10-Q

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 March 31, 2012

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

Entertainment Gaming Asia 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 3705, 37/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, if changed since last report)

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

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

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

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

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

As of May 1, 2012, 119,685,280 shares of common stock of Entertainment Gaming Asia Inc. were outstanding.

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Overview	19
	Results of Operations	22
	Liquidity and Capital Resources	27
	Critical Accounting Policies and Estimates	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31
	PART II — OTHER INFORMATION
Item 6.	Exhibits	32

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PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(amounts in thousands, except per share data)

	March 31, 2012		December 31, 2011
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,695	$	12,759
Accounts receivable, net	2,051		2,691
Other receivables	266		114
Inventories	2,045		1,894
Assets held for sale	10		30
Prepaid expenses and other current assets	1,208		811
Total current assets	17,275		18,299
Electronic gaming machines and systems, net	8,084		8,889
Casino contracts	9,763		10,340
Property and equipment, net	3,855		2,558
Goodwill	357		357
Intangible assets, net	1,158		1,227
Contract amendment fees	423		450
Deferred tax assets	93		91
Prepaids, deposits and other assets	2,015		1,893
Total assets	$	43,023	$	44,104
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,040	$	1,316
Amounts due to a related party	—		14
Accrued expenses	1,518		2,228
Income tax payable	24		68
Notes payable to a related party	4,687		6,211
Capital lease obligations	278		322
Customer deposits and other current liabilities	493		357
Total current liabilities	8,040		10,516
Other liabilities	960		869
Deferred tax liability	207		207
Total liabilities	9,207		11,592
Stockholders’ equity:
Common stock, $.001 par value, 300,000,000 shares authorized; 119,618,613 and 118,839,393 shares issued and outstanding	119		119
Additional paid-in-capital	31,472		31,191
Accumulated other comprehensive income	610		559
Retained earnings since January 1, 2011 ($386.1 million accumulated deficit eliminated upon Quasi-Reorganization)	1,614		642
Total EGT stockholders’ equity	33,815		32,511
Non-controlling interest	1		1
Total stockholders’ equity	33,816		32,512
Total liabilities and stockholders’ equity	$	43,023	$	44,104

The notes to consolidated financial statements are an integral part of these consolidated statements.

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ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(amounts in thousands, except per share data)

(Unaudited)

	Three-Month Periods Ended March 31,
	2012			2011
Revenues:
Gaming	$	4,956		$	4,165
Other products	2,126			2,070
Total revenues	7,082			6,235
Operating costs and expenses:
Cost of gaming
Electronic gaming machine depreciation	1,109			1,190
Casino contract amortization	615			619
Other gaming related intangibles amortization	63			—
Other operating costs	524			282
Cost of other products	2,006			1,764
Selling, general and administrative	1,585			1,198
Stock-based compensation expense	265			223
Gain on dispositions of assets	(12		)	—
Product development expenses	100			80
Depreciation and amortization	31			30
Total operating costs and expenses	6,286			5,386
Income from operations	796			849
Other income/(expense):
Interest expense and finance fees	(53		)	(94		)
Interest income	12			23
Foreign currency gains/(losses)	189			(7		)
Other	82			60
Total other income/(expense)	230			(18		)
Income before income tax	1,026			831
Income tax expense	(54		)	(139		)
Net income	$	972		$	692
Less: net income attributable to non-controlling interest	—			—
Net income attributable to EGT Stockholders	$	972		$	692
Earnings per share:
Basic	$	0.01		$	0.01
Diluted	$	0.01		$	0.01
Weighted average common shares outstanding
Basic	119,601			116,196
Diluted	120,758			119,138
Other comprehensive income, net of tax
Foreign currency translation adjustments	51			103
Comprehensive income	$	1,023		$	795
Less: Comprehensive income attributable to non-controlling interest	—			—
Comprehensive income attributable to EGT stockholders	$	1,023		$	795

The notes to consolidated financial statements are an integral part of these consolidated statements.

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ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(amounts in thousands)

(Unaudited)

	Three-Month Periods Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	972		$	692
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax	—			104
Foreign currency (gains)/losses	(201		)	7
Depreciation of gaming machines and systems and property and equipment	1,181			1,264
Amortization of casino contract	615			619
Amortization of intangible assets	69			6
Amortization of prepaid commitments fees	27			27
Stock-based compensation expenses	265			223
Gain on disposition of gaming machines and systems	(12		)	—
Provision for bad debt expense	—			79
Changes in operating assets and liabilities:
Accounts receivable and other receivables	544			514
Inventories	(113		)	(894		)
Prepaid expenses and other current assets	(391		)	391
Prepaids, deposits and other assets	(98		)	(24		)
Accounts payable	(300		)	195
Amount due to a related party	(14		)	1
Accrued expenses and other liabilities	(615		)	(507		)
Income tax payable	7			20
Customer deposits and other current liabilities	72			7
Net cash provided by operating activities	2,008			2,724
Cash flows from investing activities:
Purchase of property and equipment	(124		)	(95		)
Purchase of gaming machines, systems and deposits paid	(229		)	(246		)
Addition of project costs	(1,225		)	(109		)
Proceeds from sale of gaming machines, property and equipment	40			—
Net cash used in investing activities	(1,538		)	(450		)
Cash flows from financing activities:
Repayment of short-term debt and leases	(50		)	(40		)
Repayment of notes payable	(1,524		)	—
Exercise of stock options	—			9
Net cash used in financing activities	$	(1,574	)	$	(31	)
Effect of exchange rate changes on cash	40			2
(Decrease)/increase in cash and cash equivalents	(1,064		)	2,245
Cash and cash equivalents at beginning of period	12,759			10,217
Cash and cash equivalents at end of period	$	11,695		$	12,462
Supplemental disclosure of cash flow information
Interest paid	$	64		$	115
Income tax paid	$	54		$	14

The notes to consolidated financial statements are an integral part of these consolidated statements.

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ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1.Description of Business and Significant Accounting Policies

The principal business activities of Entertainment Gaming Asia Inc., a Nevada Corporation (the “Company”), are its gaming operations, which include the leasing of its owned electronic gaming machines (EGMs) placed in premier hotels and other venues and the development and operation of casinos and gaming establishments in certain emerging markets in the Indo-China region. Also, through its subsidiary, Dolphin Products Pty Limited, the Company develops, manufactures and distributes high-frequency RFID and traditional non-RFID gaming chips and plaques as well as other plastic component products for several industries.

In March 2011, the Company formed a new company in Cambodia with a local partner for the development, ownership and operation of a casino project in the Kampot Province of Cambodia. Net revenue of the new company (the total gross revenue of the casino less any payouts paid to customers, operating expenses, and gaming and non-gaming taxes on the new company’s revenue) will be shared on a 60/40 basis between the Company and the relevant local partner.

In May 2011, the Company agreed to form a new company with another local partner in Cambodia for the development, ownership and operation of a casino project in the Pailin Province of Cambodia and, in June 2011, the Company formed a legal entity in Cambodia to serve as the new company (“Dreamworld Pailin”) for the new casino project’s operations. In July 2011, the local partner agreed with the Company to revise the prior cooperation structure for the casino project and entered into new agreements pursuant to which (a) the Company is the sole owner of Dreamworld Pailin, (b) the local partner’s profit participation was reduced from 45% to 20% and (c) the Company will pay a fair monthly rental to the relevant local partner for the lease of the casino project property.

Basis of Presentation

These consolidated financial statements are prepared pursuant to generally accepted accounting principles in the United Statesfor interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of normal recurring adjustments and other adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company, for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 30, 2012. Certain previously reported amounts have been reclassified to conform to the current period presentation.

Principles of Consolidation

These consolidated financial statements include the accounts of Entertainment Gaming Asia Inc. and all its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

All highly-liquid instruments with original maturities of three months or less are considered cash equivalents. The Company places its cash and temporary investments with financial institutions. As of March 31, 2012, the Company had deposits with financial institutions in excess of Federal Deposit Insurance Corporation (FDIC) insured limits by approximately $11.4 million.

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Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at face value less any allowances for doubtful accounts. Allowances for doubtful accounts are maintained at levels determined by Company management to adequately provide for uncollectible amounts. In determining the estimated uncollectable amounts, the Company evaluates a combination of factors, including, but not limited to, activity in the related market, financial condition of customers, specific customer collection experience and history of write-offs and collections. Interest income is imposed on overdue accounts receivable after the Company evaluates a combination of factors, including but not limited to, customer collection experiences, customer relationship and contract terms. Accounts receivable balances are written off after all collection efforts have been exhausted.

Inventories

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

Long-Lived Assets

The Company accounts for impairment of long-lived assets in accordance with Financial Accounting Standards Board (FASB) ASC 360, Property, Plant and Equipment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such instances, the Company estimates the undiscounted future cash flows that result from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset, determined principally using discounted cash flows.  There were no impairment charges for long-lived assets for the three-month periods ended March 31, 2012 and 2011.

Prepaids, Deposits and Other Assets

Prepaids, deposits and other assets consist primarily of prepaid leases, prepaid value-added taxes in foreign countries, and restricted deposits as lease security. The Company had restricted deposits in the amounts of $331,000 and $448,000 as of March 31, 2012 and December 31, 2011, respectively, in the form of certificates of deposits as security on leases.  Restrictions on $168,000 and $163,000 will be removed in December 2013 and in January 2014, respectively upon termination of the operating leases. Restricted cash of $331,000 was recorded in prepaids, deposits and other assets in the accompanying consolidated balance sheets.

Electronic Gaming Machines (EGMs) and Systems

EGMs and systems are stated at cost. The Company depreciates new EGMs and systems over a five-year useful life and depreciates refurbished EGMs and systems over a three-year useful life once placed in service. Depreciation of EGMs and systems of approximately $1.1 million and $1.2 million were included in cost of EGM participation in the consolidated statements of operations for the three-month periods ended March 31, 2012 and 2011, respectively.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the useful lives of the assets currently estimated to be three to twenty-five years, which in the case of leasehold improvements, is limited to the life of the lease and throughout the renewal period as long as renewal is reasonably assured. Depreciation of property and equipment of approximately $47,000 and $50,000 were included in cost of operations (other products) in the consolidated statements of operations for the three-month periods ended March 31, 2012 and 2011, respectively.

Intangible Assets, Including Goodwill and Casino Contracts

Intangible assets consist of patents, trademarks, gaming operation agreement, casino contracts and goodwill. Intangibles assets other than goodwill are amortized on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which ranges from four to nine years. The straight-line amortization method is utilized because the Company believes there is no more reliably determinable method of reflecting the pattern for which the economic benefits of the intangible assets are consumed or otherwise used.

Amortization expenses related to casino contracts were approximately $615,000 and $619,000 for the three-month periods ended March 31, 2012 and 2011, respectively. Amortization expenses related to other gaming related intangibles were approximately $63,000 and $NIL for the three-month periods ended March 31, 2012 and 2011, respectively. The amounts were accounted for as cost of gaming operations. Amortization expenses related to patents and trademarks were approximately $6,000 and $6,000 for the three-month periods ended March 31, 2012 and 2011, respectively. The amounts were accounted for as selling, general and administrative expenses.

The Company measures and tests finite-lived intangibles for impairment when there are indicators of impairment in accordance with ASC 360-10-05, Property, Plant and Equipment.

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The Company measures and tests Goodwill for impairment, at least annually in accordance with ASC 350-10-05, Intangibles — Goodwill and Other.

Impairment testing for goodwill and other intangibles requires judgment, including the identification of reporting units, allocation of related goodwill, assignment of corporate shared assets and liabilities to reporting units, estimated future cash flows and determinations of fair values. While the Company believes its estimates of future revenues and future cash flows are reasonable, different assumptions could materially affect the assessment of useful lives, recoverability and fair values. No impairment charges relating to intangible assets were recorded for the three-month periods ended March 31, 2012 and 2011, respectively.

Litigation and Other Contingencies

In the performance of its ordinary course of business operations, the Company is subject to risks of various legal matters, litigation and claims of various types. The Company has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of these contingencies. The status of a significant claim is summarized in Note 16.

ASC 450, Contingencies, requires that liabilities for contingencies be recorded when it is probable that a liability has been incurred and that the amount can be reasonably estimated. Significant management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. For a contingency for which an unfavorable outcome is reasonably possible and which is significant, the Company discloses the nature of the contingency and, when feasible, an estimate of the possible loss.

Revenue Recognition

The Company recognizes revenue when all of the following have been satisfied:

·persuasive evidence of an arrangement exists;

·the price to the customer is fixed and determinable;

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

·no significant contractual obligations remain; and

·collection is reasonably assured.

Gaming Revenue

The Company earns recurring gaming revenue by providing customers with EGMs and casino management systems which track game performance and provide statistics on installed EGMs owned by the Company and leased to venue owners. Revenues are recognized on the contractual terms of the participation agreements between the Company and the venue owners and are based on the Company’s share of net winnings, net of customer incentives and commitment fees.

Revenues are recognized as earned with the exception of one of the Company’s venues in which revenues are recognized when the payment for net winnings are received as the collections from this venue are not yet reasonably assured. Net winnings, net of customer incentives and commitment fees paid to the venues were deferred and recognized on cash basis until the collections of such net winnings are reasonably assured.

Commitment fees paid to the venue operators relating to contract amendments which are not recoverable from daily net win are also capitalized as assets and amortized as a reduction of revenue over the term of the amended contracts. The Company had commitment fees balances related to contract amendment fees of approximately $423,000 and $450,000 as of March 31, 2012 and December 31, 2011, respectively.

Other Products Sales

The Company recognizes revenue from the sale of its products to end users upon shipment against customer contracts or purchase orders. The Company recognizes revenue from its sales to independent distributors upon shipments to the distributors against distributor contracts or purchase orders for products.

Stock-Based Compensation

Under the fair value recognition provisions of ASC 718, Compensation-Stock Compensation, the Company recognizes stock-based compensation expenses for all service-based awards to employees and non-employee directors with graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Estimates are revised if subsequent information indicates that

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forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis over the requisite service period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimates. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Cumulative catch-up adjustments are required in the event of changes in assessment of probability. See Note 13 for additional information relating to stock-based compensation assumptions. Stock-based compensation expense totaled approximately $265,000 and $223,000 for the three-month periods ended March 31, 2012 and 2011, respectively.

Product Development

Product development expenses are charged to expense as incurred. Employee related costs associated with product development are included in product development expenses. Product development expenses were approximately $100,000 and $80,000 for the three-month periods ended March 31, 2012 and 2011, respectively.  The increase was primarily a result of increased new product development activities for the other products division, specifically in respect of gaming chips and plaques.

Income Taxes

The Company is subject to income taxes in the United States (including federal and state) and several foreign jurisdictions in which it operates. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740, Income Taxes, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent the Company believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to the Company for tax reporting purposes, and other relevant factors.

The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the provision for income taxes in the statements of operations.

