Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - POKERTEK, INC. | Financial_Report.xls |
| EX-31.2 - EXHIBIT 31.2 - POKERTEK, INC. | ex31_2.htm |
| EX-32.1 - EXHIBIT 32.1 - POKERTEK, INC. | ex32_1.htm |
| EX-31.1 - EXHIBIT 31.1 - POKERTEK, INC. | ex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________to______________________
Commission File Number: 000-51572
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PokerTek, Inc.
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(Exact name of registrant as specified in its charter)
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North Carolina
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61-1455265
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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1150 Crews Road, Suite F, Matthews, North Carolina 28105
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(Address of principal executive offices) (Zip Code)
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(704) 849-0860
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(Registrant’s telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
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o Large accelerated filer
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o Accelerated filer
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o Non-accelerated filer (do not check if a smaller reporting company)
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x Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 11, 2013, there were 9,302,696 shares outstanding of the registrant’s common stock.
TABLE OF CONTENTS
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CONSOLIDATED STATEMENTS OF OPERATIONS
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||||||||||||||||
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AND OTHER COMPREHENSIVE LOSS
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||||||||||||||||
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(Unaudited)
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||||||||||||||||
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Three Months Ended September 30,
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Nine Months Ended September 30,
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|||||||||||||||
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2013
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2012
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2013
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2012
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Revenue
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||||||||||||||||
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License and service fees
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$ | 1,129,246 | $ | 1,097,641 | $ | 3,715,269 | $ | 3,087,984 | ||||||||
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Sales of systems and equipment
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13,635 | 16,537 | 422,956 | 745,714 | ||||||||||||
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Total revenue
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1,142,881 | 1,114,178 | 4,138,225 | 3,833,698 | ||||||||||||
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Cost of revenue
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313,149 | 324,816 | 1,032,607 | 1,012,172 | ||||||||||||
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Gross profit
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829,732 | 789,362 | 3,105,618 | 2,821,526 | ||||||||||||
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Operating expenses:
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||||||||||||||||
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Selling, general and administrative
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809,770 | 801,320 | 2,776,766 | 2,541,998 | ||||||||||||
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Research and development
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174,752 | 163,754 | 513,101 | 537,650 | ||||||||||||
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Share-based compensation expense
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100,038 | 77,943 | 246,696 | 274,649 | ||||||||||||
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Depreciation
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2,188 | 2,480 | 6,821 | 10,943 | ||||||||||||
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Total operating expenses
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1,086,748 | 1,045,497 | 3,543,384 | 3,365,240 | ||||||||||||
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Operating loss
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(257,016 | ) | (256,135 | ) | (437,766 | ) | (543,714 | ) | ||||||||
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Interest expense, net
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9,204 | 17,752 | 29,217 | 58,417 | ||||||||||||
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Net loss from continuing operations before income taxes
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(266,220 | ) | (273,887 | ) | (466,983 | ) | (602,131 | ) | ||||||||
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Income tax provision
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- | 52,353 | 46,020 | 59,794 | ||||||||||||
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Net loss from continuing operations
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(266,220 | ) | (326,240 | ) | (513,003 | ) | (661,925 | ) | ||||||||
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Income (loss) from discontinued operations
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- | (4,754 | ) | 535 | 50,113 | |||||||||||
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Net loss
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$ | (266,220 | ) | $ | (330,994 | ) | $ | (512,468 | ) | $ | (611,812 | ) | ||||
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Other comprehensive loss:
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||||||||||||||||
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Adjustments to net loss
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- | - | - | - | ||||||||||||
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Comprehensive loss
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$ | (266,220 | ) | $ | (330,994 | ) | $ | (512,468 | ) | $ | (611,812 | ) | ||||
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Net loss from continuing operations per common share - basic and diluted
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$ | (0.03 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.09 | ) | ||||
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Net income (loss) from discontinued operations per common share - basic and diluted
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- | (0.00 | ) | 0.00 | 0.01 | |||||||||||
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Net loss per common share - basic and diluted
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$ | (0.03 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.08 | ) | ||||
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Weighted average common shares outstanding - basic and diluted
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9,306,222 | 8,130,413 | 9,102,346 | 7,753,925 | ||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements | ||||||||||||||||
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CONSOLIDATED BALANCE SHEETS
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September 30, 2013 (Unaudited)
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December 31, 2012
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Assets
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Current assets:
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Cash and cash equivalents
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$ | 777,794 | $ | 235,757 | ||||
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Accounts receivable, net
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600,193 | 794,769 | ||||||
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Inventory
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1,326,179 | 1,342,950 | ||||||
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Prepaid expenses and other assets
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63,284 | 66,988 | ||||||
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Total current assets
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2,767,450 | 2,440,464 | ||||||
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Long-term assets:
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Gaming systems, net
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1,561,057 | 1,693,051 | ||||||
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Property and equipment, net
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26,026 | 26,967 | ||||||
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Other assets
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128,988 | 171,498 | ||||||
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Total long-term assets
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1,716,071 | 1,891,516 | ||||||
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Total assets
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$ | 4,483,521 | $ | 4,331,980 | ||||
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Liabilities and Shareholders' Equity
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Current liabilities:
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Accounts payable
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$ | 398,291 | $ | 274,609 | ||||
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Accrued liabilities
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320,481 | 569,404 | ||||||
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Deferred revenue
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138,866 | 42,266 | ||||||
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Long-term debt, current portion
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69,252 | 59,571 | ||||||
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Total current liabilities
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926,890 | 945,850 | ||||||
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Long-term liabilities:
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Long-term liability
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169,052 | 219,494 | ||||||
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Long-term debt
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187,912 | 240,429 | ||||||
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Total long-term liabilities
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356,964 | 459,923 | ||||||
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Total liabilities
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1,283,854 | 1,405,773 | ||||||
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Commitments and contingencies
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Common stock subject to rescission
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- | 71,183 | ||||||
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Shareholders' equity
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Preferred stock, no par value per share;
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- | - | ||||||
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authorized 5,000,000 none issued and outstanding
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Common stock, no par value per share; authorized 40,000,000
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- | - | ||||||
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shares, issued and outstanding 9,313,179 and 8,625,498 shares at
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September 30, 2013 and December 31, 2012, respectively
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Additional paid-in capital
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50,339,033 | 49,481,922 | ||||||
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Accumulated deficit
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(47,139,366 | ) | (46,626,898 | ) | ||||
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Total shareholders' equity
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3,199,667 | 2,855,024 | ||||||
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Total liabilities and shareholders' equity
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$ | 4,483,521 | $ | 4,331,980 | ||||
| The accompanying notes are an integral part of these consolidated financial statements | ||||||||
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
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(Unaudited)
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Common Stock
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Additional Paid-in Capital
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Accumulated Deficit
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Total Shareholders' Equity
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Shares
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Value
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Balance, December 31, 2012
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8,625,498 | $ | - | $ | 49,481,922 | $ | (46,626,898 | ) | $ | 2,855,024 | ||||||||||
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Issuances of common stock, net
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460,000 | 473,800 | 473,800 | |||||||||||||||||
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Share-based compensation, net
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70,778 | 70,778 | ||||||||||||||||||
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Net loss
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(194,825 | ) | (194,825 | ) | ||||||||||||||||
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Balance, March 31, 2013
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9,085,498 | $ | - | $ | 50,026,500 | $ | (46,821,723 | ) | $ | 3,204,777 | ||||||||||
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Issuances of common stock, net
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162,900 | 117,288 | 117,288 | |||||||||||||||||
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Common stock subject to rescission
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71,183 | 71,183 | ||||||||||||||||||
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Share-based compensation, net
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75,880 | 75,880 | ||||||||||||||||||
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Share settlements of restricted stock awards and restricted stock units
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44,781 | (51,856 | ) | (51,856 | ) | |||||||||||||||
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Net loss
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(51,423 | ) | (51,423 | ) | ||||||||||||||||
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Balance, June 30, 2013
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9,293,179 | $ | - | $ | 50,238,995 | $ | (46,873,146 | ) | $ | 3,365,849 | ||||||||||
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Issuances of common stock, net
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- | |||||||||||||||||||
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Common stock subject to rescission
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- | |||||||||||||||||||
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Share-based compensation, net
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20,000 | 100,038 | 100,038 | |||||||||||||||||
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Net loss
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(266,220 | ) | (266,220 | ) | ||||||||||||||||
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Balance, September 30, 2013
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9,313,179 | $ | - | $ | 50,339,033 | $ | (47,139,366 | ) | $ | 3,199,667 | ||||||||||
| The accompanying notes are an integral part of these consolidated financial statements | ||||||||||||||||||||
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POKERTEK, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
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Nine Months Ended September 30,
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2013
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2012
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Cash flows from operating activities:
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Net loss
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$ | (512,468 | ) | $ | (611,812 | ) | ||
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Net income from discontinued operations
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(535 | ) | (50,113 | ) | ||||
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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600,897 | 550,117 | ||||||
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Share-based compensation expense
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246,696 | 274,649 | ||||||
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Provision for doubtful accounts and other receivables
