- Quarterly Report (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 June 30, 2012

¨	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 ¨

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 August 1, 2012, 29,924,528 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	20

	Overview	20

	Results of Operations	23

	Financial Condition	31

	Critical Accounting Policies and Estimates	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risks	32

Item 4.	Controls and Procedures	32

	PART II — OTHER INFORMATION

Item 6.	Exhibits	33

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(amounts in thousands, except per share data)

	June 30, 2012		December 31, 2011
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,849	$	12,759
Accounts receivable, net		1,806		2,691
Other receivables		197		114
Inventories		1,789		1,894
Prepaid expenses and other current assets		529		841
Total current assets		16,170		18,299

Gaming equipment, net		8,032		8,889
Casino contracts		9,176		10,340
Property and equipment, net		4,611		2,558
Goodwill		357		357
Intangible assets, net		1,343		1,227
Contract amendment fees		396		450
Deferred tax assets		91		91
Prepaids, deposits and other assets		2,753		1,893
Total assets	$	42,929	$	44,104

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	781	$	1,316
Amounts due to a related party		—		14
Accrued expenses		1,802		2,228
Income tax payable		22		68
Notes payable to a related party		3,144		6,211
Capital lease obligations		223		322
Customer deposits and other current liabilities		1,086		357
Total current liabilities		7,058		10,516

Other liabilities		1,031		869
Deferred tax liability		208		207
Total liabilities		8,297		11,592

Stockholders’ equity:
Common stock, $.001 par value, 75,000,000 shares authorized; 29,924,528 and 29,709,848 shares issued and outstanding		30		30
Additional paid-in-capital		31,865		31,280
Accumulated other comprehensive income		638		559
Retained earnings since January 1, 2011 ($386.1 million accumulated deficit eliminated upon Quasi-Reorganization)		2,098		642
Total EGT stockholders’ equity		34,631		32,511
Non-controlling interest		1		1
Total stockholders’ equity		34,632		32,512
Total liabilities and stockholders’ equity	$	42,929	$	44,104

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

ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(amounts in thousands, except per share data)

(Unaudited)

	Three-Month Periods Ended June 30,						Six-Month Periods Ended June 30,
	2012			2011			2012			2011
Revenues:
Gaming, gross	$	5,198		$	4,553		$	10,154		$	8,718
Less: promotional allowances		—			—			—			—
Gaming, net		5,198			4,553			10,154			8,718
Other products		2,407			2,165			4,533			4,235
Total Revenues		7,605			6,718			14,687			12,953

Operating costs and expenses:
Cost of gaming
Gaming equipment depreciation		1,180			1,197			2,289			2,387
Casino contract amortization		615			607			1,230			1,225
Other gaming related intangibles amortization		63			—			126			—
Other operating costs		950			287			1,474			569
Cost of other products		2,253			1,898			4,259			3,662
Selling, general and administrative expenses		1,637			1,169			3,222			2,368
Stock-based compensation expenses		287			799			552			1,022
(Gain)/loss on dispositions		(17	)		152			(29	)		152
Impairment of assets		71			—			71			—
Product development expenses		86			133			186			213
Depreciation and amortization		59			29			90			60
Total operating costs and expenses		7,184			6,271			13,470			11,658

Income from operations		421			447			1,217			1,295

Other income/(expense):
Interest expense and finance fees		(36	)		(106	)		(89	)		(200	)
Interest income		14			18			26			41
Foreign currency gains/(losses)		25			(17	)		214			(24	)
Other		95			67			177			127
Total other income/(expense)		98			(38	)		328			(56	)

Income before income tax		519			409			1,545			1,239

Income tax expense		(35	)		(102	)		(89	)		(240	)

Net income	$	484		$	307		$	1,456		$	999
Less: net income attributable to non-controlling interest		—			—			—			—
Net income attributable to EGT stockholders	$	484		$	307		$	1,456		$	999

Earnings per share:
Basic	$	0.02		$	0.01		$	0.05		$	0.03
Diluted	$	0.02		$	0.01		$	0.05		$	0.03

Weighted average common shares outstanding
Basic		29,918			29,517			29,909			29,284
Diluted		31,329			30,097			30,717			29,935

Other comprehensive income, net of tax
Foreign currency translation adjustments		29			48			80			151
Comprehensive income	$	513		$	355		$	1,536		$	1,150
Less: Comprehensive income attributable to non controlling interest		—			—			—			—
Comprehensive income attributable to EGT stockholders	$	513		$	355		$	1,536		$	1,150

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

ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(amounts in thousands)

(Unaudited)

	Six-Month Periods Ended June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	1,456		$	999
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax		—			71
Foreign currency (gains)/losses		(236	)		24
Depreciation of gaming equipment and property and equipment		2,462			2,543
Amortization of casino contracts		1,230			1,225
Amortization of intangible assets		140			12
Amortization of contract amendment fees		54			54
Stock-based compensation expenses		552			1,022
(Gain)/loss on disposition of assets		(29	)		152
Impairment of assets		71			—
Provision for bad debt expenses		—			56
Changes in operating assets and liabilities:
Accounts receivable and other receivables		829			591
Inventories		105			(795	)
Prepaid expenses and other current assets		282			334
Prepaids, deposits and other assets		(847	)		(622	)
Accounts payable		(536	)		(322	)
Amount due to a related party		(14	)		—
Income tax payable		22			140
Accrued expenses and other current liabilities		(266	)		(525	)
Customer deposits and others		676			17
Net cash provided by operating activities		5,951			4,976

Cash flows from investing activities:
Construction/purchase of property and equipment		(2,125	)		(234	)
Purchase of electronic gaming machines and systems		(1,267	)		(657	)
Acquisition of technical know-how		(254	)		—
Addition of project costs		(223	)		(255	)
Proceeds from sale of gaming equipment, property and equipment		71			46
Net cash used in investing activities		(3,798	)		(1,100	)

Cash flows from financing activities:
Repayment of short-term debt and leases		(98	)		(84	)
Repayment of notes payable		(3,067	)		—
Exercise of stock options		9			26
Net cash used in financing activities		(3,156	)		(58	)

Effect of exchange rate changes on cash		93			(20	)
(Decrease)/increase in cash and cash equivalents		(910	)		3,798
Cash and cash equivalents at beginning of period		12,759			10,217
Cash and cash equivalents at end of period	$	11,849		$	14,015

Supplemental disclosure of cash flow information
Interest paid	$	110		$	229
Income tax paid	$	67		$	29

Non-cash financing activities:
Issuance of restricted/performance stock	$	179		$	672

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

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 (slot operations) 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 States for 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’s presentation.

The Company effected a 1:4 reverse stock split of its common shares as of June 12, 2012. All historical share amounts and share price information presented in the financial statements and notes have been proportionally adjusted to reflect the impact of this reverse stock split, including but not limited to basic and diluted weighted-average shares issued and outstanding.

