PokerTek (PTEK) 10-Q 2010 Q3 Quarterly report

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, 2010

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

PokerTek, Inc.

(Exact name of registrant as specified in its charter)

North Carolina	61-1455265
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1150 Crews Road, Suite F, Matthews, North Carolina 28105

(Address of principal executive offices) (Zip Code)

(704) 849-0860

(Registrant’s telephone number, including area code)

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  o     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):

o	Large accelerated filer	o	Accelerated filer
o	Non-accelerated filer (do not check if a smaller reporting company)	x	Smaller reporting company

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 8, 2010, there were 15,068,080 shares outstanding of the registrant’s common stock.

POKERTEK, INC.

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4.	Controls and Procedures	17
PART II – OTHER INFORMATION
Item 5.	Other Information	18
Item 6.	Exhibits	19
Signatures		20
Exhibit Index		21

POKERTEK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenue	$	1,450,709		$	1,327,603		$	4,300,669		$	4,046,411
Cost of revenue		401,786			767,295			1,542,737			2,301,810
Gross profit		1,048,923			560,308			2,757,932			1,744,601
Operating Expenses:
Selling, general and administrative		1,205,146			1,109,963			3,514,684			4,192,178
Research and development		264,703			272,757			797,139			919,527
Share-based compensation expense		173,722			217,277			543,765			580,612
Depreciation		33,916			47,376			107,621			147,879
Total operating expenses		1,677,487			1,647,373			4,963,209			5,840,196
Operating loss		(628,564	)		(1,087,065	)		(2,205,277	)		(4,095,595	)
Interest expense, net		(33,973	)		(76,403	)		(103,546	)		(257,674	)
Net loss from continuing operations before income taxes		(662,537	)		(1,163,468	)		(2,308,823	)		(4,353,269	)
Income tax provision		(14,188	)		(19,117	)		(52,795	)		(83,087	)
Net loss from continuing operations		(676,725	)		(1,182,585	)		(2,361,618	)		(4,436,356	)
Income (loss) from discontinued operations		32,215			(102,903	)		(1,179,372	)		(300,078	)
Net loss	$	(644,510	)	$	(1,285,488	)	$	(3,540,990	)	$	(4,736,434	)
Net loss from continuing operations per common share - basic and diluted	$	(0.05	)	$	(0.10	)	$	(0.16	)	$	(0.39	)
Net income (loss) from discontinued operations per common share - basic and diluted	$	0.00		$	(0.01	)	$	(0.08	)	$	(0.03	)
Net loss per common share - basic and diluted	$	(0.04	)	$	(0.11	)	$	(0.24	)	$	(0.42	)
Weighted average common shares outstanding - basic and diluted		15,000,055			11,811,726			14,569,355			11,287,756

The accompanying notes are an integral part of these consolidated financial statements.

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POKERTEK, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
Assets	September 30, 2010			December 31, 2009
Current assets:
Cash and cash equivalents	$	822,026		$	636,374
Accounts receivable, net		871,494			1,179,604
Inventory		1,186,015			1,336,810
Prepaid expenses and other assets		224,546			169,845
Current assets of discontinued operations		602,346			1,906,962
Total current assets		3,706,427			5,229,595
Long-term assets:
PokerPro systems, net		2,213,470			2,408,161
Property and equipment, net		108,180			211,478
Other assets		417,194			433,865
Total long-term assets		2,738,844			3,053,504
Total assets	$	6,445,271		$	8,283,099
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	442,271		$	498,573
Accrued liabilities		687,416			745,349
Deferred revenue		761,127			438,846
Long-term debt, current portion		42,930			26,239
Current liability - related party		19,500			-
Current liabilities of discontinued operations		227,455			261,198
Total current liabilities		2,180,699			1,970,205
Long-term liabilities:
Deferred revenue		146,500			-
Long-term liability - related party		377,000			-
Long-term debt		800,000			812,396
Total long-term liabilities		1,323,500			812,396
Total liabilities		3,504,199			2,782,601
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value per share; authorized 5,000,000, none issued and outstanding		-			-
Common stock, no par value per share; authorized 100,000,000 shares, issued and outstanding 15,068,080 and 14,015,658 shares at September 30, 2010 and December 31, 2009, respectively		-			-
Additional paid-in capital		46,481,736			45,500,172
Accumulated deficit		(43,540,664	)		(39,999,674	)
Total shareholders' equity		2,941,072			5,500,498
Total liabilities and shareholders' equity	$	6,445,271		$	8,283,099

The accompanying notes are an integral part of these consolidated financial statements.

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POKERTEK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
	Common Stock				Additional Paid-in			Accumulated			Total Shareholders'
	Shares		Value		Capital			Deficit			Equity
Balance, December 31, 2009		14,015,658	$	-	$	45,500,172		$	(39,999,674	)	$	5,500,498
Share-based compensation		65,385		-		224,099			-			224,099
Net loss		-		-		-			(856,593	)		(856,593	)
Balance, March 31, 2010		14,081,043		-		45,724,271			(40,856,267	)		4,868,004
Share-based compensation		65,385		-		149,497			-			149,497
Issuances of common stock, net		773,637		-		444,564			-			444,564
Net loss		-		-		-			(2,039,887	)		(2,039,887	)
Balance, June 30, 2010		14,920,065	$	-	$	46,318,332		$	(42,896,154	)	$	3,422,178
Share-based compensation		91,889		-		223,255			-			223,255
Expenses of common stock, net				-		(59,851	)		-			(59,851	)
Issuances of common stock for warrant conversions		56,126		-		-			-			-
Net loss		-		-		-			(644,510	)		(644,510	)
Balance, September 30, 2010		15,068,080	$	-	$	46,481,736		$	(43,540,664	)	$	2,941,072

The accompanying notes are an integral part of these consolidated financial statements.