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200,015 | 37,333 | ||||||
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Changes in assets and liabilities:
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Accounts and other receivables
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(5,439 | ) | 57,494 | |||||
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Prepaid expenses and other assets
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46,214 | 79,757 | ||||||
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Inventory
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16,771 | 206,588 | ||||||
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Gaming systems
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(462,082 | ) | (925,449 | ) | ||||
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Accounts payable and accrued expenses
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(58,395 | ) | (46,538 | ) | ||||
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Deferred revenue
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96,600 | (44,127 | ) | |||||
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Net cash provided by (used in) operating activities from continuing operations
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168,274 | (472,101 | ) | |||||
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Net cash provided by operating activities from discontinued operations
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535 | 66,577 | ||||||
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Net cash provided by (used in) operating activities
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168,809 | (405,524 | ) | |||||
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Cash flows from investing activities:
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Purchase of property and equipment
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(5,880 | ) | (1,378 | ) | ||||
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Net cash used in investing activities
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(5,880 | ) | (1,378 | ) | ||||
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Cash flows from financing activities:
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Repayments of long-term debt
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(42,836 | ) | - | |||||
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Proceeds from issuance of common stock, net of expenses
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421,944 | 414,869 | ||||||
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Net cash provided by financing activities
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379,108 | 414,869 | ||||||
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Net increase in cash and cash equivalents
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542,037 | 7,967 | ||||||
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Cash and cash equivalents, beginning of year
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235,757 | 606,229 | ||||||
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Cash and cash equivalents, end of period
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$ | 777,794 | $ | 614,196 | ||||
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Supplemental Disclosure of Cash Flow Information
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Cash paid for:
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Interest
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$ | 29,789 | $ | 58,179 | ||||
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Income taxes
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43,995 | 22,272 | ||||||
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Non-cash transactions:
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Amortization of commitment fee issued in common stock
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$ | - | $ | 33,825 | ||||
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Shares of common stock issued in settlement of litigation
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117,288 | - | ||||||
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Issuance of common stock for debt cancellation
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- | 400,000 | ||||||
| The accompanying notes are an integral part of these consolidated financial statements | ||||||||
POKERTEK, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Basis of Presentation
PokerTek, Inc. (the “Company”) is engaged in the business of developing, manufacturing and marketing electronic table games and related products for casinos, cruise lines, racinos, card clubs and lotteries worldwide.
The accompanying consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
The accompanying consolidated financial statements are unaudited and are presented in accordance with Article 8-03 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“U.S. GAAP”) for annual financial statements. In the opinion of management, these consolidated financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of the Company’s results of operations for the periods presented. The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results to be expected for the entire year.
Certain prior year amounts have been reclassified in our unaudited condensed consolidated financial statements to conform with current period presentation.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU No. 2013-02 is effective for annual reporting periods beginning on or after December 15, 2012. The Company adopted this guidance during its 2013 fiscal year with no significant impact on its consolidated results of operations, financial condition and cash flows.
In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters - Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”, which permits companies to release cumulative translation adjustments into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into earnings only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. ASU No. 2013-05 is effective for annual reporting periods beginning on or after December 15, 2013. The Company expects to adopt this guidance during its 2014 fiscal year and does not expect it will have a significant impact on its consolidated results of operations, financial condition and cash flows.
In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry Forward, a Similar Tax Loss, or a Tax Credit Carry Forward Exists (Topic 740)”, to provide explicit guidance and eliminate the diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. ASU No. 2013-11 is effective for annual reporting periods beginning on or after December 15, 2013. The Company expects to adopt this guidance during its 2014 fiscal year and does not expect it will have a significant impact on its consolidated results of operations, financial condition and cash flows.
The Company believes there is no additional new accounting guidance adopted but not yet effective that is relevant to the readers of the Company's condensed consolidated financial statements. However, several new Exposure Drafts and proposals are under development which, if and when enacted, may have a significant impact on the Company's consolidated financial statements.
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.
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:
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·
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The pace of growth in the Company’s business and the related investments in inventory and spending levels for development and regulatory efforts;
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·
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The launch of new products, entry into new markets, and investments in regulatory approvals;
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·
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The Company’s ability to control growth of operating expenses and penetrate new markets;
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·
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The Company’s ability to negotiate favorable payment terms with its customers and vendors;
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·
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The Company’s ability to access the capital markets and maintain its credit line;
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·
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Demand for the Company’s products, and the ability of its customers to pay us on a timely basis; and
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·
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General economic conditions, political events and legal and regulatory changes.
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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:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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|||||||||||||||
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2013
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2012
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2013
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2012
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Revenue
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$ | - | $ | - | $ | 535 | $ | 149,405 | ||||||||
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Cost of revenue
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- | - | - | 88,312 | ||||||||||||
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Gross profit
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- | - | 535 | 61,093 | ||||||||||||
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Operating expenses
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- | 4,754 | - | 10,980 | ||||||||||||
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Net income from discontinued operations
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$ | - | $ | (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 | ||||
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Allowance for doubtful accounts
|
(153,198 | ) | (185,669 | ) | ||||
|
Accounts receivable, net
|
$ | 600,193 | $ | 794,769 | ||||
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 | ||||
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Gaming systems in process
|
191,185 | 193,515 | ||||||
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Finished goods
|
99,953 | 100,060 | ||||||
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Reserve
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(185,313 | ) | (178,539 | ) | ||||
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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 | ||||||
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Prepaid expenses and other assets
|
$ | 63,284 | $ | 66,988 | ||||
|
Deferred licensing fees, net
|
$ | 78,808 | $ | 121,318 | ||||
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Other
|
50,180 | 50,180 | ||||||
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Other assets
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$ | 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 | ||||||
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Capitalized software
|
157,067 | 157,067 | ||||||
| 823,549 | 817,669 | |||||||
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Less: accumulated depreciation
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(797,523 | ) | (790,702 | ) | ||||
|
Property and equipment, net
|
$ | 26,026 | $ | 26,967 | ||||
Note 9. Accrued Liabilities
Accrued liabilities at September 30, 2013 and December 31, 2012 consisted of the following:
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September 30,
|
December 31,
|
|||||||
|
2013
|
2012
|
|||||||
|
Accrued legal settlement
|
$ | - | $ | 175,000 | ||||
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Inventory received, not invoiced
|
155,279 | 220,670 | ||||||
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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.
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
|
||||||||||||||||
|
Shares
|
Exercise Price
|
Remaining Contractual Term
|
Aggregate Instrinsic 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 | ) | |||||||||
A summary of restricted stock activity and changes during the period ended September 30, 2013 is as follows:
|
Weighted Average
|
|||||||||
|
Restricted Stock
|
Shares
|
Remaining Contractual Term
|
Grant Date 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
|
|||||||||
|
Restricted Stock Units (RSU's)
|
Shares
|
Remaining Contractual Term
|
Grant Date 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.
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 30,
|
For Nine Months Ended September 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, 2013
|
December 31, 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.
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 “Risk Factors” in Item 1A of Part I of the annual report on Form 10-K for the year ended December 31, 2012, that we filed on March 14, 2013, as well as other reports that we file from time to time with the Securities and Exchange Commission (“SEC”). As a result of these risks and uncertainties, the results or events indicated by these forward-looking statements may not occur. We caution you not to place undue reliance on any forward-looking statement.
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 the reports that we file with the SEC that discuss other factors germane to our business.
All references in this Report to “PokerTek”, “we”, “us”, “our” or “the Company” include PokerTek, Inc. and its consolidated subsidiaries.
Company Overview and Business Strategy
We develop, manufacture and market electronic table games and related products for casinos, cruise lines, racinos, card clubs and lotteries worldwide. Our products line consists of two primary platforms -- PokerPro and ProCore.
PokerPro is a 10-seat electronic poker table that allows operators to offer cash games, single-table tournaments, and multi-table tournaments with an extensive game library including Texas Hold’em, Omaha, Razz, and Seven Card Stud. Game rules and limits, including blinds, antes, rake structures and house rules, are completely configurable.
ProCore is an electronic table game platform that expands on the PokerPro technology and allows multiple house-banked games to be run on a single, efficient, economical platform. The versatility of the ProCore system allows operators to add new game content as it is released. Several variations of blackjack, baccarat, and related side bets are deployed on this platform. Games and house rules can be customized easily to meet property and regulatory requirements, making it an ideal choice for operators looking to add an automated solution to their gaming floor.
We plan to expand our position in electronic poker market with our PokerPro system. With the addition of the ProCore platform, the addressable opportunities are expanded to include blackjack, baccarat and other house-banked games. The market for electronic poker is a smaller niche where, we believe we enjoy a dominant market position. The market for blackjack, baccarat and specialty house-banked games is larger, but also characterized by more competition. We believe our product offerings have significant advantages over the competition and, as a result, we have the opportunity to expand our dominance in poker while increasing our market share for other electronic house-banked games.
We distribute our gaming products using our internal sales force and select distributors. Our revenue is derived from a recurring revenue participation model, a recurring revenue fixed license fee model or a sale of hardware combined with recurring license and support fees.
We evaluate potential new markets based on a number of criteria, including the legal and regulatory environment, the size of the market overall as well as the size of the gaming industry in that market and the sales and marketing effort required to establish a presence in the subject market. We also segment potential markets into one of three categories: those with no manual table games; those with limited manual table games; and those characterized by greater density of manual table games. We intentionally focus the majority of our sales and marketing effort on those markets that either have no or a limited number of manual table games. We also opportunistically place tables in markets with higher density of manual table games where we believe we offer a value proposition for the operators and players. This approach allows us to narrow our focus, directing our limited resources to those markets that we believe offer the best opportunity for revenue growth and profitability.
We have identified a number of markets worldwide that we believe provide actionable opportunities to grow significantly. We are also monitoring changes in regulation at the state, federal and international level and believe that budgetary, legislative and other factors are creating a favorable environment for expanding the market for gaming in general and electronic table games in particular.