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 June 30, 2012, the Company had deposits with financial institutions in excess of Federal Deposit Insurance Corporation (FDIC) insured limits by approximately $11.6 million.

Accounts Receivable and Allowances 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 relationships 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. Impairment charges of $71,000 were recognized for long-lived assets for the three-month and six-month periods ended June 30, 2012. There were no impairment charges for long-lived assets for the three-month and six-month periods ended June 30, 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 $324,000 and $448,000 as of June 30, 2012 and December 31, 2011, respectively, in the form of certificates of deposits as security on leases. Restrictions on $164,000 and $160,000 will be removed in December 2013 and in January 2014, respectively upon termination of the operating leases.

Gaming Equipment

Gaming equipment consist primarily of 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 gaming equipment of approximately $1.2 million and $1.2 million and $2.3 million and $2.4 million were included in cost of gaming operations in the consolidated statements of comprehensive income for the three-month and six-month periods ended June 30, 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 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 $48,000 and $58,000 and $95,000 and $108,000 were included in cost of operations (other products) in the consolidated statements of comprehensive income for the three-month and six-month periods ended June 30, 2012 and 2011, respectively.

Intangible Assets, Including Goodwill and Casino Contracts

Intangible assets consist of patents, trademarks, gaming operation agreement, technical know-how, 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 ten 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 $607,000 and $1.2 million and $1.2 million for the three-month and six-month periods ended June 30, 2012 and 2011, respectively. Amortization expenses related to other gaming related intangibles were approximately $63,000 and $NIL and $126,000 and $NIL for the three-month and six-month periods ended June 30, 2012 and 2011, respectively. The amounts were accounted for as cost of gaming operations. Amortization expenses related to technical know-how were approximately $2,000 and $NIL and $2,000 and $NIL for the three-month and six-month periods ended June 30, 2012 and 2011, respectively. The amounts were accounted for as cost of other products. Amortization expenses related to patents and trademarks were approximately $6,000 and $6,000 and $12,000 and $12,000 for the three-month and six-month periods ended June 30, 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 and six-month periods ended June 30, 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 and Promotional Allowances

The Company earns recurring gaming revenue from its slot and casino operations.

For slot operations, 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 slot 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.

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 amendments of approximately $396,000 and $450,000 as of June 30, 2012 and December 31, 2011, respectively.

For casino operations, the Company’s revenues are measured by the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs and for chips in the customers’ possession, if there are any. Cash discounts, other cash incentives related to casino play and commissions rebated through junkets to customers, if there are any, are recorded as a reduction to casino revenue. Consequently, the Company’s casino revenues are reduced by discounts and commissions.

The Company does not accrue a jackpot liability for slot machine base and progressive jackpots (i.e. “jackpots”) because the Company can avoid payment of such amounts, as regulations permit removal of gaming machines from the gaming floor without payment of the jackpots.

Promotional allowances represent goods and services, which would be accounted for as revenue if sold, that a casino gives to customers as an inducement to gamble at that establishment such as food and beverages. The Company includes the retail value of promotional allowances in gross revenues, and deducts it from gross revenues to reach net revenues on the face of the income statements.

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 $287,000 and $799,000 and $552,000 and $1.0 million for the three-month and six-month periods ended June 30, 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 $86,000 and $133,000 and $186,000 and $213,000 for the three-month and six-month periods ended June 30, 2012 and 2011, respectively. The decrease was primarily a result of decreased new product development activities for the other products division, specifically for 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 comprehensive income.

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.

Earnings Per Share

Basic earnings per share are computed by dividing the reported net earnings by 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 within stockholders’ equity. Gains and losses resulting from transactions in non-functional currencies are recorded in the statements of comprehensive income.

Below is a summary of closing exchange rates as of June 30, 2012 and December 31, 2011, and average exchange rates for the three-month and six-month periods ended June 30, 2012 and 2011, respectively.

($1 to foreign currency)	June 30, 2012		December 31, 2011
Australian Dollar		0.98		0.98
Philippine Peso		42.28		43.71
Hong Kong Dollar		7.76		7.77

	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
($1 to foreign currency)	2012		2011		2012		2011
Australian Dollar		0.99		0.94		0.97		0.97
Philippine Peso		42.78		43.22		42.91		43.51
Hong Kong Dollar		7.76		7.78		7.76		7.78

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 June 30, 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 include slot 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 June 30,						Six-Month Periods Ended June 30,
(amounts in thousands)	2012			2011			2012			2011
Revenues:
Gaming operations	$	5,198		$	4,553		$	10,154		$	8,718
Other products operations		2,407			2,165			4,533			4,235
Total revenues	$	7,605		$	6,718		$	14,687		$	12,953

Operating income:
Gaming operations gross margin(1)	$	2,319		$	2,462		$	4,964		$	4,537
Other products operations gross margin		154			267			274			573
Corporate and other operating costs and expenses		(2,052	)		(2,282	)		(4,021	)		(3,815	)
Total operating income	$	421		$	447		$	1,217		$	1,295

Depreciation and amortization:
Gaming operations	$	1,900		$	1,804		$	3,700		$	3,612
Other products operations		58			63			113			119
Corporate		9			24			19			49
Total depreciation and amortization	$	1,967		$	1,891		$	3,832		$	3,780

(1)

Gaming operations gross margin calculation included cost of gaming and impairment of assets.

Geographic segment revenues for the three-month and six-month periods ended June 30, 2012 and 2011 are as follows:

	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
(amounts in thousands)	2012		2011		2012		2011
Cambodia	$	4,192	$	3,716	$	8,376	$	7,077
Macau		454		192		670		257
Philippines		1,006		837		2,070		1,641
Other Asian countries		197		218		386		401
Australia		1,588		1,436		2,818		3,033
Europe		164		207		332		381
Other		4		112		35		163
	$	7,605	$	6,718	$	14,687	$	12,953

For the three-month and six-month periods ended June 30, 2012 and 2011, in the gaming segment, the largest customer represented 80% and 81% and 79% and 80%, respectively, of total gaming revenue. For the three-month and six-month periods ended June 30, 2012 and 2011, in the other products segment, the largest customer represented 18% and 25% and 15% and 22%, respectively, of total other products sales.

Note 3.

Inventories

Inventories consisted of the following:

(amounts in thousands)	June 30, 2012		December 31, 2011
	(Unaudited)
Raw materials	$	1,184	$	1,370
Finished goods		359		377
Spare parts		132		147
Casino inventory		114		—
	$	1,789	$	1,894

Note 4.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

(amounts in thousands)	June 30, 2012		December 31, 2011
	(Unaudited)
Prepayments to suppliers	$	490	$	528
Deposits on EGM orders		—		121
Restricted cash		—		123
Other		39		69
	$	529	$	841

Note 5.