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POKERTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(3,540,990	)	$	(4,736,434	)
Net loss from discontinued operations		1,179,372			300,078
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,437,017			2,152,712
Gain on sale of property and equipment		(1,440	)		-
Share-based compensation expense		543,765			580,612
Provision for accounts and other receivables		30,961			22,858
Change in assets and liabilities:
Accounts and other receivables		217,260			223,445
Prepaid expenses and other assets		122,457			164,543
Deferred cost		-			(72,184	)
Inventory		547,295			(105,145	)
PokerPro systems		(1,105,705	)		(128,221	)
Accounts payable and accrued expenses		(65,735	)		(436,901	)
Deferred revenue		468,781			66,964
Net cash used in operating activities from continuing operations		(166,962	)		(1,967,673	)
Net cash provided by operating activities from discontinued operations		96,087			80,216
Net cash used in operating activities		(70,875	)		(1,887,457	)
Cash flows from investing activities:
Purchases of property and equipment		(5,688	)		(1,471	)
Proceeds from sale of equipment		2,805			-
Sale of investments		-			3,900,000
Net cash provided by (used in) investing activities		(2,883	)		3,898,529
Cash flows from financing activities:
Repayments of short-term debt		-			(2,865,357	)
Proceeds from issuance of common stock, net		284,115			500,000
Repayments of capital lease		(24,705	)		(17,718	)
Net cash provided by (used in) financing activities		259,410			(2,383,075	)
Net increase (decrease) in cash and cash equivalents		185,652			(372,003	)
Cash and cash equivalents, beginning of period		636,374			1,481,530
Cash and cash equivalents, end of period	$	822,026		$	1,109,527
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest	$	56,096		$	164,567
Income taxes	$	62,042		$	106,919
Non-cash transactions:
Gaming inventory purchase - related party	$	396,500		$	-
Issuance of common stock for commitment fee	$	100,598		$	-
Purchase of Gaming assets with capital lease	$	29,000		$	-
Issuance of common stock in satisfaction of long-term debt	$	-		$	1,200,000
Issuance of common stock as payment for inventory of discontinued operations	$	-		$	480,250
Issuance of common stock as payment of interest	$	-		$	33,124

The accompanying notes are an integral part of these consolidated financial statements.

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POKERTEK, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.                      Nature of Business and Basis of Presentation

Nature of Business

PokerTek, Inc. (“PokerTek” or the “Company”) is engaged in the development, manufacture, and marketing of electronic poker-related products for use in the gaming market.

The Company previously had two product lines, PokerPro® gaming products and Heads-Up Challenge™ amusement products.  On August 5, 2010, the Company approved a plan to discontinue the operations of its Amusement segment. The operations of the Amusement segment is reflected as a Discontinued Operation beginning with the September 30, 2010 reporting date.

The PokerPro system consists of electronic poker table(s) and related peripheral equipment providing commercial casinos, tribal casinos, cruise ships and card clubs with a fully-automated poker-room environment designed to improve the profitability of poker by enhancing the operator’s revenue opportunities and decreasing startup and operating costs.

Basis of Presentation and Significant Accounting Policies

The accompanying consolidated financial statements include the accounts of PokerTek, Inc. 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, 2009. Certain reclassifications have been made to prior periods’ financial information to conform to the current period presentation. There were no material changes during the most recent fiscal quarter in the Company’s significant accounting policies as described in the Annual Report.

The accompanying consolidated financial statements have been prepared without audit and are presented in accordance with Article 8-03 of Regulation S-X. 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 statementsinclude 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 months ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire year.

Recent Accounting Pronouncements

In January 2010, the FASB issued an amendment to the fair value measurement and disclosure standard improving disclosures about fair value measurements. This amended guidance requires separate disclosure of significant transfers in and out of Levels 1 and 2 and the reasons for the transfers. The amended guidance also requires that in the Level 3 reconciliation, the information about purchases, sales, issuances, and settlements be disclosed separately on a gross basis rather than as one net number. The guidance for the Level 1 and 2 disclosures was adopted on January 1, 2010 and did not have an impact on the Company’s consolidated financial position, results of operations, or cash flows. The guidance for the activity in Level 3 disclosures is effective January 1, 2011 and will not have an impact on the Company’s consolidate d financial position, results of operations or cash flows as the amended guidance provides only disclosure requirements. The Company had no transfers between Level 1, 2, or 3 inputs during the nine months ended September 30, 2010.

In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately, and the Company adopted these new requirements for the quarter ended March 31, 2010.

Note 2.                      Operations and Liquidity Management

Historically, the Company has incurred net losses and used cash from financing activities to fund its operations. Over the past several quarters, the Company reduced its operating expenses in order to improve its operating results and reduce its use of cash. As of September 30, 2010, the Company’s cash balance was approximately $0.8 million.  The level of cash needed to fund operations and the Company’s ability to conduct its business for the next year is influenced primarily by the following factors:

●   The pace of growth and the related spending on market penetration, regulatory efforts and related investments in inventory.

●   The successful transition to a heavier mix of recurring revenue, which generates less upfront cash compared to selling directly to an international distributor but still requires significant investments in inventory.

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●   Management’s ability to control operating expenses and negotiate favorable payment terms with the Company’s customers and vendors as the business grows internationally and becomes more geographically diverse.

●   Management’s ability to access the capital markets and maintain availability under its credit line.

●   The impact of the economy or other factors on customers and suppliers, including the impact on demand for the Company’s products and customers’ ability to pay on a timely basis.

Management’s operating plan for the remainder of 2010 and 2011 is to balance revenue growth with operating expense control and working capital management while carefully monitoring the impact of growth on cash needs and cash balances. Should it become necessary, management plans to reduce expenditures related to inventory procurement and decrease variable operating expenses. In addition, management may also seek to raise additional capital or expand its credit facilities to bolster liquidity and to accelerate business growth during the remainder of 2010 and 2011.

Note 3.                      Discontinued Operations

In August 2010, the Company decided to exit its Amusement business.  The Company’s decision was based on the deteriorating performance of the segment during the first half of 2010, the outlook for the Amusement industry and the significant decline in demand and pricing power for our Heads-Up Challenge product.

The Company evaluated the trend of declining selling prices and margins in the first half of 2010 and determined the carrying value of the Amusement assets required adjustment to reflect those assets at the lower of cost or market based on estimated future cash flows.  In addition, the Company’s obligations to purchase additional Amusement product was determined to be an unfavorable purchase commitment requiring recognition in the financial statements.   These non-recurring costs totaled $1.1 million and are reflected in the accompanying consolidated statements of operations.

The results of operations and related non-recurring costs associated with the Amusement business have been presented as discontinued operations for all periods.  Additionally, the assets and liabilities of the discontinued operations have been segregated in the accompanying consolidated balance sheets.