As of September 30, 2013, our installed base consisted of 2,180 gaming positions worldwide, comprised of 2,060 PokerPro and 120 ProCore gaming positions. As of September 30, 2012, our install base consisted of 2,442 gaming positions deployed worldwide comprised of 2,304 PokerPro gaming positions, and 138 ProCore gaming positions.
Results of Operations for the Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012.
|
Three Months Ended September 30,
|
||||||||||||
|
2013
|
2012
|
Change
|
||||||||||
|
Revenue
|
||||||||||||
|
License and service fees
|
$ | 1,129,246 | $ | 1,097,641 | 2.9 | % | ||||||
|
Sales of systems and equipment
|
13,635 | 16,537 | (17.5 | %) | ||||||||
|
Total revenue
|
1,142,881 | 1,114,178 | 2.6 | % | ||||||||
|
Gross profit
|
829,732 | 789,362 | 5.1 | % | ||||||||
|
Percentage of revenue
|
72.6 | % | 70.8 | % | ||||||||
|
Operating expenses
|
1,086,748 | 1,045,497 | 3.9 | % | ||||||||
|
Interest expense, net
|
9,204 | 17,752 | (48.2 | %) | ||||||||
|
Income tax provision
|
- | 52,353 | (100.0 | %) | ||||||||
|
Net loss from continuing operations
|
(266,220 | ) | (326,240 | ) | 18.4 | % | ||||||
|
Net loss from discontinued operations
|
- | (4,754 | ) | (100.0 | %) | |||||||
|
Net loss
|
$ | (266,220 | ) | $ | (330,994 | ) | 19.6 | % | ||||
Revenue. Revenue increased by 2.6%, to $1.14 million for the three months ended September 30, 2013 as compared to $1.11 million for the three months ended September 30, 2012.
Revenue from license and service fees increased 2.9%. License and service fees from Canada, Mexico and cruise ships increased with several new installations generating revenue in the current year period following installation in early 2013 and late 2012. These increases were offset, however, by reductions in revenue from the United States and from other international markets, particularly as a U.S. customer elected to purchase their leased equipment in the first half of 2013, which resulted in accelerated product sale revenue in the first half of 2013 and reduced license and service fee revenue in the third quarter of 2013 as compared to the third quarter of 2012.
Revenue from systems and equipment sales decreased 17.5%, with both periods reflecting nominal equipment sales activity. The lower than normal level of systems and equipment sales revenue in the quarterly periods was the result of timing of the sales cycle with various customers.
Gross profit. Gross profit increased by 5.1%, to $0.8 million for the three months ended September 30, 2013. Gross profit margins increased to 73% for the three months ended September 30, 2013, compared to 71% for the three months ended September 30, 2012.
Operating expenses. Operating expenses increased 3.9%, to $1.1 million for the three months ended September 30, 2013. Operating expenses were relatively flat overall in comparison to the prior year periods, as higher spending on regulatory approval of new products and increased bad debt expense were partially offset by lower employee compensation and professional fees.
Interest expense, net. Interest expense decreased by $9 thousand, or 48.2%, for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. The decrease is primarily attributable to lower interest expense due to the lower outstanding principal balances on the Founders’ Loan (defined below) and lower fees associated with our credit facility.
Income tax provision. Income tax provision decreased to $0 for the three months ended September 30, 2013, as compared to $52 thousand for the three months ended September 30, 2012. The decrease in income tax provision was attributable to lower withholdings in foreign jurisdictions.
Net loss from continuing operations. Net loss from continuing operations for the three months ended September 30, 2013 improved 18.4% to a loss of $266 thousand compared to a loss of $326 thousand for the three months ended September 30, 2012. The improvement was primarily due to reductions in interest expense from lower long term debt and lower income tax expenses from foreign jurisdictions.
Net loss from discontinued operations. We previously completed the disposition of the discontinued operations and had no income or loss from discontinued operations for the three months ended September 30, 2013 and less than $5 thousand for the three months ended September 30, 2012. We do not expect to realize additional income or loss from discontinued operations in future periods.
Net loss. Net loss for the three months ended September 30, 2013 improved 19.6% to $266 thousand compared to net loss of $331 thousand for the three months ended September 30, 2012. The improvement was primarily due to reductions in interest expense from lower long term debt and lower income tax expenses from foreign jurisdictions.