Receivables

Accounts and other receivables consisted of the following:

(amounts in thousands)	June 30, 2012			December 31, 2011
	(Unaudited)
Trade accounts	$	1,845		$	2,730
Other		197			114
		2,042			2,844
Less: allowance for doubtful accounts		(39	)		(39	)
Net	$	2,003		$	2,805

Note 6.

Gaming Equipment

Gaming equipment are stated at cost.

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

	Useful Life
(amounts in thousands)	(years)		June 30, 2012			December 31, 2011
			(Unaudited)
EGMs		3-5	$	12,829		$	12,116
Systems		5		1,047			1,008
Other gaming equipment		3-5		124			—
				14,000			13,124
Less: accumulated depreciation				(5,968	)		(4,235	)
			$	8,032		$	8,889

Depreciation expenses for the three-month and six-month periods ended June 30, 2012 and 2011 were approximately $1.2 million and $1.2 million and $2.3 million and $2.4 million, respectively, which were recorded in cost of gaming in the consolidated statements of comprehensive income.

Note 7.

Property and Equipment

Property and equipment consisted of the following:

	Useful Life
(amounts in thousands)	(years)		June 30, 2012			December 31, 2011
			(Unaudited)
Equipment, vehicles, furniture and fixtures		3-10	$	1,856		$	1,246
Land and building		20		2,484			830
Leasehold improvements		1-2		148			72
Construction in progress		N/A		611			724
				5,099			2,872
Less: accumulated depreciation				(488	)		(314	)
			$	4,611		$	2,558

Note 8.

Intangible Assets, including Goodwill and Casino Contracts

Intangible assets consisted of the following:

	Useful Life
(amounts in thousands)	(years)		June 30, 2012			December 31, 2011
			(Unaudited)
Gaming operation agreement		4-5	$	1,175		$	1,173
Less: accumulated amortization				(188	)		(62	)

Goodwill		N/A		357			357

Patents		5-6		114			114
Less: accumulated amortization				(31	)		(21	)

Trademarks		5-9		26			26
Less: accumulated amortization				(5	)		(3	)

Technical know-how		10		254			—
Less: accumulated amortization				(2	)		—

Casino contracts		5-6		12,873			12,790
Less: accumulated amortization				(3,697	)		(2,450	)
			$	10,876		$	11,924

Amortization expenses for finite-lived intangible assets were approximately $686,000 and $613,000 and $1.4 million and $1.2 million for the three-month and six-month periods ended June 30, 2012 and 2011, respectively.

Note 9.

Prepaids, Deposits and Other Assets

Prepaids, deposits and other assets consisted of the following:

(amounts in thousands)	June 30, 2012		December 31, 2011
	(Unaudited)
Restricted cash	$	324	$	325
Prepaid taxes		855		752
Prepaid leases		767		786
Prepayments to suppliers		429		—
Deposits on EGM orders		149		—
Rental, utilities and other deposits		229		30
	$	2,753	$	1,893

As of June 30, 2012, prepaid leases consisted of land lease prepayments of approximately $238,000 and $529,000 for the casino projects located in the respective Cambodian provinces of Kampot and Pailin.

Note 10.

Accrued Expenses

Accrued expenses consisted of the following:

(amounts in thousands)	June 30, 2012		December 31, 2011
	(Unaudited)
Payroll and related costs	$	527	$	968
Legal, accounting and tax		295		254
Accrued tax expenses		654		625
Marketing expenses		29		41
Other		297		340
	$	1,802	$	2,228

Note 11.

Debt and Capital Lease Obligations

Debt and capital lease obligations consisted of the following:

(amounts in thousands)	June 30, 2012		December 31, 2011
	(Unaudited)
Notes payable to a related party at interest of 5%	$	3,144	$	6,211
Capital lease obligations to an Australian bank at various interest rates and collateralized by equipment		223		322
	$	3,367	$	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 $46,000 and $3.1 million and $110,000, respectively, for the three-month and six-month periods ended June 30, 2012 to EGT Entertainment Holding (See Note 14). Interest expenses capitalized during the three-month and six-month periods ended June 30, 2012 and 2011 was approximately $10,000 and $6,000 and $23,000 and $29,000, 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 June 30, 2012, the capital lease balance is approximately $223,000, which will be fully settled in 2012.

The cost and accumulated depreciation of property and equipment leased under capital lease arrangements was approximately $187,000 and $54,000, respectively as of June 30, 2012. Depreciation expense was approximately $9,000 and $17,000 for the three-month and six-month periods ended June 30, 2012. The cost and accumulated depreciation of property and equipment leased under capital lease arrangements was approximately $187,000 and $37,000, respectively as of December 31, 2011.

Note 12.

Other Liabilities

Other liabilities consisted of the following:

(amounts in thousands)	June 30, 2012		December 31, 2011
	(Unaudited)
Other tax liabilities	$	524	$	477
Provision for long service leave		326		292
Others		181		100
	$	1,031	$	869

Note 13.

Stock-Based Compensation

Options

The Company effected a 1:4 reverse stock split of its common shares as of June 12, 2012. All historical share amounts and share price information presented in this Note 13 have been proportionally adjusted to reflect the impact of this reverse stock split.

At the annual shareholders meeting held 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 1,250,000, and in July 2010 the Company’s shareholders approved an increase in the number of shares reserved for issuance to 2,500,000. 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 six-month period ended June 30, 2012, stock options for the purchase of 275,000 shares of common stock were granted with a weighted average exercise price of $0.924 and weighted average fair value of $0.76 (2011: $1.40) per share and will vest from six-month and one day periods to three-year periods. During the six-month period ended June 30, 2012, 194,805 shares of restricted stock awards with a fair value of $0.92 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 six-month period ended June 30, 2012, 19,167 shares of outstanding stock options were exercised.

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 3,750,000 shares and 75,000 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 June 30, 2012, stock options for the purchase of 936,864 and 22,550 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 June 30, 2012, there were no outstanding non-plan options to purchase common stock. All previously granted non-plan options were expired by June 30, 2012. 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 June 30, 2012, stock options for the purchase of 1,872,508 shares of common stock were outstanding under the 2008 Plan. Options granted under the 2008 Plan to purchase an aggregate of 354,653 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 MKT Company Guide by at least 354,653.

As of June 30, 2012, 2,077,755 stock options were exercisable with a weighted average exercise price of $2.45, a weighted average fair value of $0.78 and an aggregate intrinsic value of approximately $3.5 million. The total fair value of shares vested during the six-month period ended June 30, 2012 was approximately $573,000.

