Summary of POKERTEK, INC. - Yahoo! Finance

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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. Statements expressing expectations regarding our future (including pending gaming and patent approvals) and projections relating to products, sales, revenues and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions and are not historical facts and typically are identified by use of terms such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" and similar words, although some forward-looking statements are expressed differently.

All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. Our actual results may differ materially from those implied in these forward-looking statements as a result of many factors, including, but not limited to, overall industry environment, customer acceptance of our products, delay in the introduction of new products, further approvals of regulatory authorities, adverse court rulings, production and/or quality control problems, the denial, suspension or revocation of permits or licenses by regulatory or governmental authorities, termination or non-renewal of customer contracts, amendment or termination of our loans with Silicon Valley Bank, disruption of our relationships with our suppliers, competitive pressures, general economic and political conditions, such as political instability, credit market uncertainty, inflationary pressures from higher energy and fuel costs and the rate of economic growth or decline in our principal geographic markets, each of which may be amplified by recent disruptions in the U.S. and global financial markets, the possible effect of anti-dilution provisions in our outstanding warrants, and our financial condition. These and other risks and uncertainties are described in more detail in our most recent Annual Report on Form 10-K, as well as other reports and statements that we file with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date they are made and should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that we make in this and other reports that we file with the Securities and Exchange Commission that discuss factors germane to our business.

Overview

PokerTek, Inc. is engaged in the development, manufacture and marketing of electronic poker-related products for use in the gaming and amusement markets.

We currently have two product lines, PokerPro gaming products and Heads-Up Challenge amusement products. The PokerPro system is an electronic poker table that provides a fully-automated poker-room environment to tribal casinos, commercial casinos, cruise ships and card clubs. Heads-Up Challenge is an innovative heads-up amusement device that enables two players to compete against each other in a game of Texas Hold'em poker for entertainment purposes in non-gambling venues such as bars and restaurants.

Results of Operations for the Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008

Revenues. Revenues decreased by $1.1 million (33%) to $2.1 million for the three months ended March 31, 2009 as compared to $3.2 million for the three months ended March 31, 2008 due to lower product sales.

License and service fees decreased by $0.1 million (9%) to $1.4 million for the three months ended March 31, 2009 as compared to $1.5 million for the three months ended March 31, 2008. The decrease in license and service fees was driven primarily by the impact of the current economic downturn, which has resulted in lower gaming revenues in substantially all jurisdictions where our PokerPro tables are deployed on lease. As a result of lower revenues and earnings by our customers, we also realized lower revenues per PokerPro table than in the prior year.

Product sales decreased by $0.9 million (55%) to $0.7 million for the three months ended March 31, 2009 as compared to $1.7 million for the three months ended March 31, 2008. Product sales consist of casino products, primarily PokerPro systems sold to Aristocrat for deployment in international casinos, as well as sales of our Heads-Up Challenge amusement product.

Sales of the Heads-Up Challenge amusement product contributed $0.6 million in revenue for the three months ended March 31, 2009, as compared to $1.0 million in revenue for the comparable period of 2008. Demand from our customers for the Heads-Up Challenge product was affected by a combination of weakening worldwide economic conditions and a stronger U.S. dollar. As a result, we sold 182 units during the three months ended March 31, 2009 as compared with 237 units during the three months ended March 31, 2008, and those units sold in the most recent period were at lower average selling prices.

Sales of casino products for the three months ended March 31, 2009 amounted to $0.1 million, a decrease of $0.5 million over the comparable period in 2008. Sales of casino products were impacted by a combination of higher inventory levels held by our international distributor and the timing of their regulatory approvals and customer contracts.

Direct Cost of Revenue. Direct cost of revenue consists of depreciation of PokerPro systems and the cost of PokerPro systems sold primarily to Aristocrat and the cost of Heads-Up Challenge product sales. Total direct costs decreased by $0.5 million (29%) to $1.3 million for the three months ended March 31, 2009. As a percentage of total revenues, direct cost of revenues was 60% of total revenues for the three months ended March 31, 2009, compared with 56% of total revenues for the comparable period in 2008.

Depreciation of PokerPro systems increased by $0.1 million (17%) to $0.7 million for the three months ended March 31, 2009 as compared to $0.6 million for the three months ended March 31, 2008. The increase in depreciation of PokerPro systems resulted from the growth in the gross balance of PokerPro systems subject to depreciation. Cost of product sales decreased by $0.6 million (50%) to $0.6 million for the three months ended March 31, 2009 as compared to $1.2 million for the three months ended March 31, 2008. This decrease in cost of sales was attributable to the lower unit product sales of both PokerPro and Heads-Up Challenge.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") decreased by $0.5 million (22%) to $1.9 million for the three months ended March 31, 2009 as compared to $2.4 million for the three months ended March 31, 2008. This decrease was primarily due to lower salaries and other employee-related expenses as a result of the headcount reductions and other cost reduction initiatives implemented during 2008 and early 2009. As a percentage of total revenues, SG&A expenses were 87% of total revenues for the three months ended March 31, 2009, compared with 75% of total revenues for comparable period in 2008.

Research and Development Expenses. Research and development expenses decreased by $0.5 million (58%) to $0.4 million for the three months ended March 31, 2009 as compared to $0.9 million for the three months ended March 31, 2008. We continue to invest in software and hardware development to improve our gaming and amusement products through the addition of new games and features and to improve manufacturability. However, as our Heads-Up Challenge and PokerPro products are now fully commercialized, we have been able to reduce spending on pre-production engineering and internal development efforts.

Depreciation. Depreciation increased by $14,795 (30%) for the three months ended March 31, 2009 to $64,258 from $49,463 for the comparable period in 2008. The increase in depreciation was primarily attributable to depreciation associated with our investment in capitalized software.

Interest Income (Expense), net. Interest income (expense), net changed by $150,562 (229%) for the three months ended March 31, 2009 to an expense of $84,707 from income of $65,855 for the three months ended March 31, 2008. We incurred interest expense in 2009 on the loan from our founders and incurred fees associated with the credit line from Silicon Valley Bank. During 2008, we earned interest income on our ARS investments, which were liquidated on January 5, 2009 and contributed essentially no income for the three months ended March 31, 2009.

Income Taxes. Income tax provision was $42,549 for the three months ended March 31, 2009 and zero in the comparable period of 2008. The increase in income tax provision was attributable to taxes incurred in Canada, which cannot be recovered or offset against domestic net operating loss carryforwards.

Net Loss. Net loss for the three months ended March 31, 2009 was $1.8 million, an improvement of $0.3 million (15%) from $2.1 million for the three months ended March 31, 2008. Net loss per share, basic and diluted, was $0.16 per share for the three months ended March 31, 2009, an improvement of $0.04 (20%) per share from $0.20 for the comparable period of 2008. Net loss and net loss per share improved over the prior year period due primarily to the combination of lower direct cost of revenue from the casino and amusement product lines and lower operating expenses, partially offset by lower revenue.

Liquidity and Capital Resources

We have incurred net operating losses since inception and operating expenses may continue to exceed revenues. We have typically funded our operating costs, research and development activities, working capital investments and capital expenditures associated with our growth strategy with proceeds from the issuances of our common stock, as well as through credit arrangements from financial institutions and a loan from certain members of our Board of Directors. These transactions are described in more detail following the discussion of cash flows below: