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PTEK > SEC Filings for PTEK > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for POKERTEK, INC.

Form 10-Q for POKERTEK, INC.


13-Nov-2012

Quarterly Report


Note 2. Operations and Liquidity Management

Historically, the Company has incurred net losses and used cash from financing activities to fund operations. Over the past two years, the Company refocused its business strategies, significantly improving margins and reducing expenses, while also expanding growth opportunities and significantly improving operating results and cash flow performance. During that period, the Company also renewed its credit facility, closed several equity private placement transactions and entered into a stock purchase agreement with LPC (as described in Note 12 below) to improve liquidity and provide capital to grow the business.

As of September 30, 2012, the Company's cash balance was approximately $600,000 and availability from the SVB Credit Facility (as described in Note 10 below) was approximately $300,000. Cash used in operations for the nine months ended September 30, 2012 was $405,524, an improvement of $272,373 from the first nine months of 2011. The level of additional capital needed to fund operations and the Company's ability to conduct business for the next year is influenced primarily by the following factors:

? The pace of growth in the gaming business and the related investments in inventory and spending on development and regulatory efforts.

? The launch of new products, such as ProCore, which will require additional investments in inventory as the Company seeks to expand that product line;

? The Company's ability to control its operating expenses as the business grows;

? The Company's ability to negotiate favorable payment terms with its customers and vendors;

? The Company's ability to access the capital markets and maintain availability under its credit line;

? Demand for the Company's products and the ability of the Company's customers to pay on a timely basis; and

? General economic conditions as well as political events and legal and regulatory changes.

The Company's operating plan for 2012 calls for balancing revenue growth with operating expense and working capital management, and carefully monitoring the impact of growth on its cash needs and cash balances. The Company has successfully reduced its operating and net loss in 2012 compared to 2011 and expects this trend to continue through the remainder of 2012.


The Company's revenues and gross margins in 2012 have been negatively impacted by regulatory changes in Mexico adopted in the fourth quarter of 2011. In response, the Company implemented new expense reduction initiatives in late 2011 to partially offset the impact of these regulatory changes. While the Company believes the loss of business in Mexico to be temporary, its operating plans are based on replacing that business with new placements in other jurisdictions in 2012. Pursuant to that plan, the Company moved a portion of its electronic gaming tables from Mexico back to the United States to meet anticipated demand from those other markets.

The Company believes its available capital resources are sufficient to fund its ongoing operations and to support its operating plans for at least the next 12 months. However, the Company may seek to raise additional capital or expand its existing credit facilities to fund growth. The Company cannot provide assurances that, in the event additional working capital is needed, adequate additional working capital will be available or, if available, will be on terms acceptable to the Company. If the Company is unable to raise additional capital or expand its credit facilities, the Company's ability to conduct business and achieve its growth objectives would be negatively impacted.

Note 3. Discontinued Operations

In August 2010, the Company decided to exit the amusement business due to declining demand and reduced pricing power for its Heads-Up Challenge product.

The results of operations and related non-recurring costs associated with the amusement business have been presented as discontinued operations for all periods. Additionally, the assets and liabilities of the discontinued operations have been segregated in the accompanying consolidated balance sheets. The statements of operations for the discontinued operations for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

                                              Three Months Ended           Nine Months Ended
                                                September 30,                September 30,
                                              2012          2011          2012          2011

Revenue                                    $        -     $  44,022     $ 149,405     $ 136,184

Cost of revenue                                     -        14,540        88,312        48,651

  Gross profit                                      -        29,482        61,093        87,533

Operating expenses                              4,754        28,266        10,980        96,720

Net income (loss) from discontinued
operations                                 $   (4,754 )   $   1,216     $  50,113     $  (9,187 )

Assets and liabilities of discontinued operations at September 30, 2012 and December 31, 2011 consisted of the following:

                                      September 30,       December 31,
                                          2012                2011
               Assets:
               Accounts receivable   $             -     $        9,699
               Inventory                           -             82,611
               Total assets          $             -     $       92,310