A summary of all current and expired plans as of June 30, 2012 and changes during the period then ended are presented in the following tables:

Options

	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		3,148,321		$	3.90		5.40	$	1,212
Granted		275,000			0.92		—		538
Exercised		(19,167	)		0.47		—		42
Forfeited or expired		(572,232	)		11.43		—		—
Outstanding as of June 30, 2012		2,831,922			2.12		6.35		4,799
Exercisable as of June 30, 2012		2,077,755			2.45		5.43		3,545

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		194,805			0.92		—
Vested (1)		(97,403	)		0.92		—
Unvested balance as of June 30, 2012		97,402		$	0.92		0.5

(1)

Vested shares included 97,403 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 six-month periods ended June 30, 2012 and 2011:

	Six-Month Periods Ended June 30,
	2012						2011
Range of values:	Low			High			Low			High
Expected volatility		90.32	%		127.83	%		173.32	%		174.40	%
Expected dividends		—			—			—			—
Expected term (in years)		3.73			9.02			3.73			9.85
Risk free rate		0.63	%		1.95	%		1.32	%		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 six-month period ended June 30, 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 $ 46,000 and $3.1 million and $110,000, respectively to EGT Entertainment Holding for the three-month and six-month periods ended June 30, 2012.

As of June 30, 2012, the notes payable to EGT Entertainment Holding had outstanding principal amounts and additional accrued interest totaling approximately $3.1 million and $NIL, respectively (see Note 11).

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 Ended June 30,						Six-Month Periods Ended June 30,
(amounts in thousands)	2012			2011			2012			201 1
EGT Entertainment Holding
Principal and interest payments	$	1,588		$	115		$	3,177		$	229

Melco Crown Gaming (Macau) Limited
Trade sales of gaming products	$	(456	)	$	(260	)	$	(615	)	$	(327	)

Melco Services Limited
Technical services	$	8		$	9		$	15		$	17
Office rental		38			36			75			72

Note 15. Income Taxes

The Company recorded income tax expense of approximately $35,000 and $102,000 and $89,000 and $240,000 for the three-month and six-month periods ended June 30, 2012 and 2011, respectively. The Company’s effective income tax rates were 6.7% and 24.9% and 5.8% and 19.4% for the three-month and six-month periods ended June 30, 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 June 30, 2012, 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 has proposed some adjustments including a downward adjustment of the Company’s net operating losses (NOLs). The Company disagrees with the proposed adjustments and plans to appeal the decision. However, the Company’s NOLs have been fully reserved and it believes that no matter what the outcome of the appeals process with the U.S. Internal Revenue Service, there will be no impact on the consolidated statements of comprehensive income . In case the Company’s NOLs are utilized, it will impact equity accounts on the consolidated balance sheets. The Company’s NOLs, if preserved, are expected to offset against taxable income received by the Company’s U.S. entity from non-U.S. entities.

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 “Slot 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 Slot Business in filings with the SEC, press releases, and other industry and investor conferences and meetings during the period from June 13, 2007 to 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.

Note 17. Earnings Per Share

The Company effected a 1:4 reverse stock split of its common shares as of June 12, 2012. All historical share amounts and earnings per share information presented in this Note 17 have been proportionally adjusted to reflect the impact of this reverse stock split.

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

	Three-Month Periods Ended June 30,
	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	$	484		29,918	$	0.02	$	307		29,517	$	0.01
Effect of dilutive securities
Dilutive options		—		1,411				—		580
Diluted
Net income attributable to equity shareholders plus assumed conversion	$	484		31,329	$	0.02	$	307		30,097	$	0.01

	Six-Month Periods Ended June 30,
	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	$	1,456		29,909	$	0.05	$	999		29,284	$	0.03
Effect of dilutive securities
Dilutive options		—		808				—		651
Diluted
Net income attributable to equity shareholders plus assumed conversion	$	1,456		30,717	$	0.05	$	999		29,935	$	0.03

For the three-month period ended June 30, 2012, outstanding stock options of 952,548 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 June 30, 2011, outstanding stock options of 1,800,592 shares of common stock and outstanding warrants of 375,000 shares of common stock were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

For the six-month period ended June 30, 2012, outstanding stock options of 1,856,921 shares of common stock were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive. For the six-month period ended June 30, 2011, outstanding stock options of 1,800,592 shares of common stock and outstanding warrants of 375,000 shares of common stock were excluded from the calculation of dilutive earnings per share as their effect would be anti-dilutive.

Note 18. Subsequent Events

At the annual shareholders meeting held on July 13, 2012, the Company’s shareholders approved the amendment of the “2008 Stock Incentive Plan” (the “2008 Plan”) to increase the maximum number of shares reserved for issuance from 2,500,000 to 3,750,000. With the increase, provisions that prohibit the exercise of options granted under the 2008 Plan to purchase an aggregate of 354,653 shares of common stock as of June 30, 2012 have been waived in accordance with Section 711 of the NYSE MKT Company Guide.

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.

On June 12, 2012, we effected a 1-for-4 reverse stock split of our common stock and corresponding decrease in the number of authorized shares of common stock. All historical share amounts and share information presented in the financial statements and notes have been proportionally adjusted to reflect the impact of this reverse stock split, including but not limited to basic and diluted weighted-average shares issued and outstanding. Certain reclassifications have been made to the prior periods' financial statements to conform to the current period's presentation.

Overview

Over the last several years we have successfully refocused our business model and streamlined our cost structure. This has provided us with a solid base from which to expand and grow our gaming operations in our target markets in Asia.

Our primary focus is our gaming operations, which entail our slot operations (previously referred to as participation operations) in Cambodia and the Philippines and the development and operation of regional style casinos and gaming venues under our Dreamworld brand in certain markets within Indo-China.

Given our casino operations are in their infancy, revenue from our gaming operations is presently principally comprised of our slot operations, which involve the leasing of electronic gaming machines (EGMs) on a revenue sharing basis to gaming establishments. 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 June 30, 2012, our slot operations were located in two countries, Cambodia and the Philippines, and totaled 1,441 EGM seats in operation in seven venues. In Cambodia, we had a total of 818 EGM seats in operation in three venues. In the Philippines, we had a total of 623 EGM seats in operation in four venues. Due to our ongoing efforts to improve the returns for our slot operations, we have refined our operating machine base to focus on those venues with the greatest potential. As a result, during the second quarter of 2012 we opted not to renew one contract in the Philippines with 130 EGM seats. During the month of July 2012, we terminated two contracts, one in Cambodia and one in the Philippines, with a combined total of 102 EGM seats as these venues were not performing up to our expectations. There were minimal costs associated with the termination of these above mentioned contracts and it is expected the loss of these operations will not have a meaningful impact on future revenue. Approximately 84 of the EGM seats from the above mentioned terminated contracts have been redeployed to other higher potential venues. As a result, as of August 1, 2012, our slot operations totaled 1,407 EGM seats in five venues, of which 826 EGM seats were in Cambodia in two venues and 581 EGM seats were in the Philippines in three venues.

