LiNiu Technology (LINUF) 6-K First Quarter 2014 Financial Results

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

For the month of May 2014

Commission File Number: 000-53087

IAO KUN GROUP HOLDING COMPANY LIMITED

(Translation of registrant’s name into English)

Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong
(Address of Principal Executive Office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-Fx                                                Form 40-F¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):¨

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes¨                          Nox

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_______________.

EXPLANATORY NOTE

This Report of Foreign Private Issuer on Form 6-K filed by Iao Kun Group Holding Co Limited (the “Company”) 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. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions. Uncertainties and other factors may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. The information in this Report on Form 6-K is not intended to project future performance of the Company. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company does not guarantee future results, levels of activity, performance or achievements. The Company’s expectations are as of the date this Form 6-K is filed, and the Company does not intend to update any of the forward-looking statements after the date this Report on Form 6-K is filed to confirm these statements to actual results, unless required by law.

This report is hereby incorporated by reference to the registration statement on Form F-3 (File No. 333-185759) and the post-effective amendment to the registration statement on Form F-3 (333-166860) of the Company.

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED BALANCE SHEETS

	March 31, 2014		December 31, 2013
	(Unaudited and unreviewed)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents	$	9,999,777	$	7,563,097
Accounts Receivable, Net		8,086,276		5,182,352
Markers Receivable		250,682,636		242,350,301
Prepaid Expenses and Other Assets		192,801		502,017
Total Current Assets		268,961,490		255,597,767
Intangible Assets (net of accumulated amortization of $29,820,699 and $25,739,786 at March 31, 2014 and December 31, 2013, respectively)		134,196,804		138,336,945
Goodwill		17,747,727		17,754,136
Property and Equipment (net of accumulated depreciation of $50,799 and $38,654 at March 31, 2014 and December 31, 2013, respectively)		408,012		116,419
Other Assets		23,420		23,423
TOTAL ASSETS	$	421,337,453	$	411,828,690
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of Credit Payable	$	58,345,383	$	42,670,573
Accrued Expenses		20,578,863		15,701,756
Bao Li Gaming Acquisition-Contingent Purchase Price Obligation		20,211,377		16,837,500
King's Gaming Acquisition-Contingent Purchase Price Obligation		-		9,000,000
Oriental VIP Room Acquisition-Contingent Purchase Price Obligation		27,391,028		21,650,051
Loan Payable, Shareholders, current		7,307,377		5,809,075
Total Current Liabilities		133,834,028		111,668,955
Bao Li Gaming Acquisition-Contingent Purchase Price Obligation, net of current portion		-		16,189,550
Oriental VIP Room Acquisition-Contingent Purchase Price Obligation, net of current portion		19,520,603		14,878,218
King's Gaming Acquisition-Contingent Purchase Price Obligation, net of current portion		-		-
Total Liabilities		153,354,631		142,736,723
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Shares, $0.0001 par value Authorized 1,150,000 shares; none issued		-		-
Ordinary Shares, $0.0001 par value, Authorized 500,000,000 shares; 57,891,524 and 59,306,824 issued and outstanding at December 31, 2013, respectively.		5,788		5,930
Additional Paid-in Capital		122,135,909		126,329,321
Retained Earnings		145,450,073		142,270,385
Accumulated Comprehensive Income		391,052		486,331
Total Shareholders' Equity		267,982,822		269,091,967
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	421,337,453	$	411,828,690

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited and unreviewed)

	For the Three Months Ended			For the Three Months Ended
	March 31, 2014			March 31, 2013
Revenue from VIP Gaming Operations	$	79,938,622		$	64,351,897
Total Revenues		79,938,622			64,351,897
Expenses
- Commission to Agents		55,065,199			42,740,852
- Selling, General and Administrative Expenses		6,539,101			5,889,267
- Special Rolling Tax		476,847			409,595
- Amortization of Intangible Assets		4,088,938			2,428,912
Total Expenses		66,170,085			51,468,626
Operating income attributable to ordinary shareholders before change in fair value of contingent consideration		13,768,537			12,883,271
Change in Fair Value of Contingent Consideration for the Acquisitions of King's Gaming, Bao Li and Oriental		(10,588,849	)		(5,929,566	)
Net Income Attributable to Ordinary Shareholders		3,179,688			6,953,705
Other Comprehensive Income
Foreign Currency
- Translation Adjustment		(95,279	)		(372,139	)
Total Comprehensive Income	$	3,084,409		$	6,581,566
Net Income Per Share
Basic	$	0.05		$	0.16
Diluted	$	0.05		$	0.16
Weighted Average Shares Outstanding
Basic		60,402,370			43,951,202
Diluted		60,732,092			43,951,202

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2014

(Unaudited and unreviewed)

							Additional					Accumulated			Total
	Ordinary Shares						Paid-In			Retained		Comprehensive			Shareholders'
	Shares			Amount			Capital			Earnings		Income			Equity
Balances, December 31, 2013		59,306,824		$	5,930		$	126,329,321		$	142,270,385	$	486,331		$	269,091,967
Ordinary shares repurchased and retired		(1,415,300	)		(142	)		(4,193,412	)		-		-			(4,193,554	)
Net income		-			-			-			3,179,688		-			3,179,688
Foreign currency translation adjustment		-			-			-			-		(95,279	)		(95,279	)
Balances, March 31, 2014		57,891,524		$	5,788		$	122,135,909		$	145,450,073	$	391,052		$	267,982,822

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

(Unaudited and unreviewed)

	For the Three Months Ended			For the Three Months Ended
	March 31, 2014			March 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,179,688		$	6,953,705
Adjustments to reconcile net income to net cash provided by operating activities					-
Amortization of intangible assets		4,088,938			2,428,912
Change in fair value of contingent purchase price obligation for the acquisition of King's Gaming, Bao Li Gaming and Oriental		10,588,849			5,929,566
Depreciation		12,155			6,568
Change in assets and liabilities
Accounts Receivable		(2,904,897	)		(12,621,656	)
Markers Receivable		(8,417,213	)		(20,162,455	)
Prepaid Expenses and Other Assets		308,940			(714,304	)
Lines of Credit Payable		15,685,360			31,881,421
Accrued Expenses		4,882,801			2,691,923
Net cash provided by operating activities		27,424,621			16,393,680
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment		(303,699	)		(65,098	)
Net cash used in investing activities		(303,699	)		(65,098	)
CASH FLOW FROM FINANCING ACTIVITIES
Contingent consideration paid for King's Gaming acquisition		(9,000,000	)		(9,000,000	)
Contingent consideration paid for Bao Li Gaming acquisition		(13,000,000	)		-
Cash paid for shares repurchased		(4,193,554	)		(2,728,912	)
Payment of deferred offering costs		-			(16,117	)
Proceeds from shareholder loans		1,498,398
Repayment of shareholder loans		-			(1,155,940	)
Net cash provided by (used in) financing activities		(24,695,156	)		(12,900,969	)
Net (decrease) increase in cash and cash equivalents		2,425,766			3,427,613
Effect of foreign currency translation on cash		10,914			(33,573	)
Cash and cash equivalents at beginning of period		7,563,097			20,644,296
Cash and cash equivalents at end of period	$	9,999,777		$	24,038,336

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Organization and Business of Companies

Iao Kun Group Holding Company Limited (formerly Asia Entertainment & Resources Ltd. and formerly CS China Acquisition Corp.) ("Iao Kun" or the “Company”) was incorporated in the Cayman Islands on September 24, 2007 as a blank check company whose objective was to acquire, through a share exchange, asset acquisition or other similar business combination, an operating business, or control of such operating business through contractual arrangements, that has its principal operations located in People’s Republic of China (“PRC”, “China”). On September 30, 2013, the Company changed its name from Asia Entertainment & Resources Ltd (“AERL”). The decision to change the name of the Company was to enhance the Company’s brand image in Macau.

On October 6, 2009, Iao Kun entered into a Stock Purchase Agreement, subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010 and April 18, 2011 (the “Agreement”), with Asia Gaming & Resort Limited and its wholly owned subsidiaries, (collectively “AGRL”) and Spring Fortune Investments Ltd. (“Spring Fortune”) that provided for the acquisition by Iao Kun from Spring Fortune of all of the outstanding capital stock of AGRL.  On February 2, 2010, the acquisition was consummated pursuant to the terms of the Agreement, and AGRL became a wholly owned subsidiary of Iao Kun, as discussed in Note 8. 

Upon the closing of the acquisition of AGRL by Iao Kun, the Promoter Companies became variable interest entities (‘‘VIEs’’) of the subsidiaries of AGRL, which are the primary beneficiaries of the operations of the Promotion Entities through the profit interest agreements which were entered into on February 2, 2010 and agreements subsequent to that date.

On November 10, 2010, the Company entered into an agreement to acquire the right to 100% of the profits derived by King's Gaming Promotion Limited (“King's Gaming”) from the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau as discussed in Note 9.

On May 15, 2011 the Company opened a new VIP gaming room at Galaxy Resort Macau located in Cotai, Macau.

On June 16, 2011, the Company closed the VIP gaming room at the MGM Grand Hotel and Casino in Macau.

Jubilee Dynasty Limited ("Jubilee Dynasty"), a subsidiary of AGRL, was incorporated on May 18, 2012.  The main asset of Jubilee Dynasty is the right to 100% of the profit derived by Bao Li Gaming Promotion Limited (“Bao Li” or “Bao Li Gaming”) from the promotion of a VIP gaming room at the City of Dreams Hotel and Casino in Macau, pursuant to a profit interest agreement between Jubilee Dynasty and Bao Li effective September 1, 2012.

On September 5, 2012, the Company entered into an agreement to acquire the right to 100% of the profits derived by Bao Li Gaming from the promotion of a VIP gaming room at the City of Dreams Hotel and Casino in Macau as discussed in Note 10.

Frontier Champion Limited ("Frontier Champion"), a subsidiary of AGRL, was incorporated on May 28, 2013.  The main asset of Frontier Champion is the right to 100% of the profit derived by the Collaborator from the promotion of a VIP gaming room at the Le Royal Arc Casino in Macau, pursuant to a profit interest agreement between Frontier Champion and the Collaborator effective July 1, 2013.

On June 26, 2013, the Company entered into an agreement to acquire the right to 100% of the profits derived by the Collaborator from the promotion of a VIP gaming room at the Le Royal Arc Casino in Macau as discussed in Note 11. Vong Veng Im functions as a Collaborator for the licensed gaming promoter of the VIP gaming rooms at Le Royal Arc Casino in Macau. According to Macau laws, a collaborator needs to enter into an agreement with a licensed gaming promoter and register with the Gaming Inspection and Coordination Bureau of the Macau SAR.

7

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Currently, Macau laws do not allow corporate entities, such as Iao Kun, to directly operate a gaming promotion business in Macau.   Consequently, Iao Kun’s gaming promotion business is operated through a series of contractual arrangements, including profit interest agreements that enable the AGRL subsidiaries to receive substantially all of the economic benefits of the Promoter Companies (“Promoter Companies”) and Collaborator (“Vong Veng Im” or “Oriental VIP Room”) (collectively “Promotion Entities”) and for AGRL to exercise effective control over the Promotion Entities.

Management’s determination of the appropriate accounting method with respect to the AGRL VIEs is based on Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 810 “Consolidation of Variable Interest Entities" (“Topic 810”). AGRL consolidates the VIEs because the equity investors in the Promotion Entities do not have the characteristics of a controlling financial interest and Iao Kun through AGRL is the primary beneficiary.

In accordance with FASB ASC Topic 810, the operations of the Promotion Entities are consolidated with those of Iao Kun for all periods subsequent to the closing of the acquisition of AGRL by Iao Kun.

The operations of AGRL's Promotion Entities are based in Macau, and are subject to Macau jurisdiction. The Company operates a gaming promotion business in VIP gaming rooms located in hotels and casinos in Macau. Iao Kun, its subsidiaries (including AGRL) and the Promotion Entities are collectively referred to as the "Group".

VIP Gaming Promoter and Collaborator Agreements

Sang Heng’s Gaming Representative (VIP Room Promoter) Agreement dated as of February 1, 2008 entered into between Galaxy Casino, S.A., and Sang Heng allowed for the sharing of profits as a gaming representative of Iao Kun VIP Room in Star World Hotel and Casino in Macau for the period from November 30, 2007 to December 31, 2008. Pursuant to an agreement in October 2009, both parties agreed that Sang Heng should be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume. The agreement became effective on November 1, 2009. The agreement must be, and has been, renewed annually. Effective September 1, 2012, both parties agreed to change to the revenue sharing model to provide that Sang Heng be compensated based upon a mutually agreed upon percentage of the win/losses of the VIP gaming room.

King’s Gaming’s Gaming Representative (VIP Room Promoter) Agreement was entered into in July 2008 between Venetian Macau S.A. and King's Gaming which allowed for the sharing of profits as a gaming representative of Wenzhou VIP Room in Venetian Hotel and Casino in Macau for the period ended December 31, 2008. The agreement was renewed in January 2009 for the period from January 1, 2009 to December 31, 2009. Pursuant to an agreement in September 2009, both parties agreed that King's Gaming should be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume. The agreement became effective on November 1, 2009. The agreement automatically renews annually. Effective September 1, 2012, both parties agreed to change to the revenue sharing model to provide that King’s Gaming be compensated based upon a mutually agreed upon percentage of the wins/losses of the VIP gaming room.