The statements of operations for the discontinued operations for the three and nine months ended September 30, 2009 and 2010 consisted of the following:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010			2009
Revenue	$	251,433	$	234,078		$	832,191		$	1,170,170
Cost of revenue		176,880		195,565			1,708,909			1,028,118
Gross profit		74,553		38,513			(876,718	)		142,052
Operating Expenses:
Selling, general and administrative		41,305		115,786			107,101			371,862
Research and development		-		6,885			7,922			15,436
Share-based compensation expense		1,033		3,687			4,586			9,729
Depreciation		-		15,058			183,045			45,103
Total operating expenses		42,338		141,416			302,654			442,130
Net income (loss) from discontinued operations	$	32,215	$	(102,903	)	$	(1,179,372	)	$	(300,078	)

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Assets and liabilities of discontinued operations at September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,		December 31,
	2010		2009
Assets:
Accounts receivable	$	94,466	$	8,064
Inventory		417,085		1,145,429
Heads-Up Challenge units, net		90,795		570,425
Property and equipment, net		-		183,044
Total assets	$	602,346	$	1,906,962
Liabilities:
Accounts payable	$	12,352	$	19,903
Accrued liabilities		152,337		77,435
Deferred revenue		62,766		163,860
Total liabilities	$	227,455	$	261,198

Note 4.                      Inventory

Inventory at September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,			December 31,
	2010			2009
Raw materials and components	$	778,780		$	1,060,143
PokerPro systems in process		346,860			458,078
Finished goods		361,895			153,524
Reserve		(301,520	)		(334,935	)
Inventory, net	$	1,186,015		$	1,336,810

Note 5.                      Prepaid Expenses and Other Assets

Prepaid expenses and other assets at September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,		December 31,
	2010		2009
Prepaid expenses	$	89,585	$	103,053
Stock issuance commitment fee, net		102,604		-
Other		32,357		66,792
Prepaid expenses and other assets	$	224,546	$	169,845
Deferred licensing fees, net	$	299,823	$	364,482
Long-term receivable		59,889		-
Other		57,482		69,383
Other assets	$	417,194	$	433,865

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Note 6.                      PokerPro Systems, net

PokerPro systems, net at September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,			December 31,
	2010			2009
PokerPro systems	$	7,474,236		$	7,831,243
Less: accumulated depreciation and amortization		(5,260,766	)		(5,423,082	)
PokerPro systems, net	$	2,213,470		$	2,408,161

Note 7.                      Property and Equipment

Property and equipment at September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,			December 31,
	2010			2009
Equipment	$	431,119		$	434,389
Leasehold improvements		199,948			199,948
Capitalized software		157,067			157,067
		788,134			791,404
Less: accumulated depreciation		(679,954	)		(579,926	)
Property and equipment, net	$	108,180		$	211,478

Capitalized software consists of purchased software, consulting and capitalized internal costs related to the purchase and implementation of a new internal-use enterprise resource management system. Accumulated depreciation on capitalized software at September 30, 2010 was $100,290. The software portion of this systems investment was financed through a capital lease obligation (see Note 9, “Debt”).

Note 8.                      Accrued Liabilities

Accrued liabilities at September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,		December 31,
	2010		2009
Professional fees	$	168,609	$	179,968
Other liabilities and customer deposits		518,807		565,381
Accrued liabilities	$	687,416	$	745,349

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Note 9.                      Debt

The Company’s outstanding debt balances as of September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,		December 31,
	2010		2009
SVB Credit Facility	$	-	$	-
Founders' Loan		800,000		800,000
Capital lease obligation		42,930		38,635
Total debt		842,930		838,635
Current portion of debt		42,930		26,239
Long-term portion of debt	$	800,000	$	812,396

SVB Credit Facility: The Company maintains a credit facility with Silicon Valley Bank to support the Company’s working capital needs (the “SVB Credit Facility”). On October 27, 2010, the Company entered into amendments to the SVB Credit Facility, which extended the maturity date for the facility to October 20, 2011, adjusted the facility amount to have a Facility Limit of $900,000 with maximum advances determined based on the composition of the Company’s eligible accounts receivable and inventory balances and modified certain other provisions of the facility.

The SVB Credit Facility bears interest at an annual rate equal to the greater of prime plus 2.0% or 6.5%.   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, 2010, 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 Founder’s Loan.

As of September 30, 2010, there were no borrowings outstanding under the SVB Credit Facility.

Founders’ Loan: The Company entered into a loan agreement with Lyle A. Berman, James T. Crawford, Arthur L. Lomax and Gehrig H. White on March 24, 2008. Messrs. Crawford, Lomax and White are the founders of the Company. Each of the lenders is also a member of the board of directors, with Mr. Berman serving as Chairman and Mr. White serving as Vice Chairman. The $2.0 million loan originally called for cash interest at 13% with all unpaid principal and interest payable on March 24, 2010.

On July 9, 2009, the Founders’ Loan was amended to provide that monthly interest payments may be made, at the election of the holder, in common stock at a 13% annual interest rate pursuant to a formula or cash at a 9% annual interest rate. In addition, the maturity date of the loan was extended to March 21, 2012.

On September 10, 2009, the Company entered into an agreement with Lyle A. Berman, James T. Crawford, and Arthur L. Lomax to convert an aggregate $1.2 million principal amount of the loans into common stock.

The loan contains no restrictive covenants and, following the conversion described above, is collateralized by security interests in 62 PokerPro systems. Such interests have been subordinated to the SVB Credit Facility.

As of September 30, 2010, the carrying value of the Founders’ Loan was $0.8 million and its fair value was approximately $0.8 million.

Capital Lease Obligation: During 2008, the Company entered into capital lease obligations totaling $73,273 to finance the purchase of a new internal-use ERP system. These capital lease obligations have a term of 36 months, resulting in monthly payments of $2,396. At the end of the lease term, the Company has the option to purchase the software for $101. The net book value of the assets under lease at September 30, 2010 was $56,777.  Related depreciation expense recognized during the three and nine months ended September 30, 2010 and September 30, 2009 was $13,089 and $39,267, respectively, resulting in accumulated depreciation of $100,290 at September 30, 2010.

During September 2010, the Company entered into a capital lease obligation totaling $29,000 to finance the purchase of equipment. This capital lease obligation has a term of 12 months, resulting in monthly payments of $3,452. At the end of the lease term, the Company has the option to purchase the software for $1. The net book value of the asset under lease at September 30, 2010 was $26,583.  Related depreciation expense recognized during the three months ended September 30, 2010 was $2,417, resulting in accumulated depreciation of $2,417 at September 30, 2010.

Note 10.  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 15% of their annual compensation, subject to annual limitations established by the IRS. The Company matches the contributions equal to 100% on the first 3% of the deferral and 50% on the deferral from 3% to 5%.  For the three months ended September 30, 2010 and September 30, 2009, the Company recorded contribution expense of $11,355 and $16,862, respectively.  For the nine months ended September 30, 2010 and September 30, 2009, the Company recorded contribution expense of $29,452 and $63,953, respectively.