In Cambodia, our slot 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 slot operations at NagaWorld, which entail 670 EGM seats placed in prime locations in the casino hotel, have provided us with strong growth in slot revenue and cash flow.

In addition, we recently expanded our slot operations in Cambodia at Thansur Bokor Highland Resort, a new casino resort developed by leading Cambodian hotelier, Sokha Hotels and Resorts. Thansur Bokor Highland Resort is located in a tourist area of the Kampot Province. The official opening of the resort was in May 2012. However, portions of the initial phase including the VIP gaming areas and entertainment complex are not yet complete. Under the terms of the agreement, we have the ability to place up to 250 EGM seats and jointly manage these slot operations in the resort. This strategic project expands our gaming operations in the Indo-China region with a prominent new partner and is anticipated to be a meaningful contributor to earnings once the facility is fully operational and the owner has implemented its broader marketing programs.

In the Philippines, our slot operations continued to post solid revenue growth despite a reduction in the machine base. We attribute this to our strategic efforts to enhance our operating performance and improve net wins 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.

With regard to our other products segment, over the last several years we have made a strategic shift in focus of this division towards the higher-margin gaming chips and plaques side of the operation. We posted solid improvement in sales of our gaming chips and plaques for the three-month period ended June 30, 2012 compared to the prior year period due to higher customer reorders in our core markets of Australia and Asia. Further, we have secured a sizeable new order in excess of $2.0 million from an existing customer, which we expect to deliver in the third quarter of 2012. We are focused on continuing to derive greater value from these operations which feature a wide range of product offerings with state of the art security features. With continued focus on marketing and 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.

We achieved solid revenue growth for the second quarter of 2012 compared to the prior year period. Our consolidated revenue for the three-month period ended June 30, 2012 was approximately $7.6 million, of which revenue from our gaming and other products operations comprised 68.3% and 31.7%, respectively, of consolidated revenue. This compares to consolidated revenue of approximately $6.7 million for the three-month period ended June 30, 2011, of which revenue from our gaming and other products operations comprised 67.8% and 32.2%, respectively, of consolidated revenue.

Revenue from our gaming operations for the three-month period ended June 30, 2012 was approximately $5.2 million compared to approximately $4.6 million in the prior year period. Revenues from gaming operations during the three-month period ended June 30, 2012 included approximately $213,000 of casino revenue from Dreamworld Casino (Pailin), our first casino development project which opened on May 9, 2012. Gross margin for our gaming operations declined to 46.0% in the three-month period ended June 30, 2012 compared to 54.1% in the prior year period. The decline was the result of higher costs associated with the start-up and general operating expenses for the new casino operations as it is early in the ramp up period.

Cash flow provided by operations was approximately $3.9 million for the three-month period ended June 30, 2012 compared to approximately $2.3 million in the prior year period. The increase was primarily related to better inventory and supplier management and increased customer deposits as a result of higher gaming sales orders. Adjusted EBITDA (as defined below) was approximately $2.8 million for the three-month period ended June 30, 2012 compared to approximately $3.3 million in the prior year period. The decline was principally due to the incremental costs associated with the new casino operations.

Our recurring cash flow from operations 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 Indo-China. 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 slot contracts. In addition, it provides us greater long-term control over our operations.

We opened our first casino project, Dreamworld Casino (Pailin) located in the Pailin Province of Northwestern Cambodia near the Thailand border in May 2012. We have two other development projects in the pipeline, Dreamworld Club (Poipet), located in the Banteay Meanchey Province of Northwestern Cambodia near the Thailand Border, and Dreamworld Casino (Kampot), located in the Kampot Province of Southwestern Cambodia near the Vietnam border.

Dreamworld Casino (Pailin)

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 profit before depreciation (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.

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.

Dreamworld Casino (Pailin) is still in its infancy. We expedited the opening date in the second quarter of 2012 to fast-track the operation of the casino’s mass market floor and establish our presence in the local market. Our VIP rooms are not yet open. We are early in the ramp up period for mass market floor operations and results are not yet normalized. We are working on a number of initiatives to ramp up the operations including more focused marketing to attract quality players in the surrounding areas and evaluating opportunities to partner with local gaming promoters to open our VIP rooms. By utilizing gaming promoters, we expect to improve high net worth player traffic in the VIP rooms while minimizing the downside risk and volatility as the promoters typically share in wins and losses and assume the credit risk.

Dreamworld Club (Poipet)

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.

Based on the current timeline, we expect to open Dreamworld Club (Poipet) in the first quarter of 2013.

Dreamworld Casino (Kampot)

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.

We presently intend to open Dreamworld Casino (Kampot) in 2013.

In addition to the above mentioned projects, 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 and Six-Month Periods Ended June 30, 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 three-month and six-month periods ended June 30, 2012 and 2011.

	Three-Month Periods Ended June 30,						Six-Month Periods Ended June 30,
(amounts in thousands, except per share data)	2012			2011			2012			2011
Total:
Revenues	$	7,605		$	6,718		$	14,687		$	12,953
Gross profit	$	2,544		$	2,729		$	5,309		$	5,110
Gross margin percentage		33	%		41	%		36	%		39	%
Adjusted EBITDA(1)	$	2,849		$	3,339		$	6,034		$	6,352
Operating income	$	421		$	447		$	1,217		$	1,295
Net income	$	484		$	307		$	1,456		$	999

Earnings per share:
Basic	$	0.02		$	0.01		$	0.05		$	0.03
Diluted	$	0.02		$	0.01		$	0.05		$	0.03

Weighted average shares outstanding
Basic		29,918			29,517			29,909			29,284
Diluted		31,329			30,097			30,717			29,935

Gaming:
Revenues	$	5,198		$	4,553		$	10,154		$	8,718
Gross profit	$	2,390		$	2,462		$	5,035		$	4,537
Gross margin percentage		46	%		54	%		50	%		52	%

Other products:
Revenues	$	2,407		$	2,165		$	4,533		$	4,235
Gross profit	$	154		$	267		$	274		$	573
Gross margin percentage		6	%		12	%		6	%		14	%

(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.

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

	Three-Month Periods Ended June 30,						Six-Month Periods Ended June 30,
(amounts in thousands)	2012			2011			2012			2011
Net income — GAAP	$	484		$	307		$	1,456		$	999
Interest expense and finance fees		36			106			89			200
Interest income		(14	)		(18	)		(26	)		(41	)
Income tax expenses		35			102			89			240
Depreciation and amortization		1,967			1,891			3,832			3,780
Stock-based compensation expenses		287			799			552			1,022
Impairment of assets		71			—			71			—
(Gain)/Loss on dispositions		(17	)		152			(29	)		152
EBITDA, as adjusted	$	2,849		$	3,339		$	6,034		$	6,352

Total revenues increased approximately $887,000 to $7.6 million for the three-month period ended June 30, 2012 compared to approximately $6.7 million in the same period of the prior year due to revenue increases in both operating segments. Revenue from gaming increased primarily as a result of higher average net win per machine from our slot operations at NagaWorld and incremental revenue from Dreamworld Casino (Pailin), our first casino development project which opened on May 9, 2012. Revenue from other products increased as a result of increased orders from major customers for our gaming chips and plaques.

Gross profit decreased approximately $185,000 to $2.5 million for the three-month period ended June 30, 2012 compared to approximately $2.7 million in the same period of the prior year primarily as a result of higher total gaming expenses related to our new casino operations while there was a comparative lower increase in revenue from gaming operations compared to the prior year period. This decrease was also partially attributable to lower gross profit from our other products operations as a result of strategic pricing of gaming products to one of our customers and negative absorption of fixed production costs due to lower production volumes of non-gaming products.

Operating income decreased approximately $26,000 to $421,000 for the three-month period ended June 30, 2012 compared to approximately $447,000 in the same period of the prior year. The decrease in operating income was primarily the result of lower gross profit from gaming operations and other products sales and higher selling and administrative expenses, which are further discussed below.

Net income increased approximately $177,000 to $484,000 for the three-month period ended June 30, 2012 compared to approximately $307,000 for the same period in the prior year. The increase in net income was primarily the result of higher revenue from gaming operations, lower stock based compensation, research and development, interest expenses and income tax expense, and a gain on assets disposition.

Total revenues increased approximately $1.7 million to $14.7 million for the six-month period ended June 30, 2012 compared to approximately $13.0 million in the same period of the prior year due to revenue increases in both operating segments. Revenue from gaming increased primarily as a result of higher average net win per machine from our slot operations. Revenue from other products increased as a result of increased orders from major gaming chip and plaque customers.

Gross profit increased approximately $199,000 to $5.3 million for the six-month period ended June 30, 2012 compared to approximately $5.1 million in the same period of the prior year primarily as a result of increased overall volumes and an improved mix of gaming compared to other products.

Operating income decreased approximately $78,000 to $1.2 million for the six-month period ended June 30, 2012 compared to approximately $1.3 million 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 $457,000 to $1.5 million for the six-month period ended June 30, 2012 compared to approximately $999,000 for the same period in the prior year. The increase in net income was primarily the result of higher revenue, gross profit from gaming operations and foreign currency gains, lower stock-based compensation, interest expenses and income tax expense and a gain on assets disposition.

Gaming Operations

Revenues from our gaming operations consisted of slot (formerly referred to as participation) and Dreamworld Casino (Pailin) operations.

	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
(amounts in thousands, except per unit data)	2012		2011		2012		2011
Net revenue to the Company
Cambodia slot operations	$	3,979	$	3,717	$	7,871	$	7,077
Philippines slot operations		1,006		836		2,070		1,641
Net revenue from slot operations		4,985		4,553		9,941		8,718
Dreamworld Casino (Pailin)		213		—		213		—
Consolidated total	$	5,198	$	4,553	$	10,154	$	8,718

Slot operations average net win/unit/ day(1)
Cambodia slot operations	$	215	$	250	$	226	$	237
Philippines slot operations	$	72	$	61	$	73	$	59
Consolidated total	$	147	$	147	$	150	$	140

	June 30,
	2012		2011
EGM seats in operation
Cambodia slot operations		818		718
Philippines slot operations		623		784
EGM seats in slot operations		1,441		1,502
Dreamworld Casino (Pailin)		50		—
Consolidated total		1,491		1,502

(1)

Average net win figures (“WUD”) only include EGM seats in operation in our slot operations. They 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 and six-month periods ended June 30, 2012, one venue in Cambodia operated during a soft launch and one venue in the Philippines recognized revenue on a cash basis. 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 and six-month periods ended June 30, 2011, one venue in Cambodia operated during a soft launch and one venue in the Philippines recognized revenue on a cash basis. Had these seats been included and revenue recognized on an accrual basis, WUD would have been $230 for Cambodia, $60 for Philippines and $139 for the consolidated average and $219, $57 and $132 , respectively for the three-month and six-month periods ended June 30, 2011.

Revenue from our gaming operations during the three-month period ended June 30, 2012 increased approximately $645,000 to $5.2 million compared to revenue of approximately $4.6 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 at our NagaWorld and Philippines slot operations due to strategic marketing and machine placement initiatives as well as incremental revenue from our new casino, Dreamworld Casino (Pailin) which opened on May 9, 2012 and our new slot operations at Thansur Bokor, which officially opened on May 3, 2012.

Gross profit from gaming operations decreased approximately $72,000 to $2.4 million for the three-month period ended June 30, 2012 compared to approximately $2.5 million in the same period of the prior year as revenue from our gaming operations increased with relatively higher cost of gaming operations compared to the prior year period. Cost of sales for the three-month period ended June 30, 2012 included approximately $1.2 million of depreciation of gaming equipment, $615,000 of amortization of casino contracts, $63,000 of amortization of other gaming related intangibles and $950,000 of other expenses.

Revenue from our gaming operations during the six-month period ended June 30, 2012 increased approximately $1.4 million to $10.1 million compared to revenue of approximately $8.7 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 at our NagaWorld and Philippines slot operations driven by targeted marketing and machine mix improvements and incremental revenue from Dreamworld Casino (Pailin) and Thansur Bokor.

Gross profit from gaming operations increased approximately $498,000 to $5.0 million for the six-month period ended June 30, 2012 compared to approximately $4.5 million in the same period of the prior year as revenue from our gaming operations increased with relatively lower increase in cost of gaming expenses compared to the prior year period. Cost of sales for the six-month period ended June 30, 2012 included approximately $2.3 million of depreciation of gaming equipment, $1.2 million of amortization of casino contracts, $126,000 of amortization of other gaming related intangibles and $1.5 million of other expenses.

As of June 30, 2012, we had a total of 1,950 EGM seats of which 459 were held in inventory and 1,491 were in operation. Of the 1,491 EGM seats in operation, 868 were in operation in four venues in Cambodia and 623 were in operation in four venues in the Philippines.

	June 30, 2012				December 31, 2011
(amounts in thousands, excepts units data)	Units		Carrying Value		Units		Carrying Value
EGMs and systems used in operations (1,2)		1,491	$	6,075		1,477	$	6,204
EGMs and systems held for future use		459		1,957		412		2,685
Total EGMs and systems		1,950	$	8,032		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.

(2)

Included both slot and Dreamworld Casino (Pailin) operations.

