PokerTek 10K 2012 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, no par value	The NASDAQ Stock Market LLC (NASDAQ Capital Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Act). Yes o No x

The aggregate market value of the common equity held by non-affiliates of the Registrant as of June 29, 2012 was $2,936,876 based upon the last reported sale price on the NASDAQ Capital Market on June 29, 2012, the last business day of the Registrant’s most recently completed second fiscal quarter.

On March 13, 2013, there were 9,085,498 outstanding shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of our Proxy Statement for the 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

	TABLE OF CONTENTS

		Page
Cautionary Note Regarding Forward-Looking Statements		ii

	PART I
Item 1.	Business	1

Item 1A.	Risk Factors	6

Item 1B.	Unresolved Staff Comments	14

Item 2.	Properties	14

Item 3.	Legal Proceedings	14

Item 4.	Mine Safety Disclosures	14

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15

Item 6.	Selected Financial Data	15

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	26

Item 8.	Financial Statements and Supplementary Data	26

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	27

Item 9A.	Controls and Procedures	27

Item 9B.	Other Information	28

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	28

Item 11.	Executive Compensation	28

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	29

Item 13.	Certain Relationships and Related Transactions, and Director Independence	29

Item 14.	Principal Accounting Fees and Services	29

	PART IV
Item 15.	Exhibits, Financial Statement Schedules	29

Signatures		30

Exhibit Index

(i)

Cautionary Note Regarding Forward-Looking Statements

This annual report on Form 10-K for our year ended December 31, 2012 (this “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be found in Item 7 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other sections of this Report. 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 this Report and other reports that we file with the Securities and Exchange Commission (“SEC”). As a result of these risks and uncertainties, the results or events indicated by these forward-looking statements may not occur. We caution you not to place undue reliance on any forward-looking statement.

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

All references in this Report to “PokerTek”, “we”, “us”, “our” or the “Company” include PokerTek, Inc. and its consolidated subsidiaries.

(ii)

PART I

Item 1. Business.

We are a North Carolina corporation. Our corporate offices are located at 1150 Crews Road, Matthews, North Carolina 28105 and our telephone number is (704) 849-0860. 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. We distribute our electronic table games using an internal sales force, complemented by distributors and sales agents in select geographic areas, 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 offer two electronic table gaming platforms: PokerPro and ProCore. As of December 31, 2012, our installed base consisted of 2,310 gaming positions, composed of 2,160 PokerPro and 150 ProCore positions.

Product Description

PokerTek’s electronic tables are multi-station gaming devices that facilitate the play of casino games in an efficient and cost-effective manner. The tables fully automate the shuffling, dealing, cash handling, enforcement of game rules, awarding of pots and other aspects of the game. Players view their cards, place bets, and take other actions using individual touch screens. Each table also has a center monitor that allows all players to easily view community information specific to the game being played, such as dealer/house cards, community cards, player bet amounts, pot size and winning hand announcements.

The tables are part of a server-based system, which allows for system security, scalability and data visibility. Getting players into the game is easy, as PokerTek’s products are account-based and utilize a casino player card or PokerTek account card. Players setup a PIN protected account and perform deposits and withdrawals via a cashier at the system’s Customer Management System (CMS). To get into the game, players swipe their card at the table, enter their PIN and indicate how much money they want to bring to the game. All transactions are tracked, giving operators unparalleled reporting of game statistics, player tracking and financial data. Sophisticated administrative tools give operators control to manage all aspects of the system.

Both PokerPro and ProCore support multiple languages and currencies.

PokerPro

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 rules and limits, including blinds, antes, rake structures and house rules, are completely configurable.

ProCore

ProCore is a unique 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. Games and house rules can be customized easily to meet customer and regulatory requirements, making it an ideal choice for operators looking to add an automated solution to their gaming floor.

We intend to expand the library of content offered on ProCore by developing and deploying additional public domain and licensable proprietary house-banked games.

Market and Strategy for Electronic Table Games

We use an analytical approach to evaluating worldwide gaming markets and segmenting those geographic markets and individual properties where our sales and marketing efforts are to be directed. We segment the market into three categories: those with no manual table games; those with limited manual table games; and those markets characterized by greater density of manual table games. We intentionally focus the majority of our sales and marketing effort on those markets that either have no or a limited number of manual table games. We also opportunistically place tables in markets with higher density of manual table games where we believe we offer a value proposition for the operators and players. This approach allows us to narrow our focus, directing our limited resources in a targeted approach, and has significantly improved customer retention and operating margins.

In those identified markets, we plan to increase our dominant position in electronic poker with our PokerPro system. With the addition of the ProCore platform, the addressable opportunities are expanded to include blackjack, baccarat and other house-banked games. The market for poker is a smaller niche where we enjoy a dominant market position. The market for blackjack, baccarat and specialty house-banked games is larger, but also characterized by more competition. We believe our product offerings have significant advantages over the competition and, as a result, we have the opportunity to expand our dominance in poker while increasing the market for electronic house-banked games and displacing competitor products in those markets.

We have identified key markets worldwide 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 creating a favorable environment for expanding the market for gaming in general and electronic table games in particular.

Competition

The overall market for gaming devices is mature and characterized by numerous competitors that develop and license proprietary table games. We are aware of several other companies offering automated table games, including poker and blackjack products, and additional competitors could emerge. Potential competitors may have brand recognition and greater resources than we have. Potential competitors also could offer lower cost products manufactured in less regulated or lower cost foreign markets.

Some of the gaming supply companies that may offer competitive electronic table games include: Shuffle Master, Inc., WMS Industries, Inc., Lightning Gaming, DigiDeal, Inc., Amaya, F2, and Zitro. There are also several small companies offering electronic table games products in Eastern Europe, South America and other markets.

We also compete with slot machines and other gaming products for space on the customers’ floor and for share of customers’ budget. In addition, we compete with manual table games, internet poker websites and other forms of internet gaming.

Product Supply

We purchase all parts, including hardware components, signs and accessories for the PokerPro and ProCore systems from third-party suppliers. We assemble our electronic tables from such component parts at our facility in Matthews, North Carolina.

We believe that we have sufficient capacity to meet demand and that our sources of supply are adequate. Several key components we use in the manufacture of our products are proprietary and are currently manufactured by ICP Electronics Inc. (“ICP Electronics”). These components include certain complex integrated circuits which are critical to our product designs. Changing manufacturers for any of these components would require significant time and effort on the part of our management team, may require additional engineering development work, and could have a disruptive impact on our operations.

Key components are produced primarily in Taiwan and China and are subject to lead times and other challenges associated with managing an international supply chain. Furthermore, we compete with other companies for the production capacity of third-party manufacturers and suppliers for displays and for other components. We believe that our suppliers have adequate capacity to meet demand and sources of supply are adequate. However, because our supply chain originates in the Far East and we rely on third parties, our ability to satisfy demand for our products depends on their performance as well as our ability to provide accurate production forecasts and manage long logistical lead times.

Distribution Method

We distribute our gaming products on a direct basis using our own internal sales force and third-party sales agents and distributors in select markets. Our salespeople are organized generally based on geography and customer relationship and continue to be closely involved with our customers following the deployment of tables to provide product and marketing consulting and account relationship management.

Gaming Regulations and Licensing

Regulatory Overview

Generally, the manufacture, sale and use of gambling devices are subject to extensive governmental and tribal regulation. In order to distribute our electronic table games to our target markets, we must comply with the applicable regulations of each jurisdiction in which we operate. These regulations generally include investigation and approval of our Company, executive officers and members of our Board of Directors (the “Board”), as well as testing and approval of specific products.

The regulatory approval process varies widely from jurisdiction to jurisdiction and can take years to complete. Further, the laws and regulations of each jurisdiction in which we operate or intend to operate are subject to amendment and reinterpretation from time to time, and therefore it is possible that even if our products are approved at one time, its use may be restricted, conditioned or prohibited in the future.

The following is a brief description of the significant regulations that may apply to us:

Federal Regulation

The Federal Gambling Devices Act of 1962, also called the Johnson Act, generally makes it unlawful for a person to manufacture, deliver, or receive gaming machines, gaming machine-type devices, and components across state lines or to operate gaming machines unless that person has first registered with the U.S. Department of Justice. We believe that our products are not prohibited by the Johnson Act, and we are registered with the U.S. Department of Justice.

Commercial Casinos

Jurisdictions that allow some form of casino-style gambling usually have extensive regulatory requirements that must be met before gaming products can be marketed to commercial casinos located in these jurisdictions. Generally, each jurisdiction’s respective gaming commission requires that a license or finding of suitability be issued with respect to the company, the product, or both. Some jurisdictions also require that gaming products be placed in the market on a trial basis before receiving final approvals. Some jurisdictions require the licenses and findings of suitability to be renewed on a regular basis. Regulatory bodies can deny our applications for licenses and findings of suitability or revoke our licenses or prior findings of suitability for any cause.

If a jurisdiction requires that we obtain company approval in addition to the product approval required for the PokerPro system, we are required to submit detailed financial and operating reports and furnish other information. Our officers, directors, key employees and any person having a material relationship with us may have to qualify with the jurisdiction commission and obtain a finding of suitability. Our beneficial owners, especially beneficial owners of more than 5% of our outstanding common stock, may also be required to obtain a finding of suitability.

Tribal Casinos

Gaming on tribal lands is governed by the Indian Regulatory Gaming Act of 1988 (“IGRA”), the National Indian Gaming Commission (“NIGC”), specific tribal ordinances and regulations and, in some instances, agreements between Native American tribes and their respective states, referred to under the IGRA as a tribal-state compact. The IGRA provides a statutory basis for Native American tribes to operate certain gaming activities, depending on how a particular game is classified and whether the laws of the state where the Native American tribe is located allow or prohibit the particular game. The gaming classifications are: Class I, Class II and Class III.

●	Class I gaming includes traditional Native American social and ceremonial games and is regulated only by the tribes.
●	Class II gaming includes bingo and certain card games such as poker, so long as the card game is not prohibited by the laws of the state where the tribe is located, the card game is played somewhere in the state and the playing of the card game conforms to any applicable state law.

●	Class III gaming consists of all forms of gaming that are not Class I or Class II, such as video lottery games, slot machines, most table games and keno.

The classification of a gaming device is determined by the operator in each jurisdiction.

We must also obtain prior certification from an independent testing laboratory in certain tribal jurisdictions. We must also be approved as a gaming supplier with each federally recognized tribe.

Card Clubs and Charity Gaming Rooms

States that allow poker to be played in card clubs or charity gaming room may have various federal, state, local and other regulatory requirements applicable to operators and manufacturers of gambling devices.

Cruise Ships

The cruise ship market is authorized under the Johnson Act, and not subject to regulatory oversight. Therefore, the PokerPro and ProCore systems require no specific regulatory approval to operate aboard cruise ships.

International Casinos

Internationally, the regulatory environment is complex and varies by jurisdiction. Certain foreign countries permit the importation, sale and operation of gaming equipment in casino and non-casino environments. In some foreign jurisdictions, such as Canada and France, we are required to obtain company and product approvals, similar to those in U.S. commercial jurisdictions. In other foreign jurisdictions, such as Mexico, we are required to obtain electrical certifications and comply with certain government regulations, but formal company and product approval processes do not currently exist. Other jurisdictions in Latin America, Asia, Europe, Australia and Africa have varying degrees of regulation and we evaluate the requirements for each jurisdiction independently prior to entering new markets. In addition, the regulatory requirements in those jurisdictions are subject to change over time.

On September 23, 2011, SEGOB, the governmental body that issues permits and regulates gaming activities in Mexico, a market from which a significant portion of our revenue was derived in 2011, issued an information bulletin to casino operators in Mexico notifying them that all card and roulette games, whether live or electronic, would no longer be permitted. As a result, we removed all of our electronic gaming tables from the gaming floors in Mexico on that date. It is our understanding that SEGOB and other Mexican governmental agencies conducted reviews and evaluations of individual permit holders during the time of the moratorium on electronic card and roulette games. We believe that these actions represent the Mexican government’s effort to strengthen the regulatory environment and increase enforcement of the regulations, which are positive long term developments for the electronic gaming market in Mexico.

As of December 2012, SEGOB began issuing notifications to certain individual permit holders allowing them to return electronic card and roulette game to their operations. As a result, we began re-installing our systems with approved permit holders in December 2012.

Regulatory Approvals

As of December 31, 2012 we have obtained regulatory approvals for both our Company and our PokerPro system from the following regulatory bodies:

·	Nevada Gaming Control Board;

·	Société des Casinos du Québec Inc.;

·	Arkansas Racing Commission;

·	State of California Gambling Control Commission;

·	Indiana Gaming Commission;

·	Mississippi Gaming Commission;

·	Tuolumne Me-Wuk Tribal Gaming Agency;

·	Eastern Band of Cherokee Indians Tribal Gaming Commission;

·	Atlantic Lottery Corporation;

·	Alcohol and Gaming Commission of Ontario;

·	Victorian Commission for Gambling Regulation (Australia); and

·	Ho-Chunk Nation Gaming Commission

PokerTek also has a license from the Washington State Gambling Commission but that jurisdiction has not approved our PokerPro system.

We have received product certifications from Gaming Laboratories International, an independent testing laboratory, for PokerPro and ProCore. Other electrical, communications and safety certifications include certifications from:

●	Conformité Européenne, a mandatory European marking for certain product groups to indicate conformity with the essential health and safety requirements set out in European Directives;

●	The U.S. Federal Communications Commission, referred to as the “FCC”, which regulates radio emissions of electronic devices;

●	The RoHS Directive, which bans the placing on the European Union market of new electrical and electronic equipment containing more than agreed levels of certain hazardous materials;

●	Underwriters Laboratories, Inc., a product safety compliance testing laboratory; and

●	NOM (Norma Official Mexicana), a product safety compliance testing standard.

Research and Development

We invest in research and development to invent, commercialize, customize and enhance our electronic table hardware, software, game content and related products. Our research and development expenses were $0.7 million and $1.0 million during the fiscal years ended December 31, 2012 and December 31, 2011, respectively, consisting primarily of internal product development salaries and expenses and costs related to third-party engineering, prototyping and product testing.

The focus of our software and hardware development is to improve our gaming products through the addition of new games and features, to improve manufacturability and to adapt our products to customer and jurisdiction specific requirements.

Intellectual Property

Trademarks

“PokerPro®” is a registered trademark with the U.S. Patent and Trademark Office. “PokerTek®” and “PokerPro®” are registered trademarks with the Canadian Intellectual Property Office.

We also currently use the following trademark: ProCore™. We currently plan to file trademark applications with the U.S. Patent and Trademark office with respect to this and additional trademarks that we have developed or may develop in the future.

Patents

We currently have the following issued patents:

●	D512,446 (United States) – Design patent for an electronic poker table top;
●	7,556,561 (United States) – A seat request button allowing players seated at an electronic poker table to request a different sea;
●	7,618,321 (United States) – System and method for detecting collusion between poker players
●	7, 452,628 (United States) – System and method for providing an electronic poker game (rabbit hunting);
●	7,699,695 (United States) – Electronic card table and method with variable rake;
●	7,794,324 (United States) – Electronic player interaction area with player customer interaction features (pre-selecting actions);
●	200800416 (Australia) – System and method of displaying or obscuring electronic playing cards;
●	2008100356 (Australia) – System and method of displaying or obscuring electronic playing cards;
●	2008100161(Australia) – System and method of displaying or obscuring electronic playing cards;
●	2008100158(Australia) – System and method of displaying or obscuring electronic playing cards;
●	20081001057(Australia) – System and method of displaying or obscuring electronic playing cards;
●	2008100164(Australia) – Electronic card table and method;
●	2008100163 (Australia) – System and method for providing a card tournament using one or more electronic card tables;
●	2008100162 (Australia) – System and method for providing a card tournament using one or more electronic card tables;
●	2008100160 (Australia) – Administrator tool of an electronic gaming system and method of processing gaming profiles controlled by the system;
●	2006250000 (Australia) – System and method for providing a host console for replaying a previous hand of an electronic card game;
●	121649 (Singapore) – System and method of displaying or obscuring electronic playing cards;
●	2007/02456 (South Africa) – Electronic card table and method with player tracking;
●	2007/02446 (South Africa) – Electronic card table;
●	2007/02442 (South Africa) – System and method for playing an electronic card game;
●	2007/02444 (South Africa) – System and method for providing a card tournament using one or more card tables; and
●	2007/02447 (South Africa) – Electronic card table and method;

At various times, we have domestic and foreign patent applications pending that relate to various aspects of our products. As we develop new technology, we may file patent applications with respect to such technology. We can provide no assurance that any current or future patent applications will result in issued patents.

Other

We have registered the www.pokertek.com internet domain name.

Seasonality and Business Fluctuations

Our business is not generally subject to seasonality. However, quarterly revenue and net income or loss may vary based on the timing of product sales, the introduction of new products and changes in our installed base of PokerPro systems. In addition, revenues from cruise ships and casinos may vary from quarter to quarter depending on a number of factors, including the time of year, cruise itinerary and length, and player demographics.

Backlog

We are generally able to fulfill customer orders with relatively short lead-times and do not carry a significant backlog of unshipped orders.

Customer Dependence

For the year ended December 31, 2012, five customers accounted for approximately 73.2% of our total revenues from continuing operations, with one accounting for 39.8%, a second accounting for 12.3%, a third accounting for 9.2%, a fourth accounting for 6.5%, and a fifth accounting for 5.4%. The loss of any of these customers or changes in our relationship with any of them could have a material adverse effect on our business.

Employees

As of December 31, 2012, we had 25 full-time employees. We consider our relationships with our employees to be good. None of our employees is covered by a collective bargaining agreement.

Corporate History

We were founded on August 26, 2003 and initially organized as National Card Club Corporation, which owned a majority interest in an affiliated limited liability company called PokerTek, LLC. On July 27, 2004, PokerTek, LLC merged with and into National Card Club Corporation and the name was changed to PokerTek, Inc.

We completed our initial public offering on October 13, 2005 and our common stock trades on the NASDAQ Capital Market under the ticker symbol “PTEK”.

Available Information

We make available free of charge through our website, www.pokertek.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports and statements filed pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we file such material with, or furnish it to, the SEC.

Financial Information

For information with respect to revenue, operating profitability and identifiable assets attributable to our business segments and geographic areas, see Note 15 to our consolidated financial statements as of and for the year ended December 31, 2012 included elsewhere in this Report.

Item 1A. Risk Factors.

Our business is closely tied to the casino industry and factors that negatively impact the casino industry may also negatively affect our ability to generate revenues.

Factors that may negatively impact the casino industry may also negatively impact our future revenues. If casinos experience reduced patronage, our revenue will be adversely impacted because casinos will purchase fewer systems and the installed systems will generate less revenue. In some cases our systems may be taken off of the casino floor altogether. The levels of casino patronage, and therefore our revenues, are affected by a number of factors beyond our control, including:

●	general economic conditions;

●	levels of disposable income of casino patrons;

●	downturn or loss in popularity of the gaming industry in general and table and slot games in particular;

●	the relative popularity of entertainment alternatives to casino gaming;

●	the growth and number of legalized gaming jurisdictions;

●	local conditions in key gaming markets, including seasonal and weather-related factors;

●	increased transportation costs;


●	acts of terrorism and anti-terrorism efforts;

●	changes or proposed changes to tax laws;

●	increases in gaming taxes or fees;

●	legal and regulatory issues affecting the development, operation and licensing of casinos;

●	the availability and cost of capital to construct, expand or renovate new and existing casinos;

●	the level of new casino construction and renovation schedules of existing casinos; and

●	competitive conditions in the gaming industry and in particular gaming markets, including the effect of such conditions on the pricing of our games and products.

These factors significantly impact the demand for our products and technologies.

Our business would suffer if demand for gaming in general, or poker in particular, decreases.

We derive a significant portion of our revenues from distribution of the PokerPro system and from providing related maintenance and support services. The gaming has historically been repeatedly attacked by various constituencies and communities. Public tastes are unpredictable and subject to change and may be affected by changes in the country’s political and social climate. To the extent these constituencies and communities can successfully change public tastes and mores, the popularity of gaming, in general, would be adversely impacted, and/or industry regulation could increase, either of which could significantly reduce demand for our products.

Moreover, the market for electronic gaming systems is limited. Although we believe that there is a significant opportunity for our products, the number of venues in which our products can be placed is finite, as the number of jurisdictions in which gaming is legal is limited.

We are impacted by changes in consumer spending in general, and specifically with regard to discretionary spending on gaming activities.

We derive our revenues from the distribution of electronic table games. Gaming revenues and occupancy in major gaming markets have been more volatile in recent years, causing many casino operators to reevaluate their operations, reduce expenses, and in some cases to cease operations or seek bankruptcy protection. We also understand that electronics and other vendors in the Far East periodically experience volatility in demand from their customers, which could possibly impact their ability to manufacture and deliver products efficiently and at acceptable costs to us.

A prolonged decline in consumer spending on gaming activities could have a significant impact on our customers and our vendors. Accordingly, such a prolonged downturn could have a significant impact on our business operations and financial condition.

We have debt financing arrangements, which could have a material adverse effect on our financial health and our ability to obtain financing in the future, and may impair our ability to react quickly to changes in our business.

Our exposure to debt financing could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive position. For example, it could:

●	increase our vulnerability to adverse economic and industry conditions, including interest rate fluctuations, because a portion of our borrowings are at variable rates of interest;

●	require us to dedicate future cash flows to the repayment of debt, reducing the availability of cash to fund working capital, capital expenditures or other general corporate purposes;

●	limit our flexibility in planning for, or reacting to, changes in our business and industry; and

●	limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants contained in our debt agreements.

We may also incur additional indebtedness in the future, which could materially increase the impact of these risks on our financial condition and results of operations.

Our ability to repay our debt and fund our operations depends on many factors beyond our control. We may raise equity capital in the future, which may significantly dilute the holdings of our existing shareholders. If we are unable to raise sufficient capital in the future, we may seek other avenues to fund the business, including sale/leaseback arrangements, transitioning PokerPro from a capital intensive leasing strategy to a product sale strategy, or seeking to sell assets of all, or a portion of, our operations.

Payments on our debt will depend on our ability to generate cash or secure additional financing in the future. This ability, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. If our business does not generate sufficient cash flow from operations, and sufficient future financing is not available to us, we may not be able to repay our debt, operate our business or fund our other liquidity needs. If we cannot meet or refinance our obligations when they become due, this may require us to attempt to raise capital, sell assets, reduce expenditures or take other actions which we may be unable to successfully complete or, even if successful, could have a material adverse effect on us. If such sources of capital are not available or not available on sufficiently favorable terms, we may seek other avenues to fund the business, including sale/leaseback arrangements, transitioning from a capital intensive leasing strategy to a product sale strategy, or seeking to sell assets of all, or a portion of, our operations. If we decide to raise capital in the equity markets or take other actions, our shareholders could incur significant dilution or diminished valuations, or, if we are unable to raise capital, our ability to effectively operate our business could be impaired.

In addition, if we are successful in raising capital in the equity markets to repay our indebtedness, or for any other purpose, our existing shareholders may incur significant dilution.

The agreements and instruments governing our debt contain restrictions and limitations which could significantly impact our ability to operate our business.

Our credit facility with Silicon Valley Bank contains covenants that could adversely impact our business by limiting our ability to obtain future financing, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. The credit facility includes covenants requiring the achievement of specified financial ratios and thresholds and contains other terms and conditions qualifying the terms upon which Silicon Valley Bank is required to extend funds. Our ability to comply with these provisions may be affected by events beyond our control.

We depend on a small number of key suppliers and customers. Changes in our relationships with these parties, or changes in the economic or regulatory environments in which they operate, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our revenues are concentrated with a small number of customers. The loss of any of these customers or changes in our relationship with them could have a material adverse effect on our business.

To manufacture our gaming products, we purchase components from independent manufacturers, many of whom are located in the Far East. An extended interruption in the supply of these products or suitable substitute inventory would disrupt our operations, which could have a material adverse effect on our business, financial condition and results of operations.

For a number of our key inventory components, we rely on a single supplier. We cannot estimate with any certainty the length of time that would be required to establish alternative supply relationships, or whether the quantity or quality of materials that could be so obtained would be sufficient. Furthermore, we may incur additional costs in sourcing materials from alternative producers. The disruption of our inventory supply, even in the short-term, could have a material adverse effect on our business, financial condition and results of operations.

A significant portion of our business is conducted with customers and suppliers located outside of the United States. Currency, economic, regulatory, political and other risks associated with our international operations could adversely affect our operating results.

Our revenues from international customers and our inventory costs from international suppliers are exposed to the potentially adverse effects of currency exchange rates, local economic conditions, political instability and other risks associated with doing business in foreign countries. To the extent that our revenues and purchases from international business partners increase in the future, our exposure to changes in foreign economic conditions and currency fluctuations will increase.

Our dependence on foreign customers and suppliers means, in part, that we may be affected by changes in the relative value of the U.S. dollar to foreign currencies. Changes in the applicable currency exchange rates might negatively affect the profitability and business prospects of our customers and vendors. This, in turn, might cause such vendors to demand higher prices, delay shipments, or discontinue selling to us. This also might cause such customers to demand lower prices, delay or discontinue purchases of our products or demand other changes to the terms of our relationships. These situations could in turn ultimately reduce our revenues or increase our costs, which could have a material adverse effect on our business, financial condition and results of operations.

Changes in gaming regulations, or interpretation of gaming regulations, by governmental entities could have a significant negative impact on our business operations and financial condition.

As of December 2012, SEGOB began issuing notifications to certain individual permit holders allowing them to return electronic card and roulette game to their operations. As a result, we began re-installing our electronic gaming tables with approved permit holders in December 2012.

We have a limited operating history and a history of losses. We may be unable to generate sufficient net revenue in the future to achieve or sustain profitability.

We have experienced net losses for substantially all quarterly and annual periods since our inception in August 2003 and we expect to continue to experience losses and cash flow deficits for the foreseeable future. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis, and our failure to do so would adversely affect our business and the market price of our common stock and require us to raise additional capital, which may not be available on terms acceptable to us or at all.

Our success depends on achieving and maintaining acceptance by casinos and players worldwide.

Our success depends on continued market acceptance of our gaming products among casinos and players. Casinos and players may not prefer to use our gaming products for a number of reasons, including preference for live dealers, mistrust of technology and perceived lack of reliability.

In 2011 we launched a new system, ProCore, expanding into house-banked games which have different attributes than our existing PokerPro system. The launch of a new product may increase financial pressures and the new product may not be accepted by players or operators, or may not generate sufficient revenue to cover costs. If we fail to successfully manage our new product development, or if we fail to anticipate the issues associated with such development and expansion, our business may suffer.

The success of our new product introductions depends on a number of factors, including our ability to anticipate and manage a variety of issues such as: operator and player acceptance, effective management of inventory levels in line with anticipated product demand, and quality problems or other defects in the early stages of new product introduction that were not anticipated in the design of those products. Our business may suffer and we may encounter financial pressure and increased costs if we fail to successfully anticipate and manage these issues associated with the expansion of our product line.

If we fail to obtain or maintain gaming licenses and regulatory approvals, we may be unable to license or sell our gaming products.

The manufacture and distribution of gaming machines is subject to extensive federal, state, local and tribal regulation. Most jurisdictions require licenses, permits and other forms of approval for gaming devices. Most, if not all, jurisdictions also require licenses, permits and documentation of suitability, including evidence of financial stability, for the manufacturers and distributors of such gaming devices and for their officers, directors, major shareholders and key personnel. Our failure to obtain regulatory approval in any jurisdiction will prevent us from distributing our products and generating gaming revenue in that jurisdiction.

Any registrations, licenses, approvals or findings of suitability that we currently have or may obtain in the future may be revoked, suspended or conditioned at any time. The revocation or denial of a license in a particular jurisdiction will prevent us from distributing our gaming products in that jurisdiction, and could adversely affect our ability to obtain and/or maintain licenses in other jurisdictions.

Gaming authorities in various jurisdictions may require that some or all of our executive officers, key employees, directors and significant shareholders meet their suitability standards. The inability of an executive officer, key employee, director or significant shareholder to meet these standards may adversely affect the sale or licensing of our gaming products in that jurisdiction.

We are subject to the authority of various government agencies that regulate the gaming industry. The regulatory authorities may investigate some or all of our executive officers, key employees, directors and significant shareholders to determine whether they are unsuitable to serve or have an ownership interest in us. If a gaming authority in any jurisdiction finds that any of our executive officers, key employees, directors or shareholders is unsuitable, it may deny us the permits or licenses that we require to operate in their jurisdiction. A finding of suitability is generally determined based upon numerous facts and circumstances surrounding the entity or individual in question, and many gaming authorities have broad discretion in determining whether a particular entity or individual is suitable. We are unaware of circumstances that would categorically prevent a gaming authority from finding any of our officers, key employees, directors or significant shareholders suitable.

If any executive officer, key employee, director or significant shareholder that is required to meet the suitability standards of a particular jurisdiction fails to do so, we would be prevented from leasing, licensing or selling our gaming products in that jurisdiction as long as the individual or entity in question remained an officer, key employee, director or a significant shareholder. Such an occurrence would likely delay introduction of our gaming products into such jurisdiction or prevent us from introducing our gaming products in such jurisdiction altogether. Depending on how material such a jurisdiction is to our plan of operations, failure to obtain such findings of suitability could have a material adverse effect on our results of operations. In addition, a finding that one of our executive officers, certain key employees, directors or significant shareholders is not suitable in any jurisdiction may hinder our ability to obtain necessary regulatory approvals in other jurisdictions. Conversely, however, a finding of suitability by one or more gaming authorities does not ensure that similar suitability determinations will be obtained from any other gaming authorities.

Although we have the ability to terminate the employment of an executive officer or key employee in the event that such executive officer or key employee fails to meet the requisite suitability standards, such termination would disrupt the management of our company, may trigger severance provisions under certain employment agreements and would likely have an adverse effect on our business and results of operations. In addition, the removal of a director under the provisions of our Restated Bylaws requires action on the part of our shareholders at a shareholders’ meeting. Our Restated Articles of Incorporation provide that we may redeem at fair market value any or all shares of our capital stock held by any person or entity whose status as a shareholder, in the opinion of our Board, jeopardizes the approval, continued existence, or renewal of any federal, state, local or tribal license we hold. However, we may not have the funds available for a redemption under such circumstances, especially if the shareholder in question holds a significant amount of our common stock. We have not determined what action we would take in such an event. We will also be prevented from effecting such a redemption if it would violate North Carolina law.

In addition, not all of our Board members or officers have been investigated by all of the jurisdictions where we operate. If those jurisdictions decide to require new investigations of any Board members or officers, we could incur significant costs or elect to withdraw from certain jurisdictions to avoid incremental licensing costs.

If our products are found to be in violation of the Johnson Act, the Department of Justice may institute criminal and/or civil proceedings against us.

The Johnson Act generally makes it unlawful for a person to manufacture, deliver, or receive gaming machines, gaming machine-type devices, and components across state lines or to operate gaming machines unless that person has first registered with the U.S. Department of Justice. We are registered with the Department of Justice. In addition, the Johnson Act imposes various record keeping, annual registration, equipment registration, and equipment identification requirements. Violation of the Revised Johnson Act may result in seizure and forfeiture of the equipment as well as other penalties. Any change in law or regulation, or an unfavorable interpretation of any law or regulation, could adversely impact our ability to earn revenue or could require us to substantially modify our products or operations at significant expense.

We could face substantial competition, which could reduce our market share and negatively impact our net revenue.

There are a number of companies that manufacture and distribute automated gaming machines. These companies may have greater financial and other resources than we have. The primary barriers to entry are the establishment of relationships with the owners and operators of casinos and card clubs, the receipt of necessary regulatory approvals and the development of the technology necessary to create an automated poker table. It is likely that our potential competitors could include manufacturers of gaming devices that have already established such relationships and that have received some, if not all, of the regulatory approvals that would be required to market and sell automated poker tables in our target markets. Therefore, the barriers to entry discussed above may not pose a significant obstacle for such manufacturers if they sought to compete with us.

If we fail to protect our intellectual property rights, competitors may be able to use our technology, which could weaken our competitive position, reduce our net revenue and increase our costs.

Our long-term success will depend to some degree on our ability to protect the proprietary technology that we have developed or may develop or acquire in the future. Patent applications can take many years to issue and we can provide no assurance that any of these patents will be issued. If we are denied any or all of these patents, we may not be able to successfully prevent our competitors from imitating the PokerPro system or using some or all of the processes that are the subject of such patent applications. Such imitation may lead to increased competition within the finite market for the PokerPro system. Even if our pending patents are issued, our intellectual property rights may not be sufficiently comprehensive to prevent our competitors from developing similar competitive products and technologies. Although we may aggressively pursue anyone whom we reasonably believe is infringing upon our intellectual property rights, initiating and maintaining suits against third parties that may infringe upon our intellectual property rights will require substantial financial resources. We may not have the financial resources to bring such suits and if we do bring such suits, we may not prevail. Regardless of our success in any such actions, we could incur significant expenses in connection with such suits.

Third party claims of infringement against us could adversely affect our ability to market our products and require us to redesign our products or seek licenses from third parties.

We are susceptible to intellectual property lawsuits that could cause us to incur substantial costs, pay substantial damages or prohibit us from distributing our products. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. In addition, because patent applications can take many years to issue, there may be applications now pending of which we are unaware, which later may result in issued patents that our products may infringe. If any of our products infringe a valid patent, we could be prevented from distributing that product unless and until we can obtain a license or redesign it to avoid infringement. A license may not be available or may require us to pay substantial royalties. We also may not be successful in any attempt to redesign the product to avoid any infringement. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and we may not have the financial and human resources to defend ourselves against any infringement suits that may be brought against us.

Defects in, and fraudulent manipulation of, our products could reduce our revenue, increase our costs, burden our engineering and marketing resources, involve us in litigation and adversely affect our gaming licenses.

Our success will depend on our ability to avoid, detect and correct software and hardware defects and prevent fraudulent manipulation of our products. Our electronic gaming products are subject to rigorous internal testing, and additional testing by regulators in certain gaming jurisdictions. We may not be able to maintain products that are free from defects or manipulation and that continue to satisfy these tests. Although we have taken steps to prevent defects, our products could suffer such defects and our products could be subject to manipulation after they have been widely distributed.

Although we do not believe it is likely, it is possible that an individual could breach the security systems of a casino or card club, gain access to the server and fraudulently manipulate its operations. The occurrence of such fraudulent manipulation or of defects or malfunctions could result in financial losses for our customers and the subsequent termination of agreements, cancellation of orders, product returns and diversion of our resources. Even if our customers do not suffer financial losses, customers may replace our products if they do not perform according to expectations. Any of these occurrences could also result in the loss of or delay in market acceptance of our products, loss of sales and, in the case of gaming products, loss of regulatory approvals.

In addition, the occurrence of defects or fraudulent manipulation may give rise to claims for lost revenues and related litigation by our customers and may subject us to investigation or other disciplinary action by regulatory authorities that could include suspension or revocation of our regulatory approvals.

The use of our electronic table games could result in product liability claims that could be expensive and that could damage our reputation and harm our business.

Our business exposes us to the risk of product liability claims. Subject to contractual limitations, we will face financial exposure to product liability claims if our products fail to work properly and cause monetary damage to either players or casinos and card clubs. In addition, defects in the design or manufacture of our products might require us to recall those products. Although we maintain product liability insurance, the coverage limits of policies available to us may not be adequate to cover future claims. If a successful claim brought against us is in excess or outside of our insurance coverage, we may be forced to divert resources from the development of new products, the pursuit of regulatory approvals and other working capital needs in order to satisfy such claims.

The loss of key personnel or the inability of replacements to quickly and successfully perform in their new roles could adversely affect our business.

All of our existing personnel, including our executive officers, are employed on an “at-will” basis. If we lose or terminate the services of one or more of our current executives or key employees or if one or more of our current or former executives or key employees joins a competitor or otherwise competes with us, it could impair our business and our ability to successfully implement our business plan. Additionally, if we are unable to timely hire qualified replacements for our executive and other key positions, our ability to execute our business plan would be harmed. Even if we can timely hire qualified replacements, we would expect to experience operational disruptions and inefficiencies during any transition.

If we fail to manage our growth, our business and operating results could be harmed.

If we do not effectively manage our growth, our ability to develop and market systems and products could suffer, which could negatively affect our operating results. Our management believes that in order to be successful we must appropriately manage the size of our business. This may mean reducing costs and overhead in certain economic periods, and selectively growing in periods of economic expansion. For example, starting in the fourth quarter of 2011 and continuing throughout most of 2012, we reduced our operating expenses and significantly reduced the number of employees, placing significant demands on our operational and financial infrastructure in response to adverse regulatory developments in Mexico. In addition, we will be required to implement operational, financial and management information procedures and controls that are efficient and appropriate for the size and scope of our operations. The management skills and systems currently in place may not be adequate and we may not be able to manage any significant reductions or growth effectively.

Our success will depend on the reliability and performance of third-party distributors, manufacturers and suppliers.

We compete with other companies for the production capacity of third-party suppliers for components. Certain of these competing companies have substantially greater financial and other resources than we have and thus we may be at a competitive disadvantage in seeking to procure production capacity. Our inability to contract with third-party manufacturers and suppliers to provide a sufficient supply of our products on acceptable terms and on a timely basis could negatively impact our relationships with existing customers and cause us to lose revenue-generating opportunities with potential customers.

We also rely on distributors to market and distribute our products, and we rely on casino operators to operate our electronic gaming equipment. If our operators or distributors are unsuccessful, we may miss revenue-generating opportunities that might have been recognized.

Our failure to obtain any necessary additional financing would have a material adverse effect on our business.

In order to grow our business, we may need to seek additional equity or debt financing. We may not be able to obtain such additional equity or debt financing when we need it or at all. Even if such financing is available, it may not be available on terms that are favorable to us or in sufficient amounts to satisfy our requirements. If we require, but are unable to obtain, sufficient additional financing in the future we may be unable to further protect our intellectual property sufficiently, meet customer demand or withstand adverse operating results. More importantly, if we are unable to raise additional capital when needed, our continued operations may have to be scaled down or even terminated and our ability to generate revenues would be negatively affected.

Enforcement of remedies or contracts against Native American tribes could be difficult.

Contracts with Native American tribes are subject to sovereign immunity and tribal jurisdiction. If a dispute arises with respect to any of those agreements, it could be difficult for us to protect our rights. Native American tribes generally enjoy sovereign immunity from suit similar to that enjoyed by individual states and the United States. In order to sue a Native American tribe (or an agency or instrumentality of a Native American tribe), the tribe must have effectively waived its sovereign immunity with respect to the matter in dispute. Moreover, even if a Native American tribe were to waive sovereign immunity, such waiver may not be valid and in the absence of an effective waiver of sovereign immunity by a Native American tribe, we could be precluded from judicially enforcing any rights or remedies against that tribe.

Change in business strategies could adversely impact market success or financial performance.