Results of Operations for the Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012.
|
Nine Months Ended September 30,
|
||||||||||||
|
2013
|
2012
|
Change
|
||||||||||
|
Revenue
|
$ | 3,715,269 | $ | 3,087,984 | 20.3 | % | ||||||
|
License and service fees
|
422,956 | 745,714 | (43.3 | %) | ||||||||
|
Sales of systems and equipment
|
4,138,225 | 3,833,698 | 7.9 | % | ||||||||
|
Total revenue
|
||||||||||||
| 3,105,618 | 2,821,526 | 10.1 | % | |||||||||
|
Gross profit
|
75.0 | % | 73.6 | % | ||||||||
|
Percentage of revenue
|
||||||||||||
| 3,543,384 | 3,365,240 | 5.3 | % | |||||||||
|
Operating expenses
|
||||||||||||
| 29,217 | 58,417 | (50.0 | %) | |||||||||
|
Interest expense, net
|
46,020 | 59,794 | (23.0 | %) | ||||||||
|
Income tax provision
|
||||||||||||
| (513,003 | ) | (661,925 | ) | 22.5 | % | |||||||
|
Net loss from continuing operations
|
535 | 50,113 | (98.9 | %) | ||||||||
|
Net income from discontinued operations
|
$ | (512,468 | ) | $ | (611,812 | ) | 16.2 | % | ||||
|
Net loss
|
||||||||||||
Revenue. Revenue increased by $0.3 million, or 7.9%, to $4.1 million for the nine months ended September 30, 2013 as compared to $3.8 million for the nine months ended September 30, 2012.
Revenue from license and service fees increased by 20.3%. License and service fees from Canada, Mexico and cruise ships increased with several new installations generating revenue in the current year period following installation in early 2013 and late 2012. Increases in those markets were offset, however, by reductions in revenue from Europe and other international markets.
Revenue from systems and equipment sales decreased $0.3 million, or 43.3%, primarily as the result of decreased product sales revenue in the United States and Europe. During both periods, systems and equipment sales revenue benefited from customers in the United States electing to purchase their leased gaming equipment. Sales of systems and equipment to customers in Europe declined primarily due to the weaker economic conditions and reduced availability of capital for equipment purchases in France and Eastern Europe.
Gross profit. Gross profit increased by 10.1% to $3.1 million for the nine months ended September 30, 2013 compared to $2.8 million for the nine months ended September 30, 2012. Gross profit margins increased to 75% for the nine months ended September 30, 2013, compared to 74% for the nine months ended September 30, 2012.
Operating expenses. Operating expenses increased $0.2 million or 5.3%, to $3.5 million for the nine months ended September 30, 2013 compared to $3.4 million for the nine months ended September 30, 2012. The increase in operating expenses was attributable to higher spending on regulatory approval of new products and increased bad debt expense, which was partially offset by lower employee compensation expense and professional fees.
Interest expense, net. Interest expense decreased by $29 thousand, or 50.0%, for the nine months ended September 30, 2013, as compared to $58 thousand for the nine months ended September 30, 2012. The decrease is primarily attributable to lower interest expense due to the lower outstanding principal balances on the Founders’ Loan and lower fees associated with our credit facility.
Income tax provision. Income tax provision decreased to $46 thousand, or 23%, for the nine months ended September 30, 2013, as compared to $60 thousand for the nine months ended September 30, 2012. The decrease in income tax provision was attributable to lower withholdings in foreign jurisdictions.
Net loss from continuing operations. Net loss from continuing operations for the nine months ended September 30, 2013 improved 22.5% to $513 thousand compared to net loss of $662 thousand for the nine months ended September 30, 2012. The improvement was primarily due to reductions in interest expense from lower long term debt and lower income tax expenses from foreign jurisdictions
Net income from discontinued operations. For the nine months ended September 30, 2013, net income from discontinued operations was less than $1 thousand compared to $50 thousand for the nine months ended September 30, 2012. We completed the disposition of these operations and do not expect to realize additional income or loss from discontinued operations in future periods.
Net loss. Net loss for the nine months ended September 30, 2013 improved 16.2% to $0.5 million compared to net loss of $0.6 million for the nine months ended September 30, 2012. The improvement was primarily due to reductions in interest expense from lower long term debt balances and lower income tax expenses from foreign jurisdictions
Liquidity and Capital Resources
We have a history of operating losses and 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 and other financing arrangements. In order to finance our operations, we entered into equity transactions to raise capital and also maintained a credit facility, which are described in more detail below and in the notes to our financial statements included elsewhere in this Report. We expect our revenues and earnings to increase in future periods, and we expect to reinvest these earnings in additional inventory and working capital to fund anticipated grown in our recurring revenue business.
Discussion of Statement of Cash Flows
|
Nine Months Ended September 30,
|
||||||||||||
|
2013
|
2012
|
Change
|
||||||||||
|
Continuing Operations:
|
||||||||||||
|
Net cash provided by (used in) operating activities
|
$ | 168,274 | $ | (472,101 | ) | $ | 640,375 | |||||
|
Net cash used in investing activities
|
(5,880 | ) | (1,378 | ) | (4,502 | ) | ||||||
|
Net cash provided by financing activities
|
379,108 | 414,869 | (35,761 | ) | ||||||||
|
Net cash provided by (used in) continuing operations
|
541,502 | (58,610 | ) | 600,112 | ||||||||
|
Net cash provided by operating activities of discontinued operations
|
535 | 66,577 | $ | (66,042 | ) | |||||||
|
Net increase in cash and cash equivalents
|
542,037 | 7,967 | ||||||||||
|
Cash and cash equivalents, beginning of period
|
235,757 | 606,229 | ||||||||||
|
Cash and cash equivalents, end of period
|
$ | 777,794 | $ | 614,196 | ||||||||
For the nine months ended September 30, 2013, net cash provided by operating activities from continuing operations improved by $0.6 million to $0.2 million compared to a use of cash of $0.5 million for the nine months ended September 30, 2012. The improvement in cash provided by operating activities was primarily due to improved operating results and favorable working capital, primarily from increased deferred revenue and reduced use of cash for gaming systems when compared with the prior period.