Due to our ongoing efforts to improve the returns on our slot operations, we have refined our operating machine base to focus on those venues with the greatest potential. During the three-month period ended June 30, 2012, we terminated one slot contract with 130 EGM seats and scheduled to terminate another slot contract with 60 EGM seats on July 1, 2012. As a result, we recorded a non-cash impairment charge of $71,000 during this period, which is further described below. In July 2012, we terminated one additional small slot contract, which totaled 42 EGM seats. Approximately 84 of the EGM seats from the three above-mentioned closed venues have already been redeployed to other higher potential venues. There were minimal costs associated with the termination of these contracts and it is expected the loss of these operations will not have a meaningful impact on future revenue.

A large portion of our gaming operations income is derived from our slot 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 revenue sharing or 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 slot operations in Cambodia with a prominent local hotelier. 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, 2012, 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. Subsequently, we determined it was appropriate to adjust the machine mix to maximize long-term performance and in June removed 70 EGM seats. These seats were replaced in July 2012 with redeployed machines from recently closed venues. 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.

Our operations at Thansur Bokor contributed to our overall gaming revenue in Cambodia but had a negative impact on the average WUD as these operations are early in the ramp up stages.

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 slot business at the San Pedro Club, one of our existing slot 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.

During the three-month period ended June 30, 2012, we expanded our gaming operations in Cambodia to include casino operations. On May 9, 2012, we opened Dreamworld Casino (Pailin), our first casino development project. In an effort to expedite the opening of Dreamworld Casino (Pailin), we initially opened the mass market floor, which includes 26 table games and 50 EGM seats. Dreamworld Casino (Pailin) also includes two VIP rooms with a total of four tables and the VIP rooms have yet to open.

Dreamworld Casino (Pailin)’s operations are in their infancy. During the three-month period ended June 30, 2012, Dreamworld Casino (Pailin) was in operation for approximately seven weeks and contributed approximately $213,000 to total gaming revenues. Given the early stages of its operations and the fact the casino it not yet fully operational, we do not believe financial results are normalized. We are employing various marketing initiatives to ramp up the operations and are evaluating opportunities to partner with gaming promoters to open the casino’s VIP rooms.

We have two additional development projects in our pipeline, Dreamworld Club (Poipet) and Dreamworld Casino (Kampot). Dreamworld Club (Poipet) is under development and is expected to open in the first quarter of 2013 with approximately 300 EGM seats. Dreamworld Casino (Kampot) is also expected to open in 2013 following Dreamworld Club (Poipet) and is intended to include up to 14 table games and 25 EGM seats.

In addition, 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 slot 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 $242,000 to $2.4 million for the three-month period ended June 30, 2012 compared to approximately $2.2 million in the same period of the prior year. Other products revenue for the three-month period ended June 30, 2012 consisted of approximately $1.4 million in non-gaming product sales and $978,000 in gaming chip and plaque sales compared to $1.9 million and $274,000, respectively, in the same period of the prior year. Gaming chip and plaque sales increased mainly as a result of higher reorders from existing customers during the three-month period ended June 30, 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 June 30, 2012.

Gross profit on other products decreased approximately $113,000 to $154,000 in the three-month period ended June 30, 2012 compared to approximately $267,000 in the same period of the prior year mainly due to strategic pricing of gaming products to one of our customers, combined with negative absorption of fixed production costs as a result of lower production volume of non-gaming products.

Other products revenue increased approximately $298,000 to $4.5 million for the six-month period ended June 30, 2012 compared to approximately $4.2 million in the same period of the prior year. Other products revenue for the six-month period ended June 30, 2012 consisted of approximately $3.0 million in non-gaming product sales and $1.5 million in gaming chip and plaque sales compared to $3.7 million and $515,000, respectively, in the same period of the prior year. Gaming chip and plaque sales increased mainly as a result of higher reorders from existing customers and the completion of an order for a recent new customer’s casino opening during the six-month period ended June 30, 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 six-month period ended June 30, 2012.

Gross profit on other products decreased approximately $299,000 to $274,000 in the six-month period ended June 30, 2012 compared to approximately $573,000 in the same period of the prior year mainly due to strategic pricing of gaming products to one of our customers, combined with negative absorption of fixed production costs as a result of lower production volume of non-gaming products.

Operating Expenses

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

	Three-Month Periods Ended June 30,					Six-Month Periods Ended June 30,
(amounts in thousands)	2012			2011		2012			2011
Selling, general and administrative	$	1,637		$	1,169	$	3,222		$	2,368
Stock-based compensation expenses		287			799		552			1,022
Product development expenses		86			133		186			213
(Gain)/loss on dispositions		(17	)		152		(29	)		152
Depreciation and amortization		59			29		90			60
Impairment of assets		71			—		71			—
	$	2,123		$	2,282	$	4,092		$	3,815

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased approximately $468,000 to $1.6 million for the three-month period ended June 30, 2012 compared to $1.2 million in the same period of the prior year. Included in the $468,000 increase were approximately $75,000 of start-up costs related to the May 2012 opening of Dreamworld Casino (Pailin). The increase in selling and administrative also included an increase of $72,000 of salaries and wages expense, primarily due to increased headcount for the new operations. Advertising, travel and entertainment expenses increased approximately $73,000 mainly as a result of increased marketing activities and travelling required in relation to the new gaming projects. Legal, consulting and accounting expenses increased approximately $93,000 primarily due to consulting fees on new projects and increased fees for accounting services. Sales commissions increased approximately $46,000 primarily due to higher other products sales. Insurance, utilities, rent, supplies and other expenses increased approximately $109,000 primarily due to increased scale of operations.

Selling, general and administrative expenses increased approximately $854,000 to $3.2 million for the six-month period ended June 30, 2012 compared to $2.4 million in the same period of the prior year. Included in the $854,000 increase were approximately $204,000 of start-up costs related to the May 2012 opening of Dreamworld Casino (Pailin). The increase in selling and administrative expenses also included an increase of $217,000 of salaries and wages expense primarily due to increased headcount for the new operations and a one-time adjustment of an overprovision for 2010 bonuses during the three-month period ended March 31, 2011. Advertising, travel and entertainment expenses increased approximately $173,000 mainly as a result of increased marketing activities and travelling required in relation to the new gaming projects. Legal, consulting and accounting expenses increased approximately $98,000 primarily due to consulting fees on new projects and increased fees for accounting services. Sales commission increased approximately $55,000 primarily due to higher other products sales. Insurance, utilities, rent, supplies and other expenses increased approximately $163,000 primarily due to increased scale of operations. However, bad debt expenses decreased approximately $56,000 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.

Stock-Based Compensation Expense

Stock-based compensation expense decreased approximately $512,000 to $287,000 for the three-month period ended June 30, 2012 compared to $799,000 in the same period of the prior year primarily due to the absence of performance stock grants during the three-month period ended June 30, 2012 as compared to the prior year period.