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Note 11.                       Shareholders’ Equity

Private Placement Transaction

During the quarter ended June 30, 2010, the Company and four officers and directors and five private investors entered into Subscription Agreements providing for the issuance by the Company and the purchase by the investors of a total of 536,137 shares of Common Stock for an aggregate purchase price of $260,000 in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(6) and Regulation 506 under the Securities Act. The five private investors each received 10,000 common stock warrants at an exercise price of $1.00 for a total issuance of 50,000 common stock warrants.  The shares of common stock and warrants were recorded as equity.

Lincoln Park Transaction

On June 24, 2010 and amended on September 27, 2010, the Company signed a $5 million purchase agreement with LPC, an Illinois limited liability company. 

Upon signing the agreement, LPC purchased 100,000 shares of common stock at a price of $1.00 per share and the Company received $100,000 in initial proceeds under the purchase agreement.  The Company also issued a warrant to purchase an additional 100,000 shares of our common stock at an exercise price of $1.10 per share and containing a call provision exercisable by us in the event common shares trade above $3.00 per share for 20 consecutive days

The Company entered into a registration rights agreement with LPC whereby the Company agreed to file a registration statement related to the transaction within 20 days with the U.S. Securities & Exchange Commission (“SEC”) covering the shares that have been issued or may be issued to LPC under the purchase agreement.  After the SEC declared effective the registration statement related to the transaction, the Company has the right over a 30-month period to sell shares of common stock to LPC every two business days in the amount of $50,000.  This amount may be increased by $100,000 if the closing price of our shares is above $1.25, by $200,000 if the closing price is above $1.75, by $350,000 if the closing price is above $2.50 and by $500,000 if the closing price is above $3.75.

The purchase price of the shares related to the $4.9 million of future funding will be based on the prevailing market prices of our shares at the time of sales without any fixed discount and subject to the floor price.  The purchase price is determined based on the lesser of the lowest sale price on the purchase date or the average of the lowest three closing prices during the preceding 12 days.

In consideration for entering into the agreement, the Company issued to LPC 137,500 shares of our common stock.  The Company shall issue up to 180,000 common shares on a pro rata basis only if and when the Company sell additional shares to LPC. These shares shall be held by LPC for 30 months or until such time as the Purchase Agreement is terminated

The Company will control the timing and amount of any future sales of shares to LPC and is under no obligation to sell any additional shares to LPC.  The purchase agreement may be terminated by us at any time at our discretion and without any cost to us. Except for a limitation on variable priced financings, there are no negative covenants, restrictions on future fundings, penalties or liquidated damages in the agreement.  The proceeds received by us under the common stock purchase agreement are expected to be used for working capital purposes.

The registration statement related to the LPC transaction was declared effective by the SEC on November 10, 2010, and all conditions precedent to commencement under the purchase agreement have been generally satisfied.  The Company now has the right to sell shares of common stock to LPC every two business days, as described above.

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Stock Incentive Plan

Option activity under the Company’s stock incentive plans for the nine months ended September 30, 2010 was as follows:

				Weighted Average
	Shares			Exercise Price		Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2010		2,078,299		$	2.48		-		-
Granted		327,000			0.64		-		-
Exercised		-			-		-		-
Forfeited		(132,100	)		4.87		-		-
Expired		-			-		-		-
Outstanding at September, 2010		2,273,199		$	2.10		8.4	$	(3,413,499	)
Exercisable at September 30, 2010		927,631		$	3.53		7.4	$	(2,716,460	)

Note 12.  Income taxes

For the three months ended September 30, 2010 and September 30, 2009, the Company recognized a tax provision of $14,188 and $19,117, respectively.  For the nine months ended September 30, 2010 and September 30, 2009, the Company recognized a tax provision of $52,795 and $83,087, 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, 2010 and 2009 differ from the U.S. federal statutory rate principally because: (1) the tax benefit arising from the Company’s net operating losses are fully offset by the valuation allowance established against the Company’s deferred tax assets: and (2) the Company incurs withholding taxes.

Note 13.  Related Party Transactions

Transactions with Aristocrat

License fees from and equipment sales to Aristocrat of $54,180 and $834, respectively, were recorded in the three months ended September 30, 2010, while $100,831 and $107,782, respectively, were recorded during the three months ended September 30, 2009.  License fees from and equipment sales to Aristocrat of $174,999 and $3,974, respectively, were recorded in the nine months ended September 30, 2010, while $414,283 and $209,806, respectively, were recorded during the nine months ended September 30, 2009.  As of September 30, 2010 and December 31, 2009, $36,700 and $150,448, respectively, were due from Aristocrat and included in accounts receivable in the accompanying Consolidated Balance Sheets.  As of September 30, 2010 and December 31, 2009, $16,818 and $0, respectively, were due to Aristocrat and inclu ded in accounts payable in the accompanying Consolidated Balance Sheets.

The Company terminated its Exclusive Distribution Agreement and entered into an Equipment Purchase Arrangement with Aristocrat effective January 15, 2010. The Equipment Purchase Arrangement provides that the purchase price for the purchased equipment will be paid from the Company to Aristocrat as the purchased equipment is deployed and revenues are received by the Company. As revenues are received by the Company, the payment to Aristocrat will be calculated as 20% of the Company’s gross revenue attributable to each table, up to a specified cap per table.  The Company has recorded a liability of $396,500 related to its purchase of inventory, which is reflected in long-term liabilities-related party on the accompanying Consolidate Balance Sheet as of September 30, 2010.  No payments had been made to Aristocrat as of September 30, 2010.

The Company agreed to assume responsibility for (and take title to) certain PokerPro tables currently installed at specified customer locations. In return for transfer of these tables to the Company, the Company agreed to relieve Aristocrat of all responsibility and related costs to service, support, maintain, replace and repair those tables.

As of September 30, 2010 and December 31, 2009, Aristocrat owned 12.0% and 12.9%, respectively, of the Company’s common stock.

Transactions with ICP Electronics, Inc.

The Company purchased inventory and services from ICP Electronics, Inc. (“ICP”) for the nine month periods ended September 30, 2010 and September 30, 2009, of $405,697 and $316,014, respectively. As of September 30, 2010, $30,748 was due to ICP and included in accounts payable in the accompanying Consolidated Balance Sheets.  As of September 30, 2010, the Company had purchase obligations with ICP, Inc. totaling $239,417.  As of September 30, 2010 and December 31, 2009, ICP owned 4.6% and 4.9%, respectively, of the Company’s common stock. In August 2010, the Company amended its purchase commitment with ICP to immediately terminate its obligation to make the balance of 15 monthly payments of $39,389 in return for future deliveries of Heads-Up Challenge inventory in connection with its plan to exit t he Amusement business.  Since the remaining inventory held by ICP will become obsolete and ultimately be scrapped, the Company agreed to make the following payments to ICP: $52,617.82 on August 5, 2010; $52,617.82 on September 1, 2010; and $52,617.83 on October 1, 2010.