Cash used in investing activities increased to $6 thousand for the nine months ended September 30, 2013 from $1 thousand in the prior year period. Cash used in investing activities in 2013 is primarily comprised of leasehold improvements.
Net cash provided by financing activities was $379 thousand for the nine months ended September 30, 2013, compared to net cash provided by financing activities of $415 thousand for the nine months ended September 30, 2012. Cash provided by financing activities primarily consists of proceeds from sales of common stock in both periods. Principal payments on long-term debt totaled $43 thousand for the nine months ended September 30, 2013 and $0 for the nine months ended September 30, 2012.
For the nine months ended September 30, 2013, net cash provided by discontinued operations was less than $1 thousand compared to net cash provided by discontinued operations of $66 thousand for the nine months ended September 30, 2012. We do not expect to realize additional cash from discontinued operations in future periods.
As a result of improved cash from operating activities combined with proceeds from sales of common stock in a private placement transaction in March 2013, the our cash position increased by $0.5 million for the nine month period to $0.8 million as of September 30, 2013.
On March 1, 2013, we sold 460,000 shares of our common stock to ten unaffiliated accredited investors at a price of $1.05 per share, realizing gross proceeds of $483 thousand and net proceeds of $474 thousand. The offering was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”) pursuant to Section 4(5) of the Act and Rule 506 of Regulation D promulgated under the Act.
On February 28, 2013, we amended our Silicon Valley Bank Line of Credit (the “SVB Credit Facility), extending the maturity date to January 15, 2014. Maximum advances are determined based on the composition of our eligible accounts receivable and inventory balances with a facility limit of $625 thousand. The SVB Credit Facility bears interest at an annual rate equal to the greater of 6.5% or prime plus 2.0%. As of September 30, 2013, approximately $0.4 million was available under the SVB Credit Facility, based on our accounts receivable and inventory levels, and there were no amounts outstanding under the facility.
Operations and Liquidity Management
Historically, we have incurred net losses and used cash from financing activities to fund operations. In recent years, we have refocused our business strategies, significantly improved our margins, and reduced expenses, while also expanding our growth opportunities and significantly improving our operating results. We also renewed our credit facility reduced our long-term debt, and closed several equity transactions to improve our liquidity and provide capital to grow our business.
As of September 30, 2013, our cash balance was approximately $778 thousand and availability from the SVB Credit Facility 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 our ability to conduct business for the next 12 months is influenced primarily by the following factors:
|
|
·
|
The pace of growth in our business and the related investment in inventory and spending levels for development and regulatory efforts;
|
|
|
·
|
The launch of new products, entry into new markets, and investments in regulatory approvals;
|
|
|
·
|
Our ability to control growth of operating expenses as we grow the business and expand into new markets;
|
|
|
·
|
Our ability to negotiate favorable payment terms with our customers and vendors;
|
|
|
·
|
Our ability to access the capital markets and maintain our credit line;
|
|
|
·
|
Demand for our products, and the ability of our customers to pay us on a timely basis; and
|
|
|
·
|
General economic conditions, political events and legal and regulatory changes.
|
Our operating plan contemplates expanding into new markets, launching new products and accelerating revenue growth while controlling operating expense and working capital levels. As we execute our growth plans, we intend to carefully monitor the impact of growth on working capital needs and cash balances. We have demonstrated a trend of improving operating results over the past two years, and we expect those improving trends to continue into 2014.
We believe the capital resources available from cash balances, the SVB Credit Facility, cash generated from operations and cash from financing transactions will be sufficient to fund ongoing operations and to support operating plans for at least the next 12 months. In the event that we seek to raise additional capital or expand our credit facility to fund growth, we cannot assure you that adequate additional working capital will be available or, if available, will be on acceptable terms. If we are unable to raise additional capital or expand our credit facility when needed our ability to conduct business and achieve our growth objectives would be negatively impacted.
Impact of Inflation
To date, inflation has not had a material effect on our net sales, revenues or income from continuing operations.