Stock-based compensation expense decreased approximately $470,000 to $552,000 for the six-month period ended June 30, 2012 compared to $1.0 million in the same period of the prior year primarily due to same reason stated above.

(Gain)/Loss on Disposition of Assets

Gain on disposition of assets were $17,000 for the three-month period ended June 30, 2012 compared to loss on dispositions $152,000 in the same period of the prior year primarily due to less non-performing EGMs and systems disposed and higher resale prices. Gain on disposition of assets were $29,000 for the six-month period ended June 30, 2012 compared to loss on dispositions of $152,000 in the same period of the prior year primarily due to the same reason stated above.

Product Development Expenses

Product development expenses decreased approximately $47,000 to $86,000 for the three-month period ended June 30, 2012 compared to approximately $133,000 in same period of the prior year mainly as a result of decreased activities for new product development for our other products division, specifically gaming chips and plaques.

Product development expenses decreased approximately $27,000 to $186,000 for the six-month period ended June 30, 2012 compared to approximately $213,000 in same period of the prior year for the same reason as stated above.

Depreciation and Amortization Expenses

Total depreciation and amortization expenses increased by approximately $30,000 to $59,000 for the three-month period ended June 30, 2012 compared to $29,000 in the same period of the prior year primarily as a result of the May 2012 opening of Dreamworld Casino (Pailin).

Total depreciation and amortization expenses increased by approximately $30,000 to $90,000 for the six-month period ended June 30, 2012 compared to $60,000 in the same period of the prior year for the same reason as stated above.

Impairment of Assets

Impairment of assets $71,000 were recognized during the three-month and six-month periods ended June 30, 2012 compared to $NIL in the same periods of the prior year primarily as a result of impairment of non-redeployable EGMs following the closure/scheduled closure of non-performing venues during the three-month period ended June 30, 2012.

Other Income/(Expenses)

	Three-Month Periods Ended June 30,						Six-Month Periods Ended June 30,
(amounts in thousands)	2012			2011			2012			2011
Interest expense and finance fees	$	(36	)	$	(106	)	$	(89	)	$	(200	)
Interest income		14			18			26			41
Foreign currency gains/(losses)		25			(17	)		214			(24	)
Other		95			67			177			127
Total	$	98		$	(38	)	$	328		$	(56	)

Interest Expense and Finance Fees

Interest expense and finance fees decreased approximately $70,000 to $36,000 for the three-month period ended June 30, 2012 compared to approximately $106,000 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 expense and finance fees decreased approximately $111,000 to $89,000 for the six-month period ended June 30, 2012 compared to approximately $200,000 in the same period of the prior year for the same reason as stated above.

Interest Income

Interest income decreased approximately $4,000 to $14,000 for the three-month period ended June 30, 2012 compared to approximately $18,000 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.

Interest income decreased approximately $15,000 to $26,000 for the six-month period ended June 30, 2012 compared to approximately $41,000 in the same period of the prior year for the same reason as stated above.

Foreign Currency Transactions

Foreign currency gains were $25,000 for the three-month period ended June 30, 2012 compared to losses of approximately $17,000 for the same period in the prior year. The positive turnaround of approximately $42,000 was primarily due to the depreciating value of United States dollar denominated payables from our Philippines operation, whose functional currency is Philippine peso.

Foreign currency gains were $214,000 for the six-month period ended June 30, 2012 compared to losses of approximately $24,000 for the same period in the prior year. The positive turnaround of approximately $238,000 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 $28,000 to $95,000 for the three-month period ended June 30, 2012 compared to approximately $67,000 in the prior year period primarily due to a net increase in grants received from the Australian government.

Other income increased approximately $50,000 to $177,000 for the six-month period ended June 30, 2012 compared to approximately $127,000 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 were approximately 6.7% and 24.9% and 5.8% and 19.4% for the three-month and six-month periods ended June 30, 2012 and 2011, 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 June 30,				Six-Month Periods Ended June 30,
(amounts in thousands)	2012		2011		2012		2011
Income tax provisions	$	35	$	102	$	89	$	240

FINANCIAL CONDITION

Liquidity and Capital Resources

As of June 30, 2012, we had total cash and cash equivalents of approximately $11.8 million and working capital of approximately $9.1 million. Our cash and working capital during the six-month period ended June 30, 2012 was positively impacted by the cash received from our operations at NagaWorld but was negatively impacted by the construction and purchase of property and equipment and the purchase of EGMs for our gaming operations, including a portion of the EGMs needed for our slot contract with Sokha Hotels and Resorts (“Sokha Agreement”), the repayment of approximately $3.2 million in principal and interest on the promissory note issued to EGT Entertainment Holding and expenses associated with our casino development projects.

From July 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 $77,000 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.

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 $7.0 million to $8.0 million exclusive of the approximately $3.2 million of loan principal and interest to be repaid to EGT Entertainment Holding during 2012. This includes approximately: $5.5 to $6.0 million for the development of Dreamworld Club (Poipet); approximately $1.0 to $1.5 million for EGM purchases, which includes the remainder of those required to fulfill the Sokha Agreement, upgrades, and general maintenance; and approximately $500,000 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 of 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 $7.0 million to $8.0 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

	Six-Month Periods Ended June 30,
(amounts in thousands)	2012			2011
Cash provided by/ (used in):
Operations	$	5,951		$	4,976
Investing		(3,798	)		(1,100	)
Financing		(3,156	)		(58	)
Effect of exchange rate change in cash		93			(20	)
	$	(910	)	$	3,798

Operations

Cash provided by operations was approximately $6.0 million for the six-month period ended June 30, 2012 compared to approximately $5.0 million in the same period of the prior year. The increase in cash provided by operations was primarily due to the increase of daily net win and collection from Naga World and improved working capital management.

Investing

Cash used in investing activities was approximately $3.8 million for the six-month period ended June 30, 2012 compared to approximately $1.1 million 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 Dreamworld Club (Poipet), as well as the purchase of more EGMs and related systems in the six-month period ended June 30, 2012.

Financing

Cash used in financing activities was approximately $3.2 million for the six-month period ended June 30, 2012 compared to approximately $58,000 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.

Accounting estimates 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 accounting estimates, particularly those considered most sensitive to changes from external factors, with the audit committee of our board of directors. Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 30, 2012 for accounting estimates we consider to be the most critical to fully understanding and evaluating our reported financial results.

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 June 30, 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 June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 6. Exhibits

Exhibit No.	Description	Method of Filing
3.1	Certificate of Change filed with the Secretary of State of Nevada on June 12, 2012	Filed as an Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on June 12, 2012

10.1	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

*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.

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:	August 14, 2012	By:	/s/ Clarence Chung
			Clarence Chung
		Its:	President and Chief Executive Officer


Date:	August 14, 2012	By:	/s/ Andy Tsui
			Andy Tsui
		Its:	Chief Accounting Officer

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