EGT Entertaining Gaming Asia Incorporated

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM  10-K

For the fiscal year ended December 31, 2011

or

For the transition period from                     to                

Commission file number: 000-25855

Entertainment Gaming Asia Inc.

(Name of registrant as specified in its charter)

Unit 3705, 37/F, The Centrium

60 Wyndham Street

Central, Hong Kong

(Address of principal executive offices)

+ 852-3151-3800

(Registrant’s telephone number, including area code)

Securities to be registered under Section 12(b) of the Act:

Securities to be registered under Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   o  No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes o No   x

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   o   No  o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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):

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

State the aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $19,693,636

State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 119,618,613 shares as of March 15, 2012.

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TABLE OF CONTENTS

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CAUTIONARY NOTICE

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Those forward-looking statements include our expectations, beliefs, intentions and strategies regarding the future.  Such forward-looking statements relate to, among other things, overall industry environment, our working capital requirements and results of operations, the further approvals of regulatory authorities, adverse court rulings, production and/or quality control problems, the denial, suspension or revocation of privileged operating licenses by governmental authorities, competitive pressures and general economic conditions.  These and other factors that may affect our financial results are discussed more fully in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report.  We caution readers not to place undue reliance on any forward-looking statements.  We do not undertake, and specifically disclaim any obligation, to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and we urge readers to review and consider disclosures we make in this and other reports that discuss factors germane to our business.  See in particular our reports on Forms 10-K, 10-Q, and 8-K subsequently filed from time to time with the Securities and Exchange Commission.

PART I

Item 1.                     Business

GENERAL

Entertainment Gaming Asia Inc. is engaged in: (i) electronic gaming machine (EGM) participation operations, which include the ownership and leasing of EGMs in resorts, hotels and other venues in Pan-Asia placed on a revenue sharing basis with venue owners; (ii) the development of regional casinos in the Indo-China region where we intend to own and operate such casinos under the “Dreamworld” brand; (iii)  the design, manufacture and distribution of gaming chips and plaques; and (iv) the design, manufacture and distribution of other plastic products.  Our current primary focus is our EGM participation and casino development operations.

For our EGM participation business, we utilize our operational experience, established market presence and key relationships to identify and develop new gaming venues, acquire the EGMs, casino management systems and other gaming peripherals directly from manufacturers, dealers and suppliers and install the same in our contracted venues. In addition, we assist the venue owners in brand-building and marketing promotions.  Certain of our EGM participation contracts, such as for NagaWorld Resorts and Sokha Hotels and Resorts in Cambodia, also entail us functioning as a manager of the EGM operations.  In these venues, we jointly manage with the relevant casino owner the slot floor operations and design marketing programs and slot promotions for our designated gaming space.  We also hire, train and manage the floor staff and set high expectations on the level of customer service.

In May 2010, we announced our intention to expand our gaming operations and become an owner and operator of regional casinos under the “Dreamworld” brand in select emerging gaming markets in Indo-China. We believe this expanded business strategy will allow us the potential for higher long-term incremental returns on our operations given the ability to collect a greater share of the net win compared to our existing participation contracts. In addition, it provides us greater long-term control over our operations.

Pursuant to this growth strategy, we have two casino projects under active development in Cambodia, one of which is located in the Pailin Province near the border of Thailand and the second is located in the Kampot Province near the border of Vietnam. We also own a parcel of land in the Takeo Province in Cambodia where we may develop and operate a casino-hotel in the future.

In addition to our core gaming operations, through our subsidiary, Dolphin Products Pty Limited, we develop, manufacture and distribute high-frequency RFID and traditional non-RFID gaming chips and plaques as well as other plastic component products for a number of industries.

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We have offices in Hong Kong, the Philippines, Cambodia and Australia.  We also have manufacturing facilities in Melbourne, Australia.

Our mailing address in the United States is:

Entertainment Gaming Asia Inc.

40 E. Chicago Avenue, #186

Chicago, Illinois, 60611

USA

The telephone number in the United States is (312) 867-0848.

During the fiscal year ended December 31, 2011, we owned or had rights to certain trademarks that we used in connection with the sale of our products, including, but not limited to Dolphin™ and we made applications for the trademark “Dreamworld” in certain Indo-Chinese countries. Other than the aforesaid trademarks, this report also makes reference to trademarks and trade names of other companies.

RECENT DEVELOPMENTS

During the fiscal year ended December 31, 2011 and through the date of this report, we have engaged in the following:

Entered into a New Machine Participation and Management Agreement in Cambodia

On November 3, 2011, we entered into a gaming machine participation and management agreement (the “Agreement”) with Sokha Hotels and Resorts (“Sokha”), to place up to 250 electronic gaming machine seats and jointly manage these slot operations in its new Thansur Bokor Resort and Casino in the tourist-centric 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.

The first phase of Thansur Bokor is expected to open in May 2012 at which time we expect to have 200 EGM seats in operation.  We intend to ramp up to 250 seats over the subsequent several months.  This strategic project expands our gaming operations in the Indo-China region and is anticipated to contribute to near-term earnings.

Under the terms of the Agreement, we will jointly manage with the venue owner these slot operations.  While we and Sokha will share the gross win or loss and most of the operating expenses, such as marketing expenses and salaries of floor staff, on a respective basis of 27/73%, a few operating expenditure items, such as machine maintenance and repair and salaries of certain personnel appointed by us, shall be borne solely by us.  We will collect our share of the gross win and will settle its share of the relevant operating costs on a semi-monthly basis. The contract duration is five years, commencing upon the live operation of the slot floor.

Our capital expenditures under the Agreement are estimated to be approximately $1.5 to $2 million, which will be funded from internal cash resources. We intend to utilize a combination of new and used machines, some of which will be sourced from our existing inventory.

Agreement to Increase Revenue Sharing Interest in Philippine Slot Venue

On October 21, 2011, we entered into a Transfer Agreement (“Agreement”) for the purpose of increasing from 17% to 35% our share of the revenue from our participation business at the San Pedro VIP Club, one of our existing participation venues in the Philippines (“San Pedro Club”).  This Agreement serves to further our strategy of improving returns and focusing our assets on the highest-potential venues in the market and increase our control over the promotion and marketing strategies for this venue.

San Pedro Club is operated by the government operator, Philippine Amusement and Gaming Corporation (“PAGCOR”), which entered into a machine lease contract with a company (the “Proponent”), which holds the lease of the premises of the club (the “PAGCOR Contract”). The Proponent in turn entered into an agreement with us to lease EGMs to the venue (the “Agreement of Lease”). Pursuant to the terms of the PAGCOR Contract and the Agreement of Lease, the net win after gaming tax of the machines at San Pedro Club was to be shared amongst PAGCOR, the Proponent, and us in the ratio of 65%, 18%, and 17%, respectively.

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Under the terms of the Agreement, we assume the role of the Proponent and work directly with PAGCOR. Our revenue share has increased from 17% to 35% and PAGCOR maintains its 65% share.  We have also incurred certain of the venue’s operating expenses, which are recorded in our cost of gaming operations.  The closing of the Agreement will be subject to the fulfillment of various conditions, which include PAGCOR’s consent and agreement to extend the PAGCOR Contract with us until mid 2016.  Upon closing, the Agreement will be retroactively effective as of August 1, 2011. We expect to close the Agreement in the second quarter of 2012. In the meantime, we took over San Pedro Club’s operations in late October 2011.

The cash consideration for the Agreement payable by us was Philippine pesos 55 million (equivalent to approximately $1.3 million), which was funded from our internal cash resources. We also agreed to pay cash expenses to the Proponent of approximately Philippines pesos 2.9 million (equivalent to approximately $67,000) and waived net receivables from the Proponent of approximately Philippine pesos 3.5 million (equivalent to approximately $82,000). Thus, the total consideration amount agreed by us pursuant to the transaction is approximately Philippine pesos 61.4 million (equivalent to approximately $1.4 million). As of December 31, 2011, we already paid approximately Philippines pesos 50.7 million (equivalent to approximately $1.2 million).

Entry into Two Casino Development Projects in Cambodia

As part of our growth strategy to expand our gaming operations to include the ownership and operation of regional-style casinos under our Dreamworld brand in emerging gaming markets of Indo-China, we announced two new casino development projects during 2011.