We recently changed our strategic focus from traditional North American poker markets to international markets. Our existing systems, PokerPro and ProCore, may not be successful in those markets and operating in foreign countries carries additional operational, regulatory and currency risk than traditional U.S. markets. If we are unsuccessful in those markets, or incur significant additional expenses to operate in those markets, our financial results could be negatively affected.

The concentration of our common stock ownership by our founders will limit your ability to influence corporate matters.

Our Board members and corporate officers combined own approximately 40.3% of the outstanding shares of our common stock and therefore have significant influence over our management and affairs and over all matters requiring shareholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets, for the foreseeable future. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that some of our shareholders do not view as beneficial. In addition, such concentrated control could discourage others from initiating changes of control. As a result, the market price of our common stock could be adversely affected.

Our Board’s ability to issue “blank check” preferred stock and any anti-takeover provisions we adopt may depress the value of our common stock.

Our authorized capital includes 5,000,000 shares of “blank check” preferred stock. Our Board has the power to issue any or all of the shares of such preferred stock, including the authority to establish one or more series and to fix the powers, preferences, rights and limitations of such class or series, without seeking shareholder approval, subject to certain limitations on this power under the listing requirements of the NASDAQ Stock Market LLC. We may, in the future, consider adopting certain other anti-takeover measures. The authority of our Board to issue “blank check” preferred stock and any future anti-takeover measures we may adopt may in certain circumstances delay, deter or prevent takeover attempts and other changes in control of our company not approved by our Board. As a result, our shareholders may lose opportunities to dispose of their shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal and the market price of our common stock and the voting and other rights of our shareholders may also be affected.

There are certain limitations on ownership of five percent or more of our common stock and we will have the right to redeem your shares of common stock if your ownership jeopardizes any regulatory certifications, licenses or approvals we hold.

Our Restated Articles of Incorporation provide that no person or entity may become the beneficial owner of 5% or more of our outstanding shares of common stock unless such person or entity agrees to provide personal background and financial information to, consent to a background investigation by and respond to questions from the applicable gaming authorities in any jurisdiction in which we do business or desire to do business. Our Restated Articles of Incorporation also provides that we may redeem any or all shares of common stock held by any person or entity whose status as a shareholder, in the opinion of our Board, jeopardizes the approval, continued existence or renewal of any regulatory approval we hold. The amount that we will pay for such redeemed shares will equal the highest closing price of our common stock, as reported on the NASDAQ Capital Market or other exchange or quotation service on which our common stock is then listed or quoted, during the 30 days immediately preceding the date on which notice of redemption is given. This provision may force you to sell your shares of common stock before you would choose to do so and may cause you to realize a loss on your investment.

Our common stock price has been volatile. Fluctuations in our stock price could impair our ability to raise capital and make an investment in our securities undesirable.

Historically, the market price of our common stock has fluctuated significantly. We believe factors such as the market’s acceptance of our products and the performance of our business relative to market expectations, as well as general volatility in the securities markets, could cause the market price of our common stock to fluctuate substantially. In addition, the stock markets have experienced price and volume fluctuations, resulting in changes in the market prices of the stock of many companies, which may not have been directly related to the operating performance of those companies. Fluctuations in our stock price could impair our ability to raise capital and make an investment in our securities undesirable. During the year ended December 31, 2012, the closing price of our common stock as quoted on the NASDAQ Capital Market ranged from a low of $0.61 to a high of $1.31.

Our shares of common stock are at risk of being delisted by NASDAQ.

On July 11, 2012, we 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 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”). The Notice also stated that we had 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 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.

As of January 7, 2013, our common stock had achieved a closing bid price of $1.00 or more for 10 consecutive business days as required by NASDAQ. On that date, we received written notification from the NASDAQ Listing Qualifications Department that we had regained compliance with the minimum closing bid price requirement of $1.00 per share for continued listing of its common stock on the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule Section 5550(a)(2).

Although we regained compliance as of January 7, 2013, we cannot assure you that we will continue to comply with the Minimum Bid Price Rule in the future, or that we will be able to comply with any other continued listing requirements in the future. If we were unable to maintain compliance with the NASDAQ continued listing requirements in the future, our common stock could be delisted and 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., which could adversely impact an investor’s ability to sell his, her or its shares of Common Stock in a timely and efficient manner.

If our Common Stock is delisted from NASDAQ, you may have difficulty selling shares of our Common Stock.

If our stock is delisted, you may find it difficult to dispose of or obtain accurate quotations as to the market value of your shares. In addition, securities not listed on an exchange may be subject to the “penny stock” rules, which may further limit its liquidity. The “penny stock” rules apply to any security that is not listed on an exchange and that trades below $5.00 per share. Broker-dealers who recommend “penny stocks” to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker-dealer must make an individualized written suitability determination for the purchaser, considering such purchaser’s financial situation, investment experience and investment objectives, with respect to “penny stock” transactions and receive the purchaser’s written consent prior to the transaction. Our common stock may be considered a “penny stock” if it trades below $5.00 per share and we do not meet certain net asset or revenue thresholds. The “penny stock” rules severely limit the liquidity of securities in the secondary market, and many brokers choose not to participate in “penny stock” transactions. As a result, there is generally less trading in “penny stocks.” Accordingly, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate. In addition, if we are subject to the “penny stock” rules it may be more difficult for us to raise additional capital.

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 SEC declared effective a registration that we had filed to cover the resale of shares of our common stock issued and sold (or to be issued and sold) pursuant to a certain Purchase Agreement that we had entered into in June 2010. 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 at 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 (the “Securities 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, 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.) Accordingly, we reduced shareholders’ equity by $71,183, the total amount that we would have to refund if all the purchasers of those shares exercised their rescission right. In addition, we also may have indemnification obligations to the selling shareholder under that prospectus

We do not intend to pay dividends on our common stock.

We have never declared or paid any cash dividend on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We currently lease our corporate office and manufacturing facility. This facility is approximately 14,400 square feet and is located in Matthews, North Carolina. Our leased space is in good order and condition, and is adequate to satisfy our current needs. We recently exercised an option to extend this lease through August 31, 2016. This facility is leased from an entity owned and controlled by our President and our Vice Chairman of the Board. (See Note 14 – “Related Party Transactions.”)

Item 3. Legal Proceedings.

On August 21, 2009, a complaint was filed against us in the United States District Court for the District of Nevada by Marvin Roy Feldman. The plaintiff was seeking unspecified monetary damages related to the distribution of PokerPro in Mexico. While we believe that the claims were unfounded and that we have several meritorious defenses to these claims, we entered into a settlement agreement with the plaintiff on December 3, 2012 to avoid the costs and risks of a trial. The amount of settlement was within our previously reserved range of loss and did not have a material impact on our financial statements as of December 31, 2012.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Stock Listing

Our common stock is traded on The NASDAQ Capital Market under the symbol PTEK. The table below shows the high and low sales prices for our common stock for the periods indicated, as reported by The NASDAQ Capital Market.

	Market Prices of Common Stock
	2012				2011
Quarter ended	High		Low		High		Low
March 31	$	1.04	$	0.61	$	1.93	$	1.03
June 30		1.08	$	0.61		1.65		1.24
September 30		1.05	$	0.64		1.48		0.80
December 31		1.40		0.70		1.44		0.46

As of March 13, 2013, there were approximately 2,062 beneficial and 43 record holders of our common stock.

Transfer Agent

Our transfer agent is Broadridge Corporate Issuer Solutions, Inc. located at 1717Arch Street, Suite 1300, Philadelphia, PA 19103, (877) 830-4936.

Dividends

To date no cash dividends have been paid with respect to our common stock and current policy of the Board is to retain any earnings to provide for growth. The payment of cash dividends in the future, if any, will depend on factors such as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our Board.

Item 6. Selected Financial Data.

The following selected financial data has been derived from audited financial statements for the years ended December 31, 2012, 2011, 2010, 2009 and 2008. The selected financial data set forth below should be read together with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as Item 8 – “Financial Statements and Supplementary Data” and the related notes to those consolidated financial statements appearing elsewhere in this Report.

	Years Ended December 31,
	2012 (1)			2011 (1)			2010 (1)			2009 (1)			2008 (1)
(in thousands, except per share amounts and gaming positions)
Statement of operations data (continuing operations):
Revenue	$	5,177		$	6,496		$	5,899		$	5,414		$	9,669
Gross profit		3,758			4,555			3,872			2,398			3,969
Operating loss		(690	)		(1,497	)		(2,628	)		(4,864	)		(8,110	)
EBITDAS (3)		423			456			(126	)		(1,382	)		(4,171	)

Statement of cash flows data (continuing operations):
Net cash used in operating activities	$	(843	)	$	(882	)	$	(634	)	$	(2,438	)	$	(6,562	)
Net cash provided by (used in) investing activities		(1	)		(19	)		(3	)		3,887			1,958
Net cash provided by (used in) financing activities		405			817			491			(2,389	)		4,855

Loss per common share:
Net loss per common share from continuing	$	(0.11	)	$	(0.24	)	$	(0.48	)	$	(1.10	)	$	(1.93	)
operations - basic and diluted
Net loss per common share - basic and diluted	$	(0.10	)	$	(0.27	)	$	(0.69	)	$	(1.19	)	$	(1.75	)
Weighted average common shares outstanding (2)		7,974			6,784			5,888			4,787			4,376

Balance sheet data (at end of period from continuing
operations):
Current assets	$	2,440		$	3,335		$	3,314		$	5,230		$	10,950
Total assets		4,332			4,702			6,052			8,283			15,706
Current liabilities		946			1,198			1,959			1,970			5,533
Total liabilities		1,406			2,166			3,246			2,783			7,572
Shareholders' equity		2,855			2,536			2,806			5,500			8,134

Gaming positions:
PokerPro		2,160			1,944			2,514			2,044			2,314
ProCore		150			84			-			-			-
Total		2,310			2,028			2,514			2,044			2,314

(1)	During fiscal 2010, we exited our amusement business and our Heads-Up Challenge product. As such, we report our amusement business as a discontinued operation for all periods presented.

(2)	On February 25, 2011, we completed a 2.5-to-1 reverse stock split. All share amounts have been restated to reflect the reverse stock split.

(3)

In addition to disclosing financial results prepared in accordance with GAAP, we disclose information regarding EBITDAS, which differs from the term EBITDA as it is commonly used. In addition to adjusting net loss to exclude taxes, interest, and depreciation and amortization, EBITDAS also excludes share-based compensation expense. EBITDA and EBITDAS are not measures of performance defined in accordance with GAAP. However, EBITDAS is used internally by our management and by our lenders in evaluating our operating performance. Accordingly, management believes that disclosure of this metric offers investors, lenders and other stakeholders with an additional view of our operations that, when coupled with the GAAP results, provides a more complete understanding of our financial results. EBITDAS should not be considered as an alternative to net loss or to net cash used in operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation of GAAP net loss from continuing operations to EBITDAS is as follows:

	Years Ended December 31,
	2012			2011			2010			2009			2008
EBITDAS Reconciliation
Net loss from continuing operations	$	(846,391	)	$	(1,641,620	)	$	(2,814,675	)	$	(5,259,895	)	$	(8,467,102	)
Interest expense, net		69,351			93,844			131,175			287,956			94,285
Income tax provision		86,908			50,569			55,916			107,865			262,905
Other taxes		9,474			22,614			36,884			7,647			107,752
Depreciation and amortization		751,832			1,245,100			1,807,195			2,729,630			2,737,008
Stock-based compensation expense		351,996			685,708			657,490			744,856			1,094,028
EBITDAS	$	423,170		$	456,215		$	(126,015	)	$	(1,381,941	)	$	(4,171,124	)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our results of operations and financial condition together with the Selected Financial Data and the audited historical consolidated financial statements and related notes included elsewhere. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and you are urged to review and consider disclosures that we make in this and other reports that discuss factors germane to our business.

Company Overview and Business Strategy

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. We distribute our electronic table games using an internal sales force, complemented by distributors and sales agents in select geographic areas, 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. As of December 31, 2012, our installed base consisted of 2,310 gaming positions, composed of 2,160 PokerPro and 150 ProCore positions.

ProCore is a unique 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. 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 electronic table games using an internal sales force, complemented by distributors and sales agents in select geographic areas, 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 have a unique 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 worldwide 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.

Results of Operations

Statement of Operations – Selected Data

	Year Ended December 31,
	2012			2011			Change
Revenue
License and service fees	$	4,367,132		$	4,964,232			-12.0	%
Sales of systems and equipment		810,147			1,532,191			-47.1	%
Total revenue		5,177,279			6,496,423			-20.3	%

Gross profit		3,757,928			4,554,759			-17.5	%
Percentage of revenue		72.6	%		70.1	%

Operating expenses		4,448,060			6,051,966			-26.5	%

Interest expense, net		69,351			93,844			-26.1	%
Income tax provision		86,908			50,569			71.9	%

Net loss from continuing operations		(846,391	)		(1,641,620	)		48.4	%
Net income (loss) from discontinued operations		52,263			(169,032	)		130.9	%
Net loss		(794,128	)		(1,810,652	)		56.1	%

Results of Operations for the Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Revenue. Revenue from North America increased with new installations in Canada and the United States in the second half of 2012. However, revenue comparisons to the prior year were impacted by several factors, including the timing of our reentry in Mexico, a trend of declining economic conditions in Eastern Europe, and a shift in our revenue mix from hardware sales to more recurring revenue in 2012. As a result, total annual revenue was $5.2 million in 2012 compared to $6.5 million in 2011, a reduction of 20.3%.

