cash position wassignificantly higher in 2008 and only depleted over the year.  The averagecash holdings per month were higher during the six months ended June 30,2008 compared to the same period in 2009.

 

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**Foreign Currency Transactions**

 

The Company reported foreign currency gains of $64,037for the three-month period ended June 30, 2009 compared to losses of$198,439 for the same period in 2008. The current period gains resulted fromthe appreciating value of the Australian dollar bank deposits which wererecorded at an affiliate whose functional currency is the Hong Kong dollar. Inthe second quarter of 2008, the foreign currency transaction losses wereprimarily due to settlement of U.S. dollar denominated payables as a result ofthe depreciating value of the Philippine peso.

 

The Company incurred foreign currency losses of$62,259 for the six-month period ended June 30, 2009 compared to gains of$641,527 for the same period in 2008. The current period losses resulted fromthe appreciating value of the U.S. dollar denominated payables at ourPhilippine operations, whose functional currency is the Philippine peso. In thefirst quarter of 2008, the Philippine affiliate recorded foreign currencytransaction gains mainly due to settlement of U.S. dollar denominated payablesas a result of the appreciating value of the Philippine peso.

 

**Other**

 

Other income increased $645,874 to $725,642 for thethree-month period ended June 30, 2009 compared to $79,768 in the prioryear period primarily because we recorded a settlement gain of $655,506 fromthe Purton litigation during the three-month period ended June 30, 2009.On June 17, 2009, the Company entered into a deed of release with WilliamPurton and the other plaintiffs in which he has control for the settlement ofall legal claims, disputes and proceedings between the parties. For furtherdetails, please refer to Note 17 of the Notes to Consolidated FinancialStatements.

 

Other income increased $577,556 to $737,850 for thesix-month period ended June 30, 2009 compared to $160,294 in the prioryear period primarily because we recorded a settlement gain of $655,506 fromthe Purton litigation during the three-month period ended June 30, 2009.

 

**Income Tax Provisions**

 

Our effective tax rate for the six-month period ended June 30,2009 was approximately (3.93)%.  We willcontinue to review the tax losses and income generated in the future by ourforeign subsidiaries to minimize taxation implication/costs.

 
| ** **            | ** ** | **Six  Months Ended June 30,** | ** ** | **Increase/(Decrease)** | ** ** |
|-----------------------|------------|-------------------------------------|------------|-------------------------|------------|
| ** **            | ** ** | **2009**                            | ** ** | **2008**                | ** ** | **Dollar  Amount** | ** ** | **%  Amount** | ** ** |
| Income tax provisions |       | $                                   | (299,094   | )                       | $          | (22,498 | ) | $ | (276,596 | ) | 1229 | % |
|                       |            |                                     |            |                         |            |  |  |  |  |  |  |  |

 

**FINANCIAL CONDITION**

 

**Liquidity and Capital Resources**

 

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

 

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

 

We began paying our monthly installments ofapproximately $530,000 under the New Note on January 1, 2009 and have paidor settled six installments during the six month period.  As at June 30, 2009, the unpaidprincipal balance under the New Note was approximately $9.2 million (the “OutstandingPrincipal”).On July 24, 2009, for the purpose of improving our financialflexibility so as to enable us to capitalize on potential growth and investmentopportunities such as expansion of slot machine placements and operations innew venues, at our request, Elixir International entered into an Amendment No. 2to the Trade Credit Facility Agreement and Related Note with us (the “SecondFacility Amendment Agreement”).  Pursuantto the Second Facility Amendment Agreement, Elixir International has agreed torestructure the payment schedule of the Outstanding Principal. Under therevised payment schedule, we are not required to make any repayments ofprincipal or interest under the Facility Agreement until July 1, 2010provided that interest at the rate of 5% will continue to accrue on theOutstanding Principal balance. The repayment of the Outstanding Principalbalance and interest accrued thereon shall be repaid in 18 equal monthlyinstallments commencing on July 1, 2010.

 

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As of June 30, 2009,we had total cash and cash equivalents of $9.5 million and a working capitalbalance of $4.5 million.  Our workingcapital was positively impacted by operating gains and the residual sale ofinventory related to the sale of our Deckchecker and card shuffler assets in March forwhich we received $400,000 in April 2009.  However, working capitalwas negatively impacted by the repayment of the monthly installments under theNew Note due to Elixir International.

