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PTEK > SEC Filings for PTEK > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for POKERTEK, INC.

Form 10-Q for POKERTEK, INC.


12-Nov-2013

Quarterly Report


Note 2. Operations and Liquidity Management

Historically, the Company has incurred net losses and used cash from financing activities to fund its operations in each annual period since inception. In recent years, the Company refocused its business strategies, significantly improved its margins, and reduced its operating expenses, while also expanding its growth opportunities and significantly improving its operating results. The Company also closed several equity financing transactions, reduced its long-term debt, and renewed its credit facility to improve its liquidity and provide capital to grow its business.


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As of September 30, 2013, the Company's cash balances totaled approximately $778 thousand and availability under the SVB Credit Facility (see Note 10) was approximately $384 thousand. Cash provided by operations for the nine months ended September 30, 2013 was approximately $169 thousand. The level of additional capital needed to fund operations and the Company's ability to conduct business for the next 12 months is influenced primarily by the following factors:

The pace of growth in the Company's business and the related investments in inventory and spending levels for development and regulatory efforts;

The launch of new products, entry into new markets, and investments in regulatory approvals;

The Company's ability to control growth of operating expenses and penetrate new markets;

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 its credit line;

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

General economic conditions, political events and legal and regulatory changes.

The Company's operating plan contemplates expanding into new markets, launching new products and accelerating revenue growth while controlling operating expense and working capital levels. As the Company executes its growth plans, the Company intends to carefully monitor the impact of growth on working capital needs and cash balances. The Company has demonstrated a trend of improving operating results over the past two years and believes the capital resources available from cash balances, the SVB Credit Facility, cash generated by operations and cash from financing transactions will be sufficient to fund ongoing operations and support the Company's operating plan for at least the next 12 months. In the event that the Company seeks to raise additional capital or expand its credit facility to fund growth, it cannot assure you that adequate additional working capital will be available or, if available, will be on acceptable terms. If the Company were unable to raise additional capital or expand its credit facility, its ability to conduct business and achieve its growth objectives would be negatively impacted.

Note 3.           Discontinued Operations

The statements of operations for the discontinued operations for the three and
nine months ended September 30, 2013 and 2012 consisted of the following:

                                                 Three Months Ended               Nine Months Ended
                                                   September 30,                    September 30,
                                              2013              2012             2013           2012

Revenue                                    $        -       $           -     $      535      $ 149,405
Cost of revenue                                     -                   -              -         88,312
  Gross profit                                      -                   -            535         61,093
Operating expenses                                  -               4,754              -         10,980
Net income from discontinued operations    $        -       $      (4,754 )   $      535      $  50,113

Note 4.           Accounts Receivable

Accounts receivable at September 30, 2013 and December 31, 2012 consisted of the
following:

                                            September 30,       December 31,
                                                2013                2012

         Accounts receivable               $       753,391     $      980,438
         Allowance for doubtful accounts          (153,198 )         (185,669 )
           Accounts receivable, net        $       600,193     $      794,769


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Note 5.           Inventory

Inventory at September 30, 2013 and December 31, 2012 consisted of the
following:

                                          September 30,       December 31,
                                              2013                2012

          Raw materials and components   $     1,220,354     $    1,227,914
          Gaming systems in process              191,185            193,515
          Finished goods                          99,953            100,060
          Reserve                               (185,313 )         (178,539 )
          Inventory, net                 $     1,326,179     $    1,342,950

Note 6.           Prepaid Expenses and Other Assets

Prepaid expenses and other assets at September 30, 2013 and December 31, 2012
consisted of the following:

                                             September 30,       December 31,
                                                 2013                2012

        Prepaid expenses                    $        47,457     $       37,280
        Other                                        15,827             29,708
        Prepaid expenses and other assets   $        63,284     $       66,988

        Deferred licensing fees, net        $        78,808     $      121,318
        Other                                        50,180             50,180
        Other assets                        $       128,988     $      171,498

Note 7.           Gaming Systems

Gaming systems at September 30, 2013 and December 31, 2012 consisted of the
following:

                                            September 30,      December 31,
                                                2013               2012
          Gaming systems                   $     6,916,049     $   7,210,226
          Less: accumulated depreciation        (5,354,992 )      (5,517,175 )
          Gaming systems, net              $     1,561,057     $   1,693,051

Note 8.           Property and Equipment

Property and equipment at September 30, 2013 and December 31, 2012 consisted of
the following:

                                           September 30,       December 31,
                                               2013                2012

         Equipment                        $       458,094     $      458,094
         Leasehold improvements                   208,388            202,508
         Capitalized software                     157,067            157,067
                                                  823,549            817,669
         Less: accumulated depreciation          (797,523 )         (790,702 )
         Property and equipment, net      $        26,026     $       26,967


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Note 9.           Accrued Liabilities

Accrued liabilities at September 30, 2013 and December 31, 2012 consisted of the
following:

                                                September 30,       December 31,
                                                    2013                2012

     Accrued legal settlement                  $             -     $      175,000
     Inventory received, not invoiced                  155,279            220,670
     Other liabilities and customer deposits           165,202            173,734
     Accrued liabilities                       $       320,481     $      569,404

Note 10.            Debt

The Company's outstanding debt balances as of September 30, 2013 and December
31, 2012 consisted of the following:

                                         September 30,       December 31,
                                             2013                2012

            SVB Credit Facility         $             -     $            -
            Founders' Loan                      257,164            300,000
              Total debt                        257,164            300,000
            Current portion of debt              69,252             59,571
            Long-term portion of debt   $       187,912     $      240,429

SVB Credit Facility. The Company maintains a credit facility with Silicon Valley Bank to support its working capital needs (the "SVB Credit Facility"). As of February 28, 2013, the Company entered into the "Seventh Amendment to Loan and Security Agreement", which extended the maturity date of the facility to January 15, 2014. Maximum advances under the SVB Credit Facility are determined based on the composition of the Company's eligible accounts receivable and inventory balances with a facility limit of $625,000. 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 and inventory levels at September 30, 2013, as of such date availability was approximately $384,000 with no amounts 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, 2013, 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 an aggregate $2,000,000 to the Company (the "Founders' Loan"). As of September 30, 2013, the outstanding principal balance of the Founders' Loan was $257,164. The Founders' Loan contains no restrictive covenants and is collateralized by security interests in 18 PokerPro systems. Such security interests have been subordinated to the SVB Credit Facility.

As of September 30, 2013, the outstanding balance of the Founders' Loan was $257,164 and its fair value was approximately $265,000. For the periods ended September 30, 2013 and September 30, 2012, the Company made aggregate interest payments of $19,264 and $46,504 respectively. For the periods ended September 30, 2013 and September 30, 2012, the Company made aggregate principal payments of $42,836 and $0, respectively.


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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 employee contributions as follows: 100% on the first 3% of the deferred amount and 50% on the next 2% of the deferred amount. For the three months ended September 30, 2013 and 2012, the Company's expenses related to the 401K Plan were $11,663 and $12,176 respectively. For the nine months ended September 30, 2013 and 2012, the Company's expenses related to the 401K Plan were $35,405 and $37,459 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 9,313,179 and 8,625,498 shares were outstanding as of September 30, 2013 and December 31, 2012, respectively.

Private Placement Transactions

On March 1, 2013, the Company sold 460,000 shares of its common stock to accredited investors (as defined under the Securities Act of 1933, as amended (the "Act")) at a price of $1.05 per share (the "Private Placement"), yielding gross proceeds of $483,000 and net proceeds of approximately $474,000. The Private Placement was exempt from the registration requirements of the Act pursuant to Section 4(5) of the Act and Rule 506 of Regulation D promulgated under the Act.

Warrants

As of September 30, 2013, the following warrants were outstanding: 20,000 common stock warrants having an exercise price of $2.50 per share and an expiration date of March 31, 2015 issued in connection with a private placement in May 2010; and 40,000 common stock warrants having an exercise price of $2.75 per share and an expiration date of December 29, 2015 issued in connection with the Purchase Agreement with Lincoln Park Capital, LLC.

Preferred Stock. There are 5,000,000 authorized shares of preferred stock, none of which were outstanding as of September 30, 2013 and December 31, 2012.

Stock Incentive Plan

The Company's shareholders have approved stock incentive plans, authorizing the issuance of stock option, restricted stock, restricted stock units ("RSUs") and other forms of equity compensation. Pursuant to the approved stock incentive plans, 532,559 shares remained available for future grant as of September 30, 2013. 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, 2013 and December 31, 2012 were as follows:

                                     September 30,   December 31,
                                         2013            2012
                 Expected Volatility   95% - 97%       95% - 97%
                 Expected Dividends        0               0
                 Expected Term           6 yrs           6 yrs
                 Risk-free Rate      0.82% - 1.60%   0.67% - 1.02%

A summary of Stock Option activity and changes during the three months ended September 30, 2013 is as follows:

                                                                     Weighted Average
                                                                                                        Aggregate
                                                                                    Remaining           Instrinsic
                                            Shares        Exercise Price        Contractual Term          Value
Stock Options
Outstanding at December 31, 2012             724,720     $           4.68
  Granted                                          -                    -
  Exercised                                        -
  Forfeited                                        -                    -
  Expired                                          -                    -
Outstanding at September 30, 2013            724,720     $           4.68                     5.8     $   (2,536,661 )

Exercisable at September 30, 2013            701,996     $           4.43                     5.8     $   (2,282,161 )


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A summary of restricted stock activity and changes during the period ended September 30, 2013 is as follows:

                                                                     Weighted Average
                                                                Remaining
                                                               Contractual     Grant Date
Restricted Stock                                   Shares          Term        Fair Value
Nonvested at December 31, 2012                       125,000                  $     106,250
  Granted                                                  -                              -
  Vested                                            (125,000 )                     (106,250 )
  Forfeited                                                -                              -
Nonvested at September 30, 2013                            -              -   $           -

A summary of RSU activity and changes during the period ended September 30, 2013 is as follows:

                                                                      Weighted Average
                                                                 Remaining
                                                                Contractual      Grant Date
Restricted Stock Units (RSU's)                     Shares           Term         Fair Value
Nonvested at December 31, 2012                       356,000                    $     267,000
  Granted                                             85,000                           63,750
  Vested                                             (96,813 )                        (72,610 )
  Forfeited                                                -                                -
Nonvested at September 30, 2013                      344,187              1.1   $     258,140

Note 13. Income Tax Provisions

For the three months ended September 30, 2013 and 2012, the Company recognized a tax provision of $0 and $52,353, respectively. For the nine months ended September 30, 2013 and 2012, the Company recognized a tax provision of $46,020 and $59,794, 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 effective rates for the periods ending September 30, 2013 and 2012 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

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, 2016. Rent payable to related parties for the leased space for the three months ended September 30, 2013 and 2012, was $33,750 and $33,750, respectively. Rent payable to related parties for the leased space for the nine months ended September 30, 2013 and 2012, was $101,250 and $101,250 respectively.

In February 2013 the Company exercised an option to extend this lease through August 31, 2016. No other significant portions of the lease were modified, monthly rent continues at $11,250 per month, and provisions to allow the Company to buy out the lease or reduce its space commitment under certain circumstances prior to the expiration of the lease remain in place.


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Founders' Loan

The Company has loans outstanding from members of the Company's Board of Directors. (See Note 10 "Debt.").

Other

On October 18, 2012, Gehrig H. White, a director, purchased a 33% interest in Gaming Equipment Rental Co., LLC ("Gaming Equipment") which was a customer of the Company at that time. Gaming Equipment operated a charity gaming facility in Ohio and leased gaming equipment from the Company. During August 2013, Mr. White and Gaming Equipment Rental Co, LLC entered into Interest Purchase Agreement whereby Mr. White's initial investment was refunded to him in full by Gaming Equipment and his ownership interest in Gaming Equipment ceased as of that date.

Revenue from Gaming Equipment of $212,760 and $58,258 was recognized for the nine months ended September 30, 2013 and 2012, respectively. Effective as of June 30, 2013, the Company and Gaming Equipment agreed to convert $82,055 of trade accounts receivable to an unsecured note with payments due monthly over a 24 month term.

On September 7, 2013, Gaming Equipment ceased operations in response to a notice it received from the Attorney General of Ohio. The notice indicated that, in the opinion of the Attorney General of Ohio, any gaming device containing a video screen was deemed to be a slot machine under state regulatory definitions and, therefore, was not permitted under current charity gaming regulations.

As of September 30, 2013, the Company wrote off outstanding accounts and notes receivable totaling $227,198 due from Gaming Equipment as they were deemed to be uncollectible following the closure of the facility. As of December 31, 2012, the accompanying Consolidated Balance Sheets included $78,858 of trade accounts receivable from Gaming Equipment.

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, 2013 and 2012, revenues from customers outside the United States accounted for 31.9% and 22.2% of consolidated revenue, respectively. For the nine months ended September 30, 2013 and 2012, revenues from customers outside the United States accounted for 29.4% and 21.0% of consolidated revenue, respectively. For the three and nine months ended September 30, 2013 and 2012 the following are the revenues and long-lived assets by geographic area:

                                           For Three Months Ended September     For Nine Months Ended September
                                                         30,                                  30,
                                               2013                2012             2013               2012
Revenue:
  United States                            $     778,525       $    866,824     $  2,919,897       $  3,029,176
  Other Americas                                 349,293            189,014        1,095,522            346,961
  Europe                                          10,482             25,043           61,114            335,684
  Other International                              4,581             33,297           61,692            121,878
                                           $   1,142,881       $  1,114,178     $  4,138,225       $  3,833,698

                                           September 30,       December 31,
                                               2013                2012
Long-lived assets, end of period:
  United States                            $     537,858       $    884,929
  Other America's                                872,388            824,050
  Europe                                         181,093            163,218
  Other International                            124,731             19,319
                                           $   1,716,071       $  1,891,516

Note 16. Commitments and Contingencies

Legal Proceedings

The Company is subject to claims and assertions in the ordinary course of business. Legal matters are inherently unpredictable and the Company's assessments may change based on future unknown or unexpected events. The Company is not presently a party to any material legal proceedings.


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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 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including but not limited to Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations". These forward-looking statements are made under the provisions of The Private Securities Litigation Reform Act of 1995. In some cases, words such as "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or other comparable words identify forward-looking statements. Our actual results, performance or experience may differ materially from those expressed or implied by forward-looking statements as a result of many factors, including our critical accounting policies and risks and uncertainties related, but not limited to: the impact of global macroeconomic and credit conditions on our business and the business of our suppliers and customers, 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, changes in laws and regulations affecting the gaming industry, termination or non-renewal of customer contracts, competitive pressures and general economic conditions and our financial condition, including our ability to maintain sufficient liquidity to operate our business. These and all other material risks and uncertainties known to us are described in more detail under the caption . . .

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