On December 31, 2010, the Company effected a Quasi-Reorganization.  As of that date, the Company’s deferred taxes were reported in conformity with applicable income tax accounting standards described above, net of applicable valuation allowances. Deferred tax assets and liabilities were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities with corresponding valuation allowances as appropriate. In accordance with the Quasi-Reorganization requirements, pre-existing tax benefits realized subsequent to the Quasi-Reorganization are recorded directly in equity.

EarningsPer Share

Basic earnings per share is computed by dividing the reported net earningsby the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and shares issuable from stock options and restricted shares during the period. The computation of diluted earnings per share excludes the impact of stock options and restricted shares that are anti-dilutive.

Foreign Currency Translations and Transactions

The functional currency of the Company’s international subsidiaries, except for its operations in Cambodia whose functional currency is also US dollars, is generally the local currency. For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting currency translation adjustments are recorded directly to accumulated other comprehensive income/(losses) within stockholders’ equity. Gains and losses resulting from transactions in non-functional currencies are recorded in operations.

Below is a summary of closing exchange rates at March 31, 2012 and December 31, 2011, and average exchange rates for the three-month periods ended March 31, 2012 and 2011, respectively.

($1 to foreign currency)	March 31, 2012	December 31, 2011
Australian Dollar	0.96	0.98
Philippine Peso	42.86	43.71
Hong Kong Dollar	7.76	7.77

	Three-Month Periods Ended March 31,
($1 to foreign currency)	2012	2011
Australian Dollar	0.94	0.99
Philippine Peso	42.64	43.48
Hong Kong Dollar	7.76	7.79

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Fair Value Measurements

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

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

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

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

As of March 31, 2012, the fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate carrying values due to the short maturity of these items.

Note 2.Segments

The Company currently conducts business in two operating segments: (i) gaming operations, which includes electronic gaming machine (EGM) participation and casino operations; and (ii) other products operations, which consist of the design, manufacture and distribution of gaming chips and plaques and other plastic products. The accounting policies of these segments are consistent with the Company’s policies for the accompanying consolidated financial statements.

	Three-Month Periods Ended March 31,
(amounts in thousands)	2012			2011
Revenues:
Gaming operations	$	4,956		$	4,165
Other products operations	2,126			2,070
Total revenues	$	7,082		$	6,235
Operating income:
Gaming operations gross margin	$	2,645		$	2,074
Other products operations gross margin	120			306
Corporate and other operating costs and expenses	(1,969		)	(1,531		)
Total operating income	$	796		$	849
Depreciation and amortization:
Gaming operations	$	1,800		$	1,809
Other products operations	55			56
Corporate	10			24
Total depreciation and amortization	$	1,865		$	1,889

Geographic segment revenues for the three-month periods ended March 31, 2012 and 2011 are as follows:

	Three-Month Periods Ended March 31,
(amounts in thousands)	2012		2011
Cambodia	$	4,185	$	3,360
Macau	216		65
Philippines	1,064		804
Other Asian countries	189		184
Australia	1,230		1,597
Europe	168		174
Other	30		51
	$	7,082	$	6,235

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For the three-month periods ended March 31, 2012 and 2011, in the gaming segment, the largest customer represented 78% and 80%, respectively, of total gaming revenue.  For the three-month periods ended March 31, 2012 and 2011, in the other products segment, the largest customer represented 17% and 19%, respectively, of total other products sales.

Note 3.Inventories

Inventories consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Spare parts	$	141	$	147
Raw materials	1,256		1,370
Finished goods	648		377
	$	2,045	$	1,894

Note 4.Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Prepayments to suppliers	$	751	$	528
Deposits on EGM orders	418		121
Restricted cash	—		123
Prepaid leases	39		39
	$	1,208	$	811

Note 5.Receivables

Accounts and other receivables consisted of the following:

(amounts in thousands)	March 31, 2012			December 31, 2011
	(Unaudited)
Trade accounts	$	2,090		$	2,730
Other	266			114
	2,356			2,844
Less: allowance for doubtful accounts	(39		)	(39		)
Net	$	2,317		$	2,805

Note 6.Electronic Gaming Machines (EGMs) and Systems

EGMs and systems are stated at cost.

The major categories of EGMs and systems and accumulated depreciation consisted of the following:

	Useful Life
(amounts in thousands)	(years)	March 31, 2012			December 31, 2011
		(Unaudited)
EGMs	3-5	$	12,316		$	12,116
Systems	5	1,030			1,008
		13,346			13,124
Less: accumulated depreciation		(5,262		)	(4,235		)
		$	8,084		$	8,889

Depreciation expenses for the three-month periods ended March 31, 2012 and 2011 were approximately $1.1 million and $1.2 million, respectively, which were recorded in cost of EGM participation in the consolidated statements of operations.

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Note 7.           Property and Equipment

Property and equipment consisted of the following:

	Useful Life
(amounts in thousands)	(years)	March 31, 2012			December 31, 2011
		(Unaudited)
Equipment and vehicles, furniture and fixtures	3-10	$	1,352		$	1,246
Land and other project costs	3-25	2,780			1,554
Leasehold improvements	1-2	113			72
		4,245			2,872
Less: accumulated depreciation		(390		)	(314		)
		$	3,855		$	2,558

Note 8.           Intangible Assets, including Goodwill and Casino Contracts

Intangible assets consisted of the following:

	Useful Life
(amounts in thousands)	(years)	March 31, 2012			December 31, 2011
		(Unaudited)
Gaming operation agreement	4-5	$	1,173		$	1,173
Less: accumulated amortization		(125		)	(62		)
Goodwill		357			357
Patents	5-6	114			114
Less: accumulated amortization		(26		)	(21		)
Trademarks	5-9	26			26
Less: accumulated amortization		(4		)	(3		)
Casino contracts	5-6	12,835			12,790
Less: accumulated amortization		(3,072		)	(2,450		)
Totals		$	11,278		$	11,924

Amortization expense for finite-lived intangible assets was approximately $684,000 and $625,000 for the periods ended March 31, 2012 and 2011, respectively.

Note 9.           Prepaids, Deposits and Other Assets

Prepaids, deposits and other assets consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Office and equipment rental deposits	$	119	$	30
Restricted cash	331		325
Prepaid taxes	788		752
Prepaid leases	777		786
Totals	$	2,015	$	1,893

As of March 31, 2012, prepaid leases consisted of land lease prepayments of approximately $240,000 and $537,000 for the casino projects located in the respective Cambodian provinces of Kampot and Pailin.

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Note 10.         Accrued Expenses

Accrued expenses consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Payroll and related costs	$	566	$	968
Interest	8		16
Legal, accounting and tax	195		254
Accrued tax expenses	529		625
Deferred rent	—		4
Marketing expense	21		—
Other	199		361
Totals	$	1,518	$	2,228

Payroll and related costs as of December 31, 2011 included a bonus accrual of approximately $462,000, which was fully settled during the three-month period ended March 31, 2012

Note 11.         Debt and Capital Lease Obligations

Debt and capital lease obligations consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Notes payable to a related party at interest of 5%	$	4,687	$	6,211
Capital lease obligations to an Australian bank at various interest rates and collateralized by equipment	278		322
Total	$	4,965	$	6,533

On November 6, 2008, in accordance with the amended Trade Credit Facility Agreement (the “Facility Agreement”), Elixir International Limited (“Elixir International”), a then wholly-owned subsidiary of the Company’s principal shareholder EGT Entertainment Holding Limited (“EGT Entertainment Holding”), exchanged its promissory note issued under the Facility Agreement in the original principal amount advance of $15.0 million for a new promissory note issued by the Company for the then outstanding principal amount of approximately $12.1 million.  The outstanding principal and the interest accrued (revised from 8% to 5%) thereon were to be repaid in 24 equal monthly installments reset from January 1, 2009.

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

On April 20, 2010, the Company entered into a Deed of Assignment and Novation and Consent (the “Deed of Assignment”) with Elixir International and EGT Entertainment Holding. Pursuant to the Deed of Assignment, the Company agreed to the assignment and transfer by Elixir International of all its rights and obligations under the Facility Agreement and the related promissory note to EGT Entertainment Holding, our principal shareholder, with immediate effect. The said assignment and transfer was made in relation to the disposal of Elixir International by EGT Entertainment Holding and does not have any impact on the note terms or the repayment obligations of the Company save and except that when the repayment schedule resumes, the monthly repayment of principal and interest under the note will be made to or at the direction of EGT Entertainment Holding instead of Elixir International.

On May 25, 2010, the Company entered into a third amendment (“Third Amendment”) to the Facility Agreement with EGT Entertainment Holding, pursuant to which the payment schedule of the Outstanding Principal Balance and the interest accrued thereon were further restructured in the following manner: (i) the total interest accrued on the Outstanding Principal Balance during the period from July 1, 2009 to June 30, 2010 in the amount of approximately $458,000 to be paid by the Company in a lump sum payment on July 1, 2010; (ii)  on the first day of each calendar month during the period from August 1, 2010 to June 1, 2011, the Company was to pay interest in arrears on the Outstanding Principal Balance at the same rate of 5% per annum for the preceding month; and (iii)  the Company is to repay the Outstanding Principal Balance and interest accrued thereon at the rate mentioned above in 18 equal monthly installments commencing on July 1, 2011.  Pursuant to the terms of the Third Amendment, the Company paid total principal and interest of approximately $1.5 million and $64,000, respectively, for the three-month period ended March 31, 2012 to EGT Entertainment Holding.  (See Note 14)  Interest expenses capitalized during the three-month periods ended March 31, 2012 and 2011 amounted approximately $13,000 and $23,000, respectively.

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In 2006, the Company entered into a capital lease agreement for four injection molding machines with auxiliary equipment. The lease has a six-year term and the machines will be fully owned on final payment at the end of the contract term. The molding machine lease was capitalized at the present value of the future minimum lease payments at lease inception. As of March 31, 2012, the capital lease balance is approximately $278,000, which will be fully settled in 2012.

The cost and accumulated depreciation of property and equipment leased under capital lease arrangements was approximately $192,000 and $47,000, respectively as of March 31, 2012.  Depreciation expense was approximately $9,000 for the three-month period ended March 31, 2012.  The cost and accumulated depreciation of property and equipment leased under capital lease arrangements was approximately $190,000 and $9,000, respectively as of March 31, 2011.

Note 12.           Other Liabilities

Other liabilities consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Other tax liabilities	$	508	$	477
Provision for long service leave	304		292
Others	148		100
	$	960	$	869

Note 13.           Stock-Based Compensation

Options

At the annual shareholders meeting on September 8, 2008, a new stock option plan, the “2008 Stock Incentive Plan” (the “2008 Plan”), was voted on and became effective on January 1, 2009, which replaced two previous plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock Option Plan (the “Stock Option Plans”), thereby terminating both of the Stock Option Plans on December 31, 2008.

The 2008 Plan allows for incentive awards to eligible recipients consisting of:

·Options to purchase shares of common stock that qualify as incentive stock options within the meaning of the Internal Revenue Code;

·Non-statutory stock options that do not qualify as incentive options;

·Restricted stock awards; and

·Performance stock awards which are subject to future achievement of performance criteria or free of any performance or vesting.

The maximum number of shares reserved for issuance under the 2008 Plan was originally 5,000,000, and in July 2010 the Company’s shareholders approved an increase in the number of shares reserved for issuance to 10,000,000.  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 of all classes of stock of the Company or any parent or subsidiary corporation of the Company, in which case the exercise price shall then be 110% of the fair market value. The outstanding stock options generally vest over three years and have ten-year contractual terms.

During the three-month period ended March 31, 2012, stock options for the purchase of 1,100,000 shares of common stock were granted with a weighted average exercise price of $0.231 and weighted average fair value of $0.19 (2011: $0.35) per share and will vest from six-month and one day periods to three-year periods. During the three-month period ended March 31, 2012, 779,220 shares of restricted stock awards with a fair value of $0.25 per share were issued. The shares of restricted stock shall vest, subject to and upon the recipient’s achievement of key operational and financial performance milestones. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Cumulative catch-up adjustments are required in the event of any changes in the assessment of probabilities.

During the three-month period ended March 31, 2012, there was no exercise of outstanding stock options.

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

As of March 31, 2012, stock options for the purchase of 4,112,834 and 90,200 shares of common stock, respectively, were outstanding in relation to the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Director’s Stock Option Plan.

As of March 31, 2012, there were outstanding non-plan options to purchase 1,990,000 shares of common stock. The non-plan options were issued to certain employees and non-employees of EGT Entertainment Holding as approved by our stockholders in September 2007 pursuant to the initial closing of the transactions under the Securities Purchase and Product Participation Agreement dated June 12, 2007 between us and EGT Entertainment Holding.

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As of March 31, 2012, stock options for the purchase of 7,500,000 shares of common stock were outstanding under the 2008 Plan.Options granted under the 2008 Plan to purchase an aggregate of 1,418,613 shares of common stock contain provisions that prohibit the exercise of such options unless and until the number of shares of common stock that may be issued under the 2008 Plan has been increased in accordance with Section 711 of the NYSE Amex Company Guide by at least 1,418,613.

As of March 31, 2012, 10,493,033 stock options were exercisable with a weighted average exercise price of $1.10, a weighted average fair value of $0.20 and an aggregate intrinsic value of approximately $1.6 million. The total fair value of shares vested during the three-month period ended March 31, 2012 was approximately $461,000.

A summary of all current and expired plans as of March 31, 2012 and changes during the period then ended are presented in the following table:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2011	12,593,234		$	0.98	5.40	$	303
Granted	1,100,000		0.23		—	241
Exercised	—		—		—	—
Forfeited or expired	(200	)	1.75		—	—
Outstanding as of March 31, 2012	13,693,034		0.92		5.52	2,031
Exercisable as of March 31, 2012	10,493,033		1.10		4.43	1,560

Restricted Stock

	Number of shares		Weighted Average Fair Value at Grant Date		Weighted Average Remaining Contractual Life(in years)
Unvested balance as of December 31, 2011	—		$	—	—
Granted	779,220		0.25		—
Vested (1)	(194,805	)	0.25		—
Unvested balance as of March 31, 2012	584,415		$	0.25	0.75

(1)Vested shares included 194,805 shares of restricted common stock issued in 2012 for which final vesting is pending for approval by the Company’s Compensation Committee.

Recognition and Measurement

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

The following table summarizes the range of assumptions utilized in the Black-Scholes-Merton option-pricing model for the valuation of stock options granted during the three-month periods ended March 31, 2012 and 2011:

	2012				2011
Range of values:	Low		High		Low		High
Expected volatility	113.46	%	127.83	%	173.6	%	174.40	%
Expected dividends	—		—		—		—
Expected term (in years)	3.73		9.02		3.73		9.85
Risk free rate	0.63	%	1.95	%	1.56	%	3.43	%

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For stock-based compensation accrued to employees and non-employee directors, the Company recognizes stock-based compensation expense for all service-based awards with graded vesting schedules on the straight-line basis over the requisite service period for the entire award.  Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered.  Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.

For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis over the requisite service period.

The Company estimates forfeitures and recognizes compensation cost only for those awards expected to vest assuming all awards would vest and reverses recognized compensation cost for forfeited awards when the awards are actually forfeited.

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

Warrants

All previously issued warrants were expired by December 31, 2011. There were no warrants granted during the three-month period ended March 31, 2012.

Note 14.           Related Party Transactions

On April 21, 2008, the Company entered into a Trade Credit Facility Agreement (the “Facility Agreement”) with Elixir International Limited (“Elixir International”), a company which used to be a wholly-owned subsidiary of EGT Entertainment Holding, the Company’s principal shareholder. Upon entering into the Agreement, the Company issued the first note pursuant to the terms of the Facility Agreement in the principal amount of $15.0 million (the “Initial Advance”).  The Initial Advance extinguished a then trade payable of an equivalent amount to Elixir International with respect to EGMs previously acquired.

As a result of the disposal of Elixir International by EGT Entertainment Holding, Elixir International assigned and novated all its rights and obligations under the Facility Agreement and the related promissory note (as amended) to EGT Entertainment Holding in April 2010.

Subsequent to its origination, the Facility Agreement has been amended three times, mostly recently on May 25, 2010 on which date the Company entered into Amendment No.3 to the Facility Agreement with EGT Entertainment Holding (the “Third Amendment”), pursuant to which the Company issued a new note (the “Third Amended Note) to replace the previous terms.  Under the payment schedule of the Third Amended Note, the outstanding principal balance of $9.2 million and the interest accrued thereon were restructured in the following manner: (a)  the total interest accrued on the Outstanding Principal Balance during the period from July 1, 2009 to June 30, 2010 in the amount of $458,000 to be paid by us in a lump sum payment on July 1, 2010; (b) on the first day of each calendar month during the period from August 1, 2010 to June 1, 2011, the Company to pay interest in arrears on the Outstanding Principal Balance at the same rate of 5% per annum for the preceding month; and (c)  the Company to repay the Outstanding Principal Balance and interest accrued thereon at the rate mentioned above in 18 equal monthly installments commencing on July 1, 2011. Pursuant to the terms of the Third Amendment, the Company paid total principal and interest of approximately $1.5 million and $65,000, respectively to EGT Entertainment Holding for the three-month period ended March 31, 2012.

As of March 31, 2012, the total outstanding principal amount under the notes payable to EGT Entertainment Holding (see Note 11) was approximately $4.7 million.

Effective January 1, 2010, the Company began sub-leasing office space from Melco Services Limited, a wholly-owned subsidiary of Melco International Development Limited, which is also the parent of the Company’s principal shareholder, EGT Entertainment Holding.

16

Significant revenues, purchases and expenses arising from transactions with related parties consisted of the following:

	Three-Month Periods EndedMarch 31,
(amounts in thousands)	2012			2011
EGT Entertainment Holding
Principal and interest payments	$	1,588		$	115
Melco Crown Gaming (Macau) Ltd
Sales of gaming products	$	(152	)	$	(67	)
Melco Services Limited
Technical services	$	8		$	8
Office rental	$	36		$	36
Expenses paid on behalf of the Company (net)	$	(2	)	$	1

As of March 31, 2012, the notes payable to EGT Entertainment Holding had outstanding principal amounts and additional accrued interest totaling approximately $4.7 million and $78,000, respectively.

Note 15.           Income Taxes

The Company recorded income tax expense of $54,000 and $139,000 for the three-month periods ended March 31, 2012 and 2011, respectively. The Company’s effective income tax rates were 5.3% and 16.7% for the three-month periods ended March 31, 2012 and 2011, respectively. EGT Cambodia is tax exempt, paying a fixed monthly tax rather than a tax on income. The change in effective tax rate was mainly due to an increase in EGT Cambodia’s pre-tax income in proportion to consolidated pre-tax income. The Company recorded additional unrecognized tax benefit for the three-month period ended March 31, 2011, which was mainly related to withholding tax on inter-company loans provided to the Company’s foreign subsidiaries. The unrecognized tax benefit is likely to change in the next twelve months; however, the change cannot be reasonably estimated at the present time.  The Company is subject to income tax examinations by tax authorities from 2005 through the present period in jurisdictions in which we operate. Currently, the U.S. Internal Revenue Service is conducting an audit of the 2008 and 2009 tax returns in the United States and initially proposed an unfavorable adjustment to the domestic operating loss of approximately $5.1 million. The Company disagreed with the proposed adjustment and will appeal the decision if necessary.

Note 16.           Commitments and Contingencies

Legal Matters

Prime Mover/Strata Litigation

On March 26, 2010, a complaint (as subsequently amended on May 28, 2010) (the “Complaint”) was filed by certain shareholders of the Company including Prime Mover Capital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., and Strata Offshore Fund, Ltd (collectively, the “Plaintiffs”) in the United States District Court for the Southern District of New York against certain defendants including the Company and certain other current and former directors and officers of the Company.

The Complaint alleges claims related to disclosures concerning the Company’s electronic gaming machine participation business (the “Participation Business”), including but not limited to the alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, violations of Nevada Revised Statutes Sections 90.580(e) and 90.660(3), breach of fiduciary duty, and negligent misrepresentations.  The Plaintiffs allege that the Company and certain other defendants made false and misleading statements about the Participation Business in filings with the SEC, press releases, and other industry and investor conferences and meetings during the period from June 13, 2007 and August 13, 2008 and that the Plaintiffs then purchased the securities at the inflated prices and later suffered economic losses when the price of the Company’s securities decreased.

On June 22, 2011, the court ruled on the motions to dismiss filed by the Company and certain of its current and former officers and directors. The court dismissed all of Prime Mover’s claims and dismissed all of Strata’s claims except for two breach-of-contract counts against the Company.  All claims against the current and former officers and directors were dismissed. On November 7, 2011, Plaintiffs filed a motion for leave to amend the Complaint for re-pleading all the securities claims against us and all the relevant current and/or former officers and directors. On December 15, 2011 the court granted the Plaintiff’s motion to amend the Complaint and on December 20, 2011 the Plaintiffs filed a second amended Complaint (the “Second Amended Complaint”) which alleged claims substantially similar to the original claims in the Complaint.  The Company and certain current and former officers and directors have filed a motion to dismiss the Second Amended Complaint on January 23, 2012.

17

As of the date of this report, the court has not ruled on the motion to dismiss.

The Plaintiffs seek unspecified damages, as well as interest, costs and attorneys’ fees. The Company intends to defend itself vigorously against the Second Amended Complaint. As the litigation is at a preliminary stage, it is not possible to predict the likely outcome of the case or the probable loss, if any, or the continuation of insurance coverage and, accordingly, no accrual has been made for any possible losses in connection with this matter.

Note 17.           Earnings Per Share

Computation of the basic and diluted earnings per share consisted of the following:

	Three-Month Periods Ended March 31,
	2012					2011
(amounts in thousands)	Income		Number of Shares	Per Share Amount		Income		Number of Shares	Per Share Amount
Basic
Net income attributable to equity shareholders	$	972	119,601	$	0.01	$	692	116,196	$	0.01
Effect of dilutive securities
Dilutive stock options/restricted shares			1,157			—		2,942
Diluted
Net income attributable to equity shareholders plus assumed conversion	$	972	120,758	$	0.01	$	692	119,138	$	0.01

For the three-month period ended March 31, 2012, outstanding stock options of 12,326,367 shares of common stock were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive. For the three-month period ended March 31, 2011, outstanding stock options of 3,627,367 shares of common stock and outstanding warrants of 1,500,000 shares of common stock were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

Note 18.           Subsequent Events

Entry into Agreement to Develop and Operate a Slot Hall in Poipet, Cambodia

On April 2, 2012, the Company entered into a Machines Operation and Participation Agreement (the “Poipet Agreement”) with a Cambodian company, which owns and operates an existing casino in Poipet, Cambodia near the Thailand border, and a Cambodian individual, who is the controller of the casino operating company and owner of two parcels of land on which the casino is located (collectively the “Poipet Local Partner”).

Pursuant to the terms of the Poipet Agreement, the Poipet Local Partner will allocate part of its land with an area of approximately 16,000 square feet (1,500 square meters) to the Company for development and construction, at its own design, budget and cost, of a slot venue which is capable of placing and operating approximately 300 EGMs. Upon completion of the slot venue, which is expected by December 31, 2012, the Company will have the exclusive rights to operate and manage the venue to be called Dreamworld Club (Poipet).  The Company and the Poipet Local Partner will split the win per unit per day from all the EGMs placed at Dreamworld Club (Poipet) and certain operating costs related to marketing and floor staff on a respective basis of 40%/60%.

Capital expenditures for the Dreamworld Club (Poipet), which principally include the development and construction of the facility and gaming equipment, are projected to be approximately $7.5 million.  This includes an estimated $5.0 million to source top of the line EGMs.  The Company expects to provide the required EGMs through the purchase of new and used machines as well as machines from its inventory. The Company is responsible for all capital expenditures for Dreamworld Club (Poipet), which it intends to fund through its internal cash resources.

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

CAUTIONARY STATEMENT

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 30, 2012 and subsequent reports on Form 8-K, which discuss our business in greater detail.

In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act 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-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives.  For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, are included in the section “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012.

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

Overview

Based on our efforts to refocus our business model and streamline our operational structure, we have achieved substantial improvement in our operating performance resulting in greater efficiency and the establishment of quality recurring cash flow.  As a result, we produced record-breaking financial results for 2011 and this strong performance has continued in the first quarter of 2012.   Further, we have established a solid base from which to grow our gaming operations in our target markets in Asia.

Our primary focus is our gaming operations, which presently entails the leasing of EGMs on a revenue sharing basis to gaming establishments in Cambodia and the Philippines. We identify and secure venues for the placement of EGMs and casino management systems where warranted, which track game performance and provide statistics on each installed EGM owned and leased by us. We contract with the venue owners or operators for the placement of the EGMs on a revenue sharing basis.  In addition, we acquire and install the EGMs and other gaming systems and peripherals at the relevant gaming venues.

As of March 31, 2012, our EGM participation operations were located in two countries, Cambodia and the Philippines, and totaled 1,560 EGM seats in operation in eight venues. In Cambodia, we had a total of 799 EGM seats in operation in three venues.  In the Philippines, we had a total of 761 EGM seats in operation in five venues.

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In Cambodia, our EGM participation operations largely focus on operating a substantial portion of the gaming machine area in prime casino floor locations at NagaWorld, a wholly-owned subsidiary of Hong Kong listed NagaCorp Ltd. (HKSE: 3918).  NagaWorld is a premier luxury destination gaming resort and the only licensed full service casino in a designated area around the capital city of Phnom Penh.  Our gaming operations at NagaWorld, which entail 670 gaming machine seats placed in prime locations in the casino hotel, have provided us strong growth in EGM participation revenue and cash flow.

In addition, we have recently expanded our participation operations in Cambodia.  In November 2011, we entered into a new gaming machine participation and management agreement with leading Cambodian hotelier, Sokha Hotels and Resorts, to place up to 250 EGM seats and jointly manage these slot operations in its new Thansur Bokor Resort and Casino in a tourist area of the Kampot Province.  The grand opening of the first phase of the casino resort was in May 2012.  We had approximately 200 EGM seats in operation at the time of the opening and expect to ramp up to 250 seats in the future.  This strategic project expands our gaming operations in the Indo-China region and is anticipated to contribute to near-term earnings.

In the Philippines, our operations continue to post improvement in revenue and average daily net wins as we continue to benefit from our strategic efforts to enhance our operating performance and growth potential in this market.  These efforts include: implementing, with the support of our venue owner partners, targeted marketing programs; the redeployment, when possible, of our gaming assets from lower to higher performing venues in the market; and greater overall revenue sharing in this market due to our acquisition of a higher revenue sharing interest in one of our most promising venues in October 2011.  As a result, our Philippine operations posted meaningful growth in revenue and average net win per unit for the three-month period ended March 31, 2012 compared to the prior year period.

With regard to our other products segment, we posted solid improvement in sales of our gaming chips and plaques for the three-month period ended March 31, 2012 compared to the prior year period due to higher customer reorders in our core markets of Australia and Asia and the completion of an order for a recent new customer’s casino opening.  We attribute this to our targeted marketing strategies and wide range of product offerings with state of the art security features.  While gaming chip and plaque sales improved, gross margin declined due to strategic pricing offered to one of our new customers.  With continued focus on marketing and planned investment in expanding our product offerings and production capacity, we believe we are better positioned to capitalize on the future growth opportunities for gaming chips and plaques in our target markets.  While these efforts are expected to improve revenue and gross profit for these operations over the long-term, they are not anticipated to minimize the normal fluctuation in quarterly sales flow of this business segment.

With significant improvement in our gaming operations, we achieved another quarter of strong financial performance.  Our consolidated revenue for the three-month period ended March 31, 2012 was approximately $7.1 million, of which revenue from our gaming and other products operations comprised 70% and 30%, respectively, of consolidated revenue.  This compares to consolidated revenue of approximately $6.2 million for the three-month period ended March 31, 2011, of which revenue from our gaming and other products operations comprised 67% and 33%, respectively, of consolidated revenue.

Revenue from our gaming operations for the three-month period ended March 31, 2012 was approximately $5.0 million compared to approximately $4.2 million in the prior year period. Gross margin for our gaming operations improved to 53% in the three-month period ended March 31, 2012 compared to 50% in the prior year period.

With solid improvement in revenue and continued efforts to control costs for existing operations, we generated quality recurring cash flow from operations. Cash flow provided by operations was approximately $2.0 million for the three-month period ended March 31, 2012 compared to approximately $2.7 million in the prior year period.  The decline was primarily related to the faster settlement of current liabilities. In addition, adjusted EBITDA (as defined below) was approximately $3.2 million for the three-month period ended March 31, 2012 compared to approximately $3.0 million in the prior year period.

Our improved financial performance along with our established market presence provides us a solid foundation from which to expand our gaming operations to include the development and operation of casinos and gaming clubs under our “Dreamworld” brand in certain emerging gaming markets in the Indo-China region. We believe this expanded business model will allow us the potential for higher long-term incremental returns on our operations given the ability to collect a greater percentage of the gaming revenue compared to our existing EGM participation contracts. In addition, it provides us greater long-term control over our operations.

We have made solid progress in the execution of this growth strategy. Our first casino project, Dreamworld Casino (Pailin) located in the Pailin Province of Northwestern Cambodia near the Thailand border opened in May 2012.  On July 12, 2011, we formed a new company, of which we are the sole owner, to develop and operate Dreamworld Casino (Pailin). Dreamworld Casino (Pailin) is constructed on land leased from a local land owner (the “Pailin Land Owner”) and in consideration the Pailin Land Owner is entitled to receive a fair monthly rental fee and 20% of the net revenue (the total gross revenue of the casino less any payouts paid to customers, operating expenses, and gaming and non-gaming taxes on the casino’s revenue). The initial lease term is 20 years, which commenced in September 2011 and is subject to renewal by the parties in writing.