Dreamworld Casino (Kampot)

On March 4, 2011, we entered into a shareholders agreement with a local partner with respect to our participation in a company (the “new company”) for the development, ownership and operation of a casino located in Kampot Province of Cambodia near the Vietnam border (“Dreamworld Casino (Kampot)”).

The local partner is the owner of a parcel of land measuring approximately 91,000 square feet (8,500 square meters) located in a southern Cambodia in the Kampot Province near the Vietnam border and the Dreamworld Casino (Kampot) will be constructed thereon.  It will include a casino, which will be operated under the ‘Dreamworld’ brand, with table games such as baccarat, roulette and dice games as well as EGMs.  The initial phase of Dreamworld Casino (Kampot) is expected to include up to 14 table games and 25 EGMs and is expected to open in the third quarter of 2012.

Upon the completion Dreamworld Casino (Kampot), we will have the dominant management right and control over the business operations of the new company and Dreamworld Casino (Kampot) and all business decisions and policy-making in respect of the business will be vested in the board of directors of the new company in which we will have the right to nominate a majority of the members.

Subject to any early termination of the casino project pursuant to the terms of the shareholders agreement, the casino project is for an initial term of 25 years commencing March 2011 and is subject to renewal by the parties’ mutual consent.

Dreamworld Casino (Kampot) will be owned by the new company, a private company incorporated in Cambodia for the sole purpose of holding and operating Dreamworld Casino (Kampot).  The respective shareholdings of the new company by us and the local partner are 67% and 33%, respectively.  However, we and local partner will share the monthly net revenue after payouts to customers, operating expenses, and taxes on a 60%/40% basis, respectively.

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We are responsible for all capital expenditures relating to the casino project and our total capital expenditure for the initial phase Dreamworld Casino (Kampot) is expected to be approximately $1.2 million and will be funded from internal cash resources.

Dreamworld Casino (Pailin)

In May 2011, we agreed to form a company (the “new company”) with another local partner in Cambodia for the development, ownership and operation of a casino project in the Pailin Province of Cambodia near the Thailand border (“Dreamworld Casino (Pailin)”).

The local partner is the owner of a parcel of land measuring approximately 13,000 square feet (1,196 square meters) located in north western Cambodia in the Pailin Province near the Thailand border and the Dreamworld Casino (Pailin) will be constructed thereon.  It will include a casino, which will be operated under the ‘Dreamworld’ brand, with table games such as baccarat, roulette and dice games as well as EGMs.  Based on the latest venue layout, the initial phase of Dreamworld Casino (Pailin) is expected to include 30 table games and 40 EGMs. It is scheduled to open on May 9, 2012.

Under the terms of the relevant shareholders agreement, the local partner agreed to lease to the new company certain real property upon which Dreamworld Casino (Pailin) was to be developed for an annual fee of $1 and all profits (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) of the casino project were to have been split between us and the relevant local partner on a 55%/45% basis, respectively.  In June 2011, we formed a legal entity in Cambodia to serve as the company for the casino project’s operations.

In July 2011, the local partner agreed with us to revise the cooperation structure for the Dreamworld Casino (Pailin) by pervious structure and entering into new agreements pursuant to which (a) we will be the sole owner of the new company, (b) the local partner’s profit participation will be reduced from 45% to 20% and (c) we will pay a fair monthly rental to the relevant local partner for the lease of the casino project property.  The initial lease term for the land is 20 years and is subject to renewal by the parties’ mutual consent.

We are responsible for all capital expenditures relating to the casino project and our total capital expenditure for the initial phase Dreamworld Casino (Pailin) is expected to be approximately $2.4 million and will be funded from internal cash resources.

GAMING BUSINESS

Overview

Since September 2007, our primary business model has focused on the ownership and leasing of EGMs placed with venue owners on a revenue sharing basis within certain countries in Pan-Asia with operations to date located in Cambodia and the Philippines. Utilizing our developed operational experience and established market presence and key relationships, we identify and secure venues for the placement of EGMs and where warranted, casino management systems that 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.

In May 2010, we announced our intention to expand our gaming operations and become an owner and operator of regional casinos under the “Dreamworld” brand in select emerging gaming markets in Indo-China although none of our casino projects had started operations in 2011.

EGM participation operations comprised 64% of our consolidated revenues for the year ended December 31, 2011.

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Operations of our Electronic Gaming Machine Participation

We contract with the venue owners or operators for the placement of EGMs on a revenue sharing basis and directly acquire and install the EGMs and other gaming peripherals at the relevant gaming venues. The target market for our EGM participation business is hotels and resorts and various other gaming venues across Pan-Asia.  We focus on underserved gaming markets that we believe are poised for significant growth, and many of the targeted venue owners have little or no gaming operations experience.

We utilize EGMs from leading manufacturers, including Aristocrat Technologies, International Game Technology, and WMS Gaming. As of December 31, 2011, we had an inventory of 412 EGMs suitable for deployment and believe, given our casino development plans, that we will need to supplement our existing inventory with the purchase of a certain number of new and used EGMs from cash on hand and cash from operations over the next twelve months.

We help market, design and develop the gaming venues of the venue owners to whom we lease our EGMs and related systems.  We contract with the venue owner for the leasing and maintenance of the EGMs on a revenue sharing basis.  We provide the development and implementation of various related gaming services in the Pan-Asia region which include:

·       Developing the technical and network design, layout and overall space configuration of the gaming floor in order to best utilize and leverage the available space and present an appealing environment to customers; and

·       Selecting the optimal mix of EGMs for the property to optimize the economic potential of the gaming floor and overall experience for the venue owner’s customers.

We assist the venue owner by recruiting and training of the necessary gaming floor personnel regarding the operation and maintenance of the EGMs and back-of-the-house accounting and in most cases, these gaming floor staffs are employees of ours though their salaries and related expenses will be shared by the venue owner and us according to the same revenue sharing ratio as agreed under relevant participation agreement.  In addition, we maintain all performance data and provide ongoing technical and operations support in order to optimize game performance throughout the floor.

We expect that our EGM participation revenues and gross margins will be influenced by a number of factors, including the number and type of EGMs in service, the levels of play and the revenue sharing percentage. Our cost of sales includes the depreciation, joint cost sharing (primarily, in the event our contract dictates we are involved in the management of the floor operations) and other installation and maintenance costs of the EGMs.

As of December 31, 2011, our EGM participation operations were concentrated in two countries, namely, Cambodia and the Philippines. In Cambodia, we had a total of 719 EGM seats in operation in two venues.  In the Philippines, we had a total of 758 EGM seats in operation in five venues.

Competition

The global gaming industry is highly competitive.  Our competitors principally include private companies in Cambodia and both public and private companies in the Philippines with operations focused on Asian market.  Part of our operating strategy includes addressing markets and customers where we face less competition and entry barriers are higher due to several factors including:

·       United States Gaming Laws: All of the major gaming equipment suppliers are licensed by a large number of United States regulatory agencies.  In order for one of these companies to enter the markets we serve in Asia on a direct revenue sharing model with a foreign operator, the operator would be required to comply with various United States regulatory procedures.  We are not subject to this requirement as we have surrendered all our gaming licenses in the United States.

·       Local Knowledge: Through our operating experience, we have an extensive database of contacts and relationships throughout the Pan-Asia region that provides us with a unique opportunity to penetrate these under-developed markets.

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Gaming Regulations and Licensing

The regulatory structures in the Asian countries where we operate our EGM participation and casino development businesses, including the Philippines and Cambodia, are not as developed or clearly defined as the United States.  In general, all of the countries in which we currently operate require the venue owner to obtain a gaming license in order to operate the EGMs leased by us and we demand that all venue owners to whom we lease EGMs, being our customers in the Philippines and Cambodia, hold the required gaming licenses to operate their venues.  Since our EGM participation business model primarily focuses on leasing the EGMs to the venue owner, technically, we are not considered to be an operator or owner of the gaming operations by the relevant authorities (although to a certain extent we have assumed some operator roles, including but not limited to the design of marketing programs, recruitment, training and management of floor staff, in certain of our venues) and thus, we are not required to obtain any form of gaming license in either the Philippines or Cambodia for our participation business in such jurisdictions.  However, current gaming laws, including licensing requirements and other regulatory obligations, could change or become more stringent resulting in additional regulations being imposed upon us and our EGM participation operations.  Any such adverse developments in the regulation of the gaming industry could be difficult to comply with and significantly increase our costs which, in turn, could cause our participation business to be unsuccessful.

