Note 10. Debt
The Company’s outstanding debt balances as of September 30, 2012 and December 31, 2011 consisted of the following:
| | | September 30, | | | December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| SVB Credit Facility | | $ | - | | | $ | - | |
| Founders' Loan | | | 300,000 | | | | 700,000 | |
| Total debt | | | 300,000 | | | | 700,000 | |
| Current portion of debt | | | 42,836 | | | | - | |
| Long-term portion of debt | | $ | 257,164 | | | $ | 700,000 | |
SVB Credit Facility: The Company maintains a credit facility with Silicon Valley Bank to support its working capital needs (the “SVB Credit Facility”). On February 22, 2012, the Company entered into the “Sixth Amendment to Loan and Security Agreement”, which extended the maturity date for the facility to January 16, 2013. Maximum advances are determined based on the composition of the Company’s eligible accounts receivable and inventory balances with a facility limit of $937,500. The SVB Credit Facility bears interest at an annual rate equal to the greater of 6.5% or prime plus 2.0%.
Based on the Company’s accounts receivable on September 30, 2012, as of such date availability was $318,245 with no borrowings outstanding. The SVB Credit Facility includes covenants requiring the achievement of specified financial ratios and thresholds and contains other terms and conditions customary for this type of credit facility. As of September 30, 2012, the Company was in compliance with these covenants. The SVB Credit Facility is collateralized by security interests in substantially all of the assets of the Company and is senior to the Founders’ Loan (described below).
Founders’ Loan: On March 24, 2008, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) for $2.0 million with Lyle A. Berman, James T. Crawford, Arthur L. Lomax and Gehrig H. White (collectively, the “Lenders”), all of whom were founders of the Company and members of the Company’s Board of Directors at the time. Pursuant to the terms of the Note Purchase Agreement, the lenders loaned $2.0 million to the Company (the “Founders’ Loan”). Since that time the principal balance of the debt outstanding under the Founders’ Loan has been reduced to $300,000 though a series of transactions, including the transaction described below which took place during the quarter ended September 30, 2012. The Founders’ Loan contained no restrictive covenants and is collateralized by security interests in 18 PokerPro systems. Such security interests have been subordinated to the SVB Credit Facility.
On July 23, 2012, the Company entered into the Second Loan Modification Agreement (the “Second Loan Modification Agreement”) which amended and modified the terms of the Note Purchase Agreement, as previously amended. Pursuant to the Second Loan Modification Agreement $100,000 of the remaining principal balance ($700,000) of the Founders’ Loan was converted into 133,334 shares of Common Stock, reflecting a conversion price of $0.75 per share, the closing price of a share of Common Stock on Friday, July 20, 2012, as reported by the NASDAQ Capital Market.
On September 18, 2012, the Company issued 405,405 shares (the “Shares”) of its common stock to Gehrig H. White in full satisfaction of the entire outstanding principal amount of a note held by Mr. White (a component of the Founders Loan described above). The outstanding principal balance of the note at the time of issuance of the shares was $300,000. The Shares were valued at $0.74 per share, which represented the consolidated closing bid price per share on the NASDAQ Capital Market on September 17, 2012. As a result of this transaction, the remaining principal balance on the Founders’ Loan has now been reduced to $300,000.
As a result of the modifications described above, the terms of the Founders’ Loan are as follows:
| (i) | The Company will pay interest only, calculated at the rate of 9% per annum, on the remaining principal balance ($300,000) through December 31, 2012. |
| (ii) | Beginning February 1, 2013 and the first day of each calendar month thereafter until January 1, 2017, the Company will make monthly payments of interest and principal in the amount of $7,465.51, the amount required to fully amortize the remaining principal balance and the accrued interest thereon over 48 months. In the event of a prepayment, the monthly amount would be recalculated. |
| (iii) | The remaining principal balance of the note and all accrued but unpaid interest thereon is finally due and payable on December 31, 2016. |
As of September 30, 2012, the carrying value of the Founders’ Loan was $300,000and its fair value was $300,000. For the periods ended September 30, 2012 and December 31, 2011, the Company made $46,504 and $72,665, respectively, in aggregate interest payments in cash.
Note 11. Employee Benefit Plan
The Company has established a salary deferral plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. The plan allows eligible employees to defer up to 96% of their annual compensation, subject to annual limitations imposed by the Internal Revenue Service pursuant to the authority granted to it under Section 401(k). The Company matches the contributions equal to 100% on the first 3% of the deferral and 50% on the deferral from 3% to 5%. For the three months ended September 30, 2012 and 2011, the Company’s expenses related to the plan were $12,176 and $16,893 respectively. For the nine months ended September 30, 2012 and 2011, the Company’s expenses related to the plan were $37,459 and $52,806 respectively.
Note 12. Shareholders’ Equity
Common Stock. There are 40,000,000 shares, no par value, of the Company’s common stock (“Common Stock”) authorized, of which 8,638,419 and 7,490,124 shares were outstanding as of September 30, 2012 and December 31, 2011, respectively.
Lincoln Park Transaction
The Company has an agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company has the right to sell $50,000 worth (or greater amount under certain circumstances) of shares of its Common Stock to LPC every two business days, up to a maximum of $5 million worth of Common Stock, provided the shares have been registered for resale under the Securities Act of 1933, as amended. In November 2010, a registration statement covering the resale of up to 899,137 shares of Common Stock to be issued to LPC under the agreement was declared effective (the “Registration Statement”). Since June 24, 2010, the Company sold and/or issued an aggregate of 798,373 shares of Common Stock to LPC. In addition, the Company has issued to LPC warrants to purchase another 40,000 shares. No additional shares were sold or issued in the three months ended September 30, 2012. As of September 30, 2012, all of the shares of Common Stock covered by the Registration Statement have either been sold or issued to LPC or are issuable upon exercise of warrants issued to LPC. Accordingly, if the Company wishes to continue to use the LPC facility, it would have to file a new registration statement. The LPC facility expires on May 10, 2013.
Subscription Agreement with Unaffiliated Accredited Investors
During August 2012, the Company entered into binding subscription agreements with unaffiliated accredited investors pursuant to which such investors have agreed to purchase approximately $240,000 worth of shares of Common Stock at a price equal to 90% of the consolidated closing bid price of a share of Common Stock as reported on the NASDAQ Capital Market on the last trading day immediately preceding the closing date of the transaction. These transactions were completed in the quarter ended September 30, 2012. There was no placement agent or other intermediary involved in this private placement transaction and the Company is not obligated to register the shares of Common Stock to be issued to the investors.
Common Stock Subject to Rescission
Purchasers of 93,175 shares of Common Stock between December 30, 2010 and January 23, 2011 in open market transactions pursuant to a prospectus that was no longer effective may have rescission rights or claims for damages, depending on whether or not they still own such shares. Shares that are subject to rescission or redemption requirements that are outside of the control of the Company are classified outside of permanent equity until they are no longer subject to rescission or redemption. Accordingly, the Company has reclassified $71,183 as Common Stock subject to rescission.
Stock Incentive Plan
The Company’s shareholders have approved stock incentive plans, authorizing the issuance of stock option, restricted stock and other forms of equity compensation. Pursuant to the approved stock incentive plans 364,333 shares remained available for future grant as of September 30, 2012. The Company has historically issued stock options and restricted shares as compensation, although it has the authority to use other forms of equity compensation instruments in the future.
Principal assumptions used in determining the fair value of option awards include the following: (a) expected future volatility for the Company's stock price, which is based on the Company’s historical volatility, (b) expected dividends, (c) expected term and forfeiture rates, based on historical exercise and forfeiture activity, and (d) the risk-free rate is the rate on U.S. Treasury securities with a maturity equal to, or closest to, the expected life of the options. The assumptions used to determine the fair value of option awards for the periods ended September 30, 2012 and December 31, 2011 were as follows:
| | September 30, | | December 31, |
| | 2012 | | 2011 |
| Expected Volatility | 95% - 97% | | 96% - 98% |
| Expected Dividends | 0 | | 0 |
| Expected Term | 6 yrs | | 6 yrs |
| Risk-free Rate | 0.67% - 1.02% | | 0.89% - 2.11% |
A summary of Stock Option activity and changes during the nine months ended September 30, 2012, is as follows:
| | | | | | Weighted Average | | | | |
| | | Shares | | | Exercise Price | | | Remaining Contractual Term | | | Aggregate Instrinsic Value | |
| Outstanding at December 31, 2011 | | | 856,080 | | | $ | 4.55 | | | | | | | |
| Granted | | | - | | | | - | | | | | | | |
| Exercised | | | - | | | | - | | | | | | | |
| Forfeited | | | (22,134 | ) | | | 1.34 | | | | | | | |
| Expired | | | - | | | | - | | | | | | | |
| Outstanding at September 30, 2012 | | | 833,946 | | | $ | 4.63 | | | | 6.6 | | | $ | (3,236,018 | ) |
| | | | | | | | | | | | | | | | | |
| Exercisable at September 30, 2012 | | | 756,635 | | | $ | 4.58 | | | | 6.5 | | | $ | (2,896,384 | ) |
A summary of Restricted Stock activity and changes during the nine months ended September 30, 2012, is as follows:
| | | | | | Weighted Average | |
| Restricted Stock | | Shares | | | Remaining Contractual Term | | | Grant Date Fair Value | |
| Nonvested at December 31, 2011 | | | 270,000 | | | | | | $ | 197,271 | |
| Granted | | | - | | | | | | | - | |
| Vested | | | (145,000 | ) | | | | | | (91,021 | ) |
| Forfeited | | | - | | | | | | | - | |
| Nonvested at September 30, 2012 | | | 125,000 | | | 1.0 | | | $ | 106,250 | |
Note 13. Income Tax Provisions
For the three months ended September 30, 2012 and 2011, the Company recognized a tax provision of $52,353 and $10,417, respectively. For the nine months ended September 30, 2012 and 2011, the Company recognized a tax provision of $59,794 and $29,958, respectively. These provisions are based principally on the Company’s estimated foreign income tax withholding liability, which is attributable to revenues generated outside of the United States. The income tax provision incurred in the quarter ended September 30, 2012 included a $38,721 non-recurring true-up related to income taxes withheld in Romania.
The effective rates for the periods ending September 30, 2012 and 2011 differ from the U.S. federal statutory rate principally due to the tax benefit arising from the Company’s net operating losses that are fully offset by the valuation allowance established against the Company’s deferred tax assets and deferred tax liabilities.
Note 14. Related Party Transactions
Transactions with Aristocrat
Revenue from transactions with Aristocrat (“Aristocrat”) was $15,742 for the three months ended September 30, 2012, compared to $15,849 for the three months ended September 30, 2011. Revenue from transactions with Aristocrat was $47,110 for the nine months ended September 30, 2012, compared to $71,782 for the nine months ended September 30, 2011. As of September 30, 2012 and December 31, 2011, $10,532 and $10,200, respectively, were due from Aristocrat and included in accounts receivable in the accompanying Consolidated Balance Sheets.
As of both September 30, 2012 and December 31, 2011, $323,598 was payable to Aristocrat for the Company’s purchase of inventory, which is reflected in the accompanying Consolidated Balance Sheet as a related party liability. As of September 30, 2012 and December 31, 2011, Aristocrat owned approximately 8.4% and 9.6%, respectively, of the outstanding shares of Common Stock.
Office Lease
The Company leases its office and manufacturing facility under an annual operating lease from an entity owned and controlled by the Company’s President and the Company’s Vice Chairman of the Board of Directors. The lease expires on August 31, 2013. Rent expense recorded for the leased space for the three months ended September 30, 2012 and 2011, was $33,750 and $35,650, respectively. Rent expense recorded for the leased space for the nine months ended September 30, 2012 and 2011, was $101,250 and $108,850, respectively.
Founders’ Loan
During the three months ended September 30, 2012 and 2011, the Company made $14,918 and $15,879, respectively, in aggregate interest payments in cash. During the nine months ended September 30, 2012 and 2011, the Company made $46,504 and $50,103, respectively, in aggregate interest payments in cash. See Note 10, Debt, for a description of the terms of this loan.
Other
On October 18, 2102, Gehrig H. White, a director and one of the Company’s founders, purchased a 33% interest in Gaming Equipment Rental Co., LLC, which had been, and continues to be, a customer of the Company. Gaming Equipment Rental Co., LLC operates a charity gaming operation in Ohio and leases PokerPro and ProCore gaming equipment from the Company.
Note 15. Segment Information
The Company reports segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. Following the Company’s exit from its amusement business, the Company’s operations are entirely focused on gaming products. Based on the criteria specified in ASC Topic 280, Segment Reporting, the Company has one reportable segment. The results of operations for the amusement products have been reported as discontinued operations for all periods presented.
Revenues by geographic area are determined based on the location of the Company’s customers. For the three months ended September 30, 2012 and 2011, revenues from customers outside the United States accounted for 22.2% and 37.9% of consolidated revenue, respectively. For the nine months ended September 30, 2012 and 2011, revenues from customers outside the United States accounted for 21.0% and 43.0% of consolidated revenue, respectively. The following are the revenues and long-lived assets by geographic area:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | | | | | |
| | | 2012 | | | 2011 Restated | | | 2012 | | | 2011 Restated | |
| Revenue: | | | | | | | | | | | | |
| United States | | $ | 866,824 | | | $ | 1,052,611 | | | $ | 3,029,176 | | | $ | 2,941,247 | |
| North America (excluding U.S.) | | | 189,014 | | | | 305,624 | | | | 346,961 | | | | 1,091,760 | |
| Europe | | | 25,043 | | | | 155,844 | | | | 335,684 | | | | 631,434 | |
| Other International | | | 33,297 | | | | 179,738 | | | | 121,877 | | | | 494,052 | |
| | | $ | 1,114,178 | | | $ | 1,693,817 | | | $ | 3,833,698 | | | $ | 5,158,493 | |
| | | September 30, | | | December 31, | | | | | | | | | |
| | | 2012 | | | 2011 | | | | | | | | | |
| Long-lived assets: | | | | | | | | | | | | | | |
| United States | | $ | 989,547 | | | $ | 1,026,157 | | | | | | | | | |
| North America (excluding U.S.) | | | 423,388 | | | | 223,882 | | | | | | | | | |
| Europe | | | 203,611 | | | | 62,021 | | | | | | | | | |
| Other International | | | 69,308 | | | | 54,461 | | | | | | | | | |
| | | $ | 1,685,854 | | | $ | 1,366,521 | | | | | | | | | |
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.
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. The Company believes that it has several meritorious defenses to these claims and intends to defend itself vigorously.
Compliance with NASDAQ Listing Requirements
On July 11, 2012, the Company received a notification letter from The NASDAQ Stock Market (the “Notice”) advising that for the 30 consecutive business days preceding the date of the Notice (from May 29, 2012 to July 10, 2012), the closing bid price of its common stock had fallen below the $1.00 per share minimum price required for continued listing on the NASDAQ Capital Market pursuant to NASDAQ Marketplace Rule 5550(a)(2) (the “Minimum Bid Price Rule”).
The Notice has no effect on the listing of the Company’s common stock at this time and the Company’s common stock will continue to trade on the NASDAQ Capital Market under the symbol “PTEK”. The Notice also stated that the Company would be provided 180 calendar days, or until January 7, 2013 (the “Grace Period”), to regain compliance with the Minimum Bid Price Rule. To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days prior to the end of the Grace Period.
If the Company does not regain compliance within the Grace Period, it may be eligible for an additional grace period of 180 days if it meets the continued listing requirements for market value of publicly held shares and all other initial listing standards for the NASDAQ Capital Market, with the exception of the Minimum Bid Price Rule, and provide written notice of its intention to cure the minimum bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. If NASDAQ determines that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible for such additional compliance period, NASDAQ will provide notice that the Company’s common stock will be subject to delisting. The Company would then have the right to appeal a determination to delist its common stock, and the common stock would remain listed on the NASDAQ Capital Market until the completion of the appeal process.
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, 2011, that we filed on March 27, 2012, as amended by form 10-K/A filed on April 30, 2012, 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.
Company Overview and Business Strategy
All references to operating data for 2011 are restated.
All references in this Report to “PokerTek”, “we”, “us”, “our” or “the Company” include PokerTek, Inc. and its consolidated subsidiaries.
We are engaged in the development, manufacture and marketing of electronic table games and related products for casinos, cruise lines, racinos, card clubs and lotteries worldwide. Our products are PokerPro and ProCore.
PokerPro is a 10-seat electronic poker table that allows operators to offer the most popular player-banked games and tournaments. The PokerPro system offers 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 rule 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 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 distribute our gaming products using our internal sales force and select distributors, generally on a recurring revenue participation model, recurring revenue fixed license fee model or as a sale of hardware combined with recurring license and support fees.
We use an analytical approach and segment the market for our electronic table games into three categories: those with no competition from manual table games; those with limited competition from manual table games; and those markets characterized by a high level of saturation of manual table games. We intentionally focus the majority of our sales and marketing effort on those markets that have either no or limited competition from manual table games. We also opportunistically place tables in markets with higher saturation of manual table games where we believe we have a value proposition for the operators and players. This approach allows us to narrow our focus, directing our limited resources in a targeted approach, and has significantly improved customer retention.
In those identified markets, we plan to increase our dominant position in electronic poker with our PokerPro system. With the recent addition of the ProCore platform, the addressable opportunities are expanded with Blackjack and other electronic house-banked games. The market for electronic Poker is a smaller niche where we enjoy a dominant market position. The market for electronic Blackjack and specialty player-banked games is larger, but also characterized by more competition. We believe our products offer significant competitive advantages over other competing systems and platforms and, as a result, we are well-positioned to increase our market share of the electronic Poker market, while increasing the market for electronic house-banked games and displacing competitor products in those markets.
We have identified key markets in Europe, Canada, South America and the United States that meet our market segmentation criteria and we believe those markets 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 becoming favorable for expansion of gaming and electronic table games in particular.
As of September 30, 2012, our installed base consisted of 2,442 gaming positions worldwide, comprised of 2,304 PokerPro and 138 ProCore gaming positions. As of September 30, 2011, 1,958 gaming positions were deployed worldwide comprised of 1,874 PokerPro gaming positions, and 84 ProCore gaming positions. The increase in gaming positions resulted from net increased placements of PokerPro and ProCore in our target markets of the United States, Canada, Europe and other international markets.
Results of Operations for the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011, as restated.
| | | Three Months Ended September 30, | |
| | | 2012 | | | 2011 Restated | | | Change | |
| Revenue | | $ | 1,114,178 | | | $ | 1,693,817 | | | | -34.2 | % |
| Gross profit | | | 789,362 | | | | 1,153,127 | | | | -31.5 | % |
| Percentage of revenue | | | 70.8 | % | | | 68.1 | % | | | | |
| | | | | | | | | | | | | |
| Operating expenses | | | 1,045,497 | | | | 1,617,042 | | | | -35.3 | % |
| | | | | | | | | | | | | |
| Interest expense, net | | | 17,752 | | | | 20,637 | | | | -14.0 | % |
| Income tax provision | | | 52,353 | | | | 10,417 | | | | 402.6 | % |
| | | | | | | | | | | | | |
| Net loss from continuing operations | | | (326,240 | ) | | | (494,969 | ) | | | 34.1 | % |
| Net income (loss) from discontinued operations | | | (4,754 | ) | | | 1,216 | | | | -491.0 | % |
| Net loss | | | (330,994 | ) | | | (493,753 | ) | | | 33.0 | % |
Revenue. Revenue decreased by $0.6 million, or 34.2%, to $1.1 million for the three months ended September 30, 2012 as compared to $1.7 million for the three months ended September 30, 2011. This decrease was partially due to the absence of revenues from Mexico in the current quarter as well as changes in our product mix. Excluding Mexico revenue from the quarterly period comparison, total revenue decreased 24.3% on lower sales of systems and equipment.
Revenue from license and service fees decreased $0.2 million. License and service fee comparisons were favorably affected by increased revenue from the Canadian markets. Those increases were offset by decreases from Mexico, less favorable macroeconomic conditions in Eastern Europe, and the conversion of gaming positions from lease to sale in the United States in prior quarters.
Revenue from systems and equipment sales decreased $0.4 million as substantially all of the current period revenue was generated from recurring license and service fees.
Gross profit. Gross profit decreased by $0.4 million, or 31.5%, to $0.8 million for the three months ended September 30, 2012 compared to $1.2 million for the three months ended September 30, 2011. For the three months ended September 30, 2012 and 2011, gross profit margin was 70.8% and 68.1%, respectively. Gross profit margins increased due to changes in mix with recurring license and service fees generally carrying higher margins than product sales, as well as lower product costs and depreciation of leased equipment.
Operating expenses. Operating expenses decreased $0.6 million, or 35.3%, to $1.0 million for the three months ended September 30, 2012, as compared to $1.6 million for the three months ended September 30, 2011. Operating expenses decreased quarter over quarter as we continued to rationalize our overhead structure resulting in lower spending on employee compensation, regulatory and professional fees. Our provision for doubtful accounts was lower in the current quarter compared to the prior year as the quality and aging of our customer accounts improved.
Interest expense, net. Interest expense decreased $2,885, or 14.0%, for the three months ended September 30, 2012 to $17,752 from $20,637 for the three months ended September 30, 2011. The decrease is primarily attributable to lower interest expense on the lower balances Founders’ Loans (described below), lower fees associated with our credit facility at Silicon Valley Bank (described below), lower and the payoff of the capital lease obligations in 2011.
Income tax provision. Income tax provision was $52,353 for the three months ended September 30, 2012 and $10,417 in the comparable period of 2011. The increase in income tax provision was attributable to higher withholdings in foreign jurisdictions. The income tax provision increased as compared with the prior year due to increased revenue from Canada and other foreign jurisdictions subject to withholding and also included a non-recurring true-up related to income taxes withheld in Romania.
Net loss from continuing operations. Net loss from continuing operations for the three months ended September 30, 2012 was $326,240, an improvement of $168,729, or 34.1%, over the net loss of $494,969 for the three months ended September 30, 2011. The improvement in net loss from continuing operations resulted primarily from reductions in operating expenses.
Net income (loss) from discontinued operations. Net loss from discontinued operations for the three months ended September 30, 2012 was $4,754, a decline of $5,970 over a net income from discontinued operations of $1,216 for the three months ended September 30, 2011.
Net loss. Net loss for the three months ended September 30, 2012 was $330,994, an improvement of $162,759, or 33.0%, over the net loss of $493,753 for the three months ended September 30, 2011. The improvement in net loss resulted primarily from reductions in operating expenses.
Results of Operations for the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011, as restated.
| | | Nine Months Ended September 30, | |
| | | 2012 | | | 2011 Restated | | | Change | |
| Revenue | | $ | 3,833,698 | | | $ | 5,158,493 | | | | -25.7 | % |
| Gross profit | | | 2,821,526 | | | | 3,615,737 | | | | -22.0 | % |
| Percentage of revenue | | | 73.6 | % | | | 70.1 | % | | | | |
| | | | | | | | | | | | | |
| Operating expenses | | | 3,365,240 | | | | 4,725,496 | | | | -28.8 | % |
| | | | | | | | | | | | | |
| Interest expense, net | | | 58,417 | | | | 73,646 | | | | -20.7 | % |
| Income tax provision | | | 59,794 | | | | 29,958 | | | | 99.6 | % |
| | | | | | | | | | | | | |
| Net loss from continuing operations | | | (661,925 | ) | | | (1,213,363 | ) | | | 45.4 | % |
| Net income (loss) from discontinued operations | | | 50,113 | | | | (9,187 | ) | | | 645.5 | % |
| Net loss | | | (611,812 | ) | | | (1,222,550 | ) | | | 50.0 | % |
Revenue. Revenue decreased by $1.3 million, or 25.7%, to $3.8 million for the nine months ended September 30, 2012 as compared to $5.2 million for the nine months ended September 30, 2011. This decrease was partially due to the absence of revenue from Mexico in nine months ended September 30, 2012 compared to the comparable period in 2011, as well as changes in our product mix. Excluding Mexico revenue from the nine months ended September 30, 2011, total revenue decreased 10.8% on lower sales of systems and equipment.
Revenue from license and service fees decreased $0.7 million. License and service fee comparisons were favorably affected by increased revenue from the Canadian markets. Those increases were offset by decreases from Mexico, less favorable macroeconomic conditions in Eastern Europe, and the conversion of gaming positions from lease to sale in the United States.
Revenue from systems and equipment sales decreased $0.6 million. In the prior year period, sales of systems and equipment were favorably impacted by system sales in Europe which did not repeat in the current year and higher recognition of deferred revenue.
Gross profit. Gross profit decreased by $0.8 million, or 22.0%, to $2.8 million for the nine months ended September 30, 2012 compared to $3.6 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012 and 2011, gross profit margin was 73.6% and 70.1%, respectively. Gross profit margins increased due to changes in mix with recurring license and service fees generally carrying higher profit margins than product sales, as well as lower product costs and depreciation of leased equipment.
Operating expenses. Operating expenses decreased $1.4 million, or 28.8%, to $3.4 million for the nine months ended September 30, 2012, as compared to $4.7 million for the nine months ended September 30, 2011. Operating expenses decreased quarter over quarter as we continued to rationalize our overhead structure resulting in lower spending on employee compensation, regulatory and professional fees. Our provision for doubtful accounts was lower in the current quarter compared with the prior year as the quality and aging of our customer accounts improved.
Interest expense, net. Interest expense decreased $15,229, or 20.7%, for the nine months ended September 30, 2012 to $58,417 from $73,646 for the nine months ended September 30, 2011. The decrease is primarily attributable to lower interest expense on the lower balances of the Founders’ Loan (described below), lower fees associated with our credit facility at Silicon Valley Bank (described below), and the payoff of the capital lease obligations in 2011.
Income tax provision. Income tax provision was $59,794 for the nine months ended September 30, 2012, and $29,958 in the comparable period of 2011. The increase in income tax provision was attributable to higher withholdings in foreign jurisdictions. The income tax provision increased as compared with the prior year due to increased revenue from Canada and other foreign jurisdictions subject to withholding and also included a non-recurring true-up related to income taxes withheld in Romania.
Net loss from continuing operations. Net loss from continuing operations for the nine months ended September 30, 2012 was $661,925, an improvement of $551,438 over the net loss of $1,213,363 for the nine months ended September 30, 2011. The improvement in net loss from continuing operations resulted primarily from reductions in operating expenses.
Net income (loss) from discontinued operations. Net income from discontinued operations for the nine months ended September 30, 2012 was $50,113, an improvement of $59,300 over a net loss from discontinued operations of $9,187 for the nine months ended September 30, 2011.
Net loss. Net loss for the nine months ended September 30, 2012 was $611,812, an improvement of $610,738 over the net loss of $1,222,550 for the nine months ended September 30, 2011. The improvement in net loss resulted primarily from reductions in operating expenses.
Liquidity and Capital Resources
We have primarily incurred net operating losses since our inception. 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 and other financing arrangements. In recent periods, our operating results have improved with increased gross margins and lower operating costs. As a result, we are beginning to invest working capital with the introduction of the ProCore platform. In order to finance operations, we have entered into several equity transactions and maintained a credit facility, which are discussed in detail below and in the notes to our financial statements included elsewhere in this report.
Discussion of Statement of Cash Flows
| | | Nine Months Ended September 30, | | | | |
| | | 2012 | | | 2011 Restated | | | Change | |
| Continuing Operations: | | | | | | | | | |
| Net cash used in operating activities | | $ | (472,101 | ) | | $ | (658,742 | ) | | $ | 186,641 | |
| Net cash used in investing activities | | | (1,378 | ) | | | - | | | | (1,378 | ) |
| Net cash provided by financing activities | | | 414,869 | | | | 792,638 | | | | (377,769 | ) |
| Net cash provided by (used in) continuing operations | | | (58,610 | ) | | | 133,896 | | | | (192,506 | ) |
| Net cash provided by (used in) operating activities of discontinued operations | | | 66,577 | | | | (19,155 | ) | | $ | 85,732 | |
| Net increase in cash and cash equivalents | | | 7,967 | | | | 114,741 | | | | | |
| | | | | | | | | | | | | |
| Cash and cash equivalents, beginning of year | | | 606,229 | | | | 666,179 | | | | | |
| Cash and cash equivalents, end of period | | $ | 614,196 | | | $ | 780,920 | | | | | |
For the nine months ended September 30, 2012, net cash used in operating activities from continuing operations improved $186,641, or 28.3%, to $472,101. The improvement in cash used in operating activities was primarily due to improved profitability, partially offset by increases in working capital.
Cash used in investing activities included a $1,378 purchase of property and equipment in the quarter ended September 30, 2012. No cash was used in or provided by investing activities for the nine months ended September 30, 2011. As part of our ongoing cost reduction measures, we have curtailed capital expenditures, with the exception of investments required to support business operations, including replacing aged equipment where necessary.
Net cash provided by financing activities was $414,869 for the nine months ended September 30, 2012 compared to net cash provided by financing activities of $792,638 for the nine months ended September 30, 2011. Cash provided by financing activities is primarily due to the issuance of common stock in the nine months ended September 30, 2012 and 2011.
For the nine months ended September 30, 2012, net cash provided by operating activities of discontinued operations was $66,577 compared to net cash used in operating activities of discontinued operations of $19,155 for the nine months ended September 30, 2011. This increase is attributable to the sale of the remaining discontinued inventory in 2012.
We have $300,000 of debt outstanding under our Founders’ Loan, as explained in Note 10, Debt, to our financial statements (the “Founders’ Loan”).
On July 23, 2012, we entered into a Second Loan Modification Agreement (the “Second Loan Modification Agreement”) with Messrs. Lomax and White, the remaining makers of the Founders’ Loan. Pursuant to the Second Loan Modification Agreement, $100,000 of the remaining principal balance ($700,000) of the Founders’ Loan was converted into 133,334 shares of our common stock, reflecting a conversion price of $0.75 per share, the closing price of a share of our common stock on Friday, July 20, 2012, as reported by The NASDAQ Capital Market.
On September 18, 2012, the Company issued 405,405 shares (the “Shares”) of its common stock to Gehrig H. White in full satisfaction of the entire outstanding principal amount of a note held by Mr. White (a component of the Founders’ Loan described above). The outstanding principal balance of the note at the time of issuance of the shares was $300,000. The Shares were valued at $0.74 per share, which represented the consolidated closing bid price per share on The NASDAQ Capital Market on September 17, 2012. As a result of this transaction, the remaining principal balance on the Founders’ Loan has now been reduced to $300,000, and the Note Purchase Agreement was further modified as follows:
| (i) | The Company will pay interest only, calculated at the rate of 9% per annum, on the remaining principal balance ($300,000) through December 31, 2012. |
| (ii) | Beginning February 1, 2013 and the first day of each calendar month thereafter until January 1, 2017, the Company will make monthly payments of interest and principal in the amount of $7,465.51, the amount required to fully amortize the remaining principal balance and the accrued interest thereon over 48 months. In the event of a prepayment, the monthly amount would be recalculated. |
| (iii) | The remaining principal balance of the note and all accrued but unpaid interest thereon is finally due and payable on December 31, 2016. |
We maintain a credit facility with Silicon Valley Bank to support our working capital needs (the “SVB Credit Facility”). On February 22, 2012, we entered into the “Sixth Amendment to Loan and Security Agreement”, which extended the maturity date for the facility to January 16, 2013. Maximum advances are determined based on the composition of our eligible accounts receivable and inventory balances with a facility limit of $937,500. The SVB Credit Facility bears interest at an annual rate equal to the greater of 6.5% or prime plus 2.0%. As of September 30, 2012, approximately $300,000 was available under the SVB Credit Facility, based on our accounts receivable, and there were no amounts outstanding under the facility.
In June 2010 we entered into an agreement with Lincoln Park Capital (“LPC” or the “Selling Shareholder”), pursuant to which we have the right to sell to LPC up to $5.0 million worth of shares of our common stock over a period that expires May 10, 2013. Our right to sell shares to LPC is conditioned on those shares being registered for resale under the Securities Act of 1933, as amended. In November 2010 the SEC declared effective our registration statement covering the resale of up to 899,137 shares of our common stock (after giving effect to the 2.5-for-1 reverse stock split in February 2011) to be issued to LPC under the agreement. Since June 24, 2010, we sold and/or issued an aggregate of 798,373 shares of Common Stock to LPC. In addition, we issued to LPC warrants to purchase another 40,000 shares. As a result, as of September 30, 2012, zero shares covered by the registration statement remain available for sale, and no LPC shares were issued during the quarter ended September 30, 2012. On November 10, 2010, the SEC declared effective a registration that we had filed to cover the resale of the shares issued and sold (or to be issued and sold) to the Selling Shareholder. On March 25, 2011 we filed a prospectus supplement to the prospectus included in that registration statement that included our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). The 2010 Annual Report, including our audited financial statements as of and for the year ended December 31, 2010, and the notes thereto, were physically attached and incorporated into the prospectus supplement. At the time, we believed that the filing of this prospectus supplement fulfilled our obligation to update the registration with current financial information pursuant to Section 10(a)(3) of the Securities Act of 1933, as amended. However, we have since been advised that the proper manner for updating a registration statement is to file a post-effective amendment. As a result, 93,175 shares sold pursuant to that prospectus in open market transactions from December 30, 2010 through January 23, 2011 violated Section 5 of the Securities Act of 1933, as amended, and the purchasers of those shares may have rescission rights (if they still own the shares) or claims for damages (if they no longer own the shares.). Shares that are subject to rescission or redemption requirements that are outside of our control are classified outside of permanent equity until they are no longer subject to rescission or redemption. Accordingly, we reclassified $71,183 as Common stock subject to rescission.
During August 2012, the Company entered into binding subscription agreements with unaffiliated accredited investors pursuant to which such investors have agreed to purchase approximately $240,000 worth of shares of Common Stock at a price equal to 90% of the consolidated closing bid price of a share of Common Stock as reported on the NASDAQ Capital Market on the last trading day immediately preceding the closing date of the transaction. These transactions were completed in the quarter ended September 30, 2012. There was no placement agent or other intermediary involved in this private placement transaction and the Company is not obligated to register the shares of Common Stock to be issued to the investors.
Operations and Liquidity Management
Historically, we have incurred net losses and used cash from financing activities to fund our operations. Over the past two years, we refocused our business strategies, significantly improving our margins and reducing our expenses, while also expanding our growth opportunities and significantly improving our operating results and cash flow performance. During that period, we also renewed our credit facility, closed several equity transactions and entered into a stock purchase agreement with LPC to improve our liquidity and provide capital to grow our business.
As of September 30, 2012, our cash balance was approximately $600,000 and we have the ability to borrow approximately $300,000 under the SVB Credit Facility. Cash used in continuing operations for the nine months ended September 30, 2012 was $472,101, an improvement of $186,641 from the first nine months of 2011. The level of additional capital needed to fund operations and our ability to conduct business for the next year is influenced primarily by the following factors:
| ● | The pace of growth in the gaming business and the related investments in inventory and spending on development and regulatory efforts; |
| ● | The launch of new products, such as ProCore, which will require additional investments in inventory as we seek to expand that line of business; |
| ● | Our ability to control our operating expenses as the business grows; |
| ● | Our ability to negotiate favorable payment terms with our customers and vendors; |
| ● | Our ability to access the capital markets and maintain availability under our credit line; |
| ● | Demand for our products the ability of our customers to pay us on a timely basis; and |
| ● | General economic conditions as well as political events and legal and regulatory changes. |
Our operating plan for 2012 calls for balancing revenue growth with operating expense and working capital management, and carefully monitoring the impact of growth on our cash 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 through 2012.
Our operations in 2012 have been adversely impacted by regulatory changes in Mexico adopted in the fourth quarter of 2011. As a result of these regulations, our revenues and gross profits for 2012 are lower than they were in 2011. In response, we implemented new expense reduction initiatives in late 2011 to partially offset the impact of Mexico. While we believe the loss of business in Mexico to be temporary, we are building our operating plans based on replacing that business with new placements planned in other jurisdictions in 2012. We moved a portion of our electronic gaming tables from Mexico back to the United States to meet anticipated demand from those other markets.
We believe the capital resources available to us will be sufficient to fund our ongoing operations and to support our operating plans for at least the next 12 months. However, we may seek to raise additional capital or expand our existing credit facilities to fund growth. We cannot assure you that, in the event we need additional working capital, adequate additional working capital will be available or, if available, will be on terms acceptable to us. If we are unable to raise additional capital or expand our credit facilities, our ability to conduct business and achieve our growth objectives would be negatively impacted.
Contractual Obligations
The table below sets forth our known contractual obligations as of September 30, 2012:
| | | Total | | | Less than 1 year | | | 1 - 3 years | | | 3 - 5 years | | | More than 5 years | |
| | | | | | | | | | | | | | | | |
Debt obligations(1) | | $ | 300,000 | | | $ | 42,836 | | | $ | 257,164 | | | $ | - | | | $ | - | |
Operating lease obligations(2) | | | 125,430 | | | | 34,086 | | | | 91,344 | | | | - | | | | - | |
Purchase obligations(3) | | | 789,856 | | | | 789,856 | | | | | | | | - | | | | - | |
Other long-term liabilities (4) | | | 323,598 | | | | 91,420 | | | | 232,178 | | | | - | | | | - | |
| Total | | $ | 1,538,884 | | | $ | 958,198 | | | $ | 580,686 | | | $ | - | | | $ | - | |
| (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 Aristocrat. |
Customer Dependence
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%. In comparison, for the nine months ended September 30, 2011, five customers accounted for approximately 47.6% of our total revenues, with one accounting for 28.7%, a second accounting for 5.8%, a third accounting for 4.9%, a fourth accounting for 4.1%, and a fifth accounting for 4.1%. 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 the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2011. Certain reclassifications have been made to prior periods’ financial information to conform to the current period presentation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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, 2011. There have not been significant changes in our exposure to market risk since December 31, 2011.
(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.
PART II – OTHER INFORMATION
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, 2011, 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 except for the following additional risk:
We may be subject to claims for rescission or damages in connection with certain sales of shares of our Common Stock in the open market.
On November 10, 2010, the Securities and Exchange Commission declared effective a registration that we had filed to cover the resale of the shares issued and sold (or to be issued and sold) to the Selling Shareholder. On March 25, 2011 we filed a prospectus supplement to the prospectus included in that registration statement that included our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). The 2010 Annual Report, including our audited financial statements as of and for the year ended December 31, 2010, and the notes thereto, were physically attached and incorporated into the prospectus supplement. At the time, we believed that the filing of this prospectus supplement fulfilled our obligation to update the registration with current financial information pursuant to Section 10(a)(3) of the Act. However, we have since been advised that the proper manner for updating a registration statement is to file a post-effective amendment. As a result, 93,175 shares sold pursuant to that prospectus in open market transactions from December 30, 2010 through January 23, 2011 violated Section 5 of the Securities Act of 1933, as amended, and the purchasers of those shares may have rescission rights (if they still own the shares) or claims for damages (if they no longer own the shares.) Shares that are subject to rescission or redemption requirements that are outside of our control are classified outside of permanent equity until they are no longer subject to rescission or redemption. Accordingly, we reclassified $71,183 as Common stock subject to rescission. In addition, we also may have indemnification obligations to the Selling Shareholder.
Our shares of common stock are at risk of being delisted by NASDAQ.
On July 11, 2012 we received a notification letter from NASDAQ (the “Notice”) advising us that for the 30 consecutive business days preceding the date of the Notice (from May 29, 2012 to July 10, 2012), the closing bid price of our common stock had fallen below the $1.00 per share minimum price required for continued listing on The NASDAQ Capital Market pursuant to NASDAQ Marketplace Rule 5550(a)(2) (the “Minimum Bid Price Rule”). Per the notice, we have 180 calendar days, or until January 7, 2013 (the “Grace Period”), to comply with the Minimum Bid Price Rule. In order to do so, the closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days prior to the end of the Grace Period. If we fail to comply with the Minimum Bid Price Rule within the Grace Period, we may be eligible for an additional grace period of 180 days if we meet the continued listing requirements for market value of publicly held shares and all other initial listing standards for The NASDAQ Capital Market, other than the Minimum Bid Price Rule, and provide written notice of our intention to cure the minimum bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. If NASDAQ determines that we will not be able to cure the deficiency, or if we are otherwise not eligible for such additional compliance period, NASDAQ will provide notice that our common stock will be subject to delisting. We would then have the right to appeal a determination to delist our common stock.
We cannot assure you that we will be able to comply with any of NASDAQ’s continued listing requirements or that, if we are able to comply, we will not fall out of compliance again. If we do not comply with the NASDAQ continued listing requirements and our common stock is delisted, it would then be quoted on an inter-dealer electronic quotation system such as the Over-the-Counter Bulletin Board or the OTCQX or OTCQB markets operated by The OTC Markets Group, Inc.
On July 23, 2012, pursuant to the Second Loan Modification Agreement, $100,000 of the remaining principal balance ($700,000) of the Founders’ Loan was converted into 133,334 shares of our common stock, reflecting a conversion price of $0.75 per share, the closing price of a share of our common stock on Friday, July 20, 2012 as reported by the NASDAQ Capital Market.
During August 2012, we entered into binding subscription agreements with unaffiliated accredited investors pursuant to which such investors have agreed to purchase approximately $240,000 worth shares of our common stock at a price equal to 90% of the consolidated closing bid price of a share of common stock as reported on The NASDAQ Capital Market on the last trading day immediately preceding the closing date of the transaction. These transactions were completed in the quarter ended September 30, 2012. There was no placement agent or other intermediary involved in this private placement transaction and the Company is not obligated to register the shares of common stock to be issued to the investors.
On September 18, 2012, we issued 405,405 shares of our common stock to Gehrig H. White in full satisfaction of the entire outstanding principal amount of a note held by Mr. White (a component of the Founders’ Loan described above). The outstanding principal balance of the note at the time of issuance of the 405,405 shares of our common stock was $300,000. The Shares were valued at $0.74 per share, which represented the consolidated closing bid price per share on The NASDAQ Capital Market on September 17, 2012. As a result of this transaction, the remaining principal balance on the Founders’ Loan has now been reduced to $300,000.
These transactions were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to Sections 4(2) and 4(5) of the Act. All of the foregoing shares will be issued by our transfer agent as promptly as practicable after compliance with NASDAQ rules with respect to the listing of additional shares and will bear a legend restricting their transfer other than pursuant to registration or exemption from registration pursuant to the Act.
| Exhibit No. | | Description |
| 10.1 | | Form of Loan Modification Agreement, dated July 23, 2012, by and among the Registrant and Gehrig White and Arthur Lomax. (incoprorated by reference in Exhibit 10.1 to our Current Report on Form 8-K filed on July 27, 2012.) |
| 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 |
* Furnished with this report. In accordance with rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
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, 2012 | |
| | /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 |
| 10.1 | | Form of Loan Modification Agreement, dated as of July 23, 2012, by and among the Registrant and Gehrig White and Arthur Lomax. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on July 27, 2012.) |
| 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 |
* Furnished with this report. In accordance with rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
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