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The initial phase of Dreamworld Casino (Pailin) measures approximately 16,000 square feet (1,448 square meters) and includes 30 table games and 50 EGMs.The Pailin Land Owner also owns property adjacent to Dreamworld Casino (Pailin) measuring nearly 250,000 square feet (23,160 square meters). We have an option to lease this adjacent property at a future date and use it to develop additional phases of the Dreamworld Casino (Pailin). Such additional phases are intended to include expanded casino operations and complementary facilities such as hotel rooms, a spa and other entertainment amenities.

Total capital expenditures for the initial phase of Dreamworld Casino (Pailin) were approximately $2.5 million, which was paid solely by us from our internal cash resources. Capital expenditures increased from the previously reported $2.4 million primarily due to the decision to amend the design layout and add VIP facilities to the casino.

We have additional casino and gaming projects in active development. On April 2, 2012, we entered into a machines operation and participation agreement (the “Poipet Agreement”) with a Cambodian company, which owns and operates an existing casino in Poipet, Cambodia near the Thailand border, and a Cambodian individual, who controls the casino operating company and owns land on which the casino is located (collectively the “Poipet Local Partner”), to develop a slot venue.  The slot venue will be developed as an extension of the existing casino and utilize its gaming license and will be operated under the Dreamworld name (“Dreamworld Club (Poipet)”).

Under the terms of the Poipet Agreement, the Poipet Local Partner will allocate part of its land with an area of approximately 16,000 square feet (1,500 square meters) to us to develop and construct, at our own design, budget and cost, of a slot venue capable of placing and operating approximately 300 EGMs. Upon completion of Dreamworld Club (Poipet), which is expected by December 31, 2012, we will have the exclusive rights to operate and manage the venue and EGMs.  We and the Poipet Local Partner will split the win per unit per day from all the EGMs placed by us at Dreamworld Club (Poipet) and certain operating costs related to marketing and floor staff on a respective basis of 40%/60%.  The initial project term is five years beginning from the commercial launch of the slot hall with an option to renew for an additional five years subject to the achievement of certain financial milestones during the initial five-year period.

Total capital expenditures for Dreamworld Club (Poipet), which principally include the development and construction of the facility and gaming equipment, are projected to be approximately $7.5 million, including an estimated $5.0 million to source top of the line EGMs.  We expect to provide the required EGMs through the purchase of new and used machines as well as those from our inventory. We are responsible for all capital expenditures for Dreamworld Club (Poipet), which we intend to fund through our internal cash resources.

On March 4, 2011, we formed a new company (the “Kampot New Company”) with a local partner (the “Kampot Local Partner”) to develop, own and operate a casino in the Southern Cambodia province of Kampot near the Vietnam border (“Dreamworld Casino (Kampot)”).

The Kampot Local Partner owns a parcel of land in Kampot measuring approximately 91,000 square feet (8,500 square meters) where we will construct Dreamworld Casino (Kampot). The initial phase of Dreamworld Casino (Kampot) is expected to include up to 14 table games, such as baccarat, roulette and dice games, and 25 EGMs. Depending on demand and the availability of capital, we may add at a future date additional casino floor space and equipment as well as complementary facilities such as hotel rooms, a spa and other entertainment amenities.

The Kampot Local Partner will lease to the Kampot New Company the land for a period of 25 years for an annual fee of $1.  We will provide funding for all development, construction and pre-opening costs for the Dreamworld Casino (Kampot), all necessary EGMs and gaming tables and paid the Kampot Local Partner a lump sum of $260,000 as the balance consideration for his contributions.  We and the Kampot Local Partner will split the Kampot New Company’s net revenue (the total gross revenue of the casino less any payouts paid to customers, operating expenses, and gaming and non-gaming taxes on the Kampot New Company’s revenue) on a respective basis of 60%/40%. The initial lease term is 25 years, which commenced in March 2011 and is subject to renewal by the parties in writing.

Total capital expenditures for the initial phase of Dreamworld Casino (Kampot) are projected to be approximately $1.2 million as the EGMs will be sourced from our existing inventory.

While we believe that Dreamworld Casion (Kampot) has attractive long-term return potential, we plan to focus our available resources on the development of Dreamworld Club (Poipet), which is located in a more established gaming market and, in our estimation, offers higher near-term returns. As a result, we now intend to open Dreamworld Casino (Kampot) in 2013.

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We continue to selectively pursue additional casino and gaming development projects with a focus on the Indo-China region.  However, there is no guarantee we will be successful in signing new projects. In addition, we own a parcel of land with total area of approximately seven acres (30,000 square meters) in the Takeo Province of Cambodia near the Vietnam border and were granted in-principle approval to build and open a casino-hotel in the Takeo Province by the Cambodian government.  At the present time, we do not expect to commit significant capital to a hotel-casino project on this land in order to divert our available capital to the development of Dreamworld Club (Poipet) and other ongoing projects, which we believe will offer greater short- and medium-term return potential.  Our future development plans for this land will be dependent on our available capital and local market conditions at that time.

Results of Operations for the Three-Month Periods Ended March 31, 2012 and 2011

The following is a schedule summarizing operating results on a consolidated basis and separately by each of our two operating segments, namely, gaming operations and other products, for the periods ended March 31, 2012 and 2011.

	Three-Month Periods Ended March 31,
(amounts in thousands, except per share data)	2012			2011
Total:
Revenues	$	7,082		$	6,235
Gross profit	$	2,765		$	2,380
Gross margin percentage	39		%	38		%
Adjusted EBITDA (1)	$	3,185		$	3,014
Operating income	$	796		$	849
Net income	$	972		$	692
Earningsper share:
Basic	$	0.01		$	0.01
Diluted	$	0.01		$	0.01
Weighted average common shares outstanding
Basic	119,601			116,196
Diluted	120,758			119,138
Gaming:
Revenues	$	4,956		$	4,165
Gross profit	$	2,645		$	2,074
Gross margin percentage	53		%	50		%
Other products:
Revenues	$	2,126		$	2,070
Gross profit	$	120		$	306
Gross margin percentage	6		%	15		%

(1)“Adjusted EBITDA” is earnings before interest, taxes, depreciation, amortization, stock-based compensation, and other non-cash operating income and expenses. Adjusted EBITDA is presented exclusively as a supplemental disclosure because our management believes that it is widely used to measure the performance, and as a basis for valuation, of gaming companies. Our management uses Adjusted EBITDA as a measure of the operating performance of its segments and to compare the operating performance of its operations with those of its competitors. We also present Adjusted EBITDA because it is used by some investors as a way to measure a company’s ability to incur and service debt, make capital expenditures and meet working capital requirements. Gaming companies have historically reported EBITDA as a supplement to financial measures in accordance with generally accepted accounting principles in the United States (“GAAP”). Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of our performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure determined in accordance with GAAP. Unlike net income/(loss), Adjusted EBITDA does not include depreciation or interest expense and,  therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using Adjusted EBITDA as only one of several comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income, net income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in Adjusted EBITDA.  Our calculation of Adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

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A reconciliation of EBITDA, as adjusted, to the net income is provided below.

	Three-Month Periods Ended March 31,
(amounts in thousands)	2012			2011
Net income — GAAP basis	$	972		$	692
Interest expense	53			94
Interest income	(12		)	(23		)
Income tax expenses	54			139
Depreciation and amortization	1,865			1,889
Stock-based compensation expense	265			223
Gain on dispositions of assets	(12		)	—
EBITDA, as adjusted	$	3,185		$	3,014

Total revenues increased approximately $847,000 to $7.1 million for the three-month period ended March 31, 2012 compared to approximately $6.2 million in the same period of the prior year due to revenue increases in both operating segments. Revenue from gaming increased as a result of higher average net win per machine from our gaming machines participation operations. Revenue from other products increased as a result of increased orders from major customers.

Gross profit increased approximately $385,000 to $2.8 million for the three-month period ended March 31, 2012 compared to approximately $2.4 million in the same period of the prior year primarily as a result of higher revenue from gaming operations while total gaming expenses increased only slightly compared to the prior year period. This increase was partially offset by lower gross profit from our other products operations as a result of strategic pricing of gaming products to one of our new customers and negative absorption of fixed production costs due to lower production volumes of non-gaming products.

Operating income decreased approximately $53,000 to $796,000 for the three-month period ended March 31, 2012 compared to approximately $849,000 in the same period of the prior year. The decrease in operating income was primarily the result of lower gross profit from other products sales and higher selling and administrative expenses, which are further discussed below.

Net income increased approximately $280,000 to $972,000 compared to approximately $692,000 for the same period in the prior year.  The increase in net income was primarily the result of higher revenue and gross profit from gaming operations, and higher foreign currency gains.

Gaming Operations

Revenues from our gaming operations consisted solely of our EGM participation operations.

	Three-Month Periods Ended March 31,
(amounts in thousands, except per unit data)	2012		2011
Net revenue to the Company
Cambodia	$	3,892	$	3,360
Philippines	1,064		805
Consolidated total	$	4,956	$	4,165
Average net win per unit per day(1)
Cambodia	$	239	$	224
Philippines	$	73	$	58
Consolidated total	$	154	$	134

	Three-Month Periods Ended March 31,
	2012	2011
EGM seats in operation
Cambodia	799	726
Philippines	761	912
Consolidated total	1,560	1,638

(1)Average net win figures (“WUD”) exclude EGM seats in operation during venues’ soft launch opening periods, if applicable, and apply cash payments for venues for which revenue is recognized on a cash basis.  During the three-month period ended March 31, 2012, one venue in Cambodia operated during a soft launch with a total of 87 EGM seats as of March 31, 2012 and one venue in the Philippines recognized revenue on a cash basis with 60 EGM seats as of March 31, 2012.  Including these seats and revenue recognized on an accrual basis would not have had a material impact on the WUD for the period.   During the three-month period ended March 31, 2011, one venue in Cambodia operated during a soft launch with a total of 60 EGM seats as of March 31, 2011 and one venue in the Philippines recognized revenue on a cash basis with 106 EGM seats as of March 31, 2011.  Had these seats been included and revenue recognized on an accrual basis, WUD would have been $209 for Cambodia, $55 for Philippines and $124 for the consolidated average for the three-month period ended March 31, 2011.

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Revenue from our gaming operations during the three-month period ended March 31, 2012 increased approximately $791,000 to $5.0 million compared to revenue of approximately $4.2 million in the same period of the prior year. The increase in revenue was primarily the result of a higher average net win per machine driven by targeted marketing and machine mix improvements at our NagaWorld and Philippines operations compared to the prior year.

Gross profit from gaming operations increased approximately $571,000 to $2.6 million for the three-month period ended March 31, 2012 compared to approximately $2.1 million in the same period of the prior year as revenue from our gaming operations increased significantly with relatively flat cost of gaming participation expenses compared to the prior year period. Cost of sales for the three-month period ended March 31, 2012 included approximately $1.1 million of depreciation of EGMs, $615,000 of amortization of a casino contract, $63,000 of amortization of other gaming related intangibles and $524,000 of other expenses.

As of March 31, 2012, we had a total of 1,918 EGM seats of which 358 were held in inventory and 1,560 were in operation. Of the 1,560 EGM seats in operation, 799 were in operation in three venues in Cambodia and 761 were in operation in five venues in the Philippines. Of our 799 EGM seats in operation in Cambodia, 87 seats were in operation at a venue during its soft launch opening. Of our 761 EGM seats in operation in the Philippines, we recognized revenue on gaming activities occurring on 701 seats in four venues and deferred revenue for the remaining 60 seats in one venue because the collection from this venue was not yet reasonably assured.  However, our EGMs remain in operation at this venue as we are actively engaged in discussions with the venue owner to reach an amicable solution.

	March 31, 2012			December 31, 2011
(amounts in thousands)	Units	Carrying Value		Units	Carrying Value
EGMs and systems used in operations (1)	1,560	$	6,500	1,477	$	6,204
EGMs and systems held for future use	358	1,584		412	2,685
Total EGMs and systems	1,918	$	8,084	1,889	$	8,889

(1) Included 12 EGM seats, which are currently in operation on trial basis subject to achieving certain performance objectives prior to acceptance.  As a result, their carrying value was not represented above.

A large portion of our gaming operations income is derived from our EGM participation operations within NagaWorld.  NagaWorld is a luxury casino resort in the capital city of Phnom Penh, Cambodia that operates under an exclusive casino license in a designated area around the city and is currently the only gaming establishment in the area.

In December 2008, we established a relationship with NagaWorld Limited to place EGMs on a participation basis at NagaWorld and jointly operate those EGMs with them.  Due to our successful performance, we subsequently amended our contract and expanded our relationship with NagaWorld and increased our EGM seats under contract in NagaWorld to 670.

Our current operations at NagaWorld are governed under a Machines Operation and Participation Consolidation Agreement dated December 31, 2009, which was subsequently amended on May 25, 2010.  Under the terms of these agreements, we and NagaWorld control the operation of a total of 670 of our EGMs, including floor staff and respective audit rights. We and NagaWorld split the win per unit per day from all the 670 EGMs and certain operating costs related to marketing and floor staff on a respective basis of 25%/75%.  Win per unit per day from all the 670 EGMs are settled and distributed daily to us. The 670 EGM seats are under contract for a term of six years commencing March 1, 2010.

In addition to our operations at NagaWorld, we have expanded our participation operations in Cambodia with a significant new gaming machine participation and management agreement.

On November 3, 2011, we entered into a gaming machine participation and management agreement with Sokha Hotels and Resorts to place 250 EGM seats and jointly manage these slot operations in its new Thansur Bokor Resort and Casino in the tourist area of the Bokor Mountains of Cambodia (“Thansur Bokor”). Sokha, a wholly-owned subsidiary of the Cambodian conglomerate Sokimex, is a leading operator of luxury hotels and resorts in prime locations in Cambodia.

Thansur Bokor held its soft opening on March 28, at which time we had 87 EGM seats in operation. The grand opening was held on May 3, 2012, at which time we had approximately 200 EGM seats in operation.  We expect to ramp up to 250 seats in the future. Under the terms of the agreement, we and Sokha split the gross win and certain operating expenses on a respective basis of 27/73%. We collect our share of the gross win on a semi-monthly basis and settle our share of the operating costs on a monthly basis. The contract duration is five years commencing in May 2012.

Our total capital expenditures for this project are projected to be approximately $2.0 million, which primarily include the purchase of new and used machines, and will be funded from our internal cash resources.

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In the Philippines, we continue efforts to focus on our most promising venues to improve our overall returns and growth potential in this market.  These efforts include: implementing, with the support of our venue owner partners, targeted marketing programs; the redeployment, when possible, of our gaming assets from lower to higher performing venues in the market; and greater overall revenue sharing in this market due to our acquisition of a higher revenue sharing interest in one of our most promising venues in October 2011.

On October 21, 2011, we entered into an agreement to increase our share of the revenue and control over the promotion and marketing strategies for our participation business at the San Pedro Club, one of our existing participation venues in the Philippines.  Under the terms of the agreement, we bought out the interests of our former co-participant in the project for a total consideration of approximately Philippines pesos 61.4 million (equivalent to approximately $1.4 million) and we now work directly with the government operator PAGCOR and increased our revenue share from 17% to 35% and share in certain operating costs.