We currently hold certain approvals from the relevant government authorities for construction of our casino projects. We hold the in-principle approval at municipal level to build and open a casino hotel in the Kampot Province of Cambodia from the Cambodia Government. Pursuant to such approval, Dreamworld Leisure (Kampot) Limited, a new company formed by us and the local land owner partner, is allowed to construct and open a casino-hotel for table games and EGMs with the proposed name of Dreamworld Casino and Resort in the Kampot Province of Cambodia. We hold the in-principle approval at municipal and provincial levels to build and open a casino hotel in the Pailin Province of Cambodia from the Cambodia Government. Pursuant to such approval, Dreamworld Leisure (Pailin) Limited, one of our wholly-owned subsidiaries, is allowed to construct and open a casino-hotel for table games and EGMs with the proposed name of Dreamworld Casino and Resort in the Pailin Province of Cambodia. We hold the in-principle approval at municipal and provincial levels to build and open a casino hotel in the Takeo Province of Cambodia from the Cambodia Government. Pursuant to such approval, Dreamworld Leisure, one of our wholly-owned subsidiaries, is allowed to construct and open a casino-hotel for table games and EGMs with the proposed name of Dreamworld Casino and Resort in Takeo Province of Cambodia.

It is anticipated that the formal gaming license and approvals of each of the aforesaid casino projects will be obtained upon completion of the construction of the relevant casino.

OTHER PRODUCTS

We are also engaged in the design, manufacture and distribution of gaming chips and plaques, and the design, manufacture and distribution of other plastic products.

Overview of Gaming Chips and Plaques

We focus on the development, manufacture and sale of gaming chips and plaques from our Dolphin subsidiary in Melbourne, Australia.

Gaming chips and plaque products include:

·       High-frequency RFID casino chips, which are traditional casino chips embedded with a RFID tag that allows casinos to identify counterfeit casino chips and track table play.  The high-frequency 13.56 MHz RFID casino chip is designed to provide real-time data capability, enhanced chip security, player tracking and accounting management benefits for casinos. The high-frequency RFID chips enable casinos to read 1,000 chips per second and have a memory capacity of over 10,000 bits.

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·       Traditional casino chips for various table games, including a wide range of American-style gaming chips with 30 different color combinations, various sizes and other personalized printing combinations.

·       High-frequency RFID and traditional non-RFID casino plaques, which use modern, efficient plastic thermoforming techniques and a process of printing graphics to polymer that provides for a broad range of colors or designs, including a full photographic finish. Our plaques have unique security features including a patented RFID inlay which is tamper-proof and identifies each plaque, a currency grade ceramic DNA strand embedded in the plastic, a multi-directional hologram and serialization. They are available in five rectangular and three square shapes or customized to buyer requirements.

Marketing and Distribution of Gaming Chips and Plaques

In an effort to derive greater value from our high-frequency RFID and traditional non-RFID gaming chips and plaques, we have directed greater resources to these operations in the form of marketing and product development and engaged a marketing agent to promote and distribute these products for us in Australia, New Zealand, Macau and certain other Asian territories.

At present, our casino customers include, amongst others, City of Dreams, Altira, Venetians and Galaxy in Macau and Crown Casino in Melbourne, Burswood Casino in Perth and Star City Casino in Sydney, Australia.  Since gaming chip products are generally regarded as a “gaming device” by the gaming authorities in most of the states of the United States, which therefore requires the manufacturer of these products to be licensed, it is not our current intention to market or sell our gaming chip and plaque products in the United States.

Competition of Gaming Chips and Plaques

The gaming products industry is competitive.  We compete with established gaming products companies, which have more substantial histories, backgrounds, experience and records of successful operations, greater technical, marketing and other resources, and more employees and extensive facilities than we have or will have in the foreseeable future.  During the year ended December 31, 2011, our most significant competitor for our gaming chips and plaques was Gaming Partners International Corporation.

Gaming Regulations and Licensing of Gaming Chips and Plaques

Regarding our gaming chip and plaque products, in most jurisdictions outside the United States market, neither manufacturers nor distributors of gaming chip and plaque products are required to be licensed. However, since gaming chip and plaque products are generally regarded as “gaming devices” by the gaming authorities in most of the United States of America, which therefore require the manufacturers of these products to be licensed we currently do not have the intention to apply for any license to sell our Dolphin’s gaming chip and plaque products in the United States market mainly due to the costly application process and ongoing maintenance.

Manufacturing and Assembly of Gaming Chips and Plaques

The manufacture of RFID casino chips and plaques is performed at our Dolphin subsidiary in Australia, which specializes in plastic injection molding.  Dolphin has licensed certain RFID technology from a third party.

Suppliers

During the year ended December 31, 2011, most materials for our RFID casino chips and plaques were sourced in Australia. RFID casino chips and plaques were manufactured in Australia and shipped to our customers in Asia.  Dolphin has licensed certain RFID technology from a third party.

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Overview of Other Plastic Products

We also develop, manufacture and sell plastic products for a number of industries. Dolphin is well-known for its high-quality and high-precision plastic products, it renewed third-party accreditation’s in TS16949, ISO 9001, Quality Management Systems and ISO 140001 Environmental System, AS4801 OH&S System in 2011.

Research and Development of Gaming Chips and Plaques and Other Plastic Products

Dolphin is continuously engaged in product development to enhance existing and develop new products for its gaming and non-gaming business lines. During the years ended December 31, 2011 and 2010, we spent approximately $386,000 and $610,000, respectively on product development activities, principally related to our gaming chips and plaques.

INTELLECTUAL PROPERTY

In October 2005, we acquired the rights to U.S. Patent No. 6,659,875, which covers a unique process for manufacturing RFID chips and plaques. We also hold patents covering similar processes issued by Australia and the United Kingdom. In addition, in February 2007, we filed a new provisional specification in Australia to protect additional enhancements in the manufacture of RFID chips and plaques.

Many elements incorporated in our proprietary products are in the public domain or otherwise not amenable to legal protection and the steps taken by us will not, in and of themselves, preclude competition with our proprietary products.

EMPLOYEES

As of March 15, 2012, we had approximately 14 full-time employees in Hong Kong, 1 full-time employee in the United States, 34 full-time employees in the Philippines, 42 full-time employees and 412 contracted staff for floor operations at NagaWorld, Sokha Bokor and Pailin casino project in Cambodia, and 55 full-time employees in Australia. None of our employees are represented by labor unions, and we consider our relationship with employees to be satisfactory.

AVAILABLE INFORMATION

Our website is located at www.EGT-Group.com. The information on or accessible through our website is not part of this annual report on Form 10-K.  A copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

Item 1A.          Risk Factors

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.

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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, include those set out below.

We are a defendant in a litigation matter that could result in substantial costs and divert management’s attention and resources.

On March 26, 2010, a complaint (as subsequently amended on May 28, 2010) (the “Complaint”) was filed by certain of our shareholders 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 of our other current and former directors and officers.

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

On June 22, 2011, the court ruled on the motions to dismiss filed by us and certain of our 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 for leave to amend the Complaint and on December 20, 2011, the Plaintiff filed a second amended Complaint (the “Second Amended Complaint”) which alleged claim substantially similar to the original claims in the Complaint.

The Company and certain current and former officers and directors 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 our motion to dismiss. 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.

We believe that the Plaintiffs’ claims against us and our present and former officers and directors under the Second Amended Complaint are presently covered by our directors and officer insurance policies, which provide the covered parties with up to $15 million of potential insurance coverage. Directors and officer insurance policies, however, generally cover securities claims, not breach of contract claims. In the event that the court dismisses all the securities claims under the Second Amended Complaint, and thus Plaintiffs’ only remaining claims are for breach of contract, then there is a risk that our director and officer insurance may no longer be available to cover the litigation.

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The Plaintiffs seek unspecified damages, as well as interest, costs and attorneys’ fees. We intend to vigorously defend ourselves against these claims. However, no assurances can be made that we will be successful in our defense of the pending claims. If we are not successful in our defense of such claims, we could be forced to, among other things, make significant payments to resolve these claims or post significant bonds to pursue appeals, and such payments and/or bonds could have a material adverse effect on our business, financial condition and results of operations. Further, regardless of the outcome of the foregoing matters, these litigation matters themselves may result in substantial costs and divert management’s attention and resources, all of which could adversely affect our business.

We have achieved strong improvement in financial performance in recent quarters but have a history of significant operating losses. For the year ended December 31, 2011, we have incurred net income of approximately $642,000. However, this is the first year in which we recorded net income. For the year ended December 31, 2010, we incurred a net loss of approximately $5.2 million and prior to our Quasi-Reorganization at December 31, 2010, which among other things, eliminated our accumulated deficit account, with a commensurate reduction in our additional paid-in capital, we had an accumulated deficit of $386.1 million. During the last three years, we have refocused our business operations and streamlined our cost structure, which has resulted in substantially improved financial performance and the generation of positive cash flow from operations. However, we do not have a significant history in our primary focus of operations, EGM participation, and have recently commenced a new line of operations involving our development of regional casinos in the Indo-China region. Our limited operating history in the gaming business makes it difficult for potential investors to evaluate our business or prospective operations.  Further, we remain subject to the risks inherent in any developing business, including those mentioned below. While we will endeavor to continue to generate positive cash flows from operations, there can be no assurance that we will be successful in doing so.

Due to the nature of our participation operations, the actions of our venue owners with which we partner could impact our financial performance.   Our primary focus is currently on the ownership and leasing of EGMs on a revenue sharing basis in certain countries in Asia.  We focus on targeting venue owners in underserved gaming markets who have little or no gaming operations experience.  Since we participate on a revenue sharing basis with these venue owners, our revenue generated from the revenue sharing arrangements will be dependent to a significant degree on the efforts and capabilities of the venue owners.  Our revenues and results from our EGM participation operations may be impacted by the ability of the venue owners to manage the gaming operations of their venues.  Accordingly, there can be no guarantee that the venue owners will be able to manage the gaming operations successfully or that the gaming venues operated by them will perform at levels consistent with our financial projections and underlying forecasts and assumptions. Further, we have limited past business relationships with the venue operators and, despite background checks and other due diligence that we may perform, the venue operators may not be reputable. In the event that any of the venue operators are not reputable this would expose us to the risk of being unable to collect the revenue to which we are entitled under the revenue share arrangements and protect our gaming machine assets.

We have a dependence on NagaWorld. In Cambodia, our EGM participation operations currently focus primarily 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). We currently lease 670 EGMs at NagaWorld, representing 45% of our total EGM’s operating on a participation basis as of December 31, 2011, and those machines are among our highest performing units on a net win per day basis. For the year ended December 31, 2011, our operations at NagaWorld accounted for 51% of our consolidated revenues and 80% of our revenue from our EGM participation operations. Although we believe we have a good relationship with NagaCorp, should material events occur that are detrimental to NagaWorld and its operations or cause the loss of this customer, it would have a significant negative impact on our financial performance.

We could require additional funding in the future to execute our casino and gaming development plans.   As of December 31, 2011, we had working capital of approximately $7.8 million.  Since December 31, 2011, our working capital has been positively affected by solid cash flow contribution from our gaming operations, particularly our operations at NagaWorld.

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We believe we have sufficient cash on hand to fulfill all current obligations as they become due and to fund initial development for our casino development projects in the Kampot Province and Pailin Province of Cambodia and EGM purchase plans.  Based on our internal revenue projections, existing casino and gaming development and EGM placement rollout plans and our inventory of EGMs, we also believe we have the needed capital to fund our currently proposed operations over the next 12 months. However, if we were to commit to large casino and gaming development projects or the concurrent development of multiple casino and gaming projects; or should our revenue projections fail to meet our existing internal projections; or should we become required to procure additional EGMs for projects or due to reasons not currently contemplated, we may need to raise additional capital within the next 12 months.  We would endeavor to raise funds through various financing sources, including the sale of our equity and debt securities and the procurement of commercial debt financing. However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Any debt financing will increase expenses and must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the following results can occur:

·                  the percentage ownership of our existing stockholders will be reduced;

·                   our stockholders may experience additional dilution in net book value per share; and/or

·                   the new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock.

Intended expansion of gaming operations represents material addition to our business model which has not been proven by us.  In May 2010, we announced our intention to expand our gaming operations and become an owner and operator of regional casinos and gaming venues under the “Dreamworld” brand in select emerging gaming markets in Indo-China.  While we believe that we can leverage our existing market presence and relationships to execute our casino and gaming development plans, there is no guarantee we will be successful in securing new casino and gaming projects, funding those projects and/or executing our plans to build and operate any of our casino and gaming projects. Since we do not have a prior history in the development of regional casinos, it is difficult for potential investors to evaluate our prospective casino operations.  Further, we remain subject to the risks inherent in any developing business, including those mentioned herein.  Some of our assumptions will invariably not materialize and some unanticipated events and circumstances occurring subsequently may affect other assumptions. Therefore, the actual results achieved may vary from the pro forma projections considered by our management, and the variations may be material. No assurance can be given that the future results of our casino development operations will meet with consumer acceptance or market success.

Our EGM participation and casino development operations are focused in markets outside the United States which exposes us to risks inherent in international business operations. We intend to pursue our gaming machine participation and casino development businesses in certain markets in Pan-Asia. We also focus our sales efforts for our gaming chips and plaques in Asia and Australia, but these efforts may not be successful. Our international operations expose us to risks and challenges that we would otherwise not face if we conducted our business only in the United States, such as:

·                   increased cost of enforcing our intellectual property rights;

·                   heightened price sensitivity from customers in emerging markets;

·                   our ability to establish local manufacturing, support and service functions, and to form channel relationships with resellers in non-U.S. markets;

·               localization of our EGMs and components, including translation into foreign languages and the associated expenses;

·                   compliance with multiple, conflicting and changing governmental laws and regulations;

·                   foreign currency fluctuations;

·                   laws favoring local competitors;

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·                   weaker legal protections of contract terms, enforce recoveries of receivables and intellectual property rights and mechanisms for enforcing those rights;

·                   market disruptions created by public health crises in regions outside the United States, such as Avian flu, SARS and other diseases;

·                   difficulties in staffing and managing foreign operations, including challenges presented by relationships with workers’ councils and labor unions; and

·                   changing regional economic, political and regulatory conditions.

Our gaming operations are presently concentrated in Cambodia and the Philippines, which means that our results of operations or financial condition could be materially adversely effected by economic or political developments in either country.  Our business model contemplates our development of our EGM participation business throughout Pan-Asia and our casino development business throughout Indo-China, however at the present time our EGM participation business and casino development business are being pursued solely in Cambodia and the Philippines.  As a result, we experience significant exposure to the business risks presented by the economies and regulatory environments of those two countries.  The Cambodian and the Philippines government exercise substantial control over virtually every sector of their country’s economy through regulation and, in some cases, state ownership.  Our ability to operate in Cambodia and the Philippines may be harmed by changes in its laws and regulations, including those relating to gaming, taxation, environmental regulations, land use rights, property and other matters. For example, in February 2009, Cambodia’s Prime Minister called for the closure of the country’s sole bookmaker, Cambo Six, and all but two of the approximately 70 slot clubs in Cambodia’s Phnom Penh area, all of which had previously been licensed by the Cambodian government.  In the Philippines, all gaming operations are controlled by the Philippine Amusement and Gaming Corporation (“PAGCOR”), a government corporation that holds the exclusive right to operate casinos and slot rooms in the Philippines and that reports directly to the Office of the President of the Philippines.  While we have no reason to believe at this time that any of our gaming operations or those of our partners, such as NagaWorld, are at risk of adverse government action in Cambodia or the Philippines,  the central or local governments of such jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations or which may even restrict the licenses under which we and our partners operate. Likewise, any political turmoil, adverse weather condition, calamity or epidemic occurs in any of these two countries would have a significant negative impact on our business operations and financial performance.

We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.   We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business.  We have operations and agreements with third parties throughout Pan-Asia.  Our activities in Asia create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents or distributors of our company, even though they may not always be subject to our control.  It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.