Revenue from license and service fees was $4.4 million for the year ended December 31, 2012 compared to $5.0 million for the year ended December 31, 2011. In 2012, our revenue was more heavily weighted towards recurring revenue license and service fees, whereas the prior year was more heavily weighted towards sales of systems and equipment. The change in sales mix creates unfavorable total revenue comparisons to prior year, but also represents an increase in the base of recurring revenue carrying forward to 2013.

Gross profit. Gross profit was $3.8 million for year ended December 31, 2012 compared to $4.6 million for the year ended December 31, 2011, a decrease of 17.5%. Gross profit as a percent of revenue was 72.6% and 70.1% for the years ended December 31, 2012 and 2011, respectively. Gross profit margins improved primarily due to changes in sales mix which are more heavily weighted to higher margin recurring revenue, as well as reduced product costs and depreciation.

Operating expenses. Operating expenses decreased by $1.6 million (26.5%) to $4.5 million for the year ended December 31, 2012 compared to $6.1 million for the year ended December 31, 2011 as we implemented cost reduction initiatives which have streamlined our overhead and reduced spending on personnel, regulatory approvals, and professional fees.

Interest expense, net. Interest expense decreased 26.1% to $69,351 for the year ended December 31, 2012 from $93,844 for the year ended December 31, 2011. The decrease is primarily attributable to lower interest expense on lower balances of the Founders’ Loans (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 $86,908 for the year ended December 31, 2012 and $50,569 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 to 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 year ended December 31, 2012 was $0.8 million, an improvement of $0.8 million (48.4%) from $1.6 million for the year ended December 31, 2011. Net loss from continuing operations was $0.11 per share for the year ended December 31, 2012, an improvement of $0.13 (54.2%) per share compared to $0.24 for the comparable period of 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 year ended December 31, 2012 was $52,263 ($0.01 per share) compared to a net loss from discontinued operations of $169,032 ($0.03 per share) for the year ended December 31, 2011

Net loss. Net loss for the year ended December 31, 2012 was $0.8 million, an improvement of $1.0 million (56.1%) from $1.8 million for the year ended December 31, 2011. Net loss per share was $0.10 for the year ended December 31, 2012, an improvement of $0.17 (63.0%) per share compared to a net loss per share of $0.27 for the comparable period of 2011. The improvement in net loss resulted primarily from reductions in operating expenses.

Liquidity and Capital Resources

We have incurred net losses for all annual periods since 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 order to finance our operations, we entered into equity transactions to raise capital and also maintained a credit facility, which are described in more detail below and in the notes to our financial statements included elsewhere in this report. We expect our revenues and earnings to increase in future periods, and we expect to reinvest these earnings in additional inventory and working capital to fund anticipated grown in our recurring revenue business.

Discussion of Statement of Cash Flows

	Years Ended December 31,
	2012			2011			Change
Continuing Operations:
Net cash used in operating activities	$	(842,870	)	$	(882,230	)	$	39,360
Net cash used in investing activities		(1,378	)		(18,925	)	$	17,547
Net cash provided by financing activities		405,049			817,261		$	(412,212	)
Net cash used in continuing operations		(439,199	)		(83,894	)		(355,305	)
Net cash provided by operating activities of discontinued operations		68,727			23,944			44,783
Net increase (decrease) in cash and cash equivalents		(370,472	)		(59,950	)
Cash and cash equivalents, beginning of year		606,229			666,179
Cash and cash equivalents, end of period	$	235,757		$	606,229

For the year ended December 31, 2012, net cash used in operating activities from continuing operations was essentially unchanged, improving 4.5% to $842,870 compared to $882,230 for the year ended December 31, 2011. While net loss from continuing operations improved by approximately $0.8 million, non-cash add-backs decreased by approximately $1.0 million on lower depreciation, shared-based compensation expense and doubtful accounts, and cash used for working capital decreased by approximately $0.2 million as compared with 2011.

Net cash used in investing activities decreased $17,547 to $1,378 for the year ended December 31, 2012 compared to $18,925 for the year ended December 31, 2011. As part of our ongoing cost reduction measures, we have curtailed capital expenditures, with the exception of investments required to support operations, including replacing aged equipment where necessary.

Net cash provided by financing activities was $405,049 for the year ended December 31, 2012, compared to net cash provided by financing activities of $817,261 for the year ended December 31, 2011. Cash provided by financing activities is due primarily to the issuance of common stock in the years ended December 31, 2012 and 2011. As our operating results improved in 2012, we reduced the level of our common stock being issued to fund our operations as compared to the prior year.

Net cash provided by operating activities of discontinued operations was $68,727 for the year ended December 31, 2012 compared to $23,944 for the year ended December 31, 2011. This increase is attributable to the sale of the remaining discontinued inventory during 2012.

Equity Offerings

Private Placement Transactions

During August 2012, we sold 361,239 shares of our common stock to four unaffiliated accredited investors (as defined under the Securities Act) at a price of $0.675 for an aggregate purchase price of $240,000 in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(5) and Rule 506 of Regulation D promulgated under the Securities Act.

On March 1, 2013, we sold 460,000 shares of our common stock to ten unaffiliated accredited investors (as defined under the Securities Act) at a price of $1.05 per share for an aggregate purchase price of $483,000 in a transaction exempt from the registration requirements of the Act pursuant to Section 4(5) and Rule 506 of Regulation D promulgated under the Act. This private placement transaction occurred subsequent to December 31, 2012 and is therefore not reflected in the accompanying consolidated financial statements.

Lincoln Park Transaction

In 2010, we entered into a Purchase Agreement with Lincoln Park Capital, LLC (“LPC”), pursuant to which we had the right, subject to the satisfaction of certain conditions, to sell and LPC was obligated to purchase from us up to $5,000,000 worth of shares of our common stock. One of those conditions was that the shares had to be covered by an effective registration statement at the time of sale. In 2012, we sold an aggregate of 263,511 shares of our common stock to LPC for gross proceeds of $189,608 under the Purchase Agreement. As of December 31, 2012, all of the shares covered by the registration statement filed in connection with the Purchase Agreement had been issued.

The registration statement that we filed with respect to the LPC Purchase agreement was declared effective on November 10, 2010. 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. However, we were subsequently 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, 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. To date, no claims for rescission or damages have been made.

Warrants

As of December 31, 2012, the following warrants were outstanding: 20,000 common stock warrants at an exercise price of $2.50 with an expiration date of March 31, 2015 issued in connection with a private placement in May 2010, and 40,000 common stock warrants at an exercise price of $2.75 with an expiration date of December 29, 2015 issued in connection with the LPC transaction.

Debt Financings

Founders’ Loan

On March 24, 2008, we 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 PokerTek and members of our Board of Directors at the time. Pursuant to the terms of the Note Purchase Agreement, the Lenders loaned us $2.0 million (the “Founders’ Loan”). Since that time the principal balance of the debt outstanding under the Founders’ Loan has been reduced to $300,000 through a series of transactions, including the transaction described below which took place during the year ended December 31, 2012. The Founders’ Loan contains no restrictive covenants and is collateralized by security interests in 18 PokerPro systems. Such security interests have been subordinated to the SVB Credit Facility.

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 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, 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. 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 was reduced to $300,000.

As a result of the modifications described above, the terms of the Founders’ Loan as of December 31, 2012 are as follows:

(i)	From July 23, 2012 through December 31, 2012, payments continued to be interest only, calculated at the rate of 9% per annum, on the remaining principal balance ($300,000).

(ii)

Beginning February 1, 2013 and the first day of each calendar month thereafter until January 1, 2017, we 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 Founders’ Loan and all accrued but unpaid interest thereon is finally due and payable on December 31, 2016.

Credit Facility

We maintain a credit facility with Silicon Valley Bank to support our working capital needs (the “SVB Credit Facility”). As of March 1, 2013, we entered into the “Seventh Amendment to Loan and Security Agreement”, which extended the maturity date for the facility to January 16, 2014. Maximum advances are determined based on the composition of our eligible accounts receivable and inventory balances with a facility limit of $625,000. The SVB Credit Facility bears interest at an annual rate equal to the greater of 6.5% or prime plus 2.0%. As of December 31, 2012 $550,000 was available under the SVB Credit Facility, based on our accounts receivable and inventory levels, and there were no amounts outstanding under the facility.

Operations and Liquidity Management

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

As of December 31, 2012, our cash balance was $236,000 and availability from our credit line was $550,000. Cash used in operations for the year ended December 31, 2012 was $843,000 including inventory purchases. The level of additional cash 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 our recurring-revenue gaming business, the related investments in inventory and level of spending on development and regulatory efforts;

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

●	Our ability to control growth of operating expenses as we grow the business, expand with new products in new markets;

●	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, and 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 plans call for entering new markets, launching new products and accelerating revenue growth while controlling operating expense and working capital levels. As we execute our growth plans, we intend to carefully monitor the impact of growth on our working capital needs and cash balances. We have demonstrated a trend of improving operating results over the past two years, and we expect those improving trends to continue into 2013.

We believe the capital resources available to us from our cash balances, credit facility, cash generated by improving the results of our operations and cash from financing activities 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 credit facility 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.

Impact of Inflation

To date, inflation has not had a material effect on our net sales, revenues or income from continuing operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

The table below sets forth our known contractual obligations as of December 31, 2012:

	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years

Debt obligations(1)	$	300,000	$	59,571	$	240,429	$	-	$	-
Operating lease obligations(2)		496,344		136,344		360,000		-		-
Purchase obligations(3)		434,673		434,673		-		-		-
Other long-term liabilities (4)		323,598		104,104		219,494		-		-
Total	$	1,554,615	$	734,692	$	819,923	$	-	$	-

(1)	Represents the outstanding principal amount and interest on the Founders’ Loan.

(2)

Represents operating lease agreements for office and storage facilities and office equipment. We recently exercised an option to extend this lease through August 31, 2016. The operating lease obligations in the table above have been adjusted to reflect that lease as if the extension had been in effect as of December 31, 2012.

(3)	Represents open purchase orders with our vendors.

(4)	Represents purchase of gaming inventory from Aristocrat International Pty. Limited and its Affiliates (“Aristocrat”), our former international distribution agent.

Customer Dependence

For the year ended December 31, 2012, five of our customers made up approximately 73.2% of our total revenues from continuing operations, with one accounting for 39.8%, a second accounting for 12.3%, a third accounting for 9.2%, a fourth accounting for 6.5%, and a fifth accounting for 5.4%. The loss of any of these customers or changes in our relationship with any of 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.

We completed a 2.5-to-1 reverse stock split on February 24, 2011. As a result of the reverse stock split, every 2.5 shares of common stock were combined into 1 share of common stock. All consolidated financial statements and notes to the consolidated financial statements for periods prior to February 24, 2011 have been retroactively restated to reflect the reverse stock split.

Research and development

Research and development costs are charged to expense when incurred and are included in the consolidated statements of operations, except when certain qualifying expenses are capitalized. Capitalization of development costs of software products begins once the technological feasibility of the product is established. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. As of December 31, 2012 and 2011, no amounts were capitalized as technological feasibility is generally established at or near the time of general release. Research and development costs include salaries, benefits, travel and other internal costs allocated to software and hardware development efforts, as well as purchased components, engineering services and other third-party costs.

Inventories

Inventories are stated at the lower of cost or market, where cost is determined on a first-in, first-out basis. Inventories also include parts from gaming systems that have been used at customer sites and returned for refurbishment and subsequent redeployment with customer. Those inventory items are stated at the lower of cost or market, where cost is determined based on the undepreciated cost of the returned items. We regularly review inventory for slow moving, obsolete and excess characteristics and evaluate whether inventory is sated at the lower of cost or net realizable value.

Revenue Recognition

In October 2009, the FASB amended the ASC as summarized in ASU No. 2009-14 Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASU 2009-14 amends industry specific revenue accounting guidance for software and software related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. ASU 2009-13 amends the accounting for multiple-deliverable arrangements to provide guidance on how the deliverables in an arrangement should be separated and eliminates the use of the residual method. ASU 2009-13 also requires an entity to allocate revenue using the relative selling price method. We make judgments which include the allocation of proceeds from multiple-deliverable arrangements to individual units of accounting and the appropriate timing of revenue recognition. Effective January 1, 2011, we adopted the provisions of ASU 2009-13 and ASU 2009-14 for new and materially modified arrangements originating on or after January 1, 2011.

The adoption of ASU 2009-13 and ASU 2009-14 increased net revenue reported for the year ended December 31, 2011 by $0.2 million as compared to the amount that would have been reported had we still been subject to the prior revenue guidance for all transactions. The increase in revenue for the year ended December 31, 2011 was due to the recognition of revenue that would have been previously deferred for multiple-deliverable arrangements, which include hardware with embedded software, professional services and post-contract customer support (“PCS”), where we were unable to establish vender-specific objective evidence (“VSOE”) of fair value for PCS. Under the previous accounting guidance in ASC Topic 985, which continues to be followed for transactions entered into prior to January 1, 2011, revenue from software-related multiple-deliverable arrangements was deferred and recognized as PCS was delivered due to the absence of VSOE for PCS which is a requirement for separation of units of accounting under ASC Topic 985. The new standard allows for deliverables for which revenue would have been previously deferred to be separated into units of accounting with amounts allocated based on relative selling price if the delivered items have stand-alone value. As a result, for many of our multiple-deliverable transactions where revenue was previously deferred and recognized as PCS was delivered, revenue is now recognized as each deliverable representing a separate unit of accounting is delivered. We expect the adoption to have a material impact on future periods; however we cannot estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified arrangements in any given period.