As described in greater detail above, in the future, our gaming operations will also consist of our casino and gaming development projects, which will increase our installed base of EGMs in operation and add table games. These include: Dreamworld Casino (Pailin), which opened in May 2012; Dreamworld Club (Poipet), which is scheduled to open by December 31, 2012; and Dreamworld Casino (Kampot), which is expected to open in 2013.

The gaming station details of these projects are summarized below.

Project	Number of Table Games	Number of EGM Seats
Dreamworld Casino (Pailin)	30	50
Dreamworld Club (Poipet)	—	300
Dreamworld Casino (Kampot)	14	25
	44	375

We continue to selectively pursue additional gaming projects in our target markets.  Total company-wide EGM placements can fluctuate due to our strategic efforts to optimize average daily net wins.  In the event that the EGM performance at our contracted venues does not meet our original expectations, and to the extent that this is legally permitted under the terms of the relevant participation contracts, we may discuss with the relevant venue owners for withdrawing all or a portion of our EGMs from such venues for future redeployment in new or existing venues with better performance prospects.

Other Products

Other products revenue increased approximately $56,000 to $2.1 million for the three-month period ended March 31, 2012 compared to approximately $2.1 million in the same period of the prior year. Other products revenue for the three-month period ended March 31, 2012 consisted of approximately $1.6 million in non-gaming product sales and $532,000 in gaming chip and plaque sales compared to $1.8 million and $241,000, respectively in the same period of the prior year.  Gaming chip and plaque sales increased mainly as a result of the completion of an order for a recent new customer’s casino opening and higher reorders from existing customers during the three-month period ended March 31, 2012. Non-gaming product sales declined primarily as a result of a softening in the Australian automotive industry, which resulted in decreased orders for related plastic components during the three-month period ended March 31, 2012.

Gross profit on other products decreased approximately $186,000 to $120,000 in the three-month period ended March 31, 2012 compared to approximately $306,000 in the same period of the prior year mainly due to strategic pricing of gaming products to one of our new customers, combined with negative absorption of fixed production costs as a result of lower production volume of non-gaming products.

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Operating Expenses

The schedule of expenses on a consolidated basis consisted of the following:

	Three-Month Periods Ended March 31,
(amounts in thousands)	2012			2011
Selling, general and administrative	$	1,585		$	1,198
Stock-based compensation expense	265			223
Gain on dispositions of assets	(12		)	—
Product development expenses	100			80
Depreciation and amortization	31			30
	$	1,969		$	1,531

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased approximately $387,000 to $1.6 million for the three-month period ended March 31, 2012 compared to $1.2 million in the same period of the prior year. Included in the $387,000 increase were approximately $129,000 of start up costs related to the May 2012 opening of Dreamworld Casino (Pailin). The remaining increase in selling and administrative expenses of $258,000 was mainly a result of salaries and wages expense which increased approximately $145,000 primarily due to increased headcount for the new operations staff and a one-off adjustment of an overprovision for 2010 bonuses during the three-month period ended March 31, 2011. Travel and entertainment expenses increased approximately $81,000 mainly as a result of increased travelling required in relation to the new gaming projects. Insurance, utilities and other expenses increased approximately $120,000 primarily due to increased scale of operations. Sales commission increased approximately $9,000 primarily due to higher other products sales.However, bad debt expenses decreased approximately $71,000 primarily related to an operating venue in Philippines for which revenue recognition has been deferred until cash collection since the three-month period ended June 30, 2011.  Legal, consulting and accounting and other expenses decreased by approximately $26,000 primarily due to the absence of incorporation of new entities during the three-month period ended March 31, 2012 compared to the prior year period.

Stock-Based Compensation Expense

Stock-based compensation expense increased approximately $42,000 to $265,000 for the three-month period ended March 31, 2012 compared to $223,000 in the corresponding period of the prior year primarily due to an increase in average stock prices during the three-month period ended March 31, 2012 as compared to the prior year period.

Gain on Disposition of Assets

The amount represented gain on disposition of non-performing EGMs and systems during the three-month period ended March 31, 2012.

Product Development Expenses

Product development expenses increased approximately $20,000 to $100,000 for the three-month period ended March 31, 2012 compared to approximately $80,000 in the prior year period mainly as a result of increased activities for new product development for our other products division, specifically gaming chips and plaques.

Depreciation and Amortization Expenses

Total depreciation and amortization expenses increased slightly by approximately $1,000 to $31,000 for the three-month period ended March 31, 2012 compared to $30,000 in the prior year period as there were no major changes in related assets.

Other Income/(Expenses)

	Three-Month Periods Ended March 31,
(amounts in thousands)	2012			2011
Interest expense and finance fees	$	(53	)	$	(94	)
Interest income	12			23
Foreign currency gains/(losses)	189			(7		)
Other	82			60
Total	$	230		$	(18	)

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Interest Expense and Finance Fees

Interest expense and finance fees decreased approximately $41,000 to $53,000 for the three-month period ended March 31, 2012 compared to approximately $94,000 in the same period of the prior year primarily due to the reduced notes payable to a related party as principal repayments began in July 2011.

Interest Income

Interest income decreased approximately $11,000 to $12,000 for the three-month period ended March 31, 2012 compared to approximately $23,000 in the same period of the prior year primarily as a result of lower interest income charged on overdue amounts receivables due to improved collections.

Foreign Currency Transactions

Foreign currency gains increased approximately $196,000 to $189,000 for the three-month period ended March 31, 2012 compared to losses of approximately $7,000 for the same period in the prior year. The increase was primarily due to the depreciating value of United States dollar denominated payables from our Hong Kong and Philippines operations, whose functional currency are the Hong Kong dollar and Philippine peso, respectively.

Other

Other income increased approximately $22,000 to $82,000 for the three-month period ended March 31, 2012 compared to approximately $60,000 in the prior year period primarily due to a net increase in grants received from the Australian government related to the other products division, specifically in respect of the automotive components.

Income Tax Provisions

Effective tax rates for the three-month periods ended March 31, 2012 and 2011 were approximately 5.3% and 16.7%, respectively. We continue to review the treatment of tax losses and income generated in the future by our foreign subsidiaries to minimize taxation implication/costs.

	Three-Month Periods Ended March 31,
(amounts in thousands)	2012		2011
Income tax provisions	$	54	$	139

FINANCIAL CONDITION

Liquidity and Capital Resources

As of March 31, 2012, we had total cash and cash equivalents of approximately $11.7 million and working capital of approximately $9.2 million. Our cash and working capital during the three-month period ended March 31, 2012 was positively impacted by the cash received from our operations at NagaWorld but was negatively impacted by the purchase of EGMs for our gaming operations, including a portion of the EGMs needed for our participation and management contract with Sokha Hotels and Resorts (“Sokha Agreement”), the repayment of approximately $1.6 million in principal and interest on the promissory note issued to EGT Entertainment Holding and expenses associated with our casino development projects.

From April 1, 2012 to the date of this filing, our working capital position has been positively impacted by cash received from our operations at NagaWorld partly offset by the repayment of approximately $1.1 million in principal and interest on the promissory note issued to EGT Entertainment Holding and the payment of approximately $875,000 associated with our casino and gaming development projects.

As part of our growth strategy for our gaming operations, we intend to incur initial planning and construction costs related to our casino and gaming development plans.  In addition, we expect to purchase EGMs to complete total placements under the Sokha Agreement, supplement existing inventory and source future targeted deployment plans. Our current casino and gaming development plans for the remainder of 2012 include Dreamworld Club (Poipet)and completing the installation of EGMs under the Sokha Agreement.

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We expect Dreamworld Club (Poipet), which principally includes the development and construction of the facility and gaming equipment, will require total expenditure of approximately $7.5 million.  This includes an estimated $5.0 million to source top of the line EGMs.

We also continue to pursue other new gaming projects, however, there is no guarantee we will successfully sign any of these new projects.

We presently expect that our capital expenditures for the remainder of 2012 based on our current contractual commitments will be approximately $10.2 million to $11.3 million exclusive of the approximately $3.7 million of loan principal and interest to be repaid to EGT Entertainment Holding during 2012. This includes approximately: $7.5 million for the development of Dreamworld Club (Poipet); approximately $1.4 to $2.3 million for EGM purchases, which includes the reminder of those required to fulfill the Sokha Agreement, upgrades,and general maintenance; and approximately $1.3 to $1.5 million for the expansion and enhancement of our Dolphin manufacturing plant for our gaming chips and plaques.

We anticipate our available working capital, along with cash expected to be generated from operations, will allow us to meet our capital expenditures for the development ofr Dreamworld Club (Poipet), the purchase of EGMs, the expansion, enhancement of Dolphin manufacturing plant and repayments under the promissory note issued to EGT Entertainment Holding for the remainder of 2012.

As noted above, however, we continue to pursue additional casino and gaming projects. While there is no guarantee we will be successful in obtaining additional projects, if we were to secure one or more of these projects our capital expenditures for the remainder of 2012 would increase beyond the $10.2 million to $11.3 million currently contemplated.  At this time, we are unable to predict the amount of additional capital expenditures that could be required in 2012 for these potential projects. Where possible, we intend to fund our casino and gaming projects from our cash flow from operations and cash on hand. Further, we will seek to structure the development of these projects in phases to better control and pace the related expenditure of capital. However, should we commit to large projects or to the concurrent development of multiple casinos and gaming projects, we may need to acquire additional capital. We would endeavor to obtain any required additional capital from various financing sources including commercial debt financing and the sale of our debt or equity securities. However, there are no commitments or arrangements in place as of the date of this report for our receipt of additional capital and there is no assurance we will be able to acquire additional capital if, and when, needed on commercially reasonable terms or at all.

Cash Flows Summary

	Three-Month Periods Ended March 31,
(amount in thousands)	2012			2011
Cash provided by/ (used in):
Operations	$	2,008		$	2,724
Investing	(1,538		)	(450		)
Financing	(1,574		)	(31		)
Effect of exchange rate change in cash	40			2
	$	(1,064	)	$	2,245

Operations

Cash provided by operations was approximately $2.0 million for the three-month period ended March 31, 2012 compared to approximately $2.7 million in the same period of the prior year. The decrease in cash provided by operations was primarily due to faster settlement of current liabilities.

Investing

Cash used in investing activities was approximately $1.5 million for the three-month period ended March 31, 2012 compared to approximately $450,000 in the same period of the prior year. The increase in cash used in investing activities was mainly a result of the capital expenditures related to the construction of Dreamworld Casino (Pailin) and the Sokha Project, as well purchase of more EGMs and related systemsin the three-month period of ended March 31, 2012.

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Financing

Cash used in financing activities was approximately $1.6 million for the three-month period ended March 31, 2012 compared to approximately $31,000 in the same period of the prior year. The increase was primarily a result of repayments of the notes payable to EGT Entertainment Holding (see Note 14), as principal repayments began in July 2011.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States. Accordingly, we are required to make estimates incorporating judgments and assumptions we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole, as well as information available from other outside sources. Our estimates affect amounts recorded in the financial statements and actual results may differ from initial estimates.

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

Allowance for Doubtful Accounts Receivable

As of March 31, 2012, we had net accounts receivable of approximately $2.1 million, representing 5% of our total assets. We specifically analyze the collectability of each account based upon the age of the account, the customer’s financial condition, collection history and any other known information, and we provide specific allowance to aged account balances. Revenue is recognized on a cash basis for customers with doubtful accounts receivable. Our allowance for doubtful accounts receivable was approximately $39,000 as of March 31, 2012 and December 31, 2011.

Inventory

The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally one year or less. If we experience a significant unexpected decrease in demand for our products or a higher occurrence of inventory obsolescence because of changes in technology or customer requirements, we could be required to increase our inventory provisions.

Electronic Gaming Machines (EGMs) and Systems, Property and Equipment and Assets Held for Sale

As of March 31, 2012, we had EGMs and systems, property and equipment and assets held for sale of approximately $11.9 million, representing 28% of our total assets. We depreciate EGMs and systems, property and equipment on a straight-line basis over their estimated useful lives. The estimated useful lives are based on the nature of the assets as well as the current operating strategy and legal considerations such as contractual life. Future events, such as property expansions, property developments, trends in market demand, new competition, or technology obsolescence, could result in a change in the manner in which we use certain assets and require a change in the estimated useful lives of such assets.

For assets to be held and used, they are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, we first group assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the “asset group”). Secondly, we estimate the undiscounted future cash flows that are directly associated with and expected to arise from the use and eventual disposition of such asset group. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model.

To estimate the undiscounted cash flows of an asset group, we consider potential cash flows scenarios based on management’s estimates given current conditions. Determining the recoverability of our asset groups is judgmental in nature and requires the use of significant estimates and assumptions, including estimated cash flows, growth rates and future market conditions, among others. Future changes to our estimates and assumptions based upon changes in macro-economic factors, regulatory environments, operating results or management’s intentions may result in future changes to the recoverability of the asset group.

For assets to be held for sale, they are measured at the lower of their carrying amount or fair value less cost to sell. Losses are recognized for any initial or subsequent write-down to fair value less cost to sell, while gains are recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized. Any gains or losses not previously recognized that result from the sale of assets shall be recognized at the date of sale. Assets are not depreciated while classified as held for sale.

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Intangible Assets, including Goodwill and Casino Contracts

As of March 31, 2012, we had intangible assets, including goodwill and casino contracts of $11.3 million, representing 26% of our total assets.

Goodwill is not subject to amortization and is tested for impairment and recoverability annually or more frequently if events or circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of its fair value with its carrying amount. If the carrying amount is not recoverable and exceeds its fair value, an impairment will be recognized in an amount equal to that excess. If its carrying amount does not exceed the fair value, no impairment is recognized

Finite-lived intangible assets, including casino contracts are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives are based on the nature of the assets as well as legal considerations such as contractual life. Future events, such as technology obsolescence could result in a change in the manner in which we use the assets and require a change in the estimated useful lives of such assets. Finite-lived intangible assets, including casino contracts are tested for impairment and recoverability when there are indicators of impairment. The impairment test consists of a comparison of its fair value with its carrying amount. If the carrying amount is not recoverable and exceeds its fair value, an impairment will be recognized in an amount equal to that excess. If its carrying amount does not exceed the fair value, no impairment is recognized.

As of March 31, 2012, we had casino contracts and gaming operating agreement of $10.8 million, representing 96% of our total intangible assets. The fair value of our casino contracts and gaming operation agreement was estimated using a form of the income approach known as the excess earnings method, excess earnings were discounted to present value at rates commensurate with our capital structure and the prevailing borrowing rates within the industry in general. Determining the fair value of the casino contracts and gaming operation agreement is judgmental in nature and requires the use of significant estimates and assumptions, including revenue, operating expenses, growth rates, discount rates and future market conditions, among others. Future changes to our estimates and assumptions based upon changes in macro-economic factors, operating results or management’s intentions may result in future changes to the fair value of the casino contracts and gaming operation agreement.