We may be unable to adequately protect our intellectual property rights. Our success in business, in particular, in relation to our gaming chips and plaques and non-gaming products, is impacted by maintaining the confidentiality and proprietary nature of our intellectual property rights. Our ability to compete may be damaged, and our revenues may be reduced if we are unable to protect our intellectual property rights adequately. To protect these rights, we rely principally on a combination of:

·                   contractual arrangements providing for non-disclosure and prohibitions on use;

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·                   patents and pending patent applications;

·                   trade secret, copyright and trademark laws; and

·                   certain built-in technical product features.

Patent, trade secret, copyright and trademark laws provide limited protection. The protections provided by laws governing intellectual property rights do not prevent our competitors from developing, independently, products similar or superior to our products and technologies. In addition, effective protection of copyrights, trade secrets, trademarks, and other proprietary rights may be unavailable or limited in certain foreign countries. We may be unaware of certain non-publicly available patent applications, which, if issued as patents, could relate to our services and products as currently designed or as we may modify them in the future. Legal or regulatory proceedings to enforce our patents, trademarks or copyrights could be costly, time consuming, and could divert the attention of management and technical personnel.

EGT Entertainment Holding holds a significant interest in our common stock, and is our largest creditor giving EGT Entertainment Holding significant power over our management and all shareholder actions. As of March 15, 2012, EGT Entertainment Holding owned 45.8 million shares of our common stock, representing approximately 38.3% of our issued and outstanding common shares, and as of December 31, 2011 we were indebted to EGT Entertainment Holding in the approximate amount of $6.2 million (representing approximately 53.6% of our total liabilities as of such date).  Accordingly, given its equity ownership, EGT Entertainment Holding has significant control over our management and all matters requiring approval by our shareholders, including the power to elect our board members and effect the approval of mergers and other significant corporate transactions. This concentration of ownership will make it difficult for other shareholders to effect substantial changes in our Company, and also will have the effect of delaying, preventing or expediting, as the case may be, a further change in our control.

Our common stock may be delisted from the NYSE Amex and if this occurs you may have difficulty converting your investment into cash efficiently . The NYSE Amex has established certain standards for the delisting of a security from the NYSE Amex. The standards for delisting from the stock market include, among other things, common stock selling for a substantial period of time at a low price per share, if the issuer fails to effect a reverse split of such shares within a reasonable time after being notified that the stock exchange deems such action to be appropriate. Our common stock has continuously traded below $1.00 since August 2008. While we have not received any communications to date from the NYSE Amex concerning the selling price of our common shares, there can be no assurance that the NYSE Amex will take action to delist our common stock from the exchange due to the low selling price of the shares.  If that were to occur, we would consider effecting a reverse split of our common stock in order to raise our share price to a level satisfactory to the NYSE Amex. However, reverse splits of thinly traded shares have, at times, resulted in declining share prices after a proportional adjustment in share price to give effect to the split. If our common stock were to be excluded from the NYSE Amex, or if we elected to conduct a reverse split in order to maintain the listing, the price of our common stock and the ability of holders to sell such stock could be materially adversely affected.

Our board of directors may issue blank check preferred stock, which may affect the voting rights of our holders and could deter or delay an attempt to obtain control of us. Our board of directors is authorized, without stockholder approval, to issue preferred stock in series and to fix and state the voting rights and powers, designation, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. Preferred stock may rank prior to our common stock with respect to dividends rights, liquidation preferences, or both, and may have full or limited voting rights. Accordingly, issuance of shares of preferred stock could adversely affect the voting power of holders of our common stock and could have the effect of deterring or delaying an attempt to obtain control of us.

Item 1B.                 Unresolved Staff Comments

Not applicable.

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Item 2.                    Properties

We also lease the following offices and warehouse facilities throughout Asia and in Australia:

In the United States, we do not have an office but we have a mailing address at 40 E. Chicago Avenue, #186, Chicago, Illinois.

Item 3.                    Legal Proceedings

We are a party to certain legal matters as discussed below.

Prime Mover/Strata Litigation

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

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

The Plaintiffs seek unspecified damages, as well as interest, costs and attorneys’ fees.  The Company engaged legal counsel to consider the claims set forth in the Complaint. The Company intends to defend itself vigorously against and respond to the Complaint in a timely manner consistent with applicable federal and state laws.

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 our motion to dismiss.

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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.

PART II

Market Information

Our common stock currently trades on the NYSE Amex under the symbol “EGT”.

The following table sets forth the high and low closing sale prices of our common stock, as reported by the NYSE Amex, for each quarter during the past two fiscal years:

Holders of Record

As of March 15, 2012, we had outstanding 119,618,613 shares of common stock, held by approximately 127 shareholders of record.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We presently intend to retain earnings to finance the operation and expansion of our business.

Equity Compensation Plan Information

On July 23, 2010, shareholders approved an amendment of our 2008 Stock Incentive Plan (the “2008 Plan”), to increase the number of common shares authorized for issuance under the plan from 5,000,000 to 10,000,000.  The 2008 Plan was adopted by our stockholders on September 8, 2008.  We previously had two other stock options plans, our Amended and Restated 1999 Stock Option Plan and our Amended and Restated 1999 Directors’ Stock Option Plan, both of which expired in January 2009.  However, those options previously granted under our expired stock option plans which were outstanding as of the plans’ expiration remain outstanding.  Pursuant to the aforementioned plans, as of December 31, 2011, there were options outstanding to purchase 12,593,234 shares of our common stock with a weighted average exercise price per share of $0.98 and options available for future issuance to purchase 460,607 shares of our common stock.

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The following table sets forth certain information as of December 31, 2011 about our stock plans under which our equity securities are authorized for issuance.

The first column reflects outstanding stock options to purchase: (i) 4,112,834 shares of common stock pursuant to our Amended and Restated 1999 Stock Option Plan with an average exercise price of $1.07; (ii) 90,400 shares of common stock pursuant to our Amended and Restated 1999 Directors’ Stock Option Plan with an average exercise price of $1.71; (iii) 1,990,000 shares of common stock pursuant to certain non-plan options approved by our stockholders in September 2007 with an average exercise price of $2.9; and (iv) 6,400,000 shares of common stock pursuant to our 2008 Stock Incentive Plan with an average exercise price of $0.31. The third column reflects 460,607 shares remaining for issuance under our 2008 Stock Incentive Plan as of December 31, 2011.

In January 2012, our board of directors approved the grant of options to purchase a total of 1,100,000 shares of common stock and 779,220 shares of restricted common stock under our 2008 Plan.  As noted above, however, only 460,607 shares of common stock remained available for issuance pursuant to the 2008 Plan at that time. The grant of the 1,418,613 shares in excess of the share amount available for issuance under the 2008 Plan was an inadvertent mistake by us without a then present awareness of the share limitations under the 2008 Plan, and  such grant of the excess shares constitutes a breach of the listing rules of the NYSE-Amex which provide that, subject to limited exceptions, none of which apply in this case, all grants of compensatory securities must be within the number of securities that reserved for issuance under the relevant stock incentive plan as approved by the shareholders of the listed company. We voluntarily notified the NYSE-Amex of the excess share grant and the apparent breach of the NYSE-Amex listing rules and advised the NYSE-Amex that we intend to redress the situation by seeking shareholder approval, at our annual meeting of shareholders tentatively scheduled for May 2012, of a further amendment to the 2008 Plan to increase the number of shares authorized for issuance thereunder and shareholder ratification of the grant of the excess shares. In the event our shareholders do not approve the ratification of the grant of the excess shares under the 2008 Plan, our chief executive officer and certain management team members are prepared to cancel options and shares held by them totaling 1,418,613 shares to bring us into compliance with the NYSE-Amex listing rules. Any cancellation of shares and options by our management for purposes of reducing the number of shares granted under the 2008 Plan to 10 million shares will not preclude our board from issuing an equal amount of shares to such persons in the future, subject to appropriate shareholder approval requirements of the NYSE-Amex. As of the date of this report, we have not received any formal notice from the NYSE-Amex concerning our apparent breach of the NYSE-Amex listing rules and we believe that the NYSE-Amex intends to defer any action until we have had the opportunity to redress the situation in the manner set forth above.