               Liabilities:
               Accounts payable      $             -     $        2,897
               Accrued liabilities                 -             67,486
               Total liabilities     $             -     $       70,383


Note 4.  Accounts Receivable

Accounts receivable at September 30, 2012 and December 31, 2011 consisted of the
following:

                                            September 30,       December 31,
                                                2012                2011

         Accounts receivable               $       784,184     $      872,703
         Allowance for doubtful accounts          (147,411 )         (146,183 )
           Accounts receivable, net        $       636,773     $      726,520

Note 5.  Inventory

Inventory at September 30, 2012 and December 31, 2011 consisted of the
following:

                                          September 30,       December 31,
                                              2012                2011

          Raw materials and components   $     1,162,392     $      698,576
          Gaming systems in process              243,626            374,638
          Finished goods                         303,212            926,889
          Reserve                               (153,012 )         (237,297 )
            Inventory, net               $     1,556,218     $    1,762,806

Note 6.  Prepaid Expenses and Other Assets

Prepaid expenses and other assets at September 30, 2012 and December 31, 2011
consisted of the following:

                                              September 30,       December 31,
                                                  2012                2011

       Prepaid expenses                      $        29,732     $       54,012
       Stock issuance commitment fee, net             13,317             45,282
       Other                                          48,234             48,193
         Prepaid expenses and other assets   $        91,283     $      147,487

       Deferred licensing fees, net          $       115,774     $      173,153
       Other                                          50,180             50,180
         Other assets                        $       165,954     $      223,333


Note 7.  Gaming Systems

Gaming systems at September 30, 2012 and December 31, 2011 consisted of the
following:

                                            September 30,      December 31,
                                                2012               2011
          Gaming systems                   $     6,889,820     $   6,473,043
          Less: accumulated depreciation        (5,399,211 )      (5,368,710 )
            Gaming systems, net            $     1,490,609     $   1,104,333

Note 8.  Property and Equipment

Property and equipment at September 30, 2012 and December 31, 2011 consisted of
the following:

                                           September 30,       December 31,
                                               2012                2011

         Equipment                        $       458,094     $      456,715
         Leasehold improvements                   202,508            202,508
         Capitalized software                     157,067            157,067
                                                  817,669            816,290
         Less: accumulated depreciation          (788,378 )         (777,435 )
           Property and equipment, net    $        29,291     $       38,855

Note 9.  Accrued Liabilities

Accrued liabilities at September 30, 2012 and December 31, 2011 consisted of the
following:

                                                September 30,       December 31,
                                                    2012                2011

     Accrued professional fees                 $        20,000     $       62,736
     Other liabilities and customer deposits           332,973            406,222
       Accrued liabilities                     $       352,973     $      468,958

Note 10. Debt

The Company's outstanding debt balances as of September 30, 2012 and December
31, 2011 consisted of the following:

                                         September 30,       December 31,
                                             2012                2011

            SVB Credit Facility         $             -     $            -
            Founders' Loan                      300,000            700,000
              Total debt                        300,000            700,000
            Current portion of debt              42,836                  -
            Long-term portion of debt   $       257,164     $      700,000


SVB Credit Facility: The Company maintains a credit facility with Silicon Valley Bank to support its working capital needs (the "SVB Credit Facility"). On February 22, 2012, the Company entered into the "Sixth Amendment to Loan and Security Agreement", which extended the maturity date for the facility to January 16, 2013. Maximum advances are determined based on the composition of the Company's eligible accounts receivable and inventory balances with a facility limit of $937,500. The SVB Credit Facility bears interest at an annual rate equal to the greater of 6.5% or prime plus 2.0%.

Based on the Company's accounts receivable on September 30, 2012, as of such date availability was $318,245 with no borrowings outstanding. The SVB Credit Facility includes covenants requiring the achievement of specified financial ratios and thresholds and contains other terms and conditions customary for this type of credit facility. As of September 30, 2012, the Company was in compliance with these covenants. The SVB Credit Facility is collateralized by security interests in substantially all of the assets of the Company and is senior to the Founders' Loan (described below).