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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 in August 2011. Rent expense recorded for the leased space for the three months ended September 30, 2010 and September 30, 2009, was $42,600 for both periods. Rent expense recorded for the leased space for the nine months ended September 30, 2010 and September 30, 2009, was $127,800 and $146,300, respectively.

Founders’ Loan

During the three months ended September 30, 2010 and September 30, 2009, the Company made $18,148 and $29,013, respectively, in aggregate interest payments in cash.  During the nine months ended September 30, 2010 and September 30, 2009, the Company made $54,049 and $136,574, respectively, in aggregate interest payments in cash.  Refer to Note 9, “Debt” for a description of the terms of this loan.

Note 14.  Segment Information

Following the Company’s exit from the Amusement business (see Note 3, “Discontinued Operations”), the Company has one reportable segment which is entirely focused on the gaming business.  The results of operations for the Amusement business have been reported as discontinued operations for all periods presented.

Revenues by Geographic Area

Revenues by geographic area are determined based on the location of the Company’s customers.  For the three months ended September 30, 2010 and 2009, sales to customers outside the United States accounted for 39% and 22% of the Company’s consolidated revenue, respectively.  For the nine months ended September 30, 2010 and 2009, sales to customers outside the United States accounted for 37% and 32% of the Company’s consolidated revenue, respectively.

The following provides financial information concerning the Company’s revenues by geographic area:

	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
Revenue:
United States	$	878,882	$	1,034,944	$	2,706,191	$	2,770,134
North America, excluding U.S.		354,379		187,624		1,174,495		758,418
Europe		76,093		28,631		157,809		258,242
Other International		141,355		76,404		262,174		259,617
	$	1,450,709	$	1,327,603	$	4,300,669	$	4,046,411

Note 15.                       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.

On August 21, 2009, a complaint was filed against the Company in the United States District Court for the District of Nevada by Marvin Roy Feldman. The plaintiff is seeking unspecified monetary damages related to the Company's distribution of PokerPro in Mexico. Prior to filing the complaint, the plaintiff provided correspondence to the Company requesting $250,000 or four PokerPro tables as compensation. While litigation is inherently unpredictable and subject to judicial and other risks beyond the Company’s control, the Company estimates the potential cost of this matter to range between $0 and $250,000. The Company believes that it has several meritorious defenses to these claims and intends to defend itself vigorously.

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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 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements expressing expectations regarding our future (including pending gaming and patent approvals) and projections relating to products, sales, revenues and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995.  These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions and are not historical facts and typically are identified by use of terms such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" and similar words, although some forward-looking statements are expressed differently.

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

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

Overview

We are engaged in the development, manufacture and marketing of electronic table games.   We currently market our PokerPro® product to casinos, cruise line operators, racinos, card clubs, and lotteries worldwide. We are also introducing additional games on our electronic table games platform, and have announced that Blackjack will be our first non-poker offering.

Over the past year, we have adjusted our marketing strategy to target those markets with less competition and more favorable conditions for electronic table games.  In connection with this transition, we increased our focus on penetrating international gaming markets, including Canada, Mexico, and Europe. We terminated Aristocrat’s exclusive distribution agreement in January 2010 and are marketing our products on a direct basis worldwide. We believe these changes allow us to focus our resources on those markets that offer the best opportunity to build a strong business.

In August 2010 we approved a plan to discontinue our amusement business to focus on our higher-margin gaming business.   We recognized $1.1 million in non-recurring charges in the second quarter of 2010 to reflect our amusement assets at net realizable value and to reflect an unfavorable purchase commitment. Excluding the non-recurring charges from the amusement business, results from our continuing gaming operations improved as a result of higher margins on the recurring revenues and lower operating expenses.

We are committed to increasing our penetration in our new target markets, continuing to control our spending and expect our financial results for 2010 to continue to improve as we execute our strategic plan. However, we have limited financial resources and our ability to raise capital on favorable terms is not known and may impact our ability to grow and to fully implement our strategic plans. We also expect economic sluggishness and tight credit markets to continue, which may impact revenues from existing customers as well as our ability to attract new customers. Changes in consumer confidence and spending and/or significant changes in the gaming and amusement markets or our ability to obtain financing could have a material impact on our future consolidated financial position, results of operations or cash flows.

Results of Operations for the Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009

Revenues. Revenues increased by $0.1 million (9%) to $1.5 million for the three months ended September 30, 2010 as compared to $1.3 million for the three months ended September 30, 2009.   Revenues improved as we increased penetration in our target markets and shifted revenue producing assets from the United States to International markets, principally Mexico.

Gross Profit. Gross profit increased by $0.5 million (87%) to $1.0 million for the three months ended September 30, 2010 as compared to $0.6 million for the three months ended September 30, 2009.  The increase in gross profit was primarily attributable to improved asset utilization and reduced depreciation and amortization.

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Selling, General and Administrative Expenses.   Selling, general and administrative expenses (“SG&A”) increased by $0.1 million (9%) to $1.2 million for the three months ended September 30, 2010 as compared to $1.1 million for the three months ended September 30, 2009. SG&A has been essentially flat following expense reductions in 2008 and early 2009.  As a percentage of total revenues, SG&A expenses were 83% of total revenues for the three months ended September 30, 2010, compared with 84% of total revenues for the comparable period in 2009.

Research and Development Expenses. Research and development expenses decreased by $8,054 (3%) to $264,703 for the three months ended September 30, 2010 as compared to $272,757 for the three months ended September 30, 2009. We continue to invest in software and hardware development to improve PokerPro and to develop our new ProCore platform. However, our cost reduction initiatives favorably impacted research and development expenses.

Depreciation.  Depreciation decreased by $13,460 (28%) for the three months ended September 30, 2010 to $33,916 from $47,376 for the comparable period in 2009.  The decrease in depreciation was primarily attributable to certain assets being fully depreciated.

Interest Expense, net.  Interest expense decreased $42,430 (56%) for the three months ended September 30, 2010 to $33,973 from $76,403 for the three months ended September 30, 2009.  The decrease was primarily attributable to the reduction in the principal balance of our Founders’ Loan from $2.0 million to $0.8 million on September 10, 2009, combined with lower interest rates. Interest expense for the three months ended September 30, 2010 was composed of the following items: Founders’ Loan interest of $18,148; loan origination and unused line fees associated with the credit line from Silicon Valley Bank totaling $13,358; and interest on our capital lease of $2,467.