Not applicable.

OVERVIEW

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.  The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole.  This discussion should be read in conjunction with our consolidated financial statements and accompanying notes as of and for the years ended December 31, 2011 and 2010 included elsewhere in this report.

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While our discussion will include a comparison of operations between the periods in 2011 and 2010, comparison between two periods are difficult due to the Quasi-Reorganization performed on December 31, 2010 as described in Note 1 of the financial statements. In particular, because the basis of our long lived assets and intangible assets were revised, depreciation and amortization for the year ended December 31, 2011 is not comparable to amounts recorded for the year ended December 31, 2010.

Given our plan to develop casino operations in the Indo-China region and the shared common resources of our Dolphin operations, we reassessed our business components and changed our reporting segments beginning in the fiscal year 2011. We currently conduct business in two operating segments: (i) gaming, which consists of electronic gaming machine (EGM) participation operations and our plans to develop and operate casinos and gaming establishments in select emerging markets in Indo-China; and (ii) other products, which consist of the manufacture and distribution of plastic products, including traditional non-RFID and RFID casino chips and plaques and other plastic products.

In the fourth quarter of 2008, we began to implement efforts to refocus our business model and streamline our operating structure. We believe these efforts have led to our substantially improved financial performance, which has culminated in the achievement of record-high revenue, operating income, net income, and adjusted EBITDA for the year ended December 31, 2011.

Over the last three years, consolidated revenue has improved by 74%.  This was primarily driven by our gaming operations, which posted revenue growth of 149% over this same period.  This top-line growth combined with aggressive cost reductions has resulted in the achievement of annual net profitability for the first time in our history and the generation of quality recurring adjusted EBITDA, which reached $11.7 million for the year ended December 31, 2011 compared to $140,000 in year ended December 31, 2009. We have also strengthened our balance sheet as we increased cash and cash equivalents to $12.8 million as of December 31, 2011 from $4.2 million as of December 31, 2009, while we reduced debt to $6.2 million from $9.4 million, respectively.

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

As of December 31, 2011, our EGM participation operations were conducted in two countries, Cambodia and the Philippines, and totaled 1,477 EGM seats in operation in seven venues.  In Cambodia, we had a total of 719 EGM seats in operation in two venues.  In the Philippines, we had a total of 758 EGM seats in operation in five venues.

In Cambodia, our EGM participation operations currently focus primarily 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 Cambodia’s premier luxury destination gaming resort and the only licensed full service casino in a designated area around the capital city of Phnom Penh.  Our gaming operations at NagaWorld, which we jointly operate with NagaWorld, have provided us strong growth in EGM participation revenue and cash flow.  Since our first EGM installations in January 2009 of approximately 200 seats, we have dramatically grown our machine base at this venue to 670 seats under contract.

We have also continued to selectively pursue additional EGM participation opportunities.  In November 2011, we entered into a gaming machine participation and management agreement with leading Cambodian hotelier, Sokha Hotels and Resorts, to place up to 250 EGM seats and jointly manage these slot operations in its new casino resort in a tourist area of the Kampot Province .  The first phase of the casino resort is expected to open in May 2012.  We will initially place 200 EGM seats at the time of the opening and will ramp up to 250 seats over the subsequent several months.  This strategic project expands our gaming operations in the Indo-China region and is anticipated to contribute to near-term earnings.

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In the Philippines, we are beginning to derive benefits from our strategic efforts to improve our operating performance and growth potential in this market.  These efforts include: implementing, with the support of our venue owner partners, targeted marketing programs; the redeployment, when possible, of our gaming assets from lower to higher performing venues in the market; and greater overall revenue sharing in this market due to our acquisition of a higher revenue sharing interest in one of our most promising venues in October  2011. As a result, our Philippine operations posted solid growth in average net win per unit for the year ended December 31, 2011 and improvement in gaming revenues for the six-month period ended December 31, 2011 compared to the prior-year periods.

With regard to our other products segment, we posted marked improvement in sales of our gaming chip and plaques with higher customer reorders and the addition of new customers in our core markets of Australia and Asia.  We attribute this to our targeted marketing strategies and wide range of product offerings with state of the art security features. With continued focus on marketing and planned investment in expanding our product offerings and production capacity, we believe we are better positioned to capitalize on the future growth opportunities for gaming chips and plaques in our target markets.  While these efforts are expected to improve revenue and gross profit for these operations over the long-term, they are not anticipated to minimize the normal fluctuation in quarterly sales flow of this business segment.

Our consolidated revenue for the year ended December 31, 2011 was approximately $27.1 million, of which revenue from our gaming and other products operations comprised 64% and 36%, respectively, of consolidated revenue.  This compares to consolidated revenue of approximately $22.2 million for the year ended December 31, 2010, of which revenue from our gaming and other products operations comprised 64% and 36%, respectively, of consolidated revenue.

Revenue from our gaming operations for the year ended December 31, 2011 was approximately $17.4 million compared to approximately $14.3 million in the prior year.  Gross margin for the gaming business improved to 51% in the year ended December 31, 2011 compared to 39% in the prior year.  Excluding non-cash items such as EGM depreciation, casino contract amortization and assets impairment of gaming assets, gross margin for the gaming business was 93% for year ended December 31, 2011 compared to 95% in the prior year. The slight decline was primarily due to increased marketing activities, which resulted in higher other operating costs for the year ended December 31, 2011.

Based on the solid revenue performance, particularly from our operations at NagaWorld, and our continued efforts to control costs, we achieved an annual net profit for the first time in our history.   In addition, we have demonstrated our ability to generate quality recurring cash flow from operations.  Adjusted EBITDA (as defined below) was approximately $11.7 million for the year ended December 31, 2011 compared to approximately $8.4 million in the prior year.  Cash flow provided by operations was approximately $10.2 million for the year ended December 31, 2011 compared to approximately $11.4 million in the prior year. Excluding a one-off recoupment of prepaid commitment fees of approximately $4.8 million for the year ended December 31, 2010, there was a significant increase in cash flow provided from operations of approximately $3.6 million for the year ended December 31, 2011 compared to the prior year.

Our improved financial performance along with our established market presence provides us a solid foundation from which to expand our gaming operations in our target markets.

In May 2010, we announced our intention to expand our gaming operations and become an owner and operator of regional casinos under our “Dreamworld” brand in select emerging gaming markets in the Indo-China region. We believe this expanded business strategy will allow us the potential for higher long-term incremental returns on our operations given the potential to collect a greater percentage of the gaming revenue compared to our existing EGM participation contracts. In addition, it provides us greater long-term control over our operations.

Pursuant to this growth strategy, on March 4, 2011, we entered into a shareholders’ agreement with a local partner to form a new company with the name of “Dreamworld Leisure (Kampot) Limited” (the “new company”) for the development, ownership and operation of a casino project to be located in the Kampot Province of Cambodia near the Vietnam border (the “Kampot Project”).

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The local partner is the owner of a parcel of land measuring approximately 91,000 square feet (8,500 square meters) located in Southern Cambodia in the Kampot Province near the Vietnam border and the casino, which will be operated under the name Dreamworld Casino (“Dreamworld Casino (Kampot)”), will be constructed thereon.  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 and to open by the end of the third quarter of 2012. 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.

Under the terms of the shareholders agreement, the new company will apply for its own gaming license and the local partner will lease to the new company the land for a period of 25 years for an annual fee of $1 and we shall provide funding for all development, construction and pre-opening costs of the Kampot Project; provide all necessary EGMs and gaming tables to Dreamworld Casino (Kampot) as well as pay the local partner a lump sum of $260,000 as the balance consideration for his contributions.  We and the local partner will share the 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) on a 60%/40% basis, respectively.

Based on the current project timeline, we expect to open Dreamworld Casino (Kampot) in the third quarter of 2012.

Capital expenditures for the initial phase of the Kampot Project are projected to be approximately $1.2 million as the EGMs will be sourced from our existing inventory.  The Kampot Project is for an initial term of 25 years commencing March 2011 and is subject to renewal by the parties in writing.

On May 16, 2011, we announced its plans to enter into a shareholders’ agreement (the “Shareholders’ Agreement”) by one of our subsidiaries with a Cambodian individual with respect to our participation in a new company with the name of “Dreamworld Leisure (Pailin) Limited” (“DWP”) for development, ownership and operation of a casino located in the Pailin Province of Northwestern Cambodia near the Thailand border (the “Pailin Project”).