Founders' Loan: On March 24, 2008, the Company entered into a Note Purchase Agreement (the "Note Purchase Agreement") for $2.0 million with Lyle A. Berman, James T. Crawford, Arthur L. Lomax and Gehrig H. White (collectively, the "Lenders"), all of whom were founders of the Company and members of the Company's Board of Directors at the time. Pursuant to the terms of the Note Purchase Agreement, the lenders loaned $2.0 million to the Company (the "Founders' Loan"). Since that time the principal balance of the debt outstanding under the Founders' Loan has been reduced to $300,000 though a series of transactions, including the transaction described below which took place during the quarter ended September 30, 2012. The Founders' Loan contained no restrictive covenants and is collateralized by security interests in 18 PokerPro systems. Such security interests have been subordinated to the SVB Credit Facility.

On July 23, 2012, the Company entered into the Second Loan Modification Agreement (the "Second Loan Modification Agreement") which amended and modified the terms of the Note Purchase Agreement, as previously amended. Pursuant to the Second Loan Modification Agreement $100,000 of the remaining principal balance ($700,000) of the Founders' Loan was converted into 133,334 shares of Common Stock, reflecting a conversion price of $0.75 per share, the closing price of a share of Common Stock on Friday, July 20, 2012, as reported by the NASDAQ Capital Market.

On September 18, 2012, the Company issued 405,405 shares (the "Shares") of its common stock to Gehrig H. White in full satisfaction of the entire outstanding principal amount of a note held by Mr. White (a component of the Founders Loan described above). The outstanding principal balance of the note at the time of issuance of the shares was $300,000. The Shares were valued at $0.74 per share, which represented the consolidated closing bid price per share on the NASDAQ Capital Market on September 17, 2012. As a result of this transaction, the remaining principal balance on the Founders' Loan has now been reduced to $300,000.

As a result of the modifications described above, the terms of the Founders' Loan are as follows:

(i) The Company will pay interest only, calculated at the rate of 9% per annum, on the remaining principal balance ($300,000) through December 31, 2012.

(ii) Beginning February 1, 2013 and the first day of each calendar month thereafter until January 1, 2017, the Company will make monthly payments of interest and principal in the amount of $7,465.51, the amount required to fully amortize the remaining principal balance and the accrued interest thereon over 48 months. In the event of a prepayment, the monthly amount would be recalculated.

(iii) The remaining principal balance of the note and all accrued but unpaid interest thereon is finally due and payable on December 31, 2016.

As of September 30, 2012, the carrying value of the Founders' Loan was $300,000and its fair value was $300,000. For the periods ended September 30, 2012 and December 31, 2011, the Company made $46,504 and $72,665, respectively, in aggregate interest payments in cash.

Note 11. Employee Benefit Plan

The Company has established a salary deferral plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. The plan allows eligible employees to defer up to 96% of their annual compensation, subject to annual limitations imposed by the Internal Revenue Service pursuant to the authority granted to it under Section 401(k). The Company matches the contributions equal to 100% on the first 3% of the deferral and 50% on the deferral from 3% to 5%. For the three months ended September 30, 2012 and 2011, the Company's expenses related to the plan were $12,176 and $16,893 respectively. For the nine months ended September 30, 2012 and 2011, the Company's expenses related to the plan were $37,459 and $52,806 respectively.

Note 12. Shareholders' Equity

Common Stock. There are 40,000,000 shares, no par value, of the Company's common stock ("Common Stock") authorized, of which 8,638,419 and 7,490,124 shares were outstanding as of September 30, 2012 and December 31, 2011, respectively.