Income Taxes.  Income tax provision was $14,188 for the three months ended September 30, 2010 and $19,117 in the comparable period of 2009.  The decrease in income tax provision was attributable to reduced withholdings in foreign jurisdictions.

Net Loss from continuing operations.  Net loss from continuing operations for the three months ended September 30, 2010 was $0.7 million, an improvement of $0.5 million (43%) from $1.2 million for the three months ended September 30, 2009.  Net loss from continuing operations per share, basic and diluted, was $0.05 per share for the three months ended September 30, 2010, an improvement of $0.05 (55%) per share from net loss per share, basic and diluted, compared to $0.10 for the comparable period of 2009. The decrease in net loss was attributable to improved revenue and margins and stable operating expenses.

Net Income from discontinued operations.  Net income from discontinued operations for the three months ended September 30, 2010 was $32,215, an improvement of $135,118 (131%) from  a net loss of $102,903 for the three months ended September 30, 2009.  Net income from discontinued operations per share, basic and diluted, was $0.00 for the three months ended September 30, 2010, an improvement of $0.01 (125%) per share from net loss per share, basic and diluted, compared to $0.01 for the comparable period of 2009.

Net Loss.  Net loss for the three months ended September 30, 2010 was $0.6 million, an improvement of $0.6 million (50%) from $1.3 million for the three months ended September 30, 2009.    Net loss per share, basic and diluted, was $0.04 per share for the three months ended September 30, 2010, an improvement of $0.07 (61%) per share from net loss per share, basic and diluted, of $0.11 for the comparable period of 2009. The decrease in net loss was attributable to our improved results from continuing gaming business.

Results of Operations for the Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009

Revenues.  Revenues increased by $0.3 million (6%) to $4.3 million for the nine months ended September 30, 2010 as compared to $4.0 million for the nine months ended September 30, 2009. Revenues improved as we increased penetration in our target markets and shifted revenue producing assets from the United States to International markets, principally Mexico.

Gross Profit.  Gross profit increased by $1.0 million (58%) to $2.8 million for the nine months ended September 30, 2010 as compared to $1.7 million for the nine months ended September 30, 2009. The increase in gross profit was primarily attributable to improved asset utilization and reduced depreciation and amortization.

Selling, General and Administrative Expenses.   SG&A decreased by $0.7 million (16%) to $3.5 million for the nine months ended September 30, 2010 as compared to $4.2 million for the nine months ended September 30, 2009. This decrease was primarily due to lower salaries and other employee-related expenses as a result of the headcount reductions and other cost reduction initiatives.  As a percentage of total revenues, SG&A expenses were 82% of total revenues for the nine months ended September 30, 2010, compared with 104% of total revenues for the comparable period in 2009 on lower product sale revenues.

Research and Development Expenses. Research and development expenses decreased by $0.1 million (13%) to $0.8 million for the nine months ended September 30, 2010 as compared to $0.9 million for the nine months ended September 30, 2009. We continue to invest in software and hardware development to improve PokerPro and to develop our new ProCore platform. However, our cost reduction initiatives favorably impacted research and development expenses.

Depreciation.  Depreciation decreased by $40,258 (27%) for the nine months ended September 30, 2010 to $107,621 from $147,879 for the comparable period in 2009.  The decrease in depreciation was due primarily to certain assets being fully depreciated.

Interest Expense, net.  Interest expense, net decreased $154,128 (60%) for the nine months ended September 30, 2010 to $103,546 from $257,674 for the nine months ended September 30, 2009.   The decrease was primarily attributable to the reduction in the principal balance of our Founders’ Loan from $2.0 million to $0.8 million on September 10, 2009, combined with lower interest rates. Interest expense for the nine months ended September 30, 2010 was composed of the following items: Founders’ Loan interest of $53,852; loan origination and unused line fees associated with the credit line from Silicon Valley Bank totaling $45,732; and interest on our capital lease of $4,027.

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Income Taxes.  Income tax provision was $52,795 for the nine months ended September 30, 2010 and $83,087 for the comparable period of 2009.  The decrease in income tax provision was attributable to reduced withholdings in foreign jurisdictions.

Net Loss from continuing operations.   Net loss from continuing operations for the nine months ended September 30, 2010 was $2.4 million, an improvement of $2.1 million (47%) from $4.4 million for the nine months ended September 30, 2009.  Net loss per share, basic and diluted, was $0.16 per share for the nine months ended September 30, 2010, an improvement of $0.23 (59%) per share from net loss per share, basic and diluted, of $0.39 for the comparable period of 2009.  The decrease in net loss was attributable to improved revenue and margins and stable operating expenses.

Net Loss from discontinued operations.   Net loss from discontinued operations for the nine months ended September 30, 2010 was $1.2 million, an increase of $0.9 million (293%) from $0.3 million for the nine months ended September 30, 2009.  Net loss per share, basic and diluted, was $0.08 per share for the nine months ended September 30, 2010, a decrease of $0.05 (204%) per share from net loss per share, basic and diluted, of $0.03 for the comparable period of 2009.  The increase in net loss was primarily attributable to the $1.1 million in non-recurring charges recognized to reduce the Amusement assets to net realizable value and to recognize an unfavorable purchase commitment.

Net Loss.   Net loss for the nine months ended September 30, 2010 was $3.5 million, an improvement of $1.2 million (25%) from $4.7 million for the nine months ended September 30, 2009.  Net loss per share, basic and diluted, was $0.24 per share for the nine months ended September 30, 2010, an improvement of $0.18 (42%) per share from net loss per share, basic and diluted, of $0.42 for the comparable period of 2009.  The decrease in net loss was attributable to the improved results from continuing gaming business, partially offset by the $1.1 million in non-recurring charges from the Amusement segment.

Liquidity and Capital Resources

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

Discussion of Statement of Cash Flows

	Nine Months Ended September 30,
	2010			2009			Change
Net cash used in operating activities	$	(70,875	)	$	(1,887,457	)	$	1,816,582
Net cash provided by (used in) investing activities		(2,883	)		3,898,529			(3,901,412	)
Net cash provided by (used in) financing activities		259,410			(2,383,075	)		2,642,485
Net increase (decrease) in cash and cash equivalents		185,652			(372,003	)		557,655
Cash and cash equivalents, beginning of year		636,374			1,481,530
Cash and cash equivalents, end of period	$	822,026		$	1,109,527

For the nine months ended September 30, 2010, net cash used in operating activities was $0.1 million, as compared to $1.9 million for the nine months ended September 30, 2009, a decrease of $1.8 million.  The improvement in cash used in operating activities was primarily due to the reduction in net loss and management of working capital spending.