Under the Shareholders Agreement, the relevant local partner had agreed to lease to DWP certain real property upon which the Pailin Project is to be developed for an annual fee of $1 and all profits of the Pailin Project were to have been split between us and the relevant local partner on a 55%/45% basis, respectively.  Subsequent to the date of the Shareholders Agreement, we and the local partner agreed to revise the cooperation structure for the Pailin Project by terminating the Shareholders Agreement and entering into an Undertaking Agreement and a Lease Agreement, each dated July 12, 2011.  Under the Undertaking Agreement and the Lease Agreement: (a) we will be the sole owner of DWP; (b) the local partner’s profit participation will be reduced from 45% to 20%; and (c) we will pay a fair monthly rental to the local partner for the lease of the Pailin Project property.

Based on the most recent venue layout, the Pailin Project is initially intended to include a casino with approximately 30 table games and 40 EGMs . The initial phase of the casino will be constructed on land owned by the local partner and will be approximately 13,000 square feet (1,196 square meters) in size. We have an option to acquire an adjacent property, which could be used in the future to develop additional phases of the Pailin Project. Such additional phases are intended to include expanded casino operations and complementary facilities such as hotel rooms, a spa and other entertainment amenities and could expand the footprint of the project to over approximately 262,000 square feet (approximately 24,356 square meters).

We commenced construction of the initial phase of the Pailin Project in December 2011. We are responsible for all capital expenditures relating to Dreamworld Casino (Pailin) and our total capital expenditure for the initial phase of the project is expected to be approximately $2.4 million and will be funded from internal cash resources. The grand opening of Dreamworld Casino (Pailin) is scheduled on May 9, 2012.

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We continue to actively pursue casino and gaming development projects with a focus on the Indo-China region and are building a pipeline of potential projects. However, there is no guarantee we will successfully conclude any of these negotiations. 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 certain potential new 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 - YEARS ENDED DECEMBER 31, 2011 AND 2010

The following is a schedule showing summarized operating results on a consolidated basis and separately by each of our two operating segments, namely, gaming operations and other products for the years ended December 31, 2011 and 2010.

(1)  Operating loss and adjusted EBITDA for 2010 were revised to reflect the reclassification of loss on dispositions of assets.

A reconciliation of EBITDA, as adjusted, to the net profit/(loss) for the years ended December 31, 2011 and 2010 is provided below.

(1)   Adjusted EBITDA for 2010 was revised to reflect the reclassification of loss on dispositions of assets.

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Total revenue increased approximately $4.9 million to approximately $27.1 million for the year ended December 31, 2011 compared to approximately $22.2 million in the prior year due to an increase in both gaming and other products revenue.  Revenue from gaming increased as a result of higher average net win per machine.  Revenue from other products increased as a result of increased orders from major customers.

Gross profit increased approximately $3.7 million to approximately $10.2 million for the year ended December 31, 2011 compared to approximately $6.5 million in the prior year primarily as a result of higher revenue from gaming and other products operations, with relatively flat cost of gaming participation expenses in the year ended December 31, 2011 compared to the prior year.

Operating income increased approximately $6.5 million to approximately $847,000 for the year ended December 31, 2011 compared to an operating loss of approximately $5.7 million in the prior year primarily due to higher overall gross profit.  Net income increased approximately $5.9 million to approximately $642,000 compared to a net loss of approximately $5.2 million in the prior year primarily due to the improvement in operating income.

Gaming Operations

Revenues from our gaming operations currently consist solely of our EGM participation operations.

Revenue from gaming operations increased approximately $3.1 million to approximately $17.4 million for the year ended December 31, 2011 compared to revenue of approximately $14.3 million in the prior year.  The increase in revenue was primarily the result of a higher average net win per machine driven by targeted marketing and machine mix improvements at our NagaWorld operations compared to the prior year.

Gross profit from gaming operations increased approximately $3.3 million to approximately $8.8 million for the year ended December 31, 2011 compared to a gross profit of approximately $5.5 million in the prior year primarily due to an increase in revenue from our gaming operations with relatively flat cost of gaming participation expenses compared to the prior year period.  Cost of goods sold for the year ended December 31, 2011 included approximately $4.9 million of depreciation of EGMs, $2.5 million amortization of casino contracts, $63,000 amortization of other gaming related intangibles, and $1.2 million of other operating costs.

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As of December 31, 2011, we had a total of 1,889 EGM seats of which 412 were held in inventory and 1,477 were in operation.  Of the 1,477 EGM seats in operation, 719 were in operation in two venues in Cambodia and 758 were in operation in five venues in the Philippines.

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

In December 2008, we established a relationship with NagaWorld Limited to place EGMs on a participation basis at NagaWorld and jointly operate those EGMs with NagaWorld.  Due to our successful performance, we subsequently amended 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 (the “Consolidation Agreement”), which was subsequently amended on May 25, 2010.

Pursuant to the terms of the original Consolidation Agreement, we and NagaWorld established control over the operation of a total of 640 EGMs, including floor staff and respective audit rights. The number of EGMs under our joint control was increased to 670 by way of the May 2010 amendment to the Consolidation Agreement. We and NagaWorld share the win per unit per day from all the 670 EGMs and certain operating costs related to marketing and floor staff at a 25% / 75% split, respectively (subject to our right to receive 100% of the win per unit per day from certain EGMs during a certain period of time as described below). Win per unit per day from all the 670 EGMs are settled and distributed daily to us. The Consolidation Agreement is for a term of six years commencing March 1, 2010.

In consideration for entering into the Consolidation Agreement with NagaWorld, we paid to NagaWorld a $1.38 million one-time non-refundable contract amendment fee and a commitment fee of $4.1 million. Both the one-time contract amendment fee and commitment fee were to be paid in three installments. The first 50% installment was due and paid by us on December 30, 2009, the second 25% installment was due and paid by us on January 15, 2010, and the third and final 25% installment was due and paid by us on January 28, 2010. In connection with the May 2010 amendment, we paid NagaWorld a commitment fee of $1.0 million on June 15, 2010 in consideration of our right to place an additional 30 EGMs under the Consolidation Agreement.

While we and NagaWorld share the win per unit per day from the 670 EGMs at a 25%/75% split, respectively, we were entitled to 100% of the win per unit per day from 230 EGMs until we had received a total accumulated win per unit per day of $6.8 million from these 230 EGMs (representing the aggregate of the $4.1 million commitment fee paid for under the Consolidation Agreement, the $1.0 million commitment fee under the May 2010 amendment and our 25% share of win per unit per day from these 230 EGMs).  We received the total accumulated win per unit per day of $6.8 million from these 230 EGMs by the end of August 2010.

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Below is a table showing various agreements with NagaWorld and the respective commitment fees paid. All commitment fees were fully recouped by the third quarter of 2010.

In November 2011, the Company 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.

The first phase of Thansur Bokor, which will include over 400 hotel rooms and suites, entertainment parks and amenities, and convention facilities, is expected to open in May 2012. The Company will have 200 EGM seats in operation at the time of the opening and expects to ramp up to 250 seats over the subsequent several months.

Under the terms of the Agreement, Entertainment Gaming Asia will be the exclusive provider of the EGMs inside the casino on the ground floor of Thansur Bokor and will jointly manage with Sokha these slot operations.  The Company and Sokha will share the gross win and certain operating expenses on a respective basis of 27/73%.  The Company will collect its share of the gross win on a semi-monthly basis and will settle its share of the operating costs on a monthly basis. The contract duration is five years, commencing upon the live operation of the slot floor.

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 and the redeployment, when possible, of our gaming assets from lower to higher performing venues in the market.  On April 30, 2011, one of our venues under contract in the Philippines with approximately 120 EGM seats was closed.  We have redeployed a portion of these gaming assets to be used in our operations in Cambodia and are working to deploy the remainder to other higher-potential venues in the Philippines.  Given the fact that this closed venue was an underperforming venue for us, there was no material negative impact to our gaming revenue as a whole.