 

During the six-monthperiod ended June 30, 2009, we recorded net cash flow used in operationsof approximately $4.0 million.  Our current gaming machine inventory levelis approximately 1,100, which we will seek to re-deploy into new projects andexisting sites.  In accordance with ourcontract dated July 25, 2009 with NagaWorld, we paid a commitment fee toNagaWorld for $5.84 million on August 3, 2009.  In addition, we intend to purchase a limitednumber of gaming machines during 2009 to augment our existing inventory ofmachines and enhance game floor mix to better optimize performance atanticipated new and existing venues. With limited exceptions, we believe wewill be able to purchase second-hand machines at discounted prices.  Wewill also purchase casino management systems during 2009 for placement inpreviously purchased 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:

 

·                  the Second Facility Amendment Agreement dated July 24,2009 to the Trade Credit Facility, which became effective July 1, 2009, wecan defer the repayment of principal and interest payments on the outstandingprincipal balance until July 2010 providing cash flow benefits to ElixirGaming by reducing cash outlays approximately $1.6 million per quarter until July 2010and improved financial flexibility to enable us to pursue growth opportunitiesin our core electronic gaming machine participation business;

 

·                  our extensive cost cutting measures,which involve, amongst other initiatives, the closure of our China factory andMacau office and significant reductions in traveling and entertainmentexpenses, once fully implemented in the third quarter of 2009 should result inannualized selling, general and administrative cash expense savings ofapproximately 50% compared to 2008 levels;

 

·                  our ability to collect on a daily basis100% of the win per unit from NagaWorld for the additional 200 gaming machinesto be placed during the third quarter of 2009 until such time as the commitmentfee of $5.84 million plus Elixir Gaming’s 20% share of the win per day on thesemachines is recouped; and

 

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

 

We anticipate ouravailable working capital, along with cash expected to be generated fromoperations, will allow us to meet our working capital needs at least through June of2010.

 

However, should weendeavor to commit to any future large projects to expand our gamingparticipation operations, we may require additional funding at such time. Inthis case, we will look into the options for raising additional funds throughvarious financing sources, including the sale of debt or equity securitiesand/or the procurement of commercial debt financing and/or vendorfinancing.  However, there can be noguarantees that such funds will be available on commercially reasonable terms,if at all. If such financing is not available on satisfactory terms, we may beunable to expand or continue our business as desired and operating results maybe adversely affected.  Any debtfinancing will increase expenses and must be repaid regardless of operatingresults and may involve restrictions limiting our operating flexibility and anyequity financing will be dilutive to our present stockholders.

 

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**CashFlows Summary**

 
| ** **                              | ** ** | **Six  Months Ended June 30,** | ** ** | ** **  | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|-------------|------------|
| ** **                              | ** ** | **2009**                            | ** ** | **2008**    | ** ** | **Increase  (Decrease)** | ** ** |
| Cash  provided by/ (used in):           |       |                                |       |        |       |   |   |
| Operations                              |       | $                                   | (3,935,920 | )           | $          | (9,360,156 | ) | $ | (5,424,236 | ) |
| Investing                               |       | 1,890,341                           |       | (30,240,650 | )          | (32,130,991 | ) |
| Financing                               |       | (3,072,045                          | )          | (1,365,994  | )          | 1,706,051 |   |
| Effect  of exchange rate change in cash |       | 127,846                             |       | —      |       | (127,846 | ) |
|                                    |       | $                                   | (4,989,778 | )           | $          | (40,966,800 | ) | $ | (35,977,022 | ) |

 

**Operations**

 

Cash used in operationsdecreased as a result of the decrease in year-to-date operating losses beforedepreciation and amortization.

 

**Investing**

 

Cash provided byinvesting activities increased as a result of the sale of assets to ShuffleMaster and significant reductions in purchasing of gaming machines and systemsafter the first year of operations.  Electronic gaming machines andproperty, plant and equipment of $1.2 million were purchased in the six-monthperiod ended June 30, 2009.

 

**Financing**

 

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

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our consolidatedfinancial statements were prepared in conformity with accounting principlesgenerally accepted in the United States. Accordingly, we are required to makeestimates incorporating judgments and assumptions we believe are reasonablebased on our historical experience, contract terms, observance of known trendsin our Company and the industry as a whole, as well as information availablefrom other outside sources. Our estimates affect amounts recorded in thefinancial statements and actual results may differ from initial estimates.

 

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

 

**IntangibleAssets, including Goodwill**

 

Intangible assets consistof patents, customer relationships, trademarks and goodwill. They are recordedat cost 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, *Accountingfor the Impairment 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.