Stock-Based Compensation

We apply ASC 718, Compensation-Stock Compensation, to account for stock-based compensation. Under the fair value recognition provisions of ASC 718, we recognize stock-based compensation expense for all service-based awards to employees and non-employee directors with graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation costs of a change in the estimated forfeitures is recognized in the period of the change.  For non-employee awards, we remeasure compensation costs each period until the service condition is complete and recognize compensation costs on the straight-line basis over the requisite service period.  Option valuation models require the input of highly subjective assumptions, and changes 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. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered.

Stock-based compensation expense totaled approximately $265,000 and $223,000 for the three-month periods ended March 31, 2012 and 2011, respectively, in the accompanying consolidated statements of operations.

Income Taxes

We are subject to income taxes in the U.S. (including federal and state) and several foreign jurisdictions in which we operate. We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. Accounting standards regarding income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is “more-likely-than-not” that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a “more-likely-than-not” realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring, and implementation of tax planning strategies.

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We recorded a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Management will reassess the realization of deferred tax assets based on the applicable accounting standards for income taxes each reporting period and consider the scheduled reversal of deferred tax liabilities, sources of taxable income and tax planning strategies. To the extent that the financial results of these operations improve and it becomes “more-likely-than-not” that the deferred tax assets are realizable, we will be able to reduce the valuation allowance. For valuation allowance related to deferred tax assets generated prior to Quasi-Reorganization, which was effected on December 31, 2010, reductions in the valuation allowance will be recorded directly in equity.

Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions for which the tax treatment is uncertain. Accounting standards regarding uncertainty in income taxes provides a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is “more-likely-than-not” that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely, based solely on the technical merits, of being sustained on examinations. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. We recognize interest and penalties, if any, related to unrecognized tax benefits in the provision of income taxes in the statements of comprehensive income.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

Item 3.    Quantitative and Qualitative Disclosures about Market Risks

Not applicable.

Item 4.    Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief accounting officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.  Based on this evaluation, our management concluded that our disclosure controls and procedures were effective as of March 31, 2012.

(b)  Changes in Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting that occurred during the three-month period ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 6.            Exhibits

Exhibit No.	Description	Method of Filing
10.1	Restricted Stock Agreement between Registrant and Clarence Chung dated as of January 3, 2012 *	Filed as an Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed on January 5, 2012
10.2	Machines Operation and Participation Agreement dated April 2, 2012 between the Registrant and Mr. Kok An, a Cambodian individual and Crown Resorts Co., Ltd	Filed as an Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed on April 5, 2012
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
101.INS**	XBRL Instance Document	Filed electronically herewith
101.SCH**	XBRL Taxonomy Extension Schema Document	Filed electronically herewith
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document	Filed electronically herewith
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document	Filed electronically herewith
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document	Filed electronically herewith
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document	Filed electronically herewith

*  Indicates management compensatory plan, contract or arrangement.

**Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

***Certain portions of the exhibit have been omitted pursuant to Registrant’s confidential treatment request filed with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.  The omitted text has been filed separately with the Commission.

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SIGNATURES

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

		ENTERTAINMENT GAMING ASIA INC.
		(Registrant)
Date:	May 15, 2012	By:	/s/ Clarence Chung
			Clarence Chung
		Its:	President and Chief Executive Officer
Date:	May 15, 2012	By:	/s/ Andy Tsui
			Andy Tsui
		Its:	Chief Accounting Officer

33

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Section 302 Certification

I, Clarence Chung, certify that:

1)I have reviewed this quarterly report on Form 10-Q of Entertainment Gaming Asia Inc.;

2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fiscal quarter presented in this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2012	By:	/s/ Clarence Chung
		Clarence Chung, President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

Section 302 Certification

I, Andy Tsui, certify that:

1)I have reviewed this quarterly report on Form 10-Q of Entertainment Gaming Asia Inc.;

2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fiscal quarter presented in this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2012	By:	/s/ Andy Tsui
		Andy Tsui, Chief Accounting Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Entertainment Gaming Asia Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Clarence Chung, President and Chief Executive Officer of the Company, and Andy Tsui, Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ Clarence Chung	Dated:	May 15, 2012
	Clarence Chung
Title:	President and Chief Executive Officer
By:	/s/ Andy Tsui	Dated:	May 15, 2012
	Andy Tsui
Title:	Chief Accounting Officer

This certification is made solely for the purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

XML

Prepaid Expenses and Other Current Assets

3 Months Ended

Mar. 31, 2012

Prepaid Expenses and Other Current Assets

Prepaid Expenses and Other Current Assets

Note 4.Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Prepayments to suppliers	$	751	$	528
Deposits on EGM orders	418		121
Restricted cash	—		123
Prepaid leases	39		39
	$	1,208	$	811

XML

Inventories

3 Months Ended

Mar. 31, 2012

Inventories

Inventories

Note 3.Inventories

Inventories consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Spare parts	$	141	$	147
Raw materials	1,256		1,370
Finished goods	648		377
	$	2,045	$	1,894

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 11,695	$ 12,759
Accounts receivable, net	2,051	2,691
Other receivables	266	114
Inventories	2,045	1,894
Assets held for sale	10	30
Prepaid expenses and other current assets	1,208	811
Total current assets	17,275	18,299
Electronic gaming machines and systems, net	8,084	8,889
Casino contracts	9,763	10,340
Property and equipment, net	3,855	2,558
Goodwill	357	357
Intangible assets, net	1,158	1,227
Contract amendment fees	423	450
Deferred tax assets	93	91
Prepaids, deposits and other assets	2,015	1,893
Total assets	43,023	44,104
Current liabilities:
Accounts payable	1,040	1,316
Amounts due to a related party		14
Accrued expenses	1,518	2,228
Income tax payable	24	68
Notes payable to a related party	4,687	6,211
Capital lease obligations	278	322
Customer deposits and other current liabilities	493	357
Total current liabilities	8,040	10,516
Other liabilities	960	869
Deferred tax liability	207	207
Total liabilities	9,207	11,592
Stockholders' equity:
Common stock, $.001 par value, 300,000,000 shares authorized; 119,618,613 and 118,839,393 shares issued and outstanding	119	119
Additional paid-in-capital	31,472	31,191
Accumulated other comprehensive income	610	559
Retained earnings since January 1, 2011 ($386.1 million accumulated deficit eliminated upon Quasi-Reorganization)	1,614	642
Total EGT stockholders' equity	33,815	32,511
Non-controlling interest	1	1
Total stockholders' equity	33,816	32,512
Total liabilities and stockholders' equity	$ 43,023	$ 44,104

XML

Description of Business and Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Description of Business and Significant Accounting Policies

Description of Business and Significant Accounting Policies

Note 1.Description of Business and Significant Accounting Policies

The principal business activities of Entertainment Gaming Asia Inc., a Nevada Corporation (the “Company”), are its gaming operations, which include the leasing of its owned electronic gaming machines (EGMs) placed in premier hotels and other venues and the development and operation of casinos and gaming establishments in certain emerging markets in the Indo-China region. Also, through its subsidiary, Dolphin Products Pty Limited, the Company develops, manufactures and distributes high-frequency RFID and traditional non-RFID gaming chips and plaques as well as other plastic component products for several industries.

In March 2011, the Company formed a new company in Cambodia with a local partner for the development, ownership and operation of a casino project in the Kampot Province of Cambodia. Net revenue of the new company (the total gross revenue of the casino less any payouts paid to customers, operating expenses, and gaming and non-gaming taxes on the new company’s revenue) will be shared on a 60/40 basis between the Company and the relevant local partner.

In May 2011, the Company agreed to form a new company with another local partner in Cambodia for the development, ownership and operation of a casino project in the Pailin Province of Cambodia and, in June 2011, the Company formed a legal entity in Cambodia to serve as the new company (“Dreamworld Pailin”) for the new casino project’s operations. In July 2011, the local partner agreed with the Company to revise the prior cooperation structure for the casino project and entered into new agreements pursuant to which (a) the Company is the sole owner of Dreamworld Pailin, (b) the local partner’s profit participation was reduced from 45% to 20% and (c) the Company will pay a fair monthly rental to the relevant local partner for the lease of the casino project property.

Basis of Presentation

These consolidated financial statements are prepared pursuant to generally accepted accounting principles in the United Statesfor interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of normal recurring adjustments and other adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company, for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 30, 2012. Certain previously reported amounts have been reclassified to conform to the current period presentation.

Principles of Consolidation

These consolidated financial statements include the accounts of Entertainment Gaming Asia Inc. and all its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

All highly-liquid instruments with original maturities of three months or less are considered cash equivalents. The Company places its cash and temporary investments with financial institutions. As of March 31, 2012, the Company had deposits with financial institutions in excess of Federal Deposit Insurance Corporation (FDIC) insured limits by approximately $11.4 million.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at face value less any allowances for doubtful accounts. Allowances for doubtful accounts are maintained at levels determined by Company management to adequately provide for uncollectible amounts. In determining the estimated uncollectable amounts, the Company evaluates a combination of factors, including, but not limited to, activity in the related market, financial condition of customers, specific customer collection experience and history of write-offs and collections. Interest income is imposed on overdue accounts receivable after the Company evaluates a combination of factors, including but not limited to, customer collection experiences, customer relationship and contract terms. Accounts receivable balances are written off after all collection efforts have been exhausted.

Inventories

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

Long-Lived Assets

The Company accounts for impairment of long-lived assets in accordance with Financial Accounting Standards Board (FASB) ASC 360, Property, Plant and Equipment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such instances, the Company estimates the undiscounted future cash flows that result from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset, determined principally using discounted cash flows.  There were no impairment charges for long-lived assets for the three-month periods ended March 31, 2012 and 2011.

Prepaids, Deposits and Other Assets

Prepaids, deposits and other assets consist primarily of prepaid leases, prepaid value-added taxes in foreign countries, and restricted deposits as lease security. The Company had restricted deposits in the amounts of $331,000 and $448,000 as of March 31, 2012 and December 31, 2011, respectively, in the form of certificates of deposits as security on leases.  Restrictions on $168,000 and $163,000 will be removed in December 2013 and in January 2014, respectively upon termination of the operating leases. Restricted cash of $331,000 was recorded in prepaids, deposits and other assets in the accompanying consolidated balance sheets.

Electronic Gaming Machines (EGMs) and Systems

EGMs and systems are stated at cost. The Company depreciates new EGMs and systems over a five-year useful life and depreciates refurbished EGMs and systems over a three-year useful life once placed in service. Depreciation of EGMs and systems of approximately $1.1 million and $1.2 million were included in cost of EGM participation in the consolidated statements of operations for the three-month periods ended March 31, 2012 and 2011, respectively.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the useful lives of the assets currently estimated to be three to twenty-five years, which in the case of leasehold improvements, is limited to the life of the lease and throughout the renewal period as long as renewal is reasonably assured. Depreciation of property and equipment of approximately $47,000 and $50,000 were included in cost of operations (other products) in the consolidated statements of operations for the three-month periods ended March 31, 2012 and 2011, respectively.

Intangible Assets, Including Goodwill and Casino Contracts

Intangible assets consist of patents, trademarks, gaming operation agreement, casino contracts and goodwill. Intangibles assets other than goodwill are amortized on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which ranges from four to nine years. The straight-line amortization method is utilized because the Company believes there is no more reliably determinable method of reflecting the pattern for which the economic benefits of the intangible assets are consumed or otherwise used.

Amortization expenses related to casino contracts were approximately $615,000 and $619,000 for the three-month periods ended March 31, 2012 and 2011, respectively. Amortization expenses related to other gaming related intangibles were approximately $63,000 and $NIL for the three-month periods ended March 31, 2012 and 2011, respectively. The amounts were accounted for as cost of gaming operations. Amortization expenses related to patents and trademarks were approximately $6,000 and $6,000 for the three-month periods ended March 31, 2012 and 2011, respectively. The amounts were accounted for as selling, general and administrative expenses.

The Company measures and tests finite-lived intangibles for impairment when there are indicators of impairment in accordance with ASC 360-10-05, Property, Plant and Equipment.

The Company measures and tests Goodwill for impairment, at least annually in accordance with ASC 350-10-05, Intangibles — Goodwill and Other.

Impairment testing for goodwill and other intangibles requires judgment, including the identification of reporting units, allocation of related goodwill, assignment of corporate shared assets and liabilities to reporting units, estimated future cash flows and determinations of fair values. While the Company believes its estimates of future revenues and future cash flows are reasonable, different assumptions could materially affect the assessment of useful lives, recoverability and fair values. No impairment charges relating to intangible assets were recorded for the three-month periods ended March 31, 2012 and 2011, respectively.

Litigation and Other Contingencies

In the performance of its ordinary course of business operations, the Company is subject to risks of various legal matters, litigation and claims of various types. The Company has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of these contingencies. The status of a significant claim is summarized in Note 16.

ASC 450, Contingencies, requires that liabilities for contingencies be recorded when it is probable that a liability has been incurred and that the amount can be reasonably estimated. Significant management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. For a contingency for which an unfavorable outcome is reasonably possible and which is significant, the Company discloses the nature of the contingency and, when feasible, an estimate of the possible loss.

Revenue Recognition

The Company recognizes revenue when all of the following have been satisfied:

·persuasive evidence of an arrangement exists;

·the price to the customer is fixed and determinable;

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

·no significant contractual obligations remain; and

·collection is reasonably assured.

Gaming Revenue

The Company earns recurring gaming revenue by providing customers with EGMs and casino management systems which track game performance and provide statistics on installed EGMs owned by the Company and leased to venue owners. Revenues are recognized on the contractual terms of the participation agreements between the Company and the venue owners and are based on the Company’s share of net winnings, net of customer incentives and commitment fees.

Revenues are recognized as earned with the exception of one of the Company’s venues in which revenues are recognized when the payment for net winnings are received as the collections from this venue are not yet reasonably assured. Net winnings, net of customer incentives and commitment fees paid to the venues were deferred and recognized on cash basis until the collections of such net winnings are reasonably assured.

Commitment fees paid to the venue operators relating to contract amendments which are not recoverable from daily net win are also capitalized as assets and amortized as a reduction of revenue over the term of the amended contracts. The Company had commitment fees balances related to contract amendment fees of approximately $423,000 and $450,000 as of March 31, 2012 and December 31, 2011, respectively.

Other Products Sales

The Company recognizes revenue from the sale of its products to end users upon shipment against customer contracts or purchase orders. The Company recognizes revenue from its sales to independent distributors upon shipments to the distributors against distributor contracts or purchase orders for products.

Stock-Based Compensation

Under the fair value recognition provisions of ASC 718, Compensation-Stock Compensation, the Company recognizes stock-based compensation expenses for all service-based awards to employees and non-employee directors with graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis over the requisite service period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimates. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Cumulative catch-up adjustments are required in the event of changes in assessment of probability. See Note 13 for additional information relating to stock-based compensation assumptions. Stock-based compensation expense totaled approximately $265,000 and $223,000 for the three-month periods ended March 31, 2012 and 2011, respectively.