Contractual Obligations
The table below sets forth our known contractual obligations as of September 30, 2013:
|
Total
|
Less than
1 year
|
1 - 3 years
|
3 - 5 years
|
More than
5 years
|
||||||||||||||||
|
Debt obligations(1)
|
$ | 257,164 | $ | 69,252 | $ | 187,912 | $ | - | $ | - | ||||||||||
|
Operating lease obligations(2)
|
394,086 | 34,086 | 360,000 | - | - | |||||||||||||||
|
Purchase obligations(3)
|
486,536 | 486,536 | - | - | - | |||||||||||||||
|
Other long-term liabilities (4)
|
323,598 | 154,546 | 169,052 | - | - | |||||||||||||||
|
Total
|
$ | 1,461,383 | $ | 744,420 | $ | 716,964 | $ | - | $ | - | ||||||||||
|
|
(1)
|
Represents the outstanding principal amount on the Founders’ Loan.
|
|
|
(2)
|
Represents operating lease agreements for office and storage facilities and office equipment.
|
|
|
(3)
|
Represents open purchase orders with our suppliers.
|
|
|
(4)
|
Represents purchase of gaming inventory from previous distributor.
|
Customer Dependence
For the nine months ended September 30, 2013, five customers accounted for approximately 79.7% of our total revenues, with one accounting for 38.0%, a second accounting for 21.1%, a third accounting for 9.4%, a fourth accounting for 6.1%, and a fifth accounting for 5.1%. In comparison, for the nine months ended September 30, 2012, five customers accounted for approximately 72.2% of our total revenues, with one accounting for 39.4%, a second accounting for 15.0%, a third accounting for 6.6%, a fourth accounting for 5.7%, and a fifth accounting for 5.5%. The loss of any of these customers or changes in our relationship with them could have a material adverse effect on our business.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, we evaluate these estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 1 – “Nature of Business and Significant Accounting Policies” to our consolidated financial statements appearing elsewhere in this report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
These consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2012. Certain reclassifications have been made to prior periods’ financial information to conform to the current period presentation.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU No. 2013-02 is effective for annual reporting periods beginning on or after December 15, 2012. We adopted this guidance during our 2013 fiscal year with no significant impact on our consolidated results of operations, financial condition and cash flows.
In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters - Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”, which permits companies to release cumulative translation adjustments into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into earnings only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. ASU No. 2013-05 is effective for annual reporting periods beginning on or after December 15, 2013. We expect to adopt this guidance commencing with our 2014 fiscal year and do not expect it will have a significant impact on our consolidated results of operations, financial condition and cash flows.
In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists (Topic 740)”, to provide explicit guidance and eliminate the diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. ASU No. 2013-11 is effective for annual reporting periods beginning on or after December 15, 2013. We expect to adopt this guidance commencing with our 2014 fiscal year and do not expect it will have a significant impact on our consolidated results of operations, financial condition and cash flows.
We do not believe there are any other new accounting guidance adopted but not yet effective that is relevant to the readers of our condensed consolidated financial statements. However, several new Exposure Drafts and proposals are under development which, if and when enacted, may have a significant impact on our consolidated financial statements.
Reference is made to “Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. There have not been significant changes in our exposure to market risk since December 31, 2012.
(a) Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(c) and 15-d-15 (e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Information regarding our risk factors appears in Part 1, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2012, as amended. These risk factors describe some of the assumptions, risks, uncertainties and other factors that could adversely affect our business or that could otherwise result in changes that differ materially from our expectations. There have been no material changes to the risk factors contained in our annual report.
|
Exhibit No.
|
Description
|
||||||||
|
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
||||||||
|
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
||||||||
|
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
||||||||
|
101.INS
|
XBRL Instance Document*
|
||||||||
|
101.SCH
|
XBRL Taxonomy Extension Schema*
|
||||||||
|
101.CAL
|
XBRL Taxonomy Calculation Linkbase*
|
||||||||
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase*
|
||||||||
|
101.LAB
|
XBRL Taxonomy Extension label Linkbase*
|
||||||||
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase*
|
||||||||
|
*Filed herewith
|
|||||||||
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 thereunto duly authorized.
|
POKERTEK, INC.
|
||
|
Date: November 12, 2013
|
||
|
/s/ Mark D. Roberson
|
||
|
Mark D. Roberson
|
||
|
Chief Executive Officer and Chief Financial Officer
|
||
|
(Principal Executive Officer and Principal Financial Officer)
|
EXHIBIT INDEX
|
Exhibit No.
|
Description
|
|||||||
|
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|||||||
|
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|||||||
|
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|||||||
|
101.INS
|
XBRL Instance Document*
|
|||||||
|
101.SCH
|
XBRL Taxonomy Extension Schema*
|
|||||||
|
101.CAL
|
XBRL Taxonomy Calculation Linkbase*
|
|||||||
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase*
|
|||||||
|
101.LAB
|
XBRL Taxonomy Extension label Linkbase*
|
|||||||
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase*
|
|||||||
|
*Filed herewith
|
||||||||
20