Lincoln Park Transaction

The Company has an agreement with Lincoln Park Capital Fund, LLC ("LPC"), pursuant to which the Company has the right to sell $50,000 worth (or greater amount under certain circumstances) of shares of its Common Stock to LPC every two business days, up to a maximum of $5 million worth of Common Stock, provided the shares have been registered for resale under the Securities Act of 1933, as amended. In November 2010, a registration statement covering the resale of up to 899,137 shares of Common Stock to be issued to LPC under the agreement was declared effective (the "Registration Statement"). Since June 24, 2010, the Company sold and/or issued an aggregate of 798,373 shares of Common Stock to LPC. In addition, the Company has issued to LPC warrants to purchase another 40,000 shares. No additional shares were sold or issued in the three months ended September 30, 2012. As of September 30, 2012, all of the shares of Common Stock covered by the Registration Statement have either been sold or issued to LPC or are issuable upon exercise of warrants issued to LPC. Accordingly, if the Company wishes to continue to use the LPC facility, it would have to file a new registration statement. The LPC facility expires on May 10, 2013.

Subscription Agreement with Unaffiliated Accredited Investors

During August 2012, the Company entered into binding subscription agreements with unaffiliated accredited investors pursuant to which such investors have agreed to purchase approximately $240,000 worth of shares of Common Stock at a price equal to 90% of the consolidated closing bid price of a share of Common Stock as reported on the NASDAQ Capital Market on the last trading day immediately preceding the closing date of the transaction. These transactions were completed in the quarter ended September 30, 2012. There was no placement agent or other intermediary involved in this private placement transaction and the Company is not obligated to register the shares of Common Stock to be issued to the investors.

Common Stock Subject to Rescission

Purchasers of 93,175 shares of Common Stock between December 30, 2010 and January 23, 2011 in open market transactions pursuant to a prospectus that was no longer effective may have rescission rights or claims for damages, depending on whether or not they still own such shares. Shares that are subject to rescission or redemption requirements that are outside of the control of the Company are classified outside of permanent equity until they are no longer subject to rescission or redemption. Accordingly, the Company has reclassified $71,183 as Common Stock subject to rescission.

Stock Incentive Plan

The Company's shareholders have approved stock incentive plans, authorizing the issuance of stock option, restricted stock and other forms of equity compensation. Pursuant to the approved stock incentive plans 364,333 shares remained available for future grant as of September 30, 2012. The Company has historically issued stock options and restricted shares as compensation, although it has the authority to use other forms of equity compensation instruments in the future.

Principal assumptions used in determining the fair value of option awards include the following: (a) expected future volatility for the Company's stock price, which is based on the Company's historical volatility, (b) expected dividends, (c) expected term and forfeiture rates, based on historical exercise and forfeiture activity, and (d) the risk-free rate is the rate on U.S. Treasury securities with a maturity equal to, or closest to, the expected life of the options. The assumptions used to determine the fair value of option awards for the periods ended September 30, 2012 and December 31, 2011 were as follows:

                                     September 30,   December 31,
                                         2012            2011
                 Expected Volatility   95% - 97%       96% - 98%
                 Expected Dividends        0               0
                 Expected Term           6 yrs           6 yrs
                 Risk-free Rate      0.67% - 1.02%   0.89% - 2.11%


A summary of Stock Option activity and changes during the nine months ended September 30, 2012, is as follows:

                                                                 Weighted Average
                                                                             Remaining          Aggregate
                                                          Exercise          Contractual         Instrinsic
                                            Shares         Price                Term              Value
Outstanding at December 31, 2011             856,080     $     4.55
  Granted                                          -              -
  Exercised                                        -              -
  Forfeited                                  (22,134 )         1.34
  Expired                                          -              -
Outstanding at September 30, 2012            833,946     $     4.63                    6.6     $ (3,236,018 )

Exercisable at September 30, 2012            756,635     $     4.58                    6.5     $ (2,896,384 )

A summary of Restricted Stock activity and changes during the nine months ended September 30, 2012, is as follows:

                                                            Weighted Average
                                                        Remaining
                                                       Contractual     Grant Date
      Restricted Stock                    Shares          Term         Fair Value
      Nonvested at December 31, 2011       270,000                     $   197,271
        Granted                                  -                               -
        Vested                            (145,000 )                       (91,021 )
        Forfeited                                -                               -
      Nonvested at September 30, 2012      125,000             1.0     $   106,250