For contracts considered multiple-deliverable arrangements that were entered into or materially modified during or after 2011 which are subject to the new accounting guidance, we evaluate each deliverable to determine whether they represent a separate unit of accounting. The delivered item constitutes a separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the delivered items where performance of the undelivered item is not considered probable and substantially in our control. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined for the combined unit as a single unit of accounting. Allocation of arrangement consideration is determined at arrangement inception on the basis of each unit’s relative selling price.

Our multiple-deliverable product offerings include both the sale and lease of gaming system hardware with embedded software, and the provision of professional services and PCS. The gaming system hardware and the embedded software are considered a single unit of accounting on a combined basis under the new accounting guidance as the software is essential to the functionality of the hardware, and the software is never sold separately from the hardware. The professional services and PCS are each considered separate units of accounting. For fiscal year 2011 and future periods, pursuant to the guidance in ASU 2009-13, when a sale or lease arrangement contains multiple deliverables, we allocate revenues to each unit of accounting based on the selling price hierarchy: VSOE, third-party evidence (“TPE”), and the best estimate of selling price (“BESP”). If VSOE is available, it must be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then the BESP would be used. We have not been able to establish VSOE for any deliverables in an arrangement with multiple deliverables due to infrequent sales of each item separately, not pricing products within a narrow range, or only having a limited sales history.

When VSOE cannot be established, we attempt to determine the standalone selling price for each deliverable based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. We have been unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, we have not been able to establish TPE for any deliverables.

Since we have typically been unable to determine VSOE or TPE, we use BESP in its allocation of the arrangement consideration for contracts. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine BESP for product or service considering multiple factors and data points, including, but not limited to, internal costs, gross margin objectives and pricing practices for standalone sales and when products are sold with other deliverables. Market conditions and competitive factors are taken into account in determining our pricing practices. We limit the amount of revenue recognized for delivered items to the amount of BESP that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.

For product sale arrangements containing multiple deliverables, revenue is generally recognized upfront for the hardware and embedded software unit of accounting in the amount allocated based on the relative selling price method (using BESP). Revenue allocated to professional services (installation and training) is recognized as those services are delivered, which usually occurs at or near the time of delivery of the hardware and embedded software unit of accounting (gaming system). Revenue allocated to PCS services is recognized as those services are delivered on a ratable basis over the PCS term. Revenue recognized from the delivery of gaming systems and installation and training services are limited to those amounts that are not contingent upon the delivery of future PCS or other services.

Our lease arrangements are generally accounted for as operating leases as the terms are typically less than or equal to one year and they do not contain bargain purchase options, transfer of ownership or have minimum lease payments greater than 90% of the fair value of the leased equipment. For lease arrangements containing multiple deliverables, revenue from fixed-fee leases of hardware and embedded software is generally recognized on a straight-line basis over the contract term. For leases where consideration varies based on the monthly amount of revenue earned by the customer, revenue is generally recognized on a monthly basis as the lease price for each period becomes fixed and determinable. To the extent that installation and training services are provided in a lease arrangement, those professional services are treated as separate units of accounting and the allocated amounts are recognized as those services are delivered, limited to the amount that is not contingent upon the delivery of future services.

If a customer initially leases gaming systems and subsequently purchases the equipment, revenue is recorded on the effective date of the purchase agreement and when all other relevant revenue recognition criteria have been met. In addition to selling multiple-deliverable arrangements, we also sell certain products and services on a stand-alone basis that were not specifically affected by the adoption of ASU 2009-13 and ASU 2009-14. These transactions would include the sale of complete gaming systems (a rare occurrence) and the sale of spare parts and other peripheral equipment separately from the delivery of other products and services under multiple-deliverable arrangements.

Regardless of whether a transaction is a multiple-deliverable transaction subject to ASU 2009-13 and ASU 2009-14 or a stand-alone transaction, revenue is recognized only when persuasive evidence of an arrangement exists, shipment has occurred, the sales price is fixed or determinable, and collection of the resulting receivable is reasonably assured. If customer arrangements require formal notification of acceptance by the customer, revenue is recognized upon meeting such acceptance criteria.

Gaming systems and property and equipment

Our gaming systems represent equipment owned by us. The majority of this equipment is operated at customer sites pursuant to contractual license agreements. Our gaming systems may also include equipment used by us for demonstration or testing purposes.

Our gaming systems are transferred from our respective inventory accounts to the gaming systems account at the time the units are fully assembled, configured, tested and otherwise ready for use by a customer. Because the configuration of each gaming system is unique to the specific customer environment in which it is being placed, the final steps to configure and test the unit generally occur immediately prior to shipment. Depreciation expense for our gaming systems begins in the month of transfer of each gaming system from our inventory account to the gaming systems account.

Our gaming systems and property and equipment are stated at cost, less accumulated depreciation. We include an allocation of direct labor, indirect labor and overhead for each gaming system. Costs not clearly related to the procurement, manufacture and implementation are expensed as incurred. As gaming systems are returned from customer sites, the hardware components are dismantled and transferred to inventory at depreciated cost, and all labor, overhead and installation costs capitalized in connection with the original installation are expensed immediately. As the gaming systems are returned to our warehouse, the various hardware components are individually disassembled, inspected, tested, thoroughly cleaned and refurbished with new components as needed for redeployment. Unusable parts are scrapped. Refurbished systems are transferred from inventory to the gaming systems account and depreciated over their estimated useful life in a manner consistent with new gaming systems described above. In addition, when our products have been delivered but the revenue associated with the arrangement has been deferred, we transfer the balance from inventory to gaming systems. This balance is then charged to cost of revenue as the related deferred revenue is recognized.

Depreciation is computed using the straight-line method over the estimated useful life of the asset. Estimated useful lives are generally three to five years for gaming systems and five years for internal-use equipment and office furniture. Leasehold improvements are amortized over the shorter of the term of the lease or the useful life of the improvement. Expenditures for maintenance and repairs are expensed as incurred.

We evaluate property and equipment for impairment as an event occurs or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

Share-based compensation

We value our stock options issued based upon the Black-Scholes option pricing model and recognize the compensation over the period in which the options vest. We value restricted and unrestricted share grants and restricted stock units based on the closing market price of the shares at the date of grant and recognize compensation expense over the period in which the shares vest. There are inherent estimates made by management regarding the calculation of stock option expense, including volatility, expected life and forfeiture rate. (See Note 12 – “Shareholders’ Equity – Stock Incentive Plans.”)

We recognize compensation expense for options, shares and units that vest over time using the straight-line attribution approach. For performance-based options and shares issued to third parties, compensation expense is determined at each reporting date in accordance with the fair value method. Until the measurement date is reached, the total amount of compensation expense remains uncertain. Compensation expense is recorded based on the fair value of the award at the reporting date and then revalued, or the total compensation is recalculated, based on the current fair value at each subsequent reporting date.

Recent Accounting Pronouncements

At December 31, 2012, there were no recently issued accounting pronouncements that are expected to have a significant impact to our financial statements.

Fair Value Measurements

At the beginning of 2012, we adopted an ASU issued in January 2010 requiring separate disclosure of purchases, sales, issuances, and settlements of fair value instruments within the Level 3 reconciliation. Additionally, we adopted an ASU issued in May 2011 amending fair value measurements for US GAAP and IFRS convergence. The adoption of these ASUs did not have a material impact on our financial statements.

Recently Issued Accounting Standards or Updates

Presentation of Other Comprehensive Income

In June 2011, the FASB issued an ASU on presentation of comprehensive income to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of stockholders' equity, among other items. The guidance requires that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.

We adopted this ASU for our first quarter of fiscal 2012. Our total comprehensive income was comprised solely of net income for all periods presented. Accordingly, the adoption of this ASU did not affect the presentation of our financial statements.

Qualitative Impairment Assessment for Goodwill and Other Indefinite-Lived Intangibles

In September 2011, the FASB issued an ASU to simplify the annual goodwill impairment test by allowing an entity to first assess qualitative factors, considering the totality of events and circumstances, to determine that there is a greater-than 50% likelihood that the carrying amount of a reporting unit is less than its fair value. If so, then the two-step impairment test is not required. In July 2012, the FASB issued an ASU to simplify the impairment testing for other indefinite-lived intangibles in a similar fashion. Both ASUs will be effective for our 2013 first quarter and is not expected to have a material impact on our financial statements.

Offsetting Assets and Liabilities

In December 2011, the FASB issued an ASU to require new disclosures associated with offsetting financial instruments and derivative instruments on the balance sheet that will enable users to evaluate the effect on an entity’s financial position. This ASU will be effective for our 2014 first quarter and is not expected to have a material impact on our financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risks from both changes in interest rates and foreign exchange rates. A discussion of our primary market risks is presented below:

Cash and investments. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of December 31, 2012, the carrying value of our cash and cash equivalents approximated fair value.

We do not use derivative financial instruments for speculation, or trading purposes.

Fixed rate debt. As market interest rates fluctuate, the fair value of the fixed-rate Founders’ Loan will also fluctuate. The estimated fair value of the Founders’ Loan as of December 31, 2012 was $310,000. We estimate a 10% increase in interest rates would decrease the fair value by approximately $8,700. These changes would impact the fair value disclosures for this financial instrument, but would have no impact on interest expense paid or recognized in the consolidated statement of operations.

Variable rate debt. Our SVB Credit Facility bears interest at variable rates based on spreads over the prime rate. As of December 31, 2012, availability was $550,000 with no borrowings outstanding. A change in average interest rates would not have had a significant effect on net interest expense during 2012, as there were no balances outstanding under the SVB Credit Facility. As of December 31, 2012, the carrying value of our variable rate debt instruments approximated fair value. The SVB Credit Facility amended as of March 1, 2013. See “Debt Financings – Credit Facility” in Item 7 above.

Foreign currency risk. Our revenues from international customers and our inventory costs from international suppliers are exposed to the potentially adverse effects of currency exchange rates, local economic conditions, political instability and other risks associated with doing business in foreign countries. To the extent that our revenues and purchases from international business partners increase in the future, our exposure to changes in foreign economic conditions and currency fluctuations will increase.

Our dependence on foreign customers and suppliers means, in part, that we are affected by changes in the relative value of the U.S. dollar to foreign currencies, particularly the Euro, Canadian dollar, Mexican peso, Chinese RMB, and Taiwan dollar. Although receipts from foreign customers and our purchases of foreign products are principally negotiated and paid for in U.S. dollars, as our business becomes more international, payments denominated in foreign currencies may increase in the future. In addition, changes in the applicable currency exchange rates might negatively affect the profitability and business prospects of our customers and vendors. This, in turn, might cause such vendors to demand higher prices, delay shipments or discontinue selling to us. This also might cause such customers to demand lower prices, delay or discontinue purchases of our products or demand other changes to the terms of our relationships. These situations could in turn ultimately reduce our revenues or increase our costs, which could have a material adverse effect on our business, financial condition or results of operations.

We do not use derivative financial instruments for speculation or trading purposes or engage in any other hedging strategies with regard to our foreign currency risk.

Item 8. Financial Statements and Supplementary Data.

(a)	Financial Statements

The information required by this Item is submitted as a separate section of this Report commencing on page 32, attached hereto.

(b)	Supplementary Data

Selected quarterly financial data for 2012 and 2011 is as follows:

	2012
		Q1			Q2			Q3			Q4
Revenue
License and service fees	$	1,083,414		$	906,929		$	1,097,641		$	1,279,148
Sales of systems and equipment		594,523			134,654			16,537			64,433
Total revenue		1,677,937			1,041,583			1,114,178			1,343,581
Cost of revenue		385,979			301,376			324,816			407,180
Gross profit		1,291,958			740,207			789,362			936,401
Operating expenses		1,225,854			1,134,556			1,063,249			1,093,752
Net loss from continuing operations before income taxes		66,104			(394,349	)		(273,887	)		(157,351	)
Income tax provision		(6,727	)		(714	)		(52,353	)		(27,114	)
Net loss from continuing operations		59,377			(395,063	)		(326,240	)		(184,465	)
Income (loss) from discontinued operations		10,522			44,345			(4,754	)		2,150
Net loss	$	69,899		$	(350,718	)	$	(330,994	)	$	(182,315	)

Net loss from continuing operations per common share - basic and diluted	$	0.01		$	(0.05	)	$	(0.04	)	$	(0.02	)
Net loss from discontinued operations per common share - basic and diluted		0.00			0.01			(0.00	)		0.00
Net loss per common share - basic and diluted		0.01			(0.05	)		(0.04	)		(0.02	)
Weighted average common shares outstanding - basic and diluted		7,564,104			7,563,120			8,130,413			8,627,770

		2011
		Q1			Q2			Q3			Q4
Revenue
License and service fees	$	1,355,959		$	1,222,933		$	1,257,107		$	1,128,233
Sales of systems and equipment		608,403			277,381			436,710			209,697
Total revenue		1,964,362			1,500,314			1,693,817			1,337,930
Cost of revenue		571,100			430,966			540,690			398,908
Gross profit		1,393,262			1,069,348			1,153,127			939,022
Operating expenses		1,655,442			1,506,021			1,637,679			1,346,668
Net loss from continuing operations before income taxes		(262,180	)		(436,673	)		(484,552	)		(407,646	)
Income tax provision		(4,538	)		(15,003	)		(10,417	)		(20,611	)
Net loss from continuing operations		(266,718	)		(451,676	)		(494,969	)		(428,257	)
Income (loss) from discontinued operations		(9,974	)		(429	)		1,216			(159,845	)
Net loss	$	(276,692	)	$	(452,105	)	$	(493,753	)	$	(588,102	)

Net loss from continuing operations per common share - basic and diluted	$	(0.04	)	$	(0.07	)	$	(0.07	)	$	(0.06	)
Net loss from discontinued operations per common share - basic and diluted		(0.00	)		(0.00	)		0.00			(0.02	)
Net loss per common share - basic and diluted		(0.04	)		(0.07	)		(0.07	)		(0.08	)
Weighted average common shares outstanding - basic and diluted		6,210,883			6,609,726			6,939,750			7,360,194

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

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.

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our financial reports have been made known to management, including our Chief Executive Officer and Chief Financial Officer, and other persons responsible for preparing such reports so that such information may be recorded, processed, summarized and reported in a timely manner. The circumstances surrounding the restatement of unaudited interim financial statements were made known to our Chief Executive Officer and Chief Financial Officer through operation of our disclosure controls and procedures and proper disclosures were made on a timely basis. In consideration of the disclosure circumstances surrounding the matter, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively at the Evaluation Date.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and in accordance with the interpretive guidance issued by the SEC in Release No. 34-55929. Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting during the quarter ended December 31, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information called for by this item may be found in our definitive Proxy Statement in connection with our 2013 Annual Meeting of Shareholders to be filed with the SEC under the headings “Board of Directors and Management,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance Matters” and is incorporated herein by reference.

Item 11. Executive Compensation.

Information called for by this item may be found in our definitive Proxy Statement in connection with our 2013 Annual Meeting of Shareholders to be filed with the SEC under the headings “Executive Compensation” and “Corporate Governance Matters” and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information called for by this item may be found in our definitive Proxy Statement in connection with our 2013 Annual Meeting of Shareholders to be filed with the SEC under the headings “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information called for by this item may be found in our definitive Proxy Statement in connection with our 2013 Annual Meeting of Shareholders to be filed with the SEC under the headings “Related Person Transactions” and “Corporate Governance Matters” and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

Information called for by this item may be found in our definitive Proxy Statement in connection with our 2013 Annual Meeting of Shareholders to be filed with the SEC under the headings “Independent Registered Public Accounting Firm Fee Information” and “Audit Committee Pre-Approval Policy” and is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as a part of this Form 10-K:

1. Financial Statements

The following financial statements are included in a separate section of this Report beginning on page 31:

●	Report of Independent Registered Public Accounting Firm;

●	Consolidated Statements of Operations for the years ended December 31, 2012 and 2011;

●	Consolidated Balance Sheets as of December 31, 2012 and 2011;

●	Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012 and 2011;

●	Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011; and

●	Notes to Consolidated Financial Statements.

2. Financial Statement Schedules

The following financial statement schedule is included in a separate section of this Report on page 54:

●	Valuation and Qualifying Accounts and Reserves

Other financial statement schedules are omitted because they are not required or are not applicable, or the required information is provided in the consolidated financial statements or notes described in Item 15(a)(1) above.

3. Exhibits

The Exhibits listed in the Exhibit Index, which appears immediately following the Financial Statement Schedules and is incorporated herein by reference, are filed as part of this Report.

(b) See the Exhibit Index.

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 13, 2013	By:	/s/ Mark D. Roberson
		Mark D. Roberson Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.




/s/	Mark D. Roberson	Date:	March 13,2013
Name:	Mark D. Roberson
Title:	Chief Executive Officer and Chief Financial Officer (Principal Executive and Financial Officer)


/s/	Joseph J. Lahti	Date:	March 13, 2013
Name:	Joseph J. Lahti
Title:	Chairman of the Board of Directors


/s/	Gehrig H. White	Date:	March 13, 2013
Name:	Gehrig H. White
Title:	Vice Chairman of the Board of Directors


/s/	James T. Crawford, III	Date:	March 13, 2013
Name:	James T. Crawford, III
Title:	President, Secretary and Director


/s/	Lyle A. Berman	Date:	March 13, 2013
Name:	Lyle A. Berman
Title:	Director


/s/	Arthur L. Lomax	Date:	March 13, 2013
Name:	Arthur L. Lomax
Title:	Director

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	32

Consolidated Statements of Operations for the years ended December 31, 2012 and 2011	33

Consolidated Balance Sheets as of December 31, 2012 and 2011	34

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012 and 2011	35

Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011	36

Notes to Consolidated Financial Statements	37

Consolidated Financial Statement Schedules:
II. Valuation and Qualifying Accounts and Reserves	54

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

PokerTek, Inc.

Matthews, North Carolina

We have audited the accompanying consolidated balance sheets of PokerTek, Inc. and subsidiaries (“PokerTek” or the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule of PokerTek listed in Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PokerTek and subsidiaries as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ McGladrey LLP

Charlotte, North Carolina

March 13, 2013

POKERTEK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2012			2011
Revenue
License and service fees	$	4,367,132		$	4,964,232
Sales of systems and equipment		810,147			1,532,191
Total revenue		5,177,279			6,496,423
Cost of revenue		1,419,351			1,941,664
Gross profit		3,757,928			4,554,759
Operating expenses:
Selling, general and administrative		3,403,366			4,313,333
Research and development		679,431			982,782
Share-based compensation expense		351,996			685,708
Depreciation		13,267			70,143
Total operating expenses		4,448,060			6,051,966
Operating loss		(690,132	)		(1,497,207	)
Interest expense, net		69,351			93,844
Net loss from continuing operations before income taxes		(759,483	)		(1,591,051	)
Income tax provision		86,908			50,569
Net loss from continuing operations		(846,391	)		(1,641,620	)
Income (loss) from discontinued operations		52,263			(169,032	)
Net loss	$	(794,128	)	$	(1,810,652	)

Net loss from continuing operations per common share - basic and diluted	$	(0.11	)	$	(0.24	)
Net income (loss) from discontinued operations per common share - basic and diluted		0.01			(0.03	)
Net loss per common share - basic and diluted	$	(0.10	)	$	(0.27	)
Weighted average common shares outstanding - basic and diluted		7,973,609			6,783,724

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

POKERTEK, INC.
CONSOLIDATED BALANCE SHEETS

	December 31, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	235,757		$	606,229
Accounts receivable, net		794,769			726,520
Inventory		1,342,950			1,762,806
Prepaid expenses and other assets		66,988			147,487
Discontinued operations		-			92,310
Total current assets		2,440,464			3,335,352

Long-term assets:
Gaming systems, net		1,693,051			1,104,333
Property and equipment, net		26,967			38,855
Other assets		171,498			223,333
Total long-term assets		1,891,516			1,366,521
Total assets	$	4,331,980		$	4,701,873

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	274,609		$	321,955
Accrued liabilities		465,300			468,958
Deferred revenue		42,266			281,466
Long-term liability - related party, current portion		104,104			54,952
Long-term debt, current portion		59,571			-
Discontinued operations		-			70,383
Total current liabilities		945,850			1,197,714

Long-term liabilities:
Long-term liability - related party		219,494			268,646
Long-term debt		240,429			700,000
Total long-term liabilities		459,923			968,646
Total liabilities		1,405,773			2,166,360
Commitments and contingencies - see note 16
Common stock subject to rescission		71,183			-
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 40,000,000		-			-
shares, issued and outstanding 8,625,498 and 7,490,124 shares at
December 31, 2012 and December 31, 2011, respectively
Additional paid-in capital		49,481,922			48,368,283
Accumulated deficit		(46,626,898	)		(45,832,770	)
Total shareholders' equity		2,855,024			2,535,513
Total liabilities and shareholders' equity	$	4,331,980		$	4,701,873

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

POKERTEK, INC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


	Common Stock											Total
	Shares			Value		Additional Paid-in Capital			Accumulated Deficit			Shareholders' Equity
Balance, December 31, 2010		6,187,853		$	-	$	46,827,622		$	(44,022,118	)	$	2,805,504

Issuances of common stock, net		937,126			-		976,330			-			976,330
Share-based compensation, net		365,145			-		564,331			-			564,331
Net loss		-			-		-			(1,810,652	)		(1,810,652	)
Balance, December 31, 2011		7,490,124		$	-	$	48,368,283		$	(45,832,770	)	$	2,535,513

Issuances of common stock, net		1,148,295					785,385						785,385
Share-based compensation, net		(12,921	)				399,437						399,437
Common stock subject to rescission							(71,183	)					(71,183	)
Net loss										(794,128	)		(794,128	)
Balance, December 31, 2012		8,625,498		$	-	$	49,481,922		$	(46,626,898	)	$	2,855,024

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

POKERTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(794,128	)	$	(1,810,652	)
Net income (loss) from discontinued operations		(52,263	)		169,032
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		751,832			1,245,100
Share-based compensation expense		351,996			685,708
Provision for doubtful accounts and other receivables		123,214			308,094
Changes in assets and liabilities:
Accounts and other receivables		(186,382	)		73,869
Prepaid expenses and other assets		88,111			200,073
Inventory		419,856			(775,061	)
Gaming systems		(1,327,283	)		(24,260	)
Accounts payable and accrued expenses		20,994			(299,756	)
Deferred revenue		(238,817	)		(654,377	)
Net cash used in operating activities from continuing operations		(842,870	)		(882,230	)
Net cash provided by operating activities from discontinued operations		68,727			23,944
Net cash used in operating activities		(774,143	)		(858,286	)

Cash flows from investing activities:
Purchases of property and equipment		(1,378	)		(18,925	)
Net cash used in investing activities		(1,378	)		(18,925	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net of expenses		405,049			848,054
Repayments of capital lease		-			(30,793	)
Net cash provided by financing activities		405,049			817,261
Net increase (decrease) in cash and cash equivalents		(370,472	)		(59,950	)
Cash and cash equivalents, beginning of year		606,229			666,179
Cash and cash equivalents, end of period	$	235,757		$	606,229

Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest	$	66,587		$	82,581
Income taxes		49,645			48,750

Non-cash transactions:
Amortization of commitment fee issued in common stock	$	44,223		$	45,100
Issuance of common stock for debt cancellation		400,000			100,000
Transfers from inventory to property and equipment		-			9,319

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

POKERTEK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note 1. Nature of Business and Basis of Presentation

PokerTek, Inc. (the “Company”) is engaged in the development, manufacture and marketing of electronic table games and related products for casinos, cruise lines, racinos, card clubs and lotteries worldwide.

These consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. They have been prepared by the Company in accordance with accounting principles generally accepted in the United States. The financial statements of the Company’s foreign subsidiary are measured using the U.S. dollar as the functional currency. All significant intercompany transactions and accounts have been eliminated in consolidation.

The Company previously operated an amusement business. During 2010, the Company decided to exit the amusement business to focus the Company’s resources on the higher-margin gaming business. The results of operations of the amusement business are reflected as a discontinued operation in the accompanying consolidated financial statements for all periods presented.

The Company completed a 2.5-to-1 reverse stock split on February 25, 2011. As a result of the reverse stock split, every 2.5 shares of common stock were combined into 1 share of common stock. The consolidated financial statements and notes to the consolidated financial statements have been restated to reflect the reverse stock split for all periods presented.

Significant Accounting Policies

Accounting estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents. The Company considers all cash accounts and highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.

Concentrations of credit risk. Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, marketable securities and accounts receivables. The Company’s credit risk is managed by investing primarily in high-quality money market instruments and accounts guaranteed by the U.S. government and its agencies.

Receivables and allowance for doubtful accounts. The Company monitors its exposure for credit losses on its customer receivable balances and the credit worthiness of its customers on an ongoing basis and records related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical experience and aging of accounts. As of December 31, 2012 and December 31, 2011, the Company recorded an allowance for doubtful accounts of $185,700 and $146,200, respectively. If circumstances related to specific customers change, estimates of the recoverability of receivables could also change.

Deferred licensing fees. Deferred licensing fees consist of amounts paid to various regulatory agencies. As approvals are obtained, the Company begins expensing the fees over the estimated term of the license. Deferred licensing fees are included in other assets on the consolidated balance sheets.

Patents. Legal fees and application costs related to the Company’s patent application process are expensed as incurred. There is a high degree of uncertainty in the outcome of approval for any of the Company’s patents.

Research and development. Research and development costs are charged to expense when incurred and are included in the consolidated statements of operations, except when certain qualifying expenses are capitalized. Capitalization of development costs of software products begins once the technological feasibility of the product is established. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. Our research and development expenses were $0.7 million and $1.0 million during the fiscal years ended December 31, 2012 and December 31, 2011, respectively, consisting primarily of internal product development salaries and expenses and costs related to third-party engineering, prototyping and product testing.