Sang Lung’s Gaming Representative (VIP Room Promoter) Agreement dated as of June 24, 2011 entered into between Galaxy Casino, S.A., and Sang Lung allowed for Sang Lung to be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume. The agreement became effective on July 1, 2011. The agreement must be, and has been, renewed annually. Effective September 1, 2012, both parties agreed to change to the revenue sharing model to provide that Sang Lung be compensated based upon a mutually agreed upon percentage of the wins/losses of the VIP gaming room.

8

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Bao Li’s Gaming Promoter Agreement dated as of February 7, 2011 entered into between Melco Crown Gaming (Macau) Limited and Bao Li Gaming which allowed for Bao Li Gaming to be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume. The agreement automatically renews annually. As a matter of convenience and to maintain flexibility in remuneration methods, the Company also entered into an agreement with Melco Crown Gaming (Macau) Limited to share in the casino’s VIP gaming room wins/losses from the players recruited by the Company. Either the Gaming Promoter or the Casino Operator may adjust these arrangements with adequate notice and agreement by both parties to the arrangement. Effective September 1, 2012, both parties agreed to change to the revenue sharing model to provide that Bao Li Gaming be compensated based upon a mutually agreed upon percentage of the wins/losses of the VIP gaming room.

The Collaborator Agreement dated December 17, 2012 entered into between the licensed gaming promoter of Le Royal Arc Casino and Vong Veng Im as Collaborator allows the Collaborator to be compensated based upon a mutually agreed-upon percentage of the win/losses of the Oriental VIP Room at the Le Royal Arc Casino.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements as of March 31, 2014 and for the three month periods ended March 31, 2014 and 2013 are unaudited and have not been reviewed by the Company’s independent auditors. The accompanying unaudited and unreviewed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. In the opinion of management, all adjustments (consisting of normal recurring adjustments) have been made that are necessary to present fairly the financial position of the Company as of March 31, 2014 and the results of its operations and cash flows for the three month periods ended March 31, 2014 and 2013. Operating results as presented are not necessarily indicative of the results to be expected for a full year. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 20-F filed on April 30, 2014 with the Securities and Exchange Commission for the year ended December 31, 2013.

Principles of Consolidation

The operations of the Promotion Entities are consolidated with those of AGRL and its wholly owned subsidiaries and Iao Kun as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014, and 2013. Intercompany transactions and account balances have been eliminated. Unless otherwise indicated all currency amounts are in United States Dollars.

Fiscal Year End

The fiscal year end of the Company is December 31.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on historical information, information that is currently available to the management and on various other assumptions that the management believes to be reasonable under the circumstances. The Company has made significant estimates of the contingent purchase price due for the King's Gaming, Bao Li Gaming and the Oriental VIP Room acquisitions in these consolidated financial statements. Actual results could vary from those estimates.

Revenue Recognition

Revenue from VIP gaming room promotion operations is recorded monthly based upon the Promotion Entities’ share of the net gaming wins/losses or as a percentage of non-negotiable chips exchanged in VIP gaming rooms. The amounts due to the Promotion Entities are calculated and reported by the Casino Operators and the Promotion Entities on a monthly basis, usually within two days of the month end. 

9

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Additionally, the Promotion Entities earn revenues based upon percentages of non-negotiable chips exchanged in the VIP gaming rooms (typically 0.05%), which is available to offset costs incurred for accommodations, food and beverage and other services furnished to players and is included in gross revenues.  These revenues are included in revenue from VIP gaming room promotion operations in the accompanying consolidated statements of operations. 

In July 2009, all concessionaires and sub-concessionaires entered into an agreement to cap gaming promoter commissions. Under this agreement, commission payments to gaming promoters cannot exceed 1.25% of the rolling chip volume regardless of the commission structure adopted. As a result of the amendments made to Administrative Regulation No. 6/2002 by Administrative Regulation 27/2009 dated August 10, 2009, the Secretary of Economy and Finance of the Macau SAR now has the authority to issue a dispatch implementing the 1.25% gaming promoter commission cap, as agreed between all concessionaires and sub-concessionaires.  The amendment sets forth standards for what constitutes a commission to gaming promoters, including all types of payments, either monetary or in specie, that are made to gaming promoters such as food and beverage, hotel and other services and allowances. The amendment also imposes obligations on gaming promoters and Casino Operators to report regularly to the Gaming Inspection and Coordination Bureau of the Macau SAR and imposes fines or other sanctions for noncompliance with the commission cap or the monthly obligations to report and detail the amount of commissions paid to gaming promoters.

Beginning in October 2009, Star World Hotel and Casino agreed to revise the Sang Heng Agreement and removed the win/loss sharing component and replaced it with a commission payable to Sang Heng at a rate of 1.25% of the rolling chip turnover.  The Sang Lung and King’s Gaming arrangements were also based on 1.25% of the rolling chip turnover.  Management believed that this change in the revenue structure had reduced the inherent risk in promoting a VIP gaming room, due to the fluctuation surrounding gaming wins and losses.  The fixed commission revenues were based only on the amount of the rolling chip turnover, rather than the win/loss of the gaming operations.  Total rolling chip turnover in the Group’s VIP gaming rooms was approximately $4,768,392,000, and $4,096,042,000 during the three months ended March 31, 2014, and 2013, respectively.

On August 1, 2012, the Company announced that, beginning on September 1, 2012, it would be changing its remuneration model from a fixed commission model of 1.25% of the rolling chip turnover to a revenue sharing model. The decision to change from the fixed commission model to the revenue sharing model was made as a result of the Company’s expansion into four VIP gaming rooms with the ability to spread the risk of fluctuations surrounding gaming wins and losses. Additionally, management has initiated a program for junket agents who purchase non-negotiable chips in cash from the Promotion Entities (“super agent”), allowing the super agent to assume some of the risk of gaming losses or receive increased commissions as a result of gaming wins. Win rate was 3.60%, and 3.29% during the three months ended March 31, 2014 and 2013, respectively. The win rate is the percentage of rolling chip turnover exchanged in the VIP gaming room that is won by the casino (gross wins and losses divided by rolling chip turnover).

VIP Gaming Room Cage and Marker Accounting

In the VIP gaming rooms, VIP gaming patrons primarily purchase non-negotiable chips from the cage either with cash, cash chips, cashier’s order, or markers (short term, non-interest bearing loans). Non-negotiable chips can only be used to make wagers. Winning wagers are paid in cash chips. If the VIP gaming patrons continue to play, they must exchange the cash chips for non-negotiable chips, which is the basis for commission.  The exchange of the non-negotiable chips by the VIP gaming patrons in the VIP gaming room is recorded as rolling chip turnover and provides a basis for measuring VIP gaming room win percentage. It is customary in Macau to measure VIP gaming room play using this rolling chip method.

10

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A VIP gaming patron can be a player, a junket agent or a super agent. Whoever signs on the marker and takes delivery of the non-negotiable chips at the casino cage and carries them over to the game table is the borrower. It is also common practice that the VIP gaming patron taking delivery of the non-negotiable chips shares the chips with other VIP gaming patrons for the purpose of achieving a higher rolling volume (if the VIP gaming patron is a junket agent, they are entitled to receive commission even when the non-negotiable chips are wagered by third parties acquainted with them) without receiving immediate payment in cash for the non-negotiable chips. Under Macau law, licensed gaming promoters are permitted to extend credit to VIP gaming patrons creating a civil obligation to pay. This credit is typically unsecured but is generally offset by the commissions payable to a junket agent.

The Group, through the Promotion Entities, extends credit to junket agents. A majority of the Group’s consolidated markers receivable are owed by junket agents from Macau and the rest are primarily in Asia. In addition to enforceability issues, the collectability of markers receivable from foreign junket agents is affected by a number of factors including changes in economic conditions in the junket agents’ home countries. As of March 31, 2014 and December 31, 2013, markers receivable amounted to $250,682,636 and $242,350,301, respectively. 

The Group may not be able to collect all of their markers receivable from the junket agents. Management expects that the Group will be able to enforce these obligations only in a limited number of jurisdictions, including Macau and Hong Kong. To the extent that junket agents of the Group, through the Promotion Entities, are from other jurisdictions, the Group may not have access to a forum in which they will be able to collect all of their markers receivable because, among other reasons, courts of many jurisdictions do not enforce gaming debts and the Group may encounter forums that will refuse to enforce such debts. The Group’s inability to collect gaming debts could have a significant negative impact on their operating results. 

The following is a summary of an aging of the Company’s markers receivable by jurisdiction that may refuse to enforce such debts:

Jurisdiction/Aging	March 31, 2014		% of total markers receivable			December 31, 2013		% of total markers receivable
PRC
0-30 days	$	49,356,041				$	53,574,330
31-60 days		45,507,755					30,406,634
61-90 days		18,734,771					7,011,955
Greater than 90 days		9,819,898					2,185,997
Total	$	123,418,465		49	%	$	93,178,916		38	%

The Group regularly evaluates the allowance for uncollectible marker receivable based on a specific review of junket agent accounts as well as management’s prior experience with collection trends in the casino industry and current economic and business conditions. Therefore, as of March 31, 2014 and December 31, 2013, management believes that an allowance for uncollectible markers receivable is not necessary. Furthermore, upon the completion of the acquisition of AGRL by Iao Kun, Messrs. Lam and Vong guaranteed all markers receivable in the Company’s VIP gaming rooms. The guarantees by Messrs. Lam and Vong do not cover markers receivable attributable to the junket agent networks of Mr. Mok, Mr. Lou and Mr. Lei or Mr. Vong as described below. The guarantee of Messrs. Lam and Vong can be offset against the loans provided by them for the working capital. Upon the acquisition of King’s Gaming, Mr. Mok has guaranteed the collection of all markers receivable attributable to Mr. Mok and his network of junket agents at both King’s Gaming’s existing VIP gaming room and the Company’s existing and future VIP gaming rooms. Upon the acquisition of Bao Li Gaming, Mr. Lou and Mr. Lei guaranteed the collection of all markers receivable attributable to them and their network of junket agents at both Bao Li Gaming’s existing VIP gaming room and the Company’s existing and future VIP gaming rooms through December 31, 2015. Upon the acquisition of the Oriental VIP room, Mr. Vong Veng Im guaranteed the collection of all markers receivable attributable to the Collaborator and his network of junket agents at both the Oriental VIP Room existing and the Company’s existing and future VIP gaming rooms through June 30, 2016.

11

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value of Financial Instruments

FASB ASC Topic 820 “Fair Value Measurements and Disclosures” defines fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the buyer and the seller at the measurement date. In determining fair value, the valuation techniques consistent with the market approach, income approach and cost approach shall be used to measure fair value. FASB ASC Topic 820 establishes a fair value hierarchy for inputs, which represent the assumptions used by the buyer and seller in pricing the asset or liability. These inputs are further defined as observable and unobservable inputs. Observable inputs are those that buyer and seller would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs that the buyer and seller would use in pricing the asset or liability developed based on the best information available in the circumstances. 

The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 —	Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not being applied. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 —	Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means.
Level 3 —	Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

For certain of the Group's financial instruments, none of which are held for trading purposes, including cash and cash equivalents, accounts receivable, markers receivable, certain other current assets, lines of credit payable, accrued expenses, and loan payable to shareholders the carrying values of these financial instruments, other than long-term loan payable to shareholders, approximate their fair value due to their short maturities.  The carrying value of long-term loan payable to shareholders approximates their fair value since they guarantee the markers receivable.  The payables-King’s Gaming, Bao Li and Oriental VIP Room acquisitions were initially recognized for the fair values of the acquisition contingent consideration and are adjusted to the fair value at each subsequent reporting date (see Notes 9, Note 10 and Note11).

At least annually, management determines if the current valuation techniques used in the fair value measurements are still appropriate and evaluates and adjusts the unobservable inputs used in the fair value measurements based on current market conditions and other information. There were no changes in the valuation techniques during the three months ended March 31, 2014. Additional information regarding the valuation technique and inputs used is as follows:

Quantitative Information about Level 3 Fair Value Measurements 

	Fair Value
Contingent Consideration	as of  3/31/2014		Valuation Techniques	Unobservable Input	Range
Oriental VIP Room	$	46,911,631	Forecasted Performance, 2014-June 2016	Chip Turnover Annual Growth	8.6% - (27.5%)
			Monte Carlo Method	Average Simulated Share Prices	$3.05- $3.44
Bao-Li  Gaming	$	20,211,377	Forecasted Performance, 2014-2015	Chip Turnover Annual Growth	10.0% - (55.0%)
			Monte Carlo Method	Average Simulated Share Prices	$3.35- $3.15

12

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 The significant unobservable inputs used in the fair value measurement of the Company’s contingent consideration for the King’s Gaming, Bao Li Gaming and Oriental VIP Room acquisitions are the forecasted performance results of the operations of King’s Gaming, Bao Li Gaming and Oriental VIP Room and the simulated share prices of the Company’s Ordinary Shares under the Monte Carlo method. Significant increases (decreases) in any of those inputs in isolation would result in a significantly higher (lower) fair value measurement.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash, cash chips, non-negotiable chips and short-term investments with original maturities of less than 90 days. Cash equivalents are placed with high credit quality financial institutions.

Accounts Receivable and Concentration of Credit Risk

Accounts receivable are principally comprised of net gaming revenues, fees and incentives revenues receivable, which do not bear interest and are recorded at amounts due from the Casino Operators. 