 

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**Prepaidexpenses and other current assets**

 

During the second quarterof 2009, the Company paid commitment fees of $1 million to the venue operatorin Cambodia as a consideration to place 40 machines in the main lobby floorarea. This amount will be fully recouped from the net win sharing before therevenue split. Under EITF 01-9, the placement fees are generally required to becharacterized as a reduction of revenue. As of June 30, 2009, the Companyhad a commitment fee balance of $397,997 included in the prepaid expenses andother current assets. This amount is recorded as advance and will be amortizedas a reduction of participation revenue.

 

**GamingMachines and Systems**

 

Gaming machines andsystems are stated at cost.  We depreciate gaming machines and systemsover a five-year useful life to a minimal salvage value once placed inservice.  Trends in market demand andtechnological obsolescence may require us to review and evaluate therecoverability of our investment, as well as the estimated useful lives used todepreciate these assets.

 

**Propertyand Equipment**

 

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

 

**RevenueRecognition**

 

We recognize revenue whenall of the following have been satisfied:

 

·                  persuasive evidence of an arrangementexists;

 

·                  the price to the customer is fixed anddeterminable;

 

·                  delivery has occurred and any acceptanceterms have been fulfilled;

 

·                  no significant contractual obligationsremain; and

 

·                  collection is reasonably assured.

 

*Gamingand Non-Gaming Product Revenues*

 

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

 

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

 

*ParticipationRevenues*

 

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

 

Revenues are recognizedas incurred with the exception of one of our venues in which revenues arerecognized as the payment for net winnings are received as the collections fromthis venue were not yet reasonably assured. Net winnings from this venue have been recorded as deferred revenue untilthe collections of such net winnings are reasonably assured.  Deferred revenue was $318,614 and $Nil as of June 30,2009 and December 31, 2008, respectively.

 

**Stock-BasedCompensation**

 

We adopted SFAS No. 123R,*Share-Based Payment*, to accountfor all its stock-based compensation beginning January 1, 2006, andelected the modified prospective method of transition. Under the fair valuerecognition provisions of SFAS No. 123R, for stock-based compensationaccrued to employees and non-employee directors, we recognize stock-basedcompensation expense for all service-based awards with graded vesting scheduleson the straight-line basis over the requisite service period for the entireaward.  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 costs of achange in the estimated forfeitures is recognized in the period of thechange.  For non-employee awards, weremeasure compensation costs each period until the service condition iscomplete and recognizes compensation costs 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 estimate.Judgment is required in estimating stock price volatility, forfeiture rates,expected dividends, and expected terms that options remain outstanding.  Stock-based compensation expense totaled$244,315 and $2,565,258 and $446,170 and $4,367,579 for the three-month andsix-month periods ended June 30, 2009 and 2008, respectively, and is includedin selling, general and administrative expense in the accompanying consolidatedstatements of operations.

 

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**IncomeTaxes**

 

We are subject to incometaxes in the U.S. (including federal and state) and several foreignjurisdictions in which we operate. Deferred income tax balances reflect theeffects of temporary differences between the carrying amounts of assets andliabilities and their tax bases and are stated at enacted tax rates expected tobe in effect when taxes are actually paid or recovered. SFAS No. 109, *Accounting for Income Taxes* (“SFAS No. 109”),requires that deferred tax assets be evaluated for future realization andreduced by a valuation allowance to the extent we believe a portion will not berealized. We consider many factors when assessing the likelihood of futurerealization of our deferred tax assets, including our recent cumulativeearnings experience and expectations of future taxable income by taxingjurisdiction, the carry-forward periods available to us for tax reportingpurposes, 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 ismore than 50% likely of being realized upon ultimate settlement. Weconsider many factors when evaluating and estimating our tax positions and taxbenefits, which may require periodic adjustments and which may not accuratelyanticipate actual outcomes.

 

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

 

**RecentlyIssued Accounting Standards**

 

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

 

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

 

Not applicable.

 

## **Item 4.            Controlsand Procedures**

##  

*(a)  Evaluation of Disclosure Controls andProcedures*.

 

Our management, with theparticipation of our chief executive officer and chief accounting officer, hasevaluated the effectiveness of our disclosure controls and procedures pursuantto Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Based on this evaluation, our management are not yet in a position toconfirm that all of our disclosure controls and procedures are not effective asof June 30, 2009, due to the fact the additional control mechanismimplemented to rectify certain material weakness as identified at December 31,2008 have not yet been tested for effectiveness by our auditors.  While wehave implemented additional control procedures to mitigate the risks associatedwith these material weaknesses, and our internal auditors have tested for itseffectiveness, these controls have not been independently tested as of June 30,2009.  Thus, our material weaknesses will not be considered remediateduntil all testing has been completed and management has a basis to concludethat these controls are properly designed and operating effectively.