 Net cash used in investing activities was $2,883 for the nine months ended September 30, 2010, compared to cash provided by investing activities of $3.9 million for the nine months ended September 30, 2009.  During 2010, net cash used in investing activities is attributable to minor capital expenditures.  During 2009, net cash provided by investing activities was primarily investments and redemptions of our auction rate securities (“ARS”) portfolio.

Net cash provided by financing activities was $0.3 million for the nine months ended September 30, 2010 compared to net cash used in financing activities of $2.4 million for the nine months ended September 30, 2009.  During 2010, we entered into a private placement resulting in net proceeds of $260,000 and also entered into a Purchase Agreement, as amended, with Lincoln Park Capital Fund LLC (“LPC”) resulting in initial cash proceeds of $100,000. We incurred expenses related to the LPC agreement of $75,885.  The proceeds from issuances of common stock were partially offset by payments on capital lease obligations totaling $24,705. During 2009, we liquidated our UBS Credit Facility in connection with the sale of our ARS investment.

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We have $0.8 million of debt outstanding under our Founder’s Loan following the issuance of 1,445,784 shares of common stock to liquidate $1.2 million of the original $2.0 million loan.  The remaining $0.8 million has a maturity date of March 21, 2012 and provides that monthly interest payments, at the election of the holder, may be made in our common stock at a 13% annual interest rate pursuant to a formula or cash at a 9% annual interest rate.

We have a credit facility with Silicon Valley Bank to provide working capital financing.  The credit facility has a maturity date of October 20, 2011 and a Facility Limit of $0.9 million with maximum advances determined based on the composition of our eligible accounts receivable.  The credit facility bears interest at an annual rate equal to the greater of prime plus 6.5% or prime plus 2.0%.  There were no amounts drawn on the SVB Credit Facility as of September 3, 2010.

We have the ability to impact the timing and extent of our cash needs primarily by managing the pace of growth and managing our operating expenses. However, we also have significant contractual obligations and our ability to control both the timing and extent of the cash needs of the business is not unlimited, particularly in light of the current economic climate and the capital intensive nature of the PokerPro business. As we expand our international business, we may also incur additional import duties, taxes, legal, professional fees, overhead costs, and working capital needs that could impact our ability to grow and manage liquidity.

Our intent is to balance revenue growth with operating expense and working capital management, while carefully monitoring the impact of growth on our cash needs and cash balances. Accordingly, reductions in our working capital investments or declines in demand for our products or continued deterioration in general economic conditions could impact our ability to grow or to effectively manage our liquidity needs.

Based on our current capital structure and our anticipated growth plans, we may continue to explore various alternatives to fund our growth, which may include raising additional funds through public or private offerings of our securities, obtaining additional credit facilities, converting our debt, or seeking alternative sources of financing, which may or may not be available on favorable terms, if at all. If such sources of capital are not available, we may seek other avenues to fund the business, including sale/leaseback arrangements, transitioning our products from a capital intensive leasing strategy to a product sale strategy, seeking to sell our assets, or reducing our operations. If we decide to raise additional capital in the equity markets or take other actions, shareholders could incur significant dilution, or, if we are una ble to raise capital, our ability to effectively operate our business could be impaired.

Contractual Obligations

The table below sets forth our known contractual obligations as of September 30, 2010:

	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Debt obligations(1)	$	908,000	$	72,000	$	836,000	$	-	$	-
Operating lease obligations(2)		139,786		139,786		-		-		-
Capital lease obligations(3)		51,005		51,005		-		-		-
Purchase obligations(4)		244,837		244,837		-		-		-
Other long-term liabilities(5)		396,500		19,500		377,000		-		-
Total	$	1,740,128	$	527,128	$	1,213,000	$	-	$	-

(1)	Represents the outstanding principal amount and interest on our Founder’s Loan.
(2)	Represents operating lease agreements for office and storage facilities and office equipment.
(3)	Represents outstanding principal and interest payable under capital lease obligations related to our purchase of internal-use ERP system and gaming equipment.
(4)	Represents open purchase orders with our vendors, primarily purchase obligations for gaming inventory.
(5)	Represents purchase of gaming inventory from Aristocrat.

Contractual obligations decreased to $1.7 million as of September 30, 2010 from $2.1 million as of December 31, 2009 due principally to a decrease in the level of inventory purchase commitments and lease obligations.

Customer Dependence

As of September 30, 2010, five of our customers made up approximately 59% of our total revenues.  The loss of any of these customers or changes in our relationship with them could have a material adverse effect on our business.

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Critical Accounting Policies

We follow accounting principles generally accepted in the United States in preparing our financial statements, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. A summary of our significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in our Annual Report on Form 10-K for the year ended December 31, 2009. During the nine months ended September 30, 2010 there were no material changes to the accounting policies and assumptions previously disclosed.

Recent Accounting Pronouncements

In January 2010, the FASB issued an amendment to the fair value measurement and disclosure standard improving disclosures about fair value measurements. This amended guidance requires separate disclosure of significant transfers in and out of Levels 1 and 2 and the reasons for the transfers. The amended guidance also requires that in the Level 3 reconciliation, the information about purchases, sales, issuances and settlements be disclosed separately on a gross basis rather than as one net number. The guidance for the Level 1 and 2 disclosures was adopted on January 1, 2010, and did not have an impact on our consolidated financial position, results of operations or cash flows. The guidance for the activity in Level 3 disclosures is effective January 1, 2011, and will not have an impact on our consolidated financial position, results of operations or cash flows as the amended guidance provides only disclosure requirements. We had no transfers between Level 1, 2, or 3 inputs during the nine months ended September 30, 2010.

In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately, and we adopted these new requirements for the quarter ended March 31, 2010.

Subsequent Events

On October 27, 2010, we entered into amendments to the SVB Credit Facility, which extended the maturity date for the facility to October 20, 2011, adjusted the facility amount to have a Facility Limit of $900,000 with maximum advances determined based on the composition of our eligible accounts receivable and inventory balances and modified certain other provisions of the facility.

The registration statement related to the LPC transaction was declared effective by the SEC on November 10, 2010, and all conditions precedent to commencement under the purchase agreement have been generally satisfied.  The Company now has the right to sell shares of common stock to LPC every two business days, as provided in the purchase agreement.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

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, 2009.  There have not been significant changes in our exposure to market risk since December 31, 2009.