When deemed necessary, the Group records an allowance for doubtful accounts which represents management’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable. Management believes that all outstanding balances are collectible and therefore an allowance has not been established. Although management believes that no allowance is currently necessary, it is possible that the estimated amount of cash collections with respect to accounts receivable could change.

Earnings Per Share

The calculations of earnings per share are computed as follows for the three months ended March 31, 2014 and 2013:

	March 31, 2014		March 31, 2013
Numerator:
Net income  attributable to Ordinary Shareholders for basic and diluted earnings per share	$	3,179,688	$	6,953,705
Denominator:
Denominator for basic earnings per share
- Weighted-average Ordinary Shares outstanding during the period		60,402,370		43,951,202
Effect of dilutive securities:
- Oriental VIP Room earn out shares		329,722		-
Denominator for diluted earnings per share		60,732,092		43,951,202
Basic earnings per share	$	0.05	$	0.16
Diluted earnings per share	$	0.05	$	0.16

13

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

King’s Gaming did not meet its 2013 Gross Profit Target to exceed $8,860,000 and no incentive shares were issued. Bao Li Gaming met its rolling chip turnover target of $5,000,000,000 and 1,250,000 ordinary shares will be issued during the second quarter of 2014.

In 2011, the Company decided that a portion of the Directors fees and officers remuneration would be paid in Ordinary Shares. The shares are to be issued in January of each year.  A total of 60,610 ordinary shares were issued in July 2013 to satisfy the Company’s obligations for 2012 and have been included in basic and diluted earnings per share based on the weighted average shares for the three months ended March 31, 2013. A total of 60,790 ordinary shares will be issued during the second quarter of 2014 to satisfy the Company’s obligations for 2013 and have been included in basic and diluted earnings per share based on the weighted average shares for the three months ended March 31, 2014. A liability of approximately $259,000 and $209,000 is included in accrued expenses at March 31, 2014 and December 31, 2013, respectively.

The Company had 1,440,000 dilutive potential Ordinary Shares related to the Underwriter Unit Purchase Option (UPO). The UPO expired on August 10, 2013. 

The Company issued one transferable subscription right for each two ordinary shares then owned to stockholders of record on June 3, 2013. Accordingly, as required by FASB ASC Topic 260 “Earnings Per Share” the number of weighted average Ordinary Shares outstanding for basic and diluted earnings per share have been increased retroactively by a factor of 1.081 for all periods presented before June 21, 2013. This factor represents the impact of the bonus element of the rights offering on the Company’s Ordinary Shares, based upon the closing price of the Ordinary Shares immediately prior to the rights trading separately from the Ordinary Shares on June 5, 2013 ($4.07 per share), and the expected proceeds from the rights offering.

Property and Equipment

Property and equipment is stated at cost. Depreciation and amortization is recorded on a straight-line basis over the estimated useful lives of the assets ranging from two to five years, which do not exceed the lease term for leasehold improvements, if applicable.

Goodwill and Other Intangible Assets

The Company amortizes intangible assets over their estimated useful lives unless it is determined their lives to be indefinite. Goodwill and other intangible assets with indefinite lives are not amortized but are subject to tests for impairment at least annually. Management performs impairment tests more frequently than annually if events or circumstances indicate that the value of goodwill or intangible assets with indefinite lives might be impaired.

The following are the useful lives of the respective finite-lived intangible assets:

Bad Debt Guarantee	3 to 5.5 years	Based upon six months after the expiration of the employment agreement or at the expiration of the employment agreement
Non-Compete agreement	9 to 11.7 years	Based upon the termination date of the casino's license or June 2022
Profit interest agreement	9 to 11.7 years	Based upon the termination date of the casino's license or June 2022

14

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Indefinite Useful Life Assets

Goodwill is evaluated for possible impairment by comparing the fair value of a business unit with its carrying value, including the goodwill assigned to that business unit. Fair value of a business unit is estimated using a combination of income-based and market-based valuation methodologies. Under the income approach, forecasted cash flows of a business unit are discounted to a present value using a discount rate commensurate with the risks of those cash flows. Under the market approach, the fair value of a business unit is derived from recent market transactions involving merger and acquisition and/or publicly-traded guideline companies deemed broadly similar to the subject business unit. An impairment charge is recorded if the carrying value of the goodwill exceeds its implied fair value.  Assets with indefinite useful lives are not subject to amortization and are tested for impairment annually or more frequently if events or circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of the asset exceeds its fair value, an impairment will be recognized in an amount equal to that excess. If the carrying amount of the asset does not exceed the fair value, no impairment is recognized.

Impairment of Long-lived Assets

The Company evaluates when events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets are estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows was less than the carrying amount of the assets, an impairment loss would be recorded. The impairment loss would be measured on a location by location basis by comparing the fair value of the asset with its carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets’ carrying amount or fair value less costs related to the assets’ disposition. No impairment has been recognized.   

Advertising Costs

Costs for advertising and marketing are expensed the first time the advertising or marketing takes place or as incurred. Advertising and marketing costs for ongoing operations are included in selling, general and administrative expense.  During the three months ended March 31, 2014 and 2013, the Group incurred advertising costs of $317,962 and $2,851, respectively.

Stock-Based Compensation

The Company awards stock and other equity-based instruments to its employees, directors and consultants (collectively "share-based payments"). Compensation cost related to such awards is recorded when earned.  Ordinary Shares are issued to the directors subsequent to year end based on average trading price prior to December 31 each year.  All of the Company's stock-based compensation is based on grants of equity instruments and no liability awards have been granted. All of the Company directors presently receive $20,000 payable in Ordinary Shares, valued at the average of the closing prices of the Ordinary Shares over the three-month period preceding the end of each fiscal year.  As of March 31, 2014 and December 31, 2013, the Company has accrued compensation costs of approximately $200,000 each year for the value of 60,790 and 60,610 Ordinary Shares for issuance to the Company's directors and key management employees, respectively. 

In December 2011, the shareholders approved the 2011 Omnibus Securities and Incentive Plan (the “Plan”). The purpose of the plan is to assist the Company in attracting, retaining and providing incentives to key management employees and nonemployee directors of, and nonemployee consultants to the Company and its Affiliates, and to align the interests of such employees, nonemployee directors and nonemployee consultants with those of the Company’s shareholders. The Plan provides for the granting of Distribution Equivalent Rights, Incentive Share Options, Non-Qualified Share Options, Performance Share Awards, Performance Unit Awards, Restricted Share Awards, Restricted Share Unit Awards, Share Appreciation Rights, Tandem Share Appreciation Rights, Unrestricted Share Awards or any combination of the foregoing up to a maximum of 200,000 Ordinary Shares, as may be best suited to the circumstances of the particular Employee, Director or Consultant. On April 24, 2012, 50,400 Ordinary Shares were issued and on July 3, 2013, 60,610 ordinary shares were issued.

15

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Foreign Currency

The reporting currency of Iao Kun is in the United States dollar ("US $", "$", “Reporting Currency”).  The Group’s functional currency is the Hong Kong Dollar (“HKD $”, “Functional Currency”).  Monetary assets and liabilities denominated in currencies other than the Functional Currency are translated into the Functional Currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional Currency are translated into the Functional Currency at the exchange rates prevailing on the dates of the transaction.

Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective period.

For financial reporting purposes, the consolidated financial statements of the Group, which are prepared using the Functional Currency, are then translated into the Reporting Currency. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders' equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation adjustment in other comprehensive income, a component of shareholders' equity. 

	March 31, 2014		March 31, 2013		December 31, 2013
Period end HK$:US$ exchange rate	$	7.76	$	7.76	$	7.75
Average annual HK$:US$ exchange rate	$	7.76	$	7.76	$	7.76

Comprehensive Income

The Group follows standards for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a company during the period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated comprehensive income, as presented on the accompanying consolidated statements of changes in equity, is the cumulative foreign currency translation adjustment.

Economic and political risks

The Group’s current operations are conducted in Macau and Hong Kong. Accordingly, the Group’s consolidated financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC economy.

The Group’s operations in Macau and Hong Kong are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Group’s consolidated results may be adversely affected by changes in the political and social conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad and rates and methods of taxation, among other things. 

Reclassifications

Certain reclassifications were made to prior years’ amounts to conform to the current period presentation. None of the reclassifications affected the net income of the prior years.

Recently Issued Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

Note 3 — Accounts Receivable

Accounts receivable consisted of the following:

16

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	March 31,		December 31,
	2014		2013
Gaming revenues receivable	$	8,086,276	$	5,182,352

As of December 31, 2013, accounts receivable were due from four Casino Operators and one gaming promoter and as of December 31, 2013 were 41%, 33%, 12%, 9% and 5% of total receivables, respectively. As of March 31, 2014, accounts receivable were due from four Casino Operators and as of March 31, 2014 were 40%, 38%, 15%,and 7% of total receivables, respectively. 

Note 4 — Intangible Assets

Intangible assets as of March 31, 2014 and December 31, 2013 consist of the following:   

	Bad Debt Guarantee			Non-Compete Agreement			Profit Interest Agreement			Total
Amortized intangible assets:
Gross carrying amounts
Balance as of December 31, 2013	$	606,374		$	1,824,021		$	161,646,336		$	164,076,731
Foreign currency translation		(87	)		(877	)		(58,264	)		(59,228	)
Balance as of March 31, 2014		606,287			1,823,144			161,588,072			164,017,503
Accumulated amortization
Balance as of December 31, 2013	$	320,842		$	325,156		$	25,093,788		$	25,739,786
Amortization expense		31,803			44,045			4,013,091			4,088,939
Foreign currency translation		(168	)		(8	)		(7,850	)		(8,026	)
Balance as of March 31, 2014		352,477			369,193			29,099,029			29,820,699
Total amortized intangible assets	$	253,810		$	1,453,951		$	132,489,043		$	134,196,804

17

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Goodwill
Unamortized intangible assets:
Balance as of December 31, 2013	$	17,754,136
Foreign currency translation		(6,409	)
Balance as of March 31, 2014	$	17,747,727

Amortization expense for the three months ended March 31, 2014 and 2013 was $4,088,938 and $2,428,912, respectively.

Estimated amortization expense of intangibles for the next five years and thereafter is as follows:

2014(9 months)	$	12,270,610
2015		16,360,814
2016		16,264,686
2017		16,233,565
2018		16,233,565
Thereafter		56,833,564
	$	134,196,804

Note 5 — Lines of Credit Payable

Lines of Credit Payable consisted of the following:  

	March 31,		December 31,
	2014		2013
Due to Casino Operators	$	58,345,383	$	42,670,573

 Due to Casino Operators represents an advance of non-negotiable chips to Sang Heng, Sang Lung, King's Gaming and Bao Li Gaming and are interest free and renewable monthly and an advance of commission income for the Oriental VIP Room.

The Casino Operators have extended lines of credit totaling approximately $59,304,000 and $59,325,000 as of March 31, 2014 and December 31, 2013, respectively.  The lines of credit may be exceeded from time to time at the discretion of the Casino Operators.  The lines of credit for Sang Heng, Sang Lung and King’s Gaming are guaranteed by Mr. Lam or Mr. Vong and are secured by their personal checks and a deposit paid by Mr. Lam.  The line of credit for Bao Li Gaming is guaranteed by Mr. Lou and is secured by his personal check.

Note 6 — Accrued Expenses

Accrued Expenses consist of the following: 

	March 31,		December 31,
	2014		2013
Commission payable-the junket agents	$	18,800,868	$	13,806,535
Management fee payable-related party (Note 13)		618,819		619,042
Management and Directors' compensation		558,369		633,385
Others		600,807		642,794
	$	20,578,863	$	15,701,756

18

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 — Loans Payable, Shareholders

On February 2, 2010, AGRL entered in to an agreement with Messrs. Lam and Vong to provide funding for working capital and to advance funds to the Promoter Companies.  Pursuant to the agreement, the loans will be in an amount not less than $19,300,000 on and after February 2, 2010 (the date of the acquisition of AGRL by Iao Kun), not less than $45,000,000 on and after March 31, 2010 and until the agreement is terminated. This funding commitment terminates at the end of the fiscal quarter that AGRL’s working capital is not less than $100,000,000, exclusive of any working capital provided by Messrs. Lam and Vong.  If at any time the balance exceeds the minimum requirement, Messrs. Lam and Vong may request repayment for the excess amount.

In conjunction with the rights offering completed in June 2013 (See Note 12), and the regulatory requirements of the Company’s planned listing of the Company’s Ordinary Shares on the Hong Kong Stock Exchange, the Company repaid $34,197,930 of the balance of the loans provided by Messrs. Lam and Vong. A total of 3,312,620 Ordinary Shares were issued at $4.50 per share and 6,430,380 were issued at $3.00 per share to reduce the outstanding shareholders loan balance. The balance of $25,802,070 was repaid out of the cash proceeds from the rights offering in July 2013. Any remaining balance is expected to be repaid prior to the listing of the Company’s Ordinary Shares on the Hong Kong Stock Exchange.

As of March 31, 2014 and December 31, 2013, the amount of the funding advanced to AGRL by Messrs. Lam and Vong was approximately $7,307,377 and $5,809,075, respectively.  Messrs. Lam and Vong also guarantee to AGRL the repayment of the loans made by AGRL to the Promoter Companies.  Any amounts due to AGRL pursuant to the guaranty provided by Messrs. Lam and Vong may, at AGRL's election, be offset against amounts owing Messrs. Lam and Vong by AGRL pursuant to the agreement.

On April 18, 2011, the terms of the loan agreement were amended and the loan amount totaling $60,000,000 ($30,000,000 each to Messrs. Lam and Vong) was fixed, non-interest bearing and due on April 18, 2014.   In conjunction with the loan amendment, the loans are convertible at the option of the lenders at a rate of $20 per Ordinary Share or an aggregate of 3,000,000 Ordinary Shares.  Additionally, should the closing price of the Ordinary Shares as reported by the Nasdaq Stock Market for any ten (10) consecutive Trading Days following the date of amendment equals or exceeds $25, the Company shall have the right to convert all of the loans at a rate of $20 per Ordinary Shares, or an aggregate of 3,000,000 Ordinary Shares.  As a result of the loan repayments, the loans are no longer convertible under these terms.

Note 8 — Acquisition of AGRL

On October 6, 2009, Iao Kun entered into a Stock Purchase Agreement, subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010 and April 18, 2011 (the “Agreement”), with AGRL and Spring Fortune that provided for the acquisition by Iao Kun from Spring Fortune of all of the outstanding capital stock of AGRL.  On February 2, 2010, the acquisition was consummated pursuant to the terms of the Agreement and AGRL became a wholly owned subsidiary of Iao Kun.  

The amendment dated April 18, 2011 increased the amount of the incentive targets from $49,500,000 to $65,000,000 for the year ended December 31, 2011 and from $58,000,000 to $78,000,000 for the year ended December 31, 2012 to receive 2,573,000 incentive shares for each year.  Additionally, the additional incentive target to earn 530,000 Ordinary Shares in 2011 and 2012 was increased from $75,000,000 to $78,000,000 and from $82,500,000 to $94,000,000, respectively.

AGRL achieved the performance target for the year ended December 31, 2011 of $65,000,000 to earn 2,573,000 Ordinary Shares and the additional incentive target of $78,000,000 to earn 530,000 Ordinary Shares in 2011 pursuant to the Agreement. The shares were issued subsequent to the filing of the 2011 annual report on Form 20-F. The issuance is treated similar to a stock dividend and resulted in an increase to Ordinary Shares and Additional Paid in Capital totaling $17,977,151 and a decrease to Retained Earnings of $17,977,151.

19

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Additionally, the Company issued 4,210,000 shares as a result of the filing of Form 20-F for the fiscal year ended December 31, 2010 in May of 2011.  The shares are considered to be issued as part of the merger and therefore have been treated as issued for no additional cost or compensation.  The issuance is treated as an increase to Ordinary Shares and a decrease to Retained Earnings of $421 to reflect the par value of the Ordinary Shares.  The Company considered indicators to determine if the contingent payments as a result of the reverse merger between AGRL and Iao Kun constituted a form of additional compensation to/or profit sharing with the sellers and concluded they are not to be treated as additional compensation or profit sharing.

AGRL did not achieve the performance target for the year ended December 31, 2012 and no incentive shares were issued.

Note 9—Acquisition of King’s Gaming Promotion Limited

On November 10, 2010, the Company completed the purchase of the profit interest pursuant to  a Profit Interest Purchase Agreement  (“King’s Gaming Purchase Agreement”) with Mr. Mok  and Mr. Wong (together, the “King’s Gaming Seller”), to acquire the right to 100% of the profit interest derived by King’s Gaming, effective November 1, 2010, from the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau for an aggregate amount of (i) up to $36,000,000, of which $9,000,000 was paid at the closing, and (ii) 1,500,000 Ordinary Shares of the Company (the “Purchase Price”) issued at the closing. The balance of $27,000,000 of the Purchase Price will be maintained as working capital at the cage of King’s Gaming (and shall be the sole property of the Company until paid to the King’s Gaming Seller in accordance with the terms of the King’s Gaming Purchase Agreement) and shall be paid to the Seller in installments of $9,000,000 (each, an “Installment Payment”), subject to meeting a minimum Gross Profit requirement equal to $6,150,000 (the “Minimum Gross Profit Requirement”) for each of the three fiscal years following the closing date commencing with fiscal year 2011, which shall be evidenced by the management prepared financial statements of King’s Gaming approved by the Audit Committee of the Company.  In the event King’s Gaming fails to achieve the Minimum Gross Profit Requirement in any of the three fiscal years following the closing date, the Installment Payment shall be reduced by an amount equal to the product of (x) $9,000,000 and (y) the quotient obtained by dividing (A) the actual Gross Profit for such year, by (B) the Minimum Gross Profit Requirement. 

The Earnout Shares, Incentive Shares and Additional Incentive Shares (each as defined in the King’s Gaming Purchase Agreement) shall be released and issued to the Seller as follows:

	Gross Profit Target		Earnout/Incentive		Additional
Year	For Earnout/Incentive Shares		Shares		Incentive Shares
2011	$	6,150,000		500,000	*
2012	$	7,380,000		500,000	*
2013	$	8,860,000		500,000	*
2014	$	9,740,000		100,000	*
2015	$	10,720,000		100,000	*
2016	$	11,790,000		100,000	*
2017	$	12,970,000		100,000	*
2018	$	14,260,000		100,000	*
2019	$	15,690,000		100,000	*
2020	$	17,260,000		100,000	*

*- For each $1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares will be issued.  The Seller is not entitled to any Additional Shares on a pro rata basis for multiples of less or greater than $1,000,000. 

For the year ended December 31, 2011, Incentive Shares of 500,000 were earned since King’s Gaming met its 2011 Gross Profit Target exceeding $6,150,000 and earned additional incentive shares of 20,000 by exceeding its Gross Profit Target by over $2,000,000.

King’s Gaming did not meet its 2013 and 2012 Gross Profit Targets and no incentive shares were issued.

20

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 Additionally, Mr. Mok has agreed to provide a personal guaranty, for so long as he is employed by the Company or King’s Gaming providing for the guaranty of all obligations of King’s Gaming and the Seller pursuant to the King’s Gaming Purchase Agreement, including, but not limited to any bad debts the Seller network of junket agents may have incurred or may incur in the future.  

As of November 10, 2010, the total estimated purchase price of $75,973,890, consisting of $9 million in cash, 1.5 million Ordinary Shares valued at $10.74 per share for a value of $16,110,000, and estimated contingent consideration of $50,863,890 consisting of contingent cash and Ordinary Shares, was allocated based on valuations performed to determine the fair values of the acquired assets, as follows:

Gaming License Deposit	$	12,446
Bad Debt Guarantee		466,116
Non-Compete agreement		792,304
Profit interest agreement		59,694,600
Goodwill		15,008,424
Total Estimated Purchase Price	$	75,973,890

In accordance with the FASB ASC Topic 805 on business combinations, a liability of $50,857,564 was recognized for the estimated acquisition fair value of the contingent consideration based on the probability of the achievement of the Gross Profit targets at December 31, 2010. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in the Group’s estimate of the gross profit expected to be achieved, will be recognized in earnings in the period that estimated fair value changes. The fair value estimate assumes probability-weighted gross profits are achieved over the earn-out period. Actual achievement of gross profit range for this assumed earn-out period could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration could have a material impact on the Group’s statement of operations and financial position in the period of change in estimate.  During the three months ended March 31, 2014, the Company did not recognize any gains or losses due to the change in the fair value of the contingent consideration utilizing Level 3 fair value measurements as King’s Gaming only met the minimum Gross Profit requirement of $6,150,000 (the “Minimum Gross Profit Requirement”) but not the Gross Profit Target for 2013 and no ordinary shares are expected to be issued. During the three months ended March 31, 2013, the Company did not recognize any gains or losses due to the change in the fair value of the contingent consideration utilizing Level 3 fair value measurements. Fluctuations in the market value of the Company's Ordinary Shares and subsequent performance will cause the fair value to increase or decrease and the resulting change will be recognized in earnings.   

The following is a reconciliation of the change in fair value of the contingent consideration:

Contingent Consideration as of December 31, 2013	$	9,000,000
Cash Consideration Paid		(9,000,000	)
Ordinary Shares Issued		-
Change in Fair Value of Contingent Consideration		-
Foreign Currency Translation Adjustment		-
Contingent Consideration Payable as of March 31, 2014	$	-

Management has considered the factors that make up the goodwill recognized in the transaction including the reputation of the VIP gaming room and its former location at the Venetian Hotel and Casino on Cotai in Macau (now located at the Sands Cotai Central Casino). Additional factors include the synergies between the operations of King's Gaming and the operations of Sang Heng, Sang Lung, Bao Li and Oriental VIP Room, including the expanded network of junket agents and the ability to offer higher tier VIP players the opportunity to play at either a high end luxury Cotai location or a high end luxury downtown Macau location. These factors do not qualify for separate recognition in the overall purchase price allocation.

21

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10—Acquisition of Bao Li Gaming Promotion Limited

On September 12, 2012, the Company completed the purchase of the profit interest pursuant to  a Profit Interest Purchase Agreement  (“Bao Li Purchase Agreement”) with Mr. Lou  and Mr. Lei (together, the “Bao Li Seller”), to acquire the right to 100% of the profit derived by Bao Li Gaming, effective September 1, 2012, from the promotion of the VIP gaming room at the City of Dreams Hotel and Casino in Macau for an aggregate amount of $15,000,000, of which $7,500,000 was paid upon the satisfaction of all conditions to closing and $7,500,000 paid at the closing (the “Purchase Price”). Additionally, the Company reimbursed the Seller approximately $146,026 for cash and incentive receivables acquired.

For purposes of the Bao Li Purchase Agreement, “Base Rolling Chip Turnover” means $2,500,000,000 of non-negotiable chips that the Bao Li Seller’s network of junket agents purchases from Bao Li Gaming’s and the Company’s VIP gaming rooms attributable to the Bao Li Seller’s network of junket agents at Bao Li Gaming’s existing VIP gaming room and the Company’s existing and future VIP gaming rooms. 

In addition, as more fully set forth below, the Company is required to issue to the Bao Li Seller (i) up to an aggregate of $39,000,000 and 1,875,000 Ordinary Shares in the event certain rolling chip turnover targets are achieved for each of the three years following the closing date (the “Base Earnout Payment”), (ii) and additional cash payments and Ordinary Shares in the event the rolling chip turnover targets for each of the three years following the closing date are exceeded, in increments of $25,000,000 (the “Incremental Earnout Payment”).  For each $25,000,000 increment in which the rolling chip Turnover target for such year is exceeded, the Company shall pay an additional $130,000 and issue 6,250 Ordinary Shares.  The Bao Li Seller is not entitled to any additional Incremental Earnout Payments in the event that the Seller’s rolling chip turnover exceeds $5,000,000,000. As a result, in any year the maximum Incremental Earnout Payment cannot exceed $13,000,000 in cash and 625,000 in Ordinary Shares. In the event that the Seller fails to achieve the Base Rolling Chip Turnover in any year, the Bao Li Seller will not be entitled to receive any earnout payments.

The Earnout Shares, Incentive Shares and Additional Incentive Shares (each as defined in the Bao Li Purchase Agreement) shall be released and issued to the Bao Li Seller as follows:

	Rolling Chip Turnover Target
Year	For Base Earnout Payments		Base Earnout  Cash Payments		Base  Earnout  Shares		Incremental Earnout Payment
2013	$	2,500,000,000	$	13,000,000		625,000	*
2014	$	2,500,000,000	$	13,000,000		625,000	*
2015	$	2,500,000,000	$	13,000,000		625,000	*

*- For each $25,000,000 increment in which the rolling chip turnover target for such year is exceeded, the Company shall pay an additional $130,000 and 6,250 Ordinary Shares will be issued. 

Additionally, Mr. Lou and Mr. Lei have agreed to provide personal guarantees, through December 31, 2015 providing for the guaranty of all obligations of Bao Li Gaming and the Seller pursuant to the Bao Li Purchase Agreement, including, but not limited to any bad debts the Bao Li Seller network of junket agents may have incurred or may incur in the future.  

As of September 12, 2012, the total estimated purchase price of $48,007,120 consisting of $15,146,026 in cash, and estimated contingent consideration of $32,861,094 consisting of contingent cash and Ordinary Shares has been allocated based on valuations performed to determine the fair values of the acquired assets as follows:

22

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Gaming License Deposit	$	12,520
Cash and Incentive Receivables		146,026
Bad Debt Guarantee		122,381
Non-Compete agreement		723,484
Profit interest agreement		45,016,159
Goodwill		1,986,550
Total Estimated Purchase Price	$	48,007,120

In accordance with the FASB ASC Topic 805 on business combinations, a liability of $20,211,377 and $33,027,050 was recognized for the estimated acquisition fair value of the contingent consideration based on the probability of the achievement of the rolling chip turnover targets at March 31, 2014 and December 31, 2013 , respectively. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in the Group’s estimate of the rolling chip turnover expected to be achieved, will be recognized in earnings in the period that estimated fair value changes. The fair value estimate assumes probability-weighted rolling chip turnover targets are achieved over the earn-out period. Actual achievement of rolling chip turnover targets for this assumed earn-out period could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration could have a material impact on the Group’s statement of operations and financial position in the period of change in estimate. During the three months ended March 31, 2014 and 2013 , the Company recognized a loss of $195,518- and a loss of $5,929,566, respectively, due to the change in the fair value of the contingent consideration utilizing Level 3 fair value measurements.  Fluctuations in the market value of the Company's Ordinary Shares and subsequent performance will cause the fair value to increase or decrease and the resulting change will be recognized in earnings.  

Bao Li achieved the minimum rolling chip target for 2013 in May of 2013. As a result the Company paid the Bao Li Seller $13,000,000 in August 2013 and will issue 625,000 Ordinary Shares in the second quarter of 2014. Additionally, Bao Li reached the incremental earn out rolling chip target for 2013 and will be paid an additional $13,000,000 and will be issued an additional 625,000 Ordinary Shares in the second quarter of 2014.

The following is a reconciliation of the change in fair value of the contingent consideration:

Contingent Consideration as of December 31, 2013	$	33,027,050
Payment		(13,000,000	)
Ordinary Shares Issued		-
Change in Fair Value of Contingent Consideration		195,518
Foreign Currency Translation Adjustment		(11,191	)
Contingent Consideration Payable as of March31, 2014	$	20,211,377

Management has considered the factors that make up the goodwill recognized in the transaction including the reputation of the VIP gaming room and its location at the City of Dreams Hotel and Casino in Macau. Additional factors include the synergies between the operations of Bao Li Gaming and the operations of Sang Heng, Sang Lung, King’s Gaming and Oriental VIP Room, including the expanded network of junket agents and the ability to offer higher tier VIP players the opportunity to play at another high end luxury Cotai location or a high end luxury downtown Macau location. These factors do not qualify for separate recognition in the overall purchase price allocation.

23

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of the current and long term portions of the estimated contingent consideration expected to be paid for the acquisition of Bao Li Gaming:  

Years Ended December 31,	Total Contingent Consideration
2014	$	3,837,500
2015		16,373,877
	$	20,211,377

The operations of Bao Li Gaming acquired assets have been included in the results of operations of the Company from September 1, 2012, the date for such inclusion per the acquisition agreement dated September 5, 2012. The acquisition has been accounted for using the acquisition method of accounting and accordingly, the aggregate consideration has been allocated based on estimated fair values as of the acquisition date. 

Management determined that the acquisition of the operations of Bao Li from the promotion of a VIP gaming room at the City of Dreams Hotel and Casino in Macau would allow the Company to rapidly expand its operations and network of junket agents and appeal to a wider number of players which may increase revenues at the Company's other VIP gaming rooms.

Note 11 — Acquisition of the Oriental VIP Room

On June 26, 2013, the Company completed the purchase of the profit interest pursuant to  a Profit Interest Purchase Agreement  (“Oriental VIP Room Purchase Agreement”) with Mr. Vong Veng Im (the “Oriental VIP Room Seller”), to acquire the right to 100% of the profit derived from the operations, effective July 1, 2013, from the promotion of a VIP gaming room at the Le Royal Arc Casino in Macau for an aggregate amount of $20,000,000 in cash, of which $10,000,000 was paid at the closing and $10,000,000 was paid at a subsequent closing (the “Purchase Price”), upon the completion of certain conditions. Mr. Vong is a collaborator for the gaming promoter license holder at the Le Royal Arc Casino.

For purposes of the Oriental VIP Room Purchase Agreement, “Base Rolling Chip Turnover” means $2,500,000,000 of non-negotiable chips that the Oriental VIP Room Seller’s network of junket agents purchases from Oriental VIP Room’s and the Company’s VIP gaming rooms. 

In addition, as more fully set forth below, the Company is required to pay and issue to the Oriental VIP Room Seller (i) up to an aggregate of $39,000,000 and 1,875,000 Ordinary Shares in the event certain rolling chip turnover targets are achieved for each of the three 12 month periods ending June 30, 2014, 2015 and 2016 following the closing date (the “Base Earnout Payment”), (ii) and additional cash payments and Ordinary Shares in the event the rolling chip turnover targets for each of the three 12 month periods ending June 30, 2014, 2015 and 2016 following the closing date are exceeded, in increments of $25,000,000 (the “Incremental Earnout Payment”).  For each $25,000,000 increment in which the rolling chip Turnover target for such year is exceeded, the Company shall pay an additional $130,000 and issue 6,250 Ordinary Shares.  The Oriental VIP Room Seller is not entitled to any additional Incremental Earnout Payments in the event that the Seller’s rolling chip turnover exceeds $5,000,000,000. As a result, in any year the maximum Incremental Earnout Payment cannot exceed $13,000,000 in cash and 625,000 in Ordinary Shares. In the event that the Seller fails to achieve the Base Rolling Chip Turnover in any year, the Oriental VIP Room Seller will not be entitled to receive any earnout payments. If the Oriental VIP Room Seller achieves an aggregate Rolling Chip Turnover of at least $15,000,000,000 for the 36 month period ending June 30, 2016, the Company shall pay an additional $2,500,000 for every $1,000,000,000 of rolling chip turnover in excess of $15,000,000,000 up to a maximum of $12,500,000.

24

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Earnout Shares, Incentive Shares and Additional Incentive Shares (each as defined in the Oriental VIP Room Purchase Agreement) shall be released and issued to the Oriental VIP Room Seller as follows:

	Rolling Chip Turnover Target
12 Month Period	For Base Earnout Payments		Base Earnout  Cash Payments		Base  Earnout  Shares		Incremental Earnout Payment
June 30, 2014	$	2,500,000,000	$	13,000,000		625,000		*
June 30, 2015	$	2,500,000,000	$	13,000,000		625,000		*
June 30, 2016	$	2,500,000,000	$	13,000,000		625,000		*

*- For each $25,000,000 increment in which the rolling chip turnover target for such year is exceeded, the Company shall pay an additional $130,000 and 6,250 Ordinary Shares. In addition, an aggregate rolling chip turnover of at least $15,000,000,000 for the 36 month period ending June 30, 2016 the Company shall pay an additional $2,500,000 for every $1,000,000,000 of rolling chip turnover in excess of $15,000,000,000 up to a maximum of $12,500,000. 

Additionally, Mr. Vong Veng Im has agreed to provide a personal guarantee, through June 30, 2016 providing for the guaranty of all obligations of Oriental VIP Room and the Oriental VIP Room Seller pursuant to the Oriental VIP Room Purchase Agreement, including, but not limited to any bad debts the Oriental VIP Room Seller network of junket agents may have incurred or may incur in the future.  

As of June 26, 2013, the total estimated purchase price of $57,803,560 consisting of $10,000,000 in cash, and estimated contingent consideration of $47,803,560 consisting of contingent cash and Ordinary Shares has been allocated based on valuations performed to determine the fair values of the acquired assets as follows:

Bad Debt Guarantee	$	16,881
Non-Compete agreement		305,927
Profit interest agreement		56,758,004
Goodwill		722,748
Total Estimated Purchase Price	$	57,803,560

In accordance with the FASB ASC Topic 805 on business combinations, a liability of $46,911,631 and $36,528,269 was recognized for the estimated acquisition fair value of the contingent consideration based on the probability of the achievement of the rolling chip turnover targets at March 31, 2014 and December 31, 2013, respectively. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in the Group’s estimate of the rolling chip turnover expected to be achieved, will be recognized in earnings in the period that estimated fair value changes. The fair value estimate assumes probability-weighted rolling chip turnover targets are achieved over the earn-out period. Actual achievement of rolling chip turnover targets for this assumed earn-out period could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration could have a material impact on the Group’s statement of operations and financial position in the period of change in estimate. During the three months ended March 31, 2014, the Company recognized a loss of $10,393,333 due to the change in the fair value of the contingent consideration utilizing Level 3 fair value measurements.  Fluctuations in the market value of the Company's Ordinary Shares and subsequent performance will cause the fair value to increase or decrease and the resulting change will be recognized in earnings.  

The following is a reconciliation of the change in fair value of the contingent consideration:

Contingent Consideration as of December 31, 2013	$	36,528,269
Payment		—
Ordinary Shares Issued		—
Change in Fair Value of Contingent Consideration		10,393,333
Foreign Currency Translation Adjustment		(9,971	)
Contingent Consideration Payable as of March 31, 2014	$	46,911,631

25

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Management has considered the factors that make up the goodwill recognized in the transaction including the reputation of the VIP gaming room and its location at the Le Royal Arc Casino in Macau. Additional factors include the synergies between the operations of the Oriental VIP Room and the operations of Sang Heng, Sang Lung, Bao Li Gaming and King’s Gaming, including the expanded network of junket agents and the ability to offer higher tier players the opportunity to play at another high end luxury downtown Macau location or a high end luxury Cotai location. These factors do not qualify for separate recognition in the overall purchase price allocation. Total acquisition costs which have been expensed, amounting to approximately $1,252,000.

Management determined that the acquisition of the operations of Oriental VIP Room at the Le Royal Arc Casino in Macau would allow the Company to expand its operations in downtown Macau and appeal to a wider number of players. Prior to the acquisition, the Company's had only one VIP gaming room in downtown Macau. Additionally, the acquisition of the operations of Oriental VIP Room brought an additional network of junket agents and collaborators that may increase revenues at the Company's Macau VIP rooms.

The following is a summary of the current and long term portions of the estimated contingent consideration expected to be paid for the acquisition of the Oriental VIP Room:  

Years Ended December 31,	Total Contingent Consideration
2014	$	27,391,028
2015		19,520,603
	$	46,911,631

The following pro forma consolidated statements of operations have been prepared assuming that the acquisition of Oriental VIP Room occurred on January 1, 2013.

	Pro Forma
	Consolidated
	For the Three
	Months Ended
	March
	31, 2013
Revenue	$	66,185,156
Expenses		62,762,806
Pro Forma Net Income Attributable To Ordinary Shareholders	$	3,422,350
Pro Forma Net Income Per Share
Basic	$	0.08
Diluted	$	0.08
Weighted average shares outstanding
Basic		43,951,202
Diluted		43,951,202

26

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 — Shareholders’ Equity

Ordinary Shares

Iao Kun is authorized to issue 500,000,000 Ordinary Shares, par value $.0001.  The authorized Ordinary Shares was increased from 200,000,000 to 500,000,000 as a result of a shareholder vote on September 24, 2013. The Company issued 12,050,000 and 4,210,000 ordinary shares related to achieving earnings targets in 2010 following the filing of Form 20-F during the second quarter of 2011 and issued 3,103,000 and 520,000 ordinary shares related to AGRL achieving earnings targets in 2011 following the filing of the Annual Report on Form 20-F during the second quarter of 2012. AGRL did not achieve its performance targets for the year ended December 31, 2012, and King’s Gaming did not meet its Gross Profit Target for the year ended December 31, 2012 or 2013, and therefore no shares for achieving those performance targets will be issued.  The holders of the Ordinary Shares have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the Ordinary Shares.

Rights Offering

The Company issued one transferable subscription right for each two ordinary shares then owned to stockholders of record on June 3, 2013. The rights entitled rights holders to subscribe for an aggregate of up to 20,225,582 ordinary shares. The subscription price was $3 per ordinary share to be exercised. As a result of a standby purchase agreement with certain persons, including Lam Man Pou, Vong Hon Kun, Lam Chou In, Zheng An Ting, So Kam Tai, Au Chun Yin, Chan Fok Hoi, Chan Kai Ian, Sin Kam Chan, Leong Wai Meng and Cheung Mee Mo (the “Standby Purchasers”), whereby the Standby Purchasers have agreed to purchase a number of ordinary shares having a value equal to the aggregate subscription price the Company would have received with respect to the shares underlying all rights not exercised by all holders in the rights offering, referred to as the standby purchase, upon the same terms as the other holders, except the subscription price for 34% of such shares with respect to purchases made by Messrs. Lam Man Pou and Vong Hon Kun was $4.50 per share. Messrs. Lam and Vong agreed to purchase approximately 34% of the shares sold pursuant to the standby purchase for an exercise price not less than the closing price of Iao Kun’s Ordinary Shares on May 24, 2013, which was $4.37 per share, at a premium to the exercise price of the rights ($ 3.00 per share). On June 21, 2013, the subscription period for the rights offering expired and on June 28, 2013, the Company instructed its transfer agent to issue a total of 19,527,950 ordinary shares. The Company incurred offering costs of $2,067,809, which have been recorded as a reduction of Additional Paid in Capital.

Weighted average basic and diluted ordinary shares and net income per share for March 31, 2013 as originally reported and as adjusted for the bonus element were as follows:

For the three months ended March 31, 2013
	As Originally Reported		As Adjusted		Effect of Change
Weighted average basic shares outstanding		40,657,911		43,951,202		3,293,291
Weighted average diluted shares outstanding		40,657,911		43,951,202		3,293,291
Net income per weighted average basic share	$	0.17	$	0.16	$	(0.01	)
Net income per weighted average diluted share	$	0.17	$	0.16	$	(0.01	)

Directors Compensation

All of the Company’s directors presently receive annual compensation of $30,000 in cash and $20,000 payable in Ordinary Shares, valued at the average of the closing prices of the Ordinary Shares over the three-month period preceding the end of each fiscal year. The Ordinary Shares will be issued the following year.  The chairman of the audit committee will receive additional annual cash compensation of $10,000 and the other members of the audit committee will each receive additional annual cash compensation of $5,000. The chairman of the compensation and nominating committees each receive additional annual cash compensation of $5,000 and the other members of these committees each receive additional annual cash compensation of $3,000. Each director will also receive cash compensation of $1,000 for each board or committee meeting that he or she attends (whether in person or telephonically) that is at least an hour in duration and $500 for each board or committee meeting he or she attends that is less than an hour in duration.  Total director fees charged to operations during the three months ended March 31, 2014 and 2013 were $124,250 and $124,250, respectively.

27

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Share Repurchase Program

During June 2011, the Board of Directors authorized the establishment of a share repurchase program for the Company to purchase up to two million of its ordinary shares on the open market at prices to be determined by the Company’s management. The program expired on June 30, 2012. An aggregate of 26,300 ordinary shares were repurchased for an aggregate purchase price of $124,207 pursuant to the 2011 share repurchase program. The Ordinary Shares have been retired and the purchase price was allocated to par value and additional paid in capital.

The Board of Directors has established a share repurchase program, with an expiration date of June 30, 2013 (the “2012 Repurchase Plan”). The 2012 Repurchase Plan authorizes the Company to purchase up to two million of its Ordinary Shares on the open market at prices to be determined by the Company’s management. During the year ended December 31, 2012, the Company repurchased an aggregate of 1,273,947 Ordinary Shares for an aggregate purchase price of $4,166,483 pursuant to the 2012 Repurchase Plan. During the quarter ended March 31, 2013, the Company purchased the remaining 726,053 Ordinary Shares for an aggregate purchase price of $2,728,912. The Ordinary Shares have been retired and the purchase price was allocated to par value and additional paid in capital. In March 2013, the Board of Directors established a new share repurchase program with an expiration date at any time in the discretion of appropriate company officers (the “2013 Repurchase Plan”). The 2013 Repurchase Plan authorizes the Company to purchase up to four million of its Ordinary Shares on the open market at prices to be determined by the Company’s management. During the year ended December 31, 2013, the Company repurchased an aggregate of 732,900 Ordinary Shares for an aggregate purchase price of $2,295,849 pursuant to the 2013 Repurchase Plan.  During the three months ended March 31, 2014, the Company repurchased an aggregate of 1,415,300 Ordinary Shares for an aggregate purchase price of $4,193,554 pursuant to the 2013 Repurchase Plan.

Dividend

During June 2011, the Board of Directors authorized a regular cash dividend of $0.10 per outstanding Ordinary Share each year after the release of the Company’s financial results for the six months ending June 30, and, for each year after the release of the Company’s annual financial results, an amount per outstanding ordinary share equal to (i) 15% of the Company’s non-GAAP net income (defined as operating income before amortization of intangible assets and change in fair value of contingent consideration) for the most recently completed fiscal year, less the amount paid pursuant to the immediately previous six-month dividend, divided by (ii) the number of Ordinary Shares outstanding on the record date for such dividend. In March 2012, the Board of Directors authorized an increase in the dividend payable after the release of the Company’s 6-month financial statements from $0.10 to $0.12 per outstanding ordinary share. Subsequent to the rights offering, the Board of Directors authorized a proportionate decrease in the dividend payable after the release of the Company’s 6-month financial statements from $0.12 to $0.08 per outstanding ordinary share.

The record date for each period’s dividend will be set by the Company’s management to be as close as practicable to, but no less than, 15 days after the public release by the Company of the financial results for the applicable six-month period and fiscal year end. The payment date for each period’s dividend will be set by the Company’s management to be as close as practicable to, but no less than, 10 days after the record date.

Payment Date	Amount
September 2, 2011	$	3,880,406
April 18, 2012	$	7,527,988
August 31, 2012	$	5,094,140
April 26, 2013	$	4,142,199
September 20, 2013	$	4,803,178

28

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Preferred Stock

The Company is authorized to issue 1,150,000 preferred shares with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. There are no issued and outstanding preferred shares at March 31, 2014 and December 31, 2013.

Ordinary Shares Reserved for Future Issuance

At March 31, 2014 and December 31, 2013, the Company has reserved 8,288,990 and 8,288,990 shares of its authorized but unissued Ordinary Shares for possible future issuance in connection with the following:

	March 31, 2014		December 31, 2013
Officer and Director Shares		88,990		88,990
Contingently Issuable Incentive Shares-King's Gaming		700,000		700,000
Contingently Issuable Incentive Shares-Bao Li Gaming		3,750,000		3,750,000
Contingently Issuable Incentive Shares-Oriental VIP Room		3,750,000		3,750,000
Total		8,288,990		8,288,990

Note 13 — Commitments and Contingencies

Employment Agreements

AGRL entered into employment agreements with five executive officers: Mr. Lam (Chairman of the Board), Leong Siak Hung (Chief Executive Officer), Li Chun Ming (Chief Financial Officer), Mr. Vong (Director), and Lam Chou In (Operating Officer) that became effective upon the closing of the acquisition of AGRL.  Upon the closing of the acquisition of King’s Gaming, Iao Kun has entered into two additional employments contracts with Mr. Mok and Mr. Wong. Upon the closing of the acquisition of Bao Li, the Company entered into employment agreements with Mr. Lou and Mr. Lei. In February 2012, the Board amended the employment contracts with Leong Siak Hung, Li Chun Ming Raymond, Lam Man Pou, Vong Hon Kun, Ip Ching Wah, Lam Chou In, Mok Chi Hung and Wong Hon Meng effective January 1, 2012 to increase their respective annual salaries. These employment agreements were further amended effective July 1, 2013 to increase annual salaries. Upon the acquisition of the Oriental VIP Room, the Company entered into a 5 year employment agreement with Vong Veng Im. Beginning July 1, 2013, the Company entered into a two year employment agreement with Chien Lee, Chief Strategic Officer. The employment agreements for Mr. Leong and Mr. Li expired in February 2013 and are continuing on the same terms (subject to increases) on a month to month basis.

29

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Annual minimum compensation for the terms of the employment agreements for terms greater than one year, as amended, is as follows:

2014	$	1,061,555
2015		789,990
2016		448,000
2017		340,000
2018		62,000
Total	$	2,701,545

Each executive is entitled to paid vacation in accordance with AGRL’s policies and other customary benefits. The employment agreements provide that the executive, during the period of five years following the termination of his employment (three years in the case of Messrs. Leong and Li), shall not compete with AGRL or solicit any of its employees. The agreements with each of Leong Siak Hung, Li Chun Ming Raymond, Lam Man Pou, Vong Hon Kun and Lam Chou In contain provisions prohibiting the executives, during their respective terms of employment, from selling, hypothecating or otherwise transferring more than 20% of any Ordinary Shares that may be transferred to them by Spring Fortune from shares it received or receives as a result of the acquisition. If an executive’s employment is terminated for any reason prior to the expiration of the employment term, or if the executive breaches the confidentiality and non-competition and non-solicitation provisions of his employment agreement, the executive is obligated to transfer and assign to the Company all securities then held by him and all rights to receive securities in the future, which securities will be canceled.

Total compensation charged to operations during the three months ended March 31, 2014, and 2013, related to these employment contracts were $353,852 and $238,426 , respectively.

Office Lease

The Company has office leases in Hong Kong and Macau for executive offices which expire in September 2015 and April, 2016, respectively.  The Company also rents a storage space on a month to month basis for $1,160 per month. Minimum future lease payments are $57,559, $68,406, and $11,857 for the years ended December 31, 2014, 2015 and 2016, respectively. Rent expense was $22,406 and $16,739 for the three months ended March 31, 2014 and 2013, respectively.

Gaming Table Rentals

Starting from August 1, 2013, the Company pays a monthly rental of approximately $425,000 for six gaming tables in its Oriental VIP Room in order to have a greater percentage of revenue sharing, which management believes will be a continuing cost of operating the Oriental VIP Room. Rental expense charged to operations for gaming table rentals was $1,275,921, and $0 for the three months ended March 31, 2014 and 2013, respectively. 

Revenue Sharing

Beginning in September 2012, the Company has adopted a new program to allow certain cash basis junket junket agents (non-marker) to share in the risk of wins and losses in the VIP gaming rooms. The maximum percentage of sharing that the junket agent may elect to share in the risk of wins and losses is limited to their percentage of rolling chip turnover during the previous month. The junket agent must make its election by the second day of the subsequent month and may elect from zero percent to the maximum percent. A total of approximately $735,643 was recorded as a credit on commission expense in April 2014 for participating junket agents based on March 2014 rolling chip turnover. Due to fluctuations in wins and losses as well as the agents’ participation, levels, the total amount of revenues and losses shared as well as their percentage of rolling chip turnover may fluctuate significantly. 

30

IAO KUN GROUP HOLDING COMPANY LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Certain Risks and Uncertainties

The Group’s operations are dependent on the annual renewal of the gaming licenses by the Macau SAR to the Promoter Companies and the registration of the Collaborator by the licensed gaming promoter.  The tenure of the Promotion Entities acting as gaming promoters and collaborator for the Casinos is subject to the Gaming Representative / Gaming Promoter Arrangements and Collaborator Agreement.

The Group may not be able to collect all of their markers receivable from the junket agents. Management expects that the Group will be able to enforce these obligations only in a limited number of jurisdictions, including Macau. To the extent that junket agents of the Group, through the Promotion Entities, are from other jurisdictions, the Group may not have access to a forum in which they will be able to collect all of their markers receivable because, among other reasons, courts of many jurisdictions do not enforce gaming debts and the Group may encounter forums that will refuse to enforce such debts. The Group’s inability to collect gaming debts could have a significant negative impact on their operating results.

The Group receives all of their revenue from Casino Operators within the Asia-Pacific Region. If economic conditions in these areas were to decline materially or additional casino licenses to new Casino Operators were awarded in these locations, the Group’s consolidated results of operations could be materially affected.  

Note 14 — Related Party Transactions

Management Agreements

Day-to-day management and operation of the VIP gaming rooms is contracted by the Promotion Entities to Pak Si Management and Consultancy Limited of Macau (“Pak Si”), a related party management company that is responsible for hiring and managing all staff needed for operations.  This includes local managers and executives to provide supervision, finance and cage personnel, public relations, drivers and other service staff (waiters, cleaners, etc.).  The agreements renew annually. The principal of Pak Si is the sister-in-law of Mr. Vong, a director of the Company and its chief operating officer. 

Effective January 1, 2013, the monthly payments were revised for Sang Heng and Sang Lung from $180,000 to $155,000 each, and Bao Li and King’s Gaming remained at a monthly rate of $103,000.

Beginning in July 2013, the Oriental VIP Room entered into a management agreement with Pak Si for $103,000 per month.

Total expenses for Pak Si's services were $1,855,885 and $1,547,189 during the three months ended March 31, 2014 and 2013, respectively.  Amounts due to Pak Si as of March 31, 2014 and December 31, 2013 were $618,820 and $619,042, respectively and have been recorded in accrued expenses. 

Entertainment Expense

During the three months ended March 31, 2014 and 2013 the Group’s paid entertainment expense approximately $181,508 and $142,059, respectively, for catering and restaurant services to a related party which three directors have the ownership interest in.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known and unknown factors.

You should read the following management discussion and analysis (“MD&A”) in conjunction with the unaudited and unreviewed consolidated financial statements and related footnotes thereto included in this report and in conjunction with the MD&A and the audited consolidated financial statements and related footnotes thereto included in our annual report on Form 20-F for the year ended December 31, 2013. All capitalized terms in this MD&A that are not defined shall have the meaning ascribed to them in the Notes to the Financial Statements included herewith.

Overview

We are a holding company that operates a gaming promotion business in VIP gaming rooms located in hotels and casinos in Macau (Special Administrative Region, China)(“Macau” or “Macau SAR”) through our wholly owned subsidiary, Asia Gaming & Resort Limited (“AGRL”), its subsidiaries, and Promotion Entities. We were incorporated in the Cayman Islands on September 24, 2007 under the name “CS China Acquisition Corp.” for the purpose of acquiring an operating business.

Prior to the business combination with AGRL, we had no operating business.

On February 2, 2010, we acquired all of the outstanding securities of AGRL from Spring Fortune Investment Ltd. (“Spring Fortune”), resulting in AGRL becoming our wholly owned subsidiary. Upon the business combination with AGRL, we changed our name to “Asia Entertainment & Resources Ltd.” (“AERL”). On September 30, 2013, we changed our name to Iao Kun Group Holding Company Limited (“IKGH”).

AGRL was incorporated on May 2, 2007 in Hong Kong. It is a holding company of subsidiaries that, through profit interest agreements with affiliated companies and business entity known as Promotion Entities, are entitled to receive all of the profits of the Promotion Entities from VIP gaming rooms in casinos at major hotels in Macau.

The acquisition of AGRL has been accounted for as a “reverse merger” and recapitalization since Spring Fortune, the former shareholder of AGRL, became the owner of a majority of the outstanding Ordinary Shares immediately following the completion of the transaction and has significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, and AGRL’s senior management dominates the management of the combined entity, in accordance with the provisions of FASB ASC Topic 805 "Business Combinations". Accordingly, AGRL was deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of AGRL. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of AGRL and are recorded at the historical cost basis of AGRL. Our assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of AGRL after consummation of the acquisition.

Foxhill, Billion Boom, Kasino Fortune, Super Number, Jubilee Dynasty and Frontier Champion are the significant subsidiaries of IKGH, which have a relationship with IKGH’s VIP gaming promoters (the “Promoter Companies”) and the collaborator (“Vong Veng Im” or “Oriental VIP Room”) (“Promotion Entities”).

The Promotion Entities became variable interest entities (“VIEs”) of the subsidiaries of IKGH, which are the primary beneficiaries of the operations of Promotion Entities. Management’s determination of the appropriate accounting method with respect to IKGH’s VIEs is based on FASB ASC Topic 810, “Consolidation of Variable Interest Entities”. IKGH consolidates the VIEs in which it is the primary beneficiary and will disclose significant variable interests in VIEs of which it is not the primary beneficiary, if any. Therefore, the operations of the Promotion Entities are to be consolidated with those of IKGH for all periods subsequent to the closing of the acquisitions.