Note 13. Income Tax Provisions

For the three months ended September 30, 2012 and 2011, the Company recognized a tax provision of $52,353 and $10,417, respectively. For the nine months ended September 30, 2012 and 2011, the Company recognized a tax provision of $59,794 and $29,958, respectively. These provisions are based principally on the Company's estimated foreign income tax withholding liability, which is attributable to revenues generated outside of the United States. The income tax provision incurred in the quarter ended September 30, 2012 included a $38,721 non-recurring true-up related to income taxes withheld in Romania.

The effective rates for the periods ending September 30, 2012 and 2011 differ from the U.S. federal statutory rate principally due to the tax benefit arising from the Company's net operating losses that are fully offset by the valuation allowance established against the Company's deferred tax assets and deferred tax liabilities.

Note 14. Related Party Transactions

Transactions with Aristocrat

Revenue from transactions with Aristocrat ("Aristocrat") was $15,742 for the three months ended September 30, 2012, compared to $15,849 for the three months ended September 30, 2011. Revenue from transactions with Aristocrat was $47,110 for the nine months ended September 30, 2012, compared to $71,782 for the nine months ended September 30, 2011. As of September 30, 2012 and December 31, 2011, $10,532 and $10,200, respectively, were due from Aristocrat and included in accounts receivable in the accompanying Consolidated Balance Sheets.

As of both September 30, 2012 and December 31, 2011, $323,598 was payable to Aristocrat for the Company's purchase of inventory, which is reflected in the accompanying Consolidated Balance Sheet as a related party liability. As of September 30, 2012 and December 31, 2011, Aristocrat owned approximately 8.4% and 9.6%, respectively, of the outstanding shares of Common Stock.

Office Lease

The Company leases its office and manufacturing facility under an annual operating lease from an entity owned and controlled by the Company's President and the Company's Vice Chairman of the Board of Directors. The lease expires on August 31, 2013. Rent expense recorded for the leased space for the three months ended September 30, 2012 and 2011, was $33,750 and $35,650, respectively. Rent expense recorded for the leased space for the nine months ended September 30, 2012 and 2011, was $101,250 and $108,850, respectively.


Founders' Loan

During the three months ended September 30, 2012 and 2011, the Company made $14,918 and $15,879, respectively, in aggregate interest payments in cash. During the nine months ended September 30, 2012 and 2011, the Company made $46,504 and $50,103, respectively, in aggregate interest payments in cash. See Note 10, Debt, for a description of the terms of this loan.

Other

On October 18, 2102, Gehrig H. White, a director and one of the Company's founders, purchased a 33% interest in Gaming Equipment Rental Co., LLC, which had been, and continues to be, a customer of the Company. Gaming Equipment Rental Co., LLC operates a charity gaming operation in Ohio and leases PokerPro and ProCore gaming equipment from the Company.

Note 15. Segment Information

The Company reports segment information based on the "management approach". The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments. Following the Company's exit from its amusement business, the Company's operations are entirely focused on gaming products. Based on the criteria specified in ASC Topic 280, Segment Reporting, the Company has one reportable segment. The results of operations for the amusement products have been reported as discontinued operations for all periods presented.

Revenues by geographic area are determined based on the location of the Company's customers. For the three months ended September 30, 2012 and 2011, revenues from customers outside the United States accounted for 22.2% and 37.9% of consolidated revenue, respectively. For the nine months ended September 30, 2012 and 2011, revenues from customers outside the United States accounted for 21.0% and 43.0% of consolidated revenue, respectively. The following are the revenues and long-lived assets by geographic area:

                                                 Three Months Ended                   Nine Months Ended
                                                    September 30,                       September 30,

                                              2012          2011 Restated         2012          2011 Restated
Revenue:
  United States                            $   866,824     $     1,052,611     $ 3,029,176     $     2,941,247
. . .
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