Product Development

Product development expenses are charged to expense as incurred. Employee related costs associated with product development are included in product development expenses. Product development expenses were approximately $100,000 and $80,000 for the three-month periods ended March 31, 2012 and 2011, respectively.  The increase was primarily a result of increased new product development activities for the other products division, specifically in respect of gaming chips and plaques.

Income Taxes

The Company is subject to income taxes in the United States (including federal and state) and several foreign jurisdictions in which it operates. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740, Income Taxes, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent the Company believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to the Company for tax reporting purposes, and other relevant factors.

The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the provision for income taxes in the statements of operations.

On December 31, 2010, the Company effected a Quasi-Reorganization.  As of that date, the Company’s deferred taxes were reported in conformity with applicable income tax accounting standards described above, net of applicable valuation allowances. Deferred tax assets and liabilities were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities with corresponding valuation allowances as appropriate. In accordance with the Quasi-Reorganization requirements, pre-existing tax benefits realized subsequent to the Quasi-Reorganization are recorded directly in equity.

EarningsPer Share

Basic earnings per share is computed by dividing the reported net earningsby the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and shares issuable from stock options and restricted shares during the period. The computation of diluted earnings per share excludes the impact of stock options and restricted shares that are anti-dilutive.

Foreign Currency Translations and Transactions

The functional currency of the Company’s international subsidiaries, except for its operations in Cambodia whose functional currency is also US dollars, is generally the local currency. For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting currency translation adjustments are recorded directly to accumulated other comprehensive income/(losses) within stockholders’ equity. Gains and losses resulting from transactions in non-functional currencies are recorded in operations.

Below is a summary of closing exchange rates at March 31, 2012 and December 31, 2011, and average exchange rates for the three-month periods ended March 31, 2012 and 2011, respectively.

($1 to foreign currency)	March 31, 2012	December 31, 2011
Australian Dollar	0.96	0.98
Philippine Peso	42.86	43.71
Hong Kong Dollar	7.76	7.77

	Three-Month Periods Ended March 31,
($1 to foreign currency)	2012	2011
Australian Dollar	0.94	0.99
Philippine Peso	42.64	43.48
Hong Kong Dollar	7.76	7.79

Fair Value Measurements

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

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

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

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

As of March 31, 2012, the fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate carrying values due to the short maturity of these items.

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Earnings Per Share

3 Months Ended

Mar. 31, 2012

Earnings Per Share

Earnings Per Share

Note 17.          Earnings Per Share

Computation of the basic and diluted earnings per share consisted of the following:

	Three-Month Periods Ended March 31,
	2012					2011
(amounts in thousands)	Income		Number of Shares	Per Share Amount		Income		Number of Shares	Per Share Amount
Basic
Net income attributable to equity shareholders	$	972	119,601	$	0.01	$	692	116,196	$	0.01
Effect of dilutive securities
Dilutive stock options/restricted shares			1,157			—		2,942
Diluted
Net income attributable to equity shareholders plus assumed conversion	$	972	120,758	$	0.01	$	692	119,138	$	0.01

For the three-month period ended March 31, 2012, outstanding stock options of 12,326,367 shares of common stock were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive. For the three-month period ended March 31, 2011, outstanding stock options of 3,627,367 shares of common stock and outstanding warrants of 1,500,000 shares of common stock were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

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Segments

3 Months Ended

Mar. 31, 2012

Segments

Segments

Note 2.Segments

The Company currently conducts business in two operating segments: (i) gaming operations, which includes electronic gaming machine (EGM) participation and casino operations; and (ii) other products operations, which consist of the design, manufacture and distribution of gaming chips and plaques and other plastic products. The accounting policies of these segments are consistent with the Company’s policies for the accompanying consolidated financial statements.

	Three-Month Periods Ended March 31,
(amounts in thousands)	2012			2011
Revenues:
Gaming operations	$	4,956		$	4,165
Other products operations	2,126			2,070
Total revenues	$	7,082		$	6,235
Operating income:
Gaming operations gross margin	$	2,645		$	2,074
Other products operations gross margin	120			306
Corporate and other operating costs and expenses	(1,969		)	(1,531		)
Total operating income	$	796		$	849
Depreciation and amortization:
Gaming operations	$	1,800		$	1,809
Other products operations	55			56
Corporate	10			24
Total depreciation and amortization	$	1,865		$	1,889

Geographic segment revenues for the three-month periods ended March 31, 2012 and 2011 are as follows:

	Three-Month Periods Ended March 31,
(amounts in thousands)	2012		2011
Cambodia	$	4,185	$	3,360
Macau	216		65
Philippines	1,064		804
Other Asian countries	189		184
Australia	1,230		1,597
Europe	168		174
Other	30		51
	$	7,082	$	6,235

For the three-month periods ended March 31, 2012 and 2011, in the gaming segment, the largest customer represented 78% and 80%, respectively, of total gaming revenue.  For the three-month periods ended March 31, 2012 and 2011, in the other products segment, the largest customer represented 17% and 19%, respectively, of total other products sales.

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Consolidated Balance Sheets (Parenthetical) (USD $) In Millions, except Share data, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Consolidated Balance Sheets
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	300,000,000	300,000,000
Common stock, shares issued	119,618,613	118,839,393
Common stock, shares outstanding	119,618,613	118,839,393
Retained earnings, accumulated deficit eliminated upon quasi-reorganization	$ 386.1	$ 386.1

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Other Liabilities

3 Months Ended

Mar. 31, 2012

Other Liabilities

Other Liabilities

Note 12.          Other Liabilities

Other liabilities consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Other tax liabilities	$	508	$	477
Provision for long service leave	304		292
Others	148		100
	$	960	$	869

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 01, 2012
Document and Entity Information
Entity Registrant Name	Entertainment Gaming Asia Inc.
Entity Central Index Key	0001004673
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		119,685,280
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1

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Stock-Based Compensation

3 Months Ended

Mar. 31, 2012

Stock-Based Compensation

Stock-Based Compensation

Note 13.          Stock-Based Compensation

Options

At the annual shareholders meeting on September 8, 2008, a new stock option plan, the “2008 Stock Incentive Plan” (the “2008 Plan”), was voted on and became effective on January 1, 2009, which replaced two previous plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock Option Plan (the “Stock Option Plans”), thereby terminating both of the Stock Option Plans on December 31, 2008.

The 2008 Plan allows for incentive awards to eligible recipients consisting of:

·Options to purchase shares of common stock that qualify as incentive stock options within the meaning of the Internal Revenue Code;

·Non-statutory stock options that do not qualify as incentive options;

·Restricted stock awards; and

·Performance stock awards which are subject to future achievement of performance criteria or free of any performance or vesting.

The maximum number of shares reserved for issuance under the 2008 Plan was originally 5,000,000, and in July 2010 the Company’s shareholders approved an increase in the number of shares reserved for issuance to 10,000,000.  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 of all classes of stock of the Company or any parent or subsidiary corporation of the Company, in which case the exercise price shall then be 110% of the fair market value. The outstanding stock options generally vest over three years and have ten-year contractual terms.

During the three-month period ended March 31, 2012, stock options for the purchase of 1,100,000 shares of common stock were granted with a weighted average exercise price of $0.231 and weighted average fair value of $0.19 (2011: $0.35) per share and will vest from six-month and one day periods to three-year periods. During the three-month period ended March 31, 2012, 779,220 shares of restricted stock awards with a fair value of $0.25 per share were issued. The shares of restricted stock shall vest, subject to and upon the recipient’s achievement of key operational and financial performance milestones. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Cumulative catch-up adjustments are required in the event of any changes in the assessment of probabilities.

During the three-month period ended March 31, 2012, there was no exercise of outstanding stock options.

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

As of March 31, 2012, stock options for the purchase of 4,112,834 and 90,200 shares of common stock, respectively, were outstanding in relation to the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Director’s Stock Option Plan.

As of March 31, 2012, there were outstanding non-plan options to purchase 1,990,000 shares of common stock. The non-plan options were issued to certain employees and non-employees of EGT Entertainment Holding as approved by our stockholders in September 2007 pursuant to the initial closing of the transactions under the Securities Purchase and Product Participation Agreement dated June 12, 2007 between us and EGT Entertainment Holding.

As of March 31, 2012, stock options for the purchase of 7,500,000 shares of common stock were outstanding under the 2008 Plan.Options granted under the 2008 Plan to purchase an aggregate of 1,418,613 shares of common stock contain provisions that prohibit the exercise of such options unless and until the number of shares of common stock that may be issued under the 2008 Plan has been increased in accordance with Section 711 of the NYSE Amex Company Guide by at least 1,418,613.

As of March 31, 2012, 10,493,033 stock options were exercisable with a weighted average exercise price of $1.10, a weighted average fair value of $0.20 and an aggregate intrinsic value of approximately $1.6 million. The total fair value of shares vested during the three-month period ended March 31, 2012 was approximately $461,000.

A summary of all current and expired plans as of March 31, 2012 and changes during the period then ended are presented in the following table:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2011	12,593,234		$	0.98	5.40	$	303
Granted	1,100,000		0.23		—	241
Exercised	—		—		—	—
Forfeited or expired	(200	)	1.75		—	—
Outstanding as of March 31, 2012	13,693,034		0.92		5.52	2,031
Exercisable as of March 31, 2012	10,493,033		1.10		4.43	1,560

Restricted Stock

	Number of shares		Weighted Average Fair Value at Grant Date		Weighted Average Remaining Contractual Life(in years)
Unvested balance as of December 31, 2011	—		$	—	—
Granted	779,220		0.25		—
Vested (1)	(194,805	)	0.25		—
Unvested balance as of March 31, 2012	584,415		$	0.25	0.75

(1)Vested shares included 194,805 shares of restricted common stock issued in 2012 for which final vesting is pending for approval by the Company’s Compensation Committee.

Recognition and Measurement

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

The following table summarizes the range of assumptions utilized in the Black-Scholes-Merton option-pricing model for the valuation of stock options granted during the three-month periods ended March 31, 2012 and 2011:

	2012				2011
Range of values:	Low		High		Low		High
Expected volatility	113.46	%	127.83	%	173.6	%	174.40	%
Expected dividends	—		—		—		—
Expected term (in years)	3.73		9.02		3.73		9.85
Risk free rate	0.63	%	1.95	%	1.56	%	3.43	%

For stock-based compensation accrued to employees and non-employee directors, the Company recognizes stock-based compensation expense for all service-based awards with graded vesting schedules on the straight-line basis over the requisite service period for the entire award.  Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered.  Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.

For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis over the requisite service period.

The Company estimates forfeitures and recognizes compensation cost only for those awards expected to vest assuming all awards would vest and reverses recognized compensation cost for forfeited awards when the awards are actually forfeited.

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

Warrants

All previously issued warrants were expired by December 31, 2011. There were no warrants granted during the three-month period ended March 31, 2012.

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Revenues:
Gaming	$ 4,956	$ 4,165
Other products	2,126	2,070
Total revenues	7,082	6,235
Cost of gaming
Electronic gaming machine depreciation	1,109	1,190
Casino contract amortization	615	619
Other gaming related intangibles amortization	63
Other operating costs	524	282
Cost of other products	2,006	1,764
Selling, general and administrative	1,585	1,198
Stock-based compensation expense	265	223
Gain on dispositions of assets	(12)
Product development expenses	100	80
Depreciation and amortization	31	30
Total operating costs and expenses	6,286	5,386
Income from operations	796	849
Other income/(expense):
Interest expense and finance fees	(53)	(94)
Interest income	12	23
Foreign currency gains/(losses)	189	(7)
Other	82	60
Total other income/(expense)	230	(18)
Income before income tax	1,026	831
Income tax expense	(54)	(139)
Net income	972	692
Less: net income attributable to non-controlling interest	0
Net income attributable to EGT Stockholders	972	692
Earnings per share:
Basic (in dollars per share)	$ 0.01	$ 0.01
Diluted (in dollars per share)	$ 0.01	$ 0.01
Weighted average common shares outstanding
Basic (in shares)	119,601	116,196
Diluted (in shares)	120,758	119,138
Other comprehensive income, net of tax
Foreign currency translation adjustments	51	103
Comprehensive income	1,023	795
Less: Comprehensive income attributable to non-controlling interest	0
Comprehensive income attributable to EGT stockholders	$ 1,023	$ 795

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Property and Equipment

3 Months Ended

Mar. 31, 2012

Property and Equipment

Property and Equipment

Note 7.           Property and Equipment

Property and equipment consisted of the following:

	Useful Life
(amounts in thousands)	(years)	March 31, 2012			December 31, 2011
		(Unaudited)
Equipment and vehicles, furniture and fixtures	3-10	$	1,352		$	1,246
Land and other project costs	3-25	2,780			1,554
Leasehold improvements	1-2	113			72
		4,245			2,872
Less: accumulated depreciation		(390		)	(314		)
		$	3,855		$	2,558

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Electronic Gaming Machines (EGMs) and Systems

3 Months Ended

Mar. 31, 2012

Electronic Gaming Machines (EGMs) and Systems

Electronic Gaming Machines (EGMs) and Systems

Note 6.Electronic Gaming Machines (EGMs) and Systems

EGMs and systems are stated at cost.

The major categories of EGMs and systems and accumulated depreciation consisted of the following:

	Useful Life
(amounts in thousands)	(years)	March 31, 2012			December 31, 2011
		(Unaudited)
EGMs	3-5	$	12,316		$	12,116
Systems	5	1,030			1,008
		13,346			13,124
Less: accumulated depreciation		(5,262		)	(4,235		)
		$	8,084		$	8,889

Depreciation expenses for the three-month periods ended March 31, 2012 and 2011 were approximately $1.1 million and $1.2 million, respectively, which were recorded in cost of EGM participation in the consolidated statements of operations.

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Subsequent Events

3 Months Ended

Mar. 31, 2012

Subsequent Events

Subsequent Events

Note 18.          Subsequent Events

Entry into Agreement to Develop and Operate a Slot Hall in Poipet, Cambodia

On April 2, 2012, the Company entered into a Machines Operation and Participation Agreement (the “Poipet Agreement”) with a Cambodian company, which owns and operates an existing casino in Poipet, Cambodia near the Thailand border, and a Cambodian individual, who is the controller of the casino operating company and owner of two parcels of land on which the casino is located (collectively the “Poipet Local Partner”).

Pursuant to the terms of the Poipet Agreement, the Poipet Local Partner will allocate part of its land with an area of approximately 16,000 square feet (1,500 square meters) to the Company for development and construction, at its own design, budget and cost, of a slot venue which is capable of placing and operating approximately 300 EGMs. Upon completion of the slot venue, which is expected by December 31, 2012, the Company will have the exclusive rights to operate and manage the venue to be called Dreamworld Club (Poipet).  The Company and the Poipet Local Partner will split the win per unit per day from all the EGMs placed at Dreamworld Club (Poipet) and certain operating costs related to marketing and floor staff on a respective basis of 40%/60%.

Capital expenditures for the Dreamworld Club (Poipet), which principally include the development and construction of the facility and gaming equipment, are projected to be approximately $7.5 million.  This includes an estimated $5.0 million to source top of the line EGMs.  The Company expects to provide the required EGMs through the purchase of new and used machines as well as machines from its inventory. The Company is responsible for all capital expenditures for Dreamworld Club (Poipet), which it intends to fund through its internal cash resources.

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Related Party Transactions

3 Months Ended

Mar. 31, 2012

Related Party Transactions

Related Party Transactions

Note 14.          Related Party Transactions

On April 21, 2008, the Company entered into a Trade Credit Facility Agreement (the “Facility Agreement”) with Elixir International Limited (“Elixir International”), a company which used to be a wholly-owned subsidiary of EGT Entertainment Holding, the Company’s principal shareholder. Upon entering into the Agreement, the Company issued the first note pursuant to the terms of the Facility Agreement in the principal amount of $15.0 million (the “Initial Advance”).  The Initial Advance extinguished a then trade payable of an equivalent amount to Elixir International with respect to EGMs previously acquired.

As a result of the disposal of Elixir International by EGT Entertainment Holding, Elixir International assigned and novated all its rights and obligations under the Facility Agreement and the related promissory note (as amended) to EGT Entertainment Holding in April 2010.

Subsequent to its origination, the Facility Agreement has been amended three times, mostly recently on May 25, 2010 on which date the Company entered into Amendment No.3 to the Facility Agreement with EGT Entertainment Holding (the “Third Amendment”), pursuant to which the Company issued a new note (the “Third Amended Note) to replace the previous terms.  Under the payment schedule of the Third Amended Note, the outstanding principal balance of $9.2 million and the interest accrued thereon were restructured in the following manner: (a)  the total interest accrued on the Outstanding Principal Balance during the period from July 1, 2009 to June 30, 2010 in the amount of $458,000 to be paid by us in a lump sum payment on July 1, 2010; (b) on the first day of each calendar month during the period from August 1, 2010 to June 1, 2011, the Company to pay interest in arrears on the Outstanding Principal Balance at the same rate of 5% per annum for the preceding month; and (c)  the Company to repay the Outstanding Principal Balance and interest accrued thereon at the rate mentioned above in 18 equal monthly installments commencing on July 1, 2011. Pursuant to the terms of the Third Amendment, the Company paid total principal and interest of approximately $1.5 million and $65,000, respectively to EGT Entertainment Holding for the three-month period ended March 31, 2012.

As of March 31, 2012, the total outstanding principal amount under the notes payable to EGT Entertainment Holding (see Note 11) was approximately $4.7 million.

Effective January 1, 2010, the Company began sub-leasing office space from Melco Services Limited, a wholly-owned subsidiary of Melco International Development Limited, which is also the parent of the Company’s principal shareholder, EGT Entertainment Holding.

Significant revenues, purchases and expenses arising from transactions with related parties consisted of the following:

	Three-Month Periods EndedMarch 31,
(amounts in thousands)	2012			2011
EGT Entertainment Holding
Principal and interest payments	$	1,588		$	115
Melco Crown Gaming (Macau) Ltd
Sales of gaming products	$	(152	)	$	(67	)
Melco Services Limited
Technical services	$	8		$	8
Office rental	$	36		$	36
Expenses paid on behalf of the Company (net)	$	(2	)	$	1

As of March 31, 2012, the notes payable to EGT Entertainment Holding had outstanding principal amounts and additional accrued interest totaling approximately $4.7 million and $78,000, respectively.

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Accrued Expenses

3 Months Ended

Mar. 31, 2012

Accrued Expenses

Accrued Expenses

Note 10.         Accrued Expenses

Accrued expenses consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Payroll and related costs	$	566	$	968
Interest	8		16
Legal, accounting and tax	195		254
Accrued tax expenses	529		625
Deferred rent	—		4
Marketing expense	21		—
Other	199		361
Totals	$	1,518	$	2,228

Payroll and related costs as of December 31, 2011 included a bonus accrual of approximately $462,000, which was fully settled during the three-month period ended March 31, 2012

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Intangible Assets, including Goodwill and Casino Contracts

3 Months Ended

Mar. 31, 2012

Intangible Assets, including Goodwill and Casino Contracts

Intangible Assets, including Goodwill and Casino Contracts

Note 8.           Intangible Assets, including Goodwill and Casino Contracts

Intangible assets consisted of the following:

	Useful Life
(amounts in thousands)	(years)	March 31, 2012			December 31, 2011
		(Unaudited)
Gaming operation agreement	4-5	$	1,173		$	1,173
Less: accumulated amortization		(125		)	(62		)
Goodwill		357			357
Patents	5-6	114			114
Less: accumulated amortization		(26		)	(21		)
Trademarks	5-9	26			26
Less: accumulated amortization		(4		)	(3		)
Casino contracts	5-6	12,835			12,790
Less: accumulated amortization		(3,072		)	(2,450		)
Totals		$	11,278		$	11,924

Amortization expense for finite-lived intangible assets was approximately $684,000 and $625,000 for the periods ended March 31, 2012 and 2011, respectively.

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Prepaids, Deposits and Other Assets

3 Months Ended

Mar. 31, 2012

Prepaids, Deposits and Other Assets

Prepaids, Deposits and Other Assets

Note 9.           Prepaids, Deposits and Other Assets

Prepaids, deposits and other assets consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Office and equipment rental deposits	$	119	$	30
Restricted cash	331		325
Prepaid taxes	788		752
Prepaid leases	777		786
Totals	$	2,015	$	1,893

As of March 31, 2012, prepaid leases consisted of land lease prepayments of approximately $240,000 and $537,000 for the casino projects located in the respective Cambodian provinces of Kampot and Pailin.

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Debt and Capital Lease Obligations

3 Months Ended

Mar. 31, 2012

Debt and Capital Lease Obligations

Debt and Capital Lease Obligations

Note 11.         Debt and Capital Lease Obligations

Debt and capital lease obligations consisted of the following:

(amounts in thousands)	March 31, 2012		December 31, 2011
	(Unaudited)
Notes payable to a related party at interest of 5%	$	4,687	$	6,211
Capital lease obligations to an Australian bank at various interest rates and collateralized by equipment	278		322
Total	$	4,965	$	6,533

On November 6, 2008, in accordance with the amended Trade Credit Facility Agreement (the “Facility Agreement”), Elixir International Limited (“Elixir International”), a then wholly-owned subsidiary of the Company’s principal shareholder EGT Entertainment Holding Limited (“EGT Entertainment Holding”), exchanged its promissory note issued under the Facility Agreement in the original principal amount advance of $15.0 million for a new promissory note issued by the Company for the then outstanding principal amount of approximately $12.1 million.  The outstanding principal and the interest accrued (revised from 8% to 5%) thereon were to be repaid in 24 equal monthly installments reset from January 1, 2009.

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

On April 20, 2010, the Company entered into a Deed of Assignment and Novation and Consent (the “Deed of Assignment”) with Elixir International and EGT Entertainment Holding. Pursuant to the Deed of Assignment, the Company agreed to the assignment and transfer by Elixir International of all its rights and obligations under the Facility Agreement and the related promissory note to EGT Entertainment Holding, our principal shareholder, with immediate effect. The said assignment and transfer was made in relation to the disposal of Elixir International by EGT Entertainment Holding and does not have any impact on the note terms or the repayment obligations of the Company save and except that when the repayment schedule resumes, the monthly repayment of principal and interest under the note will be made to or at the direction of EGT Entertainment Holding instead of Elixir International.

On May 25, 2010, the Company entered into a third amendment (“Third Amendment”) to the Facility Agreement with EGT Entertainment Holding, pursuant to which the payment schedule of the Outstanding Principal Balance and the interest accrued thereon were further restructured in the following manner: (i) the total interest accrued on the Outstanding Principal Balance during the period from July 1, 2009 to June 30, 2010 in the amount of approximately $458,000 to be paid by the Company in a lump sum payment on July 1, 2010; (ii)  on the first day of each calendar month during the period from August 1, 2010 to June 1, 2011, the Company was to pay interest in arrears on the Outstanding Principal Balance at the same rate of 5% per annum for the preceding month; and (iii)  the Company is to repay the Outstanding Principal Balance and interest accrued thereon at the rate mentioned above in 18 equal monthly installments commencing on July 1, 2011.  Pursuant to the terms of the Third Amendment, the Company paid total principal and interest of approximately $1.5 million and $64,000, respectively, for the three-month period ended March 31, 2012 to EGT Entertainment Holding.  (See Note 14)  Interest expenses capitalized during the three-month periods ended March 31, 2012 and 2011 amounted approximately $13,000 and $23,000, respectively.

In 2006, the Company entered into a capital lease agreement for four injection molding machines with auxiliary equipment. The lease has a six-year term and the machines will be fully owned on final payment at the end of the contract term. The molding machine lease was capitalized at the present value of the future minimum lease payments at lease inception. As of March 31, 2012, the capital lease balance is approximately $278,000, which will be fully settled in 2012.

The cost and accumulated depreciation of property and equipment leased under capital lease arrangements was approximately $192,000 and $47,000, respectively as of March 31, 2012.  Depreciation expense was approximately $9,000 for the three-month period ended March 31, 2012.  The cost and accumulated depreciation of property and equipment leased under capital lease arrangements was approximately $190,000 and $9,000, respectively as of March 31, 2011.

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2012

Commitments and Contingencies

Commitments and Contingencies

Note 16.          Commitments and Contingencies

Legal Matters

Prime Mover/Strata Litigation

On March 26, 2010, a complaint (as subsequently amended on May 28, 2010) (the “Complaint”) was filed by certain shareholders of the Company including Prime Mover Capital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., and Strata Offshore Fund, Ltd (collectively, the “Plaintiffs”) in the United States District Court for the Southern District of New York against certain defendants including the Company and certain other current and former directors and officers of the Company.

The Complaint alleges claims related to disclosures concerning the Company’s electronic gaming machine participation business (the “Participation Business”), including but not limited to the alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, violations of Nevada Revised Statutes Sections 90.580(e) and 90.660(3), breach of fiduciary duty, and negligent misrepresentations.  The Plaintiffs allege that the Company and certain other defendants made false and misleading statements about the Participation Business in filings with the SEC, press releases, and other industry and investor conferences and meetings during the period from June 13, 2007 and August 13, 2008 and that the Plaintiffs then purchased the securities at the inflated prices and later suffered economic losses when the price of the Company’s securities decreased.

On June 22, 2011, the court ruled on the motions to dismiss filed by the Company and certain of its current and former officers and directors. The court dismissed all of Prime Mover’s claims and dismissed all of Strata’s claims except for two breach-of-contract counts against the Company.  All claims against the current and former officers and directors were dismissed. On November 7, 2011, Plaintiffs filed a motion for leave to amend the Complaint for re-pleading all the securities claims against us and all the relevant current and/or former officers and directors. On December 15, 2011 the court granted the Plaintiff’s motion to amend the Complaint and on December 20, 2011 the Plaintiffs filed a second amended Complaint (the “Second Amended Complaint”) which alleged claims substantially similar to the original claims in the Complaint.  The Company and certain current and former officers and directors have filed a motion to dismiss the Second Amended Complaint on January 23, 2012.

As of the date of this report, the court has not ruled on the motion to dismiss.

The Plaintiffs seek unspecified damages, as well as interest, costs and attorneys’ fees. The Company intends to defend itself vigorously against the Second Amended Complaint. As the litigation is at a preliminary stage, it is not possible to predict the likely outcome of the case or the probable loss, if any, or the continuation of insurance coverage and, accordingly, no accrual has been made for any possible losses in connection with this matter.

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flows from operating activities:
Net income	$ 972	$ 692
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax		104
Foreign currency (gains)/losses	(201)	7
Depreciation of gaming machines and systems and property and equipment	1,181	1,264
Amortization of casino contract	615	619
Amortization of intangible assets	69	6
Amortization of prepaid commitments fees	27	27
Stock-based compensation expense	265	223
Gain on disposition of gaming machines and systems	(12)
Provision for bad debt expense		79
Changes in operating assets and liabilities:
Accounts receivable and other receivables	544	514
Inventories	(113)	(894)
Prepaid expenses and other current assets	(391)	391
Prepaids, deposits and other assets	(98)	(24)
Accounts payable	(300)	195
Amount due to a related party	(14)	1
Accrued expenses and other liabilities	(615)	(507)
Income tax payable	7	20
Customer deposits and other current liabilities	72	7
Net cash provided by operating activities	2,008	2,724
Cash flows from investing activities:
Purchase of property and equipment	(124)	(95)
Purchase of gaming machines, systems and deposits paid	(229)	(246)
Addition of project costs	(1,225)	(109)
Proceeds from sale of gaming machines, property and equipment	40
Net cash used in investing activities	(1,538)	(450)
Cash flows from financing activities:
Repayment of short-term debt and leases	(50)	(40)
Repayment of notes payable	(1,524)
Exercise of stock options		9
Net cash used in financing activities	(1,574)	(31)
Effect of exchange rate changes on cash	40	2
(Decrease) increase in cash and cash equivalents	(1,064)	2,245
Cash and cash equivalents at beginning of period	12,759	10,217
Cash and cash equivalents at end of period	11,695	12,462
Supplemental disclosure of cash flow information
Interest paid	64	115
Income tax paid	$ 54	$ 14

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Receivables

3 Months Ended

Mar. 31, 2012

Receivables

Receivables

Note 5.Receivables

Accounts and other receivables consisted of the following:

(amounts in thousands)	March 31, 2012			December 31, 2011
	(Unaudited)
Trade accounts	$	2,090		$	2,730
Other	266			114
	2,356			2,844
Less: allowance for doubtful accounts	(39		)	(39		)
Net	$	2,317		$	2,805

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Income Taxes

3 Months Ended

Mar. 31, 2012

Income Taxes

Income Taxes

Note 15.          Income Taxes

The Company recorded income tax expense of $54,000 and $139,000 for the three-month periods ended March 31, 2012 and 2011, respectively. The Company’s effective income tax rates were 5.3% and 16.7% for the three-month periods ended March 31, 2012 and 2011, respectively. EGT Cambodia is tax exempt, paying a fixed monthly tax rather than a tax on income. The change in effective tax rate was mainly due to an increase in EGT Cambodia’s pre-tax income in proportion to consolidated pre-tax income. The Company recorded additional unrecognized tax benefit for the three-month period ended March 31, 2011, which was mainly related to withholding tax on inter-company loans provided to the Company’s foreign subsidiaries. The unrecognized tax benefit is likely to change in the next twelve months; however, the change cannot be reasonably estimated at the present time.  The Company is subject to income tax examinations by tax authorities from 2005 through the present period in jurisdictions in which we operate. Currently, the U.S. Internal Revenue Service is conducting an audit of the 2008 and 2009 tax returns in the United States and initially proposed an unfavorable adjustment to the domestic operating loss of approximately $5.1 million. The Company disagreed with the proposed adjustment and will appeal the decision if necessary.