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We completed the acquisition of the rights to 100% of the profits derived by King’s Gaming for the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau in November 2010. King’s Gaming moved its VIP gaming room to Sands Cotai Central in February 2013.

We completed the acquisition of the rights to 100% of the profits derived by Bao Li Gaming Promotion Limited (“Bao Li Gaming”) for the promotion of the Kam Bao Li Club at the City of Dreams Hotel and Casino in Macau in September 2012.

On June 26, 2013, the Company entered into an agreement to acquire the right to 100% of the profits derived by Mr. Vong Veng Im from the promotion of a VIP gaming room at the Le Royal Arc Casino in Macau. Vong Veng Im functions as a Collaborator for the licensed gaming promoter of the VIP gaming rooms at Le Royal Arc Casino in Macau. According to Macau laws, a collaborator needs to enter into an agreement with a licensed gaming promoter and registered with the Gaming Inspection and Coordination Bureau of the Macau SAR. Beginning in November 2013, Lam Chou In was named the Collaborator.

Sang Heng, King’s Gaming, Bao Li Gaming and Sang Lung are promoters and the Oriental VIP Room is a collaborator of the VIP gaming rooms, which are private gaming facilities located in casinos in Macau.

Highlights

When compared to the three months ended March 31, 2013, our revenue increased 24.2% for the three months ended March 31, 2014 period-over-period, compared to the overall growth in Macau of 19.8% and growth in VIP Baccarat of 12.5 % according to the Macau Gaming Inspection and Coordination Bureau (DICJ). The following factors contributed to our results of operations:

¨ Higher than normal win rate of 3.60% and increased Rolling Chip Turnover;

¨ The economic uncertainties in parts of Mainland China caused us to reduce the amount of markers made available to VIP gaming patrons and to take steps to collect outstanding markers. A VIP gaming patron can be a player, or a junket agent. The reduction in amounts made available to VIP gaming patrons negatively impacted the growth in our total Rolling Chip Turnover, however, the addition of the Oriental VIP Room contributed to overall increased Rolling Chip Turnover. Rolling Chip Turnover generally is correlated with the availability of cage capital that can be made available for credit to VIP gaming patrons. In order to reduce the effects of the tightening of credit to VIP gaming patrons, management is continuing to explore ways to enlarge its network of junket agents. If recent improvement in the China economy demonstrates sustainable momentum, we may consider relaxing our credit policy towards our VIP gaming patrons. As an incentive to attract more non-credit junket agents, beginning on September 1, 2012, the Company provided an option for large non-credit junket agents to participate in sharing overall win/loss with us based on their proportionate contribution of total Rolling Chip Turnover.   The high sharing for the super agents as a result of the high win rate , the higher proportion of non-credit junket agents and the increased competition amongst VIP gaming promoters, the agent commission rate increased to 1.15% in the first quarter of 2014 from 1.04% in the first quarter of 2013.

Recent Activities

Beginning in September 2012, we changed our remuneration model from a fixed commission of 1.25% on Rolling Chip Turnover to a revenue sharing model. Under a revenue sharing model, we share in the gaming wins and losses of the VIP gaming rooms we promote. Our share of the gaming wins and losses ranges from 42.5% to 55% in our five VIP gaming rooms. In respect of Oriental VIP Room at Le Royal Arc Casino, we elected to pay table rental in exchange for a higher win and losses sharing ratio.

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Beginning in January 2013, the Company began receiving service revenues for hotel and casino services charged to junket agents. Previously, the junket agents received these services on a complimentary basis. The commission rates for junket agents were adjusted upward to reflect the reduction of complimentary services. Agent commissions have started to trend upwards, based in part on the increased competition amongst VIP gaming promoters as well as cash versus credit junket agents.

In February 2013, the Company moved King’s Gaming room from the Venetian Macao-Resort-Hotel to a new room at the Sands Cotai Central. The new VIP gaming room has four tables plus a private room for a total of five tables.

In June 2013, we issued one transferable subscription right for each two ordinary shares then owned by shareholders of record on June 3, 2013. The rights entitled holders to subscribe for an aggregate of up to 20,225,582 ordinary shares. The subscription price was $3 per ordinary share to be exercised. As a result of a standby purchase agreement with certain persons, including Lam Man Pou and Vong Hon Kun (the “Standby Purchasers”), whereby the Standby Purchasers agreed to purchase a number of ordinary shares having a value equal to the aggregate subscription price the Company would have received with respect to the shares underlying all rights not exercised by all holders in the rights offering, referred to as the standby purchase, upon the same terms as the other holders, except the subscription price for 34% of such shares with respect to purchases made by Messrs. Lam Man Pou and Vong Hon Kun was $4.50 per share. On June 21, 2013, the closing date of the offering and the standby purchases, a total of 19,527,950 ordinary shares were issued in exchange for $29,354,850 in cash and the cancellation of $34,197,930 of debt owed by us to Messrs. Lam Man Pou and Vong Hon Kun. The remaining balance of $25,802,070 of the loans from Messrs. Lam Man Pou and Vong Hon Kun was repaid in July 2013 out of the cash proceeds from the rights offering. The Company incurred offering costs of $2,067,809, which have been recorded as a reduction of Additional Paid in Capital.

On June 26, 2013, we completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“Oriental VIP Room Purchase Agreement”) with Mr. Vong Veng Im (the “Oriental VIP Room Seller”), to acquire the right to 100% of the profit derived from the promotion of a VIP gaming room at the Le Royal Arc Casino in Macau, effective July 1, 2013.

On September 20, 2013, we announced a delay in our planned Hong Kong Stock Exchange listing due to the unexpected passing of the sponsor’s principal who was in charge of our Hong Kong listing application. We have engaged a new sponsor. We expect the listing submission to be completed during the second quarter of 2014 after the completion of our annual audit.

On September 24, 2013, we increased our authorized Ordinary Shares to 500,000,000. The increase in the authorized shares was to gain additional flexibility for our planned Hong Kong Stock Exchange listing.

On September 30, 2013, we changed our name from Asia Entertainment & Resources Ltd. to Iao Kun Group Holding Company Limited.

At the end of 2013, the Board of Directors extended our share repurchase program on an open-ended basis to purchase up to four million of our ordinary shares on the open market at prices to be determined by our management. Purchases pursuant to the program may be made from time to time in accordance with SEC rules and regulations through open market transactions, subject to market conditions, our share price and other factors. The repurchase program may be modified, suspended or discontinued at any time. During the first quarter of 2014, we repurchased 1,415,300 shares at an average price per share of $2.96.

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RESULTS OF OPERATIONS

Three Months ended March 31, 2014 Compared to the Three Months ended March 31, 2013

The following table sets forth certain information regarding our results of operations for the three months ended March 31, 2014 and 2013 (all figures are in $ thousands except ratios and percentages).

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013			% change from 2013 to 2014
Revenue from VIP gaming promotion	$	79,939		$	64,352			24	%
Commission to junket agents	$	55,065		$	42,741			29	%
Selling, general and administrative expenses	$	6,539		$	5,889			11	%
Operating income after amortization of intangible assets and before change in fair value of contingent consideration	$	13,769		$	12,883			7	%
Percentage of operating income after amortization of intangible assets and before change in fair value of contingent consideration/Revenue from VIP gaming promotion		17.22	%		20.02	%

Non-GAAP Financial Results

The following Non-GAAP financial results for the three months ended March 31, 2014 and 2013 are used by management to evaluate our financial performance prior to the deduction of amortization of intangible assets and change in fair value of contingent consideration related to the acquisitions of King's Gaming, Bao Li Gaming and Oriental VIP Room (all figures are in $ thousands except ratios and percentages) (see Non-GAAP Financial Measures on page 39).

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013			% change from 2013 to 2014
Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration	$	17,857		$	15,312			17	%
Percentage of Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration/Revenue from VIP gaming promotion		22.34	%		23.79	%

Rolling Chip Turnover Ratios

Rolling Chip Turnover is used by casinos to measure the volume of VIP gaming room business transacted and represents the aggregate amount non-negotiable chips exchanged by VIP gaming patrons. Bets are wagered with ‘‘non-negotiable chips’’ and winning bets are paid out by casinos in so-called ‘‘cash’’ chips. If a player continues to make bets, they have to change the cash chips to non-negotiable chips.

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Rolling Chip Turnover ratios are calculated as percentages of Rolling Chip Turnover, and represent the changes in revenue, expenses and income in comparison to the change in gaming volume which investors and management use to assess the operating efficiencies of the Promotion Entities.

The following table sets forth certain information regarding our results relating to our Rolling Chip Turnover and certain performance ratios for the three months ended March 31, 2014 and 2013 (all figures are in $ thousands except for ratios and percentages).

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013			% change from 2013 to 2014
Rolling Chip Turnover	$	4,768,392		$	4,096,042			16.4	%
Revenue from VIP gaming promotion/Rolling Chip Turnover		1.68	%		1.57	%		7.0	%
Commission to junket agents/Rolling Chip Turnover		1.15	%		1.04	%		10.6	%
Gross margin (Revenue less commissions and special rolling tax)/Rolling Chip Turnover		0.49	%		0.48	%		2.1	%
Selling, general and administrative expenses/Rolling Chip Turnover		0.14	%		0.14	%		0.0	%
Operating income after amortization of intangible assets and before change in fair value of contingent consideration/Rolling Chip Turnover		0.29	%		0.31	%		(6.5	)%

Beginning in September 2012, we changed our remuneration model from a fixed commission of 1.25% on Rolling Chip Turnover to a revenue sharing model. Under the revenue sharing model, we share in the gaming wins and losses of the VIP gaming rooms we promote. Our share of the gaming wins and losses ranges from 42.5% to 55% in our five VIP gaming rooms. With the addition of the Oriental VIP Room, we promote a total of five VIP gaming rooms and forty gaming tables. We promoted four VIP gaming rooms and thirty four tables as of March 31, 2013.

The decision to change to the revenue sharing model was made as a result of the Company’s expansion to four VIP gaming rooms at the time, giving the Company the ability to spread the risk of fluctuations surrounding gaming wins and losses.

Under the revenue sharing model, a number of factors impact our revenue, income from operations and our Rolling Chip Turnover. Our revenue and income from operations are most significantly impacted by the following:

¨ Win rate: The win rate is the percentage of Rolling Chip Turnover exchanged in the VIP gaming room that is won by the casino (gaming wins and losses divided by Rolling Chip Turnover). The generally expected win rate for baccarat ranges from 2.7% to 3.0%. 

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¨ Mix of VIP players: VIP players can come to our VIP gaming rooms through junket agents or through our direct marketing efforts. Our most significant expenses are commissions we pay to junket agents, and our commissions vary depending upon the mix of VIP players who visit our rooms since we do not pay commission on players who visit the VIP gaming rooms based upon our direct marketing efforts. The highest commissions are paid to junket agents who are considered non-credit junket agents (junket agents that do not require the extension of credit) and super agents (junket agents who participate in our win/loss sharing program). Credit junket agents (those who require an extension of credit from us) are easier to obtain and retain, however, and our current marketing efforts are focused on increasing non-credit junket agents due to the conservative approach we are taking relating to credit extension. While our efforts to increase our cash junket agents have been successful, our costs have increased significantly as well. The percentage of large non-credit junket agents at our VIP gaming rooms increased from around 9.4% in the first half to over 12% in the second half. We expect that the proportion of large non-credit junket agents will continue to increase this year. In the first quarter the percentage increased to 18.2%.

¨ Rolling Chip Turnover-Rolling Chip Turnover is one of the methods management uses to analyze our business volume and is impacted by a number of factors. Most significantly, Rolling Chip Turnover is affected by the win rate. Higher win rates will generally result in lower Rolling Chip Turnover, while lower win rates generally result in higher Rolling Chip Turnover. When a player wins, they tend to continue to “roll” their winnings into more chips, while when the player loses; they tend to play for shorter periods of time. With lower win rates and higher Rolling Chip Turnover, our commission expense increases. Prior to our change in remuneration methods, our revenue was tied only to Rolling Chip Turnover and we sought to increase the Rolling Chip Turnover while managing credit extension risk. 

Below is a quarterly analysis of the win rate in our VIP gaming rooms from January 1, 2013 to March 31, 2014:

Period	Win Rate %
Q1 2013		3.29	%
Q2 2013		3.06	%
Q3 2013		3.18	%
Q4 2013		2.39	%
Q1 2014		3.60	%

Revenue from VIP gaming promotion was $79,938,622 for the three months ended March 31, 2014, as compared to $ 64,351,897 for the three months ended March 31, 2013, an increase of $15,586,725 or 24.2%, principally as a result of the following factors:

(i) the win rate of 3.60% for the three months ended March 31, 2014, higher than the generally expected win rate of 2.7%-3.0%, as well as a 16.4% increase in Rolling Chip Turnover;

(ii) the acquisition of the profit rights derived by the Oriental VIP Room in June 2013; and

(iii) the impact of our marketing efforts to gaming patrons throughout Macau.

Revenue from VIP gaming promotion, as a percentage of Rolling Chip Turnover, increased 7.0% to 1.68% during the three months ended March 31, 2014, from 1.57% during the three months ended March 31, 2013 as a result of the 3.60% win rate compared to 3.29% during the prior period.