On October 21, 2011, and as described more fully above, we entered into an agreement to increase our share of the revenue and control over the promotion and marketing strategies for our participation business at the San Pedro VIP Club, one of our existing participation venues in the Philippines .  Under the terms of the agreement, we w ork directly with the government operator PAGCOR and we have increased our revenue share from 17% to 35% and shared in certain operating costs. The cash consideration for the agreement payable by us was Philippine pesos 55 million (equivalent to approximately $1.3 million), which was funded from our internal cash resources. We also agreed to pay cash expenses to the Proponent of approximately Philippines pesos 2.9 million (equivalent to approximately $67,000) and waived net receivables from the Proponent of approximately Philippine pesos 3.5 million (equivalent to approximately $82,000). Thus, the total consideration amount agreed by us pursuant to the transaction is approximately Philippine pesos 61.4 million (equivalent to approximately $1.4 million).

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

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Other Products

Revenue from other products increased approximately $1.8 million to approximately $9.7 million for the year ended December 31, 2011 compared to approximately $7.9 million in the prior year.  Other products revenue for the year ended December 31, 2011 consisted of approximately $7.7 million in non-gaming product sales and $2.0 million in gaming chip and plaque sales compared to $6.6 million and $1.3 million, respectively, in the prior year.  The consolidated increase was mainly a result of an increase in sales to our non-gaming customers as they increased their production for the year ended December 31, 2011.

Gross profit on other products increased approximately $410,000 to $1.4 million in the year ended December 31, 2011 compared to approximately $977,000 in the prior year due to higher sales and production volumes and improved production efficiencies.

Operating Expenses

The following is a schedule showing expenses on a consolidated basis:

(1)                 2010 total operating expenses were revised to reflect the reclassification of loss on dispositions of assets.

Selling, General and Administrative Expenses

Selling, general and administrative expenses remained steady at approximately $5.9 million for the years ended December 31, 2011 and 2010. Legal expense and external consultancy and accounting fees decreased approximately $366,000 primarily due to management efforts to reduce legal consultancy services. Travelling, meetings, advertising, utilities, printing, shipping and other operating expenses decreased by approximately $355,000 due to various cost reduction initiatives. However, salaries and wages expense and sales commissions increased approximately $133,000 as a result of more other products sales. Investor relations expense increased $114,000 mainly due to increased listing fees and higher related third-party services fees primarily related to an increase in the number of SEC filings and communications with the market. Bad debt expense increased by approximately $34,000 primarily related to an operating venue in Philippines where revenue collection was not reasonably assured. Rent, supplies, insurance, training, and other expenses increased approximately $440,000 primarily as a result of incorporation of new entities and various business taxes.

Stock-based Compensation Expense

Stock-based compensation expense increased approximately $565,000 to approximately $1.5 million for the year ended December 31, 2011 compared to approximately $887,000 in the prior year primarily due to performance stock grants to directors and senior management during the year ended December 31, 2011.

Impairment of Goodwill, Intangibles and Other Long-Lived Assets

As a result of “fresh-start” reporting, the asset carrying values of intangible assets were adjusted to a new cost basis and the accumulated amortization was also removed to adjust the basis as of December 31, 2010. Intangible assets consist of patents, trademarks, gaming operation agreement, casino contracts and goodwill. They are amortized, except for goodwill, on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which range from 4 to 9 years. The straight-line amortization method is utilized because we believe there is not a more reliably determinable method of reflecting the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.

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We measure and test goodwill for impairment in accordance with ASC 350,  Intangibles — Goodwill and Other , at least annually on December 31, or more often if there are indications of impairment.

We measure and test finite -lived intangibles for impairment in accordance with ASC 360 , Property, Plant and Equipment when there are indicators of impairment.

During the year ended December 31, 2011, no impairment was required for goodwill and other intangibles based on the impairment analysis conducted on December 31, 2011 which showed no indicators of impairment on those assets.

During the year ended December 31, 2010, as a result of our annual impairment review, we recorded a $2.4 million write-down of goodwill and intangible assets associated with our Dolphin operations in Australia as the current carrying value of the assets was higher than the expected value of the projected future cash flows.

The following table summarizes the impairment of goodwill and intangible assets:

Long-lived assets are reviewed for impairment when there are indicators of impairment in accordance with ASC 360 Property, Plant and Equipment .  We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Such reviews assess the fair value of the assets based upon our estimates of the future cash flows we expect the assets to generate. In response to changes in industry and market conditions, we may be required to strategically realign our resources in the future which, in turn, could result in impairments of long-lived assets.

For the year ended December 31, 2011, we recorded an impairment charge of approximately $1.4 million primarily related to the write-off of non-performing gaming assets.

For the year ended December 31, 2010, we recorded an impairment charge of approximately $665,000 in relation to property and equipment of our Dolphin operations in Australia. We also recorded an impairment of approximately $388,000 mainly due to the write-off of gaming assets primarily related to the closure of a non-performing venue during the year and write-down of certain EGMs held for sale to zero values.

The following table reflects the components of the impairment of long-lived assets included in the consolidated statement of operations:

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Loss on Dispositions of Assets

Loss on disposition of assets increased approximately $11,000 to approximately $175,000 for the year ended December 31, 2011 compared to a loss of approximately $164,000 in the prior year primarily as a result of more disposals of unused fixed assets during the year ended December 31, 2011.

Product Development Expenses

Product development expenses decreased approximately $224,000 to approximately $386,000 for the year ended December 31, 2011 compared to approximately $610,000 in the prior year. The decrease was primarily a result of stabilized new product development activities for the other products division, specifically in respect of gaming chips and plaques during the year ended December 31, 2011.

Depreciation and Amortization Expenses

Depreciation and amortization expenses decreased approximately $772,000 to approximately $113,000 for the year ended December 31, 2011 compared to approximately $885,000 in the prior year.  The decrease was primarily a result of the reduction in the value of finite-lived intangibles by approximately $2.3 million following the impairment charges recorded in December 2010.

Depreciation and amortization expenses for the years ended December 31, 2011 and 2010 were not comparable as a result of the Quasi-Reorganization conducted as at December 31, 2010.

Restructuring Charges

During the year ended December 31, 2011, we incurred no restructuring charges.  During the year ended December 31, 2010, we incurred restructuring charges of approximately $310,000 for severance wages and benefits related to the termination of employees.

Other Income/(Expense)

(1)           2010 total other expenses were revised to reflect the reclassification of loss on dispositions of assets.

Interest Expense and Finance Fees

Interest expense and finance fees decreased approximately $6,000 to approximately $405,000 for the year ended December 31, 2011 compared to approximately $411,000 in the prior year primarily due to the reduced notes payable to a related party as principal repayments began in July 2011.

Interest Income

Interest income increased approximately $1,000 to approximately $93,000 for the year ended December 31, 2011 compared to approximately $92,000 in the prior year primarily as a result of higher average cash balances at bank, net of a lower interest income charged on overdue amounts receivables as a result of improved collections.

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Foreign Currency Transactions

Foreign currency losses increased approximately $22,000 to $94,000 for the year ended December 31, 2011 compared to losses of approximately $72,000 for the prior year primarily due to the appreciating 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 $50,000 to approximately $252,000 for the year ended December 31, 2011 compared to approximately $202,000 in the prior year 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 Provision

Effective tax rates for the years ended December 31, 2011 and 2010 were approximately 7.4% and 11.3%, respectively.  During the year ended December 31, 2011, we also renewed tax incentive arrangement for our Cambodia operations in February 2011. The tax arrangement was effective for the period January 1, 2011 through December 31, 2011. Under this tax arrangement, we are required to pay only a fixed obligation tax to the Cambodia government instead of paying income tax based on the profits of our Cambodia operations. The fixed obligation tax paid during the year ended December 31, 2011 was classified as other taxes under selling, general and administrative expenses.

The fixed obligation tax arrangement is subject to annual renewal and negotiation. Nevertheless, we have also obtained a similar tax arrangement for the year ending December 31, 2012 in January 2012.

During the year ended December 31, 2010, we recorded a one-time tax benefit of approximately $775,000 in relation to the release of deferred tax liabilities due to impairment of assets and discharge of potential tax exposures following the deregistration of a foreign subsidiary.

We will continue to review the treatment of tax losses and income generated in the future by our foreign subsidiaries to minimize taxation implication/costs.