 

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As previously reported inour Annual Report on Form 10-K, as filed with the Securities and ExchangeCommission on March 30, 2009, in connection with our assessment of theeffectiveness of our internal control over financial reporting at the end ofits last fiscal year, management identified four material weaknesses (i) trackingand accounting of electronic gaming machines (EGMs), (ii) foreign currencytransaction and translation, (iii) calculation and recording ofstock-based compensation, and (iv) valuation of inventory, receivables andintangible assets, in our internal control over financial reporting as of December 31,2008. This section of Item 4, “Controls and Procedures,” should be read inconjunction with Item 9A, “Controls and Procedures,” included in our Form 10-Kfor the year ended December 31, 2008, for additional information onManagement’s Report on Internal Controls Over Financial Reporting. Managementis committed to remediate the material weaknesses as timely as possible and hasimplemented the following additional control procedures during the quarterended June 30, 2009 when preparing the unaudited quarterly consolidatedfinancial statements in accordance with generally accepted accountingprinciples in the United States.

 

·                  In order to ensure our EGMs balance wascorrect as of June 30, 2009, a physical count of EGMs at June 30,2009 was conducted with no material discrepancies noted.

 

·                  Management performed a thorough review ofthe re-measurement of foreign currency balances at June 30, 2009.

 

·                  Management performed a thorough review ofthe calculation and recording of stock-based compensation for the three-monthperiod ended June 30, 2009.

 

·                  Management performed thorough reviews ofand more robust analyses on certain critical estimates and account balances at June 30,2009.

 

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

 

Except as indicated insection (a) above, there were no other changes in our internal controls overfinancial reporting that occurred during the quarter ended June 30, 2009that have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

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# **PART II — OTHERINFORMATION**

#  

## **Item 6.            Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                               | ** ** | **Method of Filing**                                                                   |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|
| 31.1             |       | Certifications Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                               |       | Filed electronically  herewith                                                                   |
|             |       |                                                                                                                                                                          |       |                                                                                             |
| 31.2             |       | Certifications Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                               |       | Filed electronically  herewith                                                                   |
|             |       |                                                                                                                                                                          |       |                                                                                             |
| 32.1             |       | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  Section 1350). |       | Filed electronically  herewith                                                                   |
|             |       |                                                                                                                                                                          |       |                                                                                             |
| 10.1             |       | Deed of Release dated  June 27, 2009 between, inter alia, Registrant and William Purton.                                                                                 |       | Filed electronically  herewith                                                                   |
|             |       |                                                                                                                                                                          |       |                                                                                             |
| 10.2             |       | Two Services Agreements  both dated May 18, 2009 between Registrant and Melco Services Limited.                                                                          |       | Filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on May 18, 2009  |
|             |       |                                                                                                                                                                          |       |                                                                                             |
| 10.3             |       | Amendment No. 2 to  Trade Credit Facility Agreement and Related Note dated July 24, 2009  between Registrant and Elixir International Limited.                           |       | Filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on July 24, 2009 |
|             |       |                                                                                                                                                                          |       |                                                                                             |
| 10.4             |       | Machines Operation and  Participation Agreement dated July 25, 2009 between Registrant, Elixir  Gaming Technologies (Hong Kong) Limited and NagaWorld Limited (Note*).   |       | Filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on July 24, 2009 |
|             |       |                                                                                                                                                                          |       |                                                                                             |
| 10.5             |       | Option Deed dated July 25,  2009 between Elixir Gaming Technologies (Hong Kong) Limited and NagaWorld  Limited.                                                          |       | Filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on July 24, 2009 |

 

----

Note* : Certain portionsof the exhibit have been omitted pursuant to Registrant’s confidentialtreatment request filed with the Commission pursuant to Rule 24b-2 underthe Securities Exchange Act of 1934. The omitted text has been filed separatelywith the Commission.

 

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**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** ** | ** **           | **ELIXIR  GAMING TECHNOLOGIES, INC.** |
|------------|----------------------|---------------------------------------|
|       |                 | (Registrant)                          |
|       |                 |                                  |   |
|       |                 |                                  |   |
| Date:      | August 14, 2009 | By:                                   | /s/ Clarence Chung |
|       |                 |                                  | Clarence Chung |
|       |                 | Its:                                  | President and Chief Executive Officer |
|       |                 |                                  |   |
|       |                 |                                  |   |
| Date:      | August 14, 2009 | By:                                   | /s/ Andy Tsui |
|       |                 |                                  | Andy Tsui |
|       |                 | Its:                                  | Chief Accounting Officer |

 

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