As of March 31, 2014, the total available lines of credit from the casino operators were an aggregate of approximately $59,304,000, and the casino operators may extend temporary credit in excess of this amount. As of December 31, 2013, the total available lines of credit from the casino operators were an aggregate of approximately $59,325,000. Additional cage capital is available as a result of retained profits. Since September 1, 2012, all of our revenue is derived from the revenue sharing model, which has a higher risk of volatility than revenue earned under the fixed commission model. With the increase in cage capital, the number of rooms and the number of gaming tables available to us, management believes the risk of loss is lower than in prior periods. Due to the uncertainties in part of China’s economy, we reduced the amounts of markers made available to VIP gaming patrons and took steps to collect outstanding markers. The reduction in amounts made available to VIP gaming patrons negatively impacted the growth in our total Rolling Chip Turnover during prior quarters. As a result, we continue our marketing efforts to increase our Rolling Chip Turnover by working with junket agents who can provide their own capital (“non-credit junket agents”). Rolling Chip Turnover is correlated with the availability of cage capital and the win rate in the VIP gaming room. In order to reduce the effects of the policy of tightening credit to VIP gaming patrons, management continues to explore ways to enlarge its network of junket agents, including through the acquisition of Bao Li Gaming and the Oriental VIP Room, and to implement a more attractive commission program for junket agents as we have the flexibility after changing our remuneration model from a fixed commission of 1.25% on Rolling Chip Turnover to a revenue sharing model. If recent improvement in the China economy demonstrates sustainable momentum, we might consider increasing credit made available to VIP gaming patrons.

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The commission paid to junket agents increased by $12,324,347 or 28.8%, during the three months ended March 31, 2014, as compared to the same period in 2013, as a result of higher commission rates and the high sharing for the large non-credit junket agents as a result of the high win rate . The commission paid to junket agents, as a percentage of Rolling Chip Turnover, was 1.15% for the three months ended March 31, 2014, up from 1.04% for the three months ended March 31, 2013, as a result of greater non-credit commission paid and less direct business in relation to total Rolling Chip Turnover as a result of the tightening of credit to VIP gaming patrons. In order to attract more non-credit junket agents, beginning on September 1, 2012, the Company provided an option for large non-credit junket agents to participate in sharing overall win/loss with us based on their proportionate contribution of total Rolling Chip Turnover. This also resulted in a higher percentage of commission paid to junket agents in relation to Rolling Chip Turnover.

Sales, general and administrative expenses increased by approximately $650,000 or 11.0%, while revenue increased by 24.2%, during the three months ended March 31, 2014 as compared to 2013. Legal and professional fees increased by approximately $46,000 as a result of increased compliance costs. VIP gaming room operating costs increased approximately $1,288,000 as a result of and table rental costs of approximately $1,276,000 in the Oriental VIP Room. We pay a monthly rental of approximately $425,000 in order to have a greater percentage of revenue sharing, which we believe will be a recurring operating cost. Our Hong Kong listing costs decreased by approximately $684,525 as a result of our auditors for the listing auditing multiple prior periods during the quarter ended March 31, 2013. Salaries increased by approximately $260,000 as a result of an increase in the number of employees and direct employment of employees from Pak Si and increased salary for certain officers. Management fees increased by approximately $309,000, primarily as a result of the addition of the Oriental VIP Room beginning in July 2013. These increases were partially offset by a decrease in management fees due to direct employment of some employees from Pak Si.

The special rolling tax increased by $67,252, or 16.4%, during the three months ended March 31, 2014 as compared to the same period in 2013 as a direct result of the increase in Rolling Chip Turnover. The percentage of the rolling tax to revenue from VIP gaming promotion remained consistent at approximately 0.1%.

Operating income, after amortization of intangible assets and before change in the fair value of contingent consideration for the acquisitions of King's Gaming, Bao Li Gaming and the Oriental VIP Room, was $13,768,537 for the three months ended March 31, 2014, as compared to operating income of $ 12,883,271 for the three months ended March 31, 2013, a increase of approximately 6.9%, principally as a result of increased revenues offset by higher commission rate paid to the junket agents, and additional amortization associated with intangible assets acquired in the Oriental VIP Room acquisition. Operating income was 17.2% as a percentage of revenue from VIP gaming promotion, was lower than in prior periods.  In order to attract more non-credit junket agents, beginning on September 1, 2012, we provided an option for large non-credit junket agents to share the wins and losses under the revenue sharing model based on their proportionate contribution of total Rolling Chip Turnover. The additional sharing that the junket agents received as a result of higher win rate during the three months ended March 31, 2014 resulted in a higher percentage of commission paid to junket agents in relation to Rolling Chip Turnover.

Non-GAAP income, before amortization of intangible assets and change in fair value of contingent consideration related to the acquisitions of King's Gaming, Bao Li Gaming and Oriental VIP Room, as a percentage of revenue from VIP gaming promotion was 22.3% for the three months ended March 31, 2014, as compared to 23.79% for the three months ended March 31, 2013.  The decrease as a percentage of revenue from VIP gaming promotion was due to higher commissions, higher management fees paid, and the increase in the number of direct employees.

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There is no change in the fair value of the contingent consideration for King’s Gaming as the forecasted gross profit level of King’s Gaming resulted in no additional earn-out shares expected to be earned by the King’s Gaming Sellers. Additionally, there was a net increase to the contingent consideration liability for Bao Li Gaming and the Oriental VIP Room of $10,588,849 due primarily to an increase in the forecasted Rolling Chip Turnover performance of Bao Li and the Oriental VIP Room. As required by FASB ASC Topic 805 on business combinations, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of the gross profit and Rolling Chip Turnover expected to be achieved, will be recognized in earnings in the period that estimated fair value changes. The fair value estimate assumes probability-weighted gross profit and Rolling Chip Turnover are achieved over the earn-out period. Actual achievement of gross profit range and Rolling Chip Turnover Target for this assumed earn-out period could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration could have a material impact on our statement of operations and financial position in the period of change in estimate.

Earnings per share (“EPS”) attributable to ordinary shareholders for the three months ended March 31, 2014 was $0.05, for basic and fully diluted based upon the basic and fully diluted weighted average share counts of 60,402,370 (basic) and 60,732,092 (fully diluted).

Non-GAAP EPS before amortization of intangible assets and change in the fair value of contingent consideration for the three months ended March 31, 2014 was $0.30 for basic and $0.29 for fully diluted based upon the basic and fully diluted weighted average share counts of 60,402,370 (basic) and 60,732,092 (fully diluted).

Non-GAAP Financial Measures

Our calculation of Non-GAAP income (operating income before amortization of intangible assets and change in fair value of contingent consideration) and Non-GAAP EPS for the three months ended March 31, 2014 and 2013 differs from EPS based on net income because it does not include amortization of intangible assets and change in fair value of contingent consideration.  We use this information internally in evaluating our operations and believe this information is important to investors because it provides a complete picture of our operations for the entire period and is more accurately comparable to the prior-year period.  Notwithstanding the foregoing, Non-GAAP income and EPS should not be considered an alternative to, or more meaningful than, net income and EPS as determined in accordance with GAAP.   The following is a reconciliation of our unaudited net income to Non-GAAP income and GAAP EPS to our Non-GAAP EPS:

	For  the Three Months Ended March 31, 2014		For  the Three Months Ended March 31, 2013
Net Income attributable to ordinary shareholders	$	3,179,688	$	6,953,705
Amortization of intangible assets		4,088,938		2,428,912
Change in fair value of contingent consideration		10,588,849		5,929,566
Non-GAAP income (before amortization of intangible assets and  change in fair value of contingent consideration)	$	17,857,475	$	15,312,183
Weighted Average Shares Outstanding
Basic		60,402,370		43,951,202
Diluted		60,732,092		43,951,202

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	For  the Three Months Ended March 31, 2014				For  the Three Months Ended March 31, 2013
	Basic		Fully Diluted		Basic		Fully Diluted
Earnings per share attributable to ordinary shareholders	$	0.05	$	0.05	$	0.16	$	0.16
Amortization of intangible assets	$	0.07	$	0.07	$	0.06	$	0.06
Change in fair value of contingent consideration	$	0.18	$	0.17	$	0.13	$	0.13
Non-GAAP Earnings per share (before amortization of intangible assets and change in fair value of contingent consideration)	$	0.30	$	0.29	$	0.35	$	0.35

Liquidity and Capital Resources

As of March 31, 2014, total available cage capital in Macau was approximately $260,682,000.  The total available cage capital is comprised of markers receivable of approximately $250,682,000 and cash, cash chips and non-negotiable chips of approximately $10,000,000.  Our loans from related parties increased from $5,809,075 as of December 31, 2013 to $7,307,377 as of March 31, 2014, am increase of $1,498,302. Mr. Lam and Mr. Vong provide short term loans from time to time as needed. The remaining balance is expected to be repaid prior to the listing of our Ordinary Shares on the Hong Kong Stock Exchange. Our related parties have guaranteed the lines of credit with the casino operators, as well as uncollectible markers receivable (if any).

As of March 31, 2014, IKGH had cash and cash equivalents of $9,999,777. Cash and cash equivalents provided by operations was $27,424,621 for the three months ended March 31, 2014, compared to cash provided by operations of $16,393,680 for the three months ended March 31, 2013, as a result of our increased utilization of our lines of credit and increased outstanding markers receivable. The Company’s credit risk is primarily attributable to markers receivable, which are guaranteed by Mr. Lam, Mr. Vong, Mr. Mok, Mr. Lou and Mr. Vong Veng Im. Management has a credit policy in place and the exposure to these credit risks are monitored on an ongoing basis. With respect to markers receivable, credit evaluations are performed on all VIP gaming patrons. These evaluations focus on the VIP gaming patron’s past history of making payments when due and current ability to pay, and take into account information specific to the VIP gaming patrons as well as analysis of the economic environment from which the VIP gaming patrons come from. As of March 31, 2014, management believes that there is no concentration of credit risk related to markers receivable. 

We have available lines of credit of approximately $59,304,000 from casino operators, of which $58,345,000 was outstanding as of March 31, 2014. The lines of credit may be increased from time to time at the discretion of the casino operators.

If the casino operators decide not to renew the lines of credit in any given month, Rolling Chip Turnover may be reduced as a result of reducing credit extended to VIP gaming patrons for gaming purposes. As a result, the amount of the reduced Rolling Chip Turnover, our gaming revenue from the casino operators and our net operating income might also be reduced.

Our expected sources of repayment of the Lines of Credit are the repayment of markers receivable from VIP gaming patrons as well as receivables due from the casino operators.

In order to attract more non-credit junket agents, beginning on September 1, 2012, the Company provided an option for large non-credit junket agents to participate in sharing overall win/loss with us based on their proportionate contribution of total Rolling Chip Turnover (“super agents”). This may result in a higher percentage of commission paid to junket agents in relation to Rolling Chip Turnover.

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We paid dividends totaling $3,880,406 on September 2, 2011, $7,527,988 on April 18, 2012, $5,097,296 on August 31, 2012, $4,142,199 on April 26, 2013 and $4,803,178 on September 20, 2013.

During the year ended December 31, 2012, we repurchased an aggregate of 1,273,947 Ordinary Shares for an aggregate purchase price of $4,166,483 pursuant to the 2012 Repurchase Plan. By the end of February 2013, the Company had repurchased the remaining 726,053 Ordinary Shares available under the 2012 Repurchase Plan for an aggregate purchase price of $2,728,912. The Ordinary Shares have been retired and the purchase price was allocated to par value and additional paid in capital. In March 2013 the Board of Directors established a new share repurchase program, which expired on December 31, 2013 (the “2013 Repurchase Plan”). The 2013 Repurchase Plan authorizes the Company to purchase up to four million of its Ordinary Shares on the open market at prices to be determined by the Company’s management. At the end of 2013, our Board extended the share repurchase program to be open-ended with no expiration date. Any Ordinary Shares repurchased under the 2013 Repurchase Plan will be retired and the purchase price was allocated to par value, additional paid in capital and retained earnings based on US GAAP. During the year ended December 31, 2013, the Company repurchased an aggregate of 732,900 Ordinary Shares for an aggregate purchase price of $2,295,849 pursuant to the 2013 Repurchase Plan.  During the three months ended March 31, 2014, we repurchased an aggregate of 1,415,300 Ordinary Shares for an aggregate purchase price of $4,193,554.

We made cash payments of $9,000,000 and $13,000,000for the acquisitions of King’s Gaming and Bao Li Gaming, respectively, during the three months ended March 31, 2014.

Future Sources and Uses of Cash

We expect that our future liquidity and capital requirements will be affected by:

¨ Capital requirements related to prior and future acquisitions;

¨ Cash flow from acquisitions;

¨ Working capital requirements;

¨ Dividend distributions;

¨ Repurchase of outstanding shares;

¨ Funds raised through the sale of our securities; and

¨ Earnings accumulated and reinvested.

Other Events

On May 29, 2014, the Company issued a press release announcing first quarter of 2014 financial results. A copy of the press release is attached as Exhibit 99.1.  

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

May 30, 2014

IAO KUN GROUP HOLDING COMPANY LIMITED
By:	/s/ Li Chun Ming Raymond
Name:	Li Chun Ming Raymond
Title:	Chief Financial Officer

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EXHIBIT INDEX

Financial Statements and Exhibits.

Exhibit No.	Description
99.1	Press Release dated May 29, 2014

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