Item 4.   Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As of September 30, 2010, an evaluation of the effectiveness of our disclosure controls and procedures was conducted under the supervision of, and reviewed by, our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that our disclosure controls and procedures were effective as of September 30, 2010 to enable us to record, process, summarize, and report in a timely manner the information that we are required to disclose in our Exchange Act reports and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

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Changes in Internal Control over Financial Reporting

We have been making changes to our internal controls during 2010 in connection with the implementation of the inventory, fixed asset, MRP and other modules of our new ERP system in order to address previously identified significant deficiencies in internal control. We have also made enhancements to our disclosure process to improve our control environment.  During 2010, we are continuing to formalize and test those new procedures and controls in connection with the transition to the new system.  Our management does not believe that these significant deficiencies are indicative of a material weakness in our internal control over financial reporting.  We believe that the changes to our internal control over financial reporting during the quarter ended September 30, 2010 have enhanced our internal control ov er financial reporting.  We can provide no assurance that all significant deficiencies will be resolved by the new systems and controls.  These significant deficiencies have been reported to our Audit Committee by our management and to our independent registered public accounting firm.

PART II – OTHER INFORMATION

Item 5.     Other Information

On July 1, 2010, we received a letter from The NASDAQ Stock Market indicating that the closing bid price of our common stock had fallen below $1.00 for the 30 consecutive business days from May 19, 2010 to June 20, 2010, and therefore, we were not in compliance with NASDAQ Listing Rule 5550(a)(2) as of July 1, 2010.  NASDAQ provides an automatic 180 day grace period, through December 28, 2010, to regain compliance with the Bid Price Rule by maintaining a closing bid price of $1.00 per share for a minimum of 10 consecutive business days. At that time, if we have not regained compliance, we may receive a notice of delisting from NASDAQ, which is appealable to a hearing panel. Alternatively, we may at that time be eligible for an additional grace period of 180 days if we meet the initial listing standards, with the exception of bid price, for The NASDAQ Capital Market. 

On August 5, 2010, our Board of Directors approved a plan to exit our Amusement business consisting of the manufacture and sale of Heads-Up Challenge units. Our strategic plan is to focus on expanding our higher margin gaming business. Our decision to exit the Amusement business, which has generated consistently declining revenues over the past few years and in management’s view, has a shrinking market, is consistent with this strategy. We expect to complete the exit from our Amusement business by March 31, 2011.

In connection with management’s evaluation of the Amusement business, which led to the decision to discontinue the business, management evaluated the trend of declining selling prices and margins in the first half of 2010 and determined the carrying value of the Amusement assets required adjustment to reflect those assets at the lower of cost or market. In addition, our obligation to purchase additional Amusement product was determined to be an unfavorable purchase commitment requiring recognition in the financial statements as of June 30, 2010. 

Beginning with the current reporting period, the Amusement segment is treated as discontinued operations under generally accepted accounting principles, and all prior periods will be recast to reflect discontinued operations treatment.

Pursuant to an Amendment to Inventory Purchase Commitment, dated August 5, 2010, between us and ICP Electronics, Inc. (“ICP”), the parties agreed that our obligation to make the balance of 15 monthly payments of $39,389 in return for future deliveries of Heads-Up Challenge inventory would be terminated immediately.  As part of the Amendment, ICP agreed to complete assembly and ship the 141 Heads-Up Challenge units previously paid for by us in accordance with a shipping schedule to be mutually agreed upon by ICP and us.  In addition, since the remaining inventory held by ICP will become obsolete and ultimately be scrapped, we agreed to make the following payments to ICP: $52,617.82 on August 5, 2010; $52,617.82 on September 1, 2010; and $52,617.83 on October 1, 2010.

On August 27, 2010, we entered into the Third Amendment to our Loan and Security Agreement (the “Amendment”) with Silicon Valley Bank (“SVB”). We established this Loan and Security Agreement with SVB on July 25, 2008 (the “Credit Facility”), which was previously amended on or about December 23, 2008 and on or about July 23, 2009.

The Credit Facility, as amended, extended the maturity date for the Credit Facility to October 21, 2010, reduced the Facility Limit to One Million Two Hundred Fifty Thousand Dollars ($1,250,000) with maximum advances determined based on the composition of our eligible accounts receivable and modified certain other provisions of the Credit Facility.  Under the Loan and Security Agreement portion of the Credit Facility, we may advance up to 80% of eligible domestic accounts receivable. The total face amount of domestic accounts receivable eligible for advance may not exceed the Facility Amount of $1,250,000.

The Applicable Rate remains unchanged at the greater of Prime Rate plus 2.00% or 6.50, and the Unused Commitment Fee remains unchanged at .50% per annum of the average unused portion of the Total Commitment Amount and the Credit Facility continues to require the attainment of certain restrictive covenants, including the maintenance of an Adjusted Quick Ratio of 1.00 to 1.00.

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On September 27, 2010, we executed an Amended and Restated Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), amending the $5 million purchase agreement with LPC that we signed on June 24, 2010, to make clear that LPC does not have the ability to make an investment decision after the filing of our registration statement on Form S-1 and that LPC is irrevocably bound to purchase the securities underlying the put. In addition, under the amended and restated purchase agreement LPC does not have the right to terminate the agreement upon the occurrence of an event of default.

Item 6.     Exhibits.

Exhibit No.	Description
10.1	Amendment to Inventory Purchase Commitment, dated August 5, 2010, between us and ICP Electronics, Inc. (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on August 10, 2010).
10.2	Third Amendment to Loan and Security Agreement, dated August 27, 2010, between us and Silicon Valley Bank.
10.3	Amended and Restated Purchase Agreement dated as of September 27, 2010, by and between us and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on September 28, 2010).
31.1	Certification of Chief Executive Officer and 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.

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SIGNATURES

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 15, 2010
	/s/ Mark D. Roberson
	Mark D. Roberson
	Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

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POKERTEK, INC.

EXHIBIT INDEX

Exhibit No.	Description
10.1	Amendment to Inventory Purchase Commitment, dated August 5, 2010, between us and ICP Electronics, Inc. (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on August 10, 2010).
10.2	Third Amendment to Loan and Security Agreement, dated August 27, 2010, between us and Silicon Valley Bank.
10.3	Amended and Restated Purchase Agreement dated as of September 27, 2010, by and between us and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on September 28, 2010).
31.1	Certification of Chief Executive Officer and 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.

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