Advertising. Advertising and promotional costs are expensed as incurred. Advertising costs for the years ended December 31, 2012 and 2011 were $16,500 and $2,400, respectively.

Inventories. Inventories are stated at the lower of cost or market, where cost is determined on a first-in, first-out basis. Inventories may include parts from gaming systems that have been previously operated at customer sites and returned for refurbishment and subsequent redeployment. Those inventory items are stated at the lower of cost or market, where cost is determined based on the depreciated cost of the returned items. The Company regularly reviews inventory for slow moving, obsolete and excess characteristics in relation to historical and expected usage and establishes reserves to value inventory at the lower of cost or estimated net realizable value. If expectations related to customer demand change or the Company changes its product offering in the future, estimates regarding the net realizable value of inventory could also change.

Revenue recognition. In October 2009, the FASB amended the Accounting Standards Codification (“ASC”) as summarized in ASU No. 2009-14 Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASU 2009-14 amended industry specific revenue accounting guidance for software and software related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. ASU 2009-13 amends the accounting for multiple-deliverable arrangements to provide guidance on how the deliverables in an arrangement should be separated and eliminates the use of the residual method. ASU 2009-13 also requires an entity to allocate revenue using the relative selling price method. The Company makes judgments which include the allocation of proceeds from multiple-deliverable arrangements to individual units of accounting and the appropriate timing of revenue recognition. Effective January 1, 2011, the Company adopted the provisions of ASU 2009-13 and ASU 2009-14 for new and materially modified arrangements originating on or after January 1, 2011.

The adoption of ASU 2009-13 and ASU 2009-14 increased net revenue reported for the year ended December 31, 2011 by $0.2 million as compared to the amount that would have been reported had the Company still been subject to the prior revenue guidance for all transactions. The increase in revenue for the year ended December 31, 2011 was due to the recognition of revenue that would have been previously deferred for multiple-deliverable arrangements, which include hardware with embedded software, professional services and post-contract customer support (“PCS”), where the Company was unable to establish vender-specific objective evidence (“VSOE”) of fair value for PCS. Under the previous accounting guidance in ASC Topic 985, which continues to be followed for transactions entered into prior to January 1, 2011, revenue from multiple-deliverable arrangements was deferred and recognized as PCS was delivered due to the absence of VSOE for PCS which is a requirement for separation of units of accounting under ASC Topic 985. The new standard allows for deliverables for which revenue would have been previously deferred to be separated into units of accounting with amounts allocated based on relative selling price if the delivered items have stand-alone value. As a result, for many of the Company’s software-related multiple-deliverable transactions where revenue was previously deferred and recognized as PCS was delivered, revenue is now recognized as each deliverable representing a separate unit of accounting is delivered. The Company expects the adoption could have a material impact on future periods; however the Company cannot estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified arrangements in any given period.

For contracts considered multiple-deliverable arrangements that were entered into or materially modified during or after 2011 which are subject to the guidance noted above, the Company evaluates each deliverable to determine whether they represent a separate unit of accounting. The delivered item constitutes a separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the delivered items where performance of the undelivered item is not considered probable and substantially in the Company’s control. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined for the combined unit as a single unit of accounting. Allocation of arrangement consideration is determined at arrangement inception on the basis of each unit’s relative selling price.

The Company’s multiple-deliverable product offerings include both the sale and lease of gaming system hardware with embedded software, and the provision of professional services and PCS. The gaming system hardware and the embedded software are considered a single unit of accounting on a combined basis as the software is essential to the functionality of the hardware, and the software is never sold separately from the hardware. The professional services and PCS are each considered separate units of accounting. For fiscal year 2011 and future periods, pursuant to the guidance in ASU 2009-13, when a sale or lease arrangement contains multiple deliverables, the Company allocates revenues to each unit of accounting based on the selling price hierarchy: VSOE, third-party evidence (“TPE”), and the best estimate of selling price (“BESP”). If VSOE is available, it must be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then the BESP would be used. The Company has not been able to establish VSOE for any deliverables in an arrangement with multiple deliverables due to infrequent sales of each item separately, not pricing products within a narrow range, or only having a limited sales history.

When VSOE cannot be established, the Company attempts to determine the standalone selling price for each deliverable based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. The Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company has not been able to establish TPE for any deliverables.

Since the Company is typically unable to determine VSOE or TPE, the Company uses BESP in its allocation of the arrangement consideration for contracts. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines BESP for product or service considering multiple factors and data points, including, but not limited to, internal costs, gross margin objectives and pricing practices for standalone sales and when products are sold with other deliverables. Market conditions and competitive factors are taken into account in determining the Company’s pricing practices. The Company limits the amount of revenue recognized for delivered items to the amount of BESP that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.

The Company’s lease arrangements are generally accounted for as operating leases as the terms are typically less than one year and they do not contain bargain purchase options, transfer of ownership or have minimum lease payments greater than 90% of the fair value of the leased equipment. For lease arrangements containing multiple deliverables, revenue from fixed-fee leases of hardware and embedded software is generally recognized on a straight-line basis over the contract term. For leases where consideration varies based on the monthly amount of revenue earned by the customer, revenue is generally recognized on a monthly basis as the lease price for each period becomes fixed and determinable. To the extent that installation and training services are provided in a lease arrangement, those professional services are treated as separate units of accounting and the allocated amounts are recognized as those services are delivered, limited to the amount that is not contingent upon the delivery of future services.

If a customer initially leases gaming systems and subsequently purchases the equipment, revenue is recorded on the effective date of the purchase agreement and when all other relevant revenue recognition criteria have been met. In addition to selling multiple-deliverable arrangements, the Company also sells certain products and services on a stand-alone basis that were not specifically affected by the adoption of ASU 2009-13 and ASU 2009-14. These transactions would include the sale of complete gaming systems (a rare occurrence) and the sale of spare parts and other peripheral equipment separately from the delivery of other products and services under multiple-deliverable arrangements.

Gaming systems and property and equipment. The Company’s gaming systems represent equipment owned by the Company. The majority of this equipment is operated at customer sites pursuant to contractual license agreements. Gaming systems may also include equipment used by the Company for demonstration or testing purposes.

Gaming systems are transferred from the Company’s respective inventory accounts to the gaming systems account at the time the units are fully assembled, configured, tested and otherwise ready for use by a customer. Because the configuration of each gaming system is unique to the specific customer environment in which it is being placed, the final steps to configure and test the unit generally occur immediately prior to shipment. Depreciation expense for gaming systems begins in the month of transfer of each gaming system from the Company’s inventory account to the gaming systems account.

Gaming systems and property and equipment are stated at cost, less accumulated depreciation. The Company includes an allocation of direct labor, indirect labor and overhead for each gaming system. Costs not clearly related to the procurement, manufacture and implementation are expensed as incurred. As gaming systems are returned from customer sites, the hardware components are dismantled and transferred to inventory at depreciated cost, and all labor, overhead and installation costs capitalized in connection with the original installation are expensed immediately. As the systems are returned to the Company’s warehouse, the various hardware components are individually taken apart, inspected, tested, thoroughly cleaned and refurbished with new components as needed for redeployment. Unusable parts are scrapped. Refurbished systems are transferred from inventory to the gaming systems account and depreciated over their estimated useful life in a manner consistent with new gaming systems described above. In addition, when the Company’s products have been delivered but the revenue associated with the arrangement has been deferred, the Company transfers the balance from inventory to gaming systems. This balance is then charged to cost of revenue as the related deferred revenue is recognized.

The Company evaluates property and equipment for impairment as an event occurs or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, the Company evaluates the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

Offering costs. Offering costs incurred in connection with the Company’s equity offerings, consisting principally of legal, accounting and underwriting fees, are charged to additional paid in capital as incurred.

Income taxes. The Company accounts for income taxes and uncertain tax positions in accordance with generally accepted accounting principles. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

The accounting for income taxes involves significant judgments and estimates and deals with complex tax regulations. The recoverability of certain deferred tax assets is based in part on estimates of future income and the timing of temporary differences. (See Note 13 – “Income Taxes.”)

Earnings (loss) per share. The Company computes earnings (loss) per share (“EPS”) in accordance with generally accepted accounting principles which require presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted to common stock. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all potential dilutive shares due to their anti-dilutive effect.

Share-based compensation. The Company values its stock options issued based upon the Black-Scholes option pricing model and recognize the compensation over the period in which the options vest. The Company values restricted and unrestricted share grants and restricted stock units based on the closing market price of the shares at the date of grant and recognize compensation expense over the period in which the shares vest. There are inherent estimates made by management regarding the calculation of stock option expense, including volatility, expected life and forfeiture rate. (See Note 12 – “Shareholders’ Equity – Stock Incentive Plans.”)

The Company recognizes compensation expense for options, shares and units that vest over time using the straight-line attribution approach. For performance-based options and shares issued to third parties, compensation expense is determined at each reporting date in accordance with the fair value method. Until the measurement date is reached, the total amount of compensation expense remains uncertain. Compensation expense is recorded based on the fair value of the award at the reporting date and then revalued, or the total compensation is recalculated, based on the current fair value at each subsequent reporting date.

Warrants. The Company evaluates its outstanding warrants at issuance and at each quarter end. As a result of its evaluation and analysis, management determined that its warrants should be classified as equity instruments in the accompanying consolidated balance sheets.

Shipping costs. The Company includes all of the outbound freight, shipping and handling costs associated with the shipment of products to customers in cost of revenue. Any amounts paid by customers to the Company for shipping and handling are recorded as revenue on the consolidated statement of operations.

Fair Value of Financial Instruments. Under generally accepted accounting principles, fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The fair value hierarchy for measurement and disclosure of the fair value for financial instruments is as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.

The fair value of financial assets and liabilities is determined at each balance sheet date and future declines in market conditions, the future performance of the underlying investments or new information could affect the recorded values of the Company’s investments.

Subsequent Events. Management has evaluated all events and transactions that occurred from January 1, 2013 through the date these consolidated financial statements were issued for subsequent events requiring recognition or disclosure in the financial statements.

Recent Accounting Pronouncements

At December 31, 2012, there were no recently issued accounting pronouncements that are expected to have a significant impact to the Company’s financial statements.

Fair Value Measurements

At the beginning of 2012, the Company adopted an ASU issued in January 2010 requiring separate disclosure of purchases, sales, issuances, and settlements of fair value instruments within the Level 3 reconciliation. Additionally the Company adopted an ASU issued in May 2011 amending fair value measurements for US GAAP and IFRS convergence. The adoption of these ASUs did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Standards or Updates

Presentation of Other Comprehensive Income

The Company adopted this ASU for its first quarter of fiscal 2012. The Company’s total comprehensive income was comprised solely of net income for all periods presented. Accordingly, the adoption of this ASU did not affect the presentation of the financial statements.

Qualitative Impairment Assessment for Goodwill and Other Indefinite-Lived Intangibles

In September 2011, the FASB issued an ASU to simplify the annual goodwill impairment test by allowing an entity to first assess qualitative factors, considering the totality of events and circumstances, to determine that there is a greater-than 50% likelihood that the carrying amount of a reporting unit is less than its fair value. If so, then the two-step impairment test is not required. In July 2012, the FASB issued an ASU to simplify the impairment testing for other indefinite-lived intangibles in a similar fashion. Both ASUs will be effective for the Company’s 2013 first quarter and is not expected to have a material impact on the Company’s financial statements.

Offsetting Assets and Liabilities

In December 2011, the FASB issued an ASU to require new disclosures associated with offsetting financial instruments and derivative instruments on the balance sheet that will enable users to evaluate the effect on an entity’s financial position. This ASU will be effective for the Company’s 2014 first quarter and is not expected to have a material impact on the Company’s financial statements.

Note 2. Operations and Liquidity Management

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

As of December 31, 2012, the Company’s cash balance was $236,000 and availability from its credit line was $550,000. Cash used in operations for the year ended December 31, 2012 was $843,000 including inventory purchases. The level of additional cash needed to fund operations and the Company’s ability to conduct business for the next year is influenced primarily by the following factors:

●	The pace of growth in its recurring-revenue gaming business, the related investments in inventory and level of spending on development and regulatory efforts;

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

●	Its ability to control growth of operating expenses as we grow the business, expand with new products in new markets;

●	Its ability to negotiate favorable payment terms with our customers and vendors;

●	Its ability to access the capital markets and maintain availability under our credit line;

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

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

The Company’s operating plans call for entering new markets, launching new products and accelerating revenue growth while controlling operating expense and working capital levels. As the Company executes its growth plans, it intends to carefully monitor the impact of growth on its working capital needs and cash balances. The Company has demonstrated a trend of improving operating results over the past two years, and it expects those improving trends to continue into 2013.

The Company believes the capital resources available to it from its cash balances, credit facility, cash generated by improving the results of its operations and cash from financing activities will be sufficient to fund its ongoing operations and to support its operating plans for at least the next 12 months. However, the Company may seek to raise additional capital or expand its credit facility to fund growth. The Company cannot assure you that, in the event it needs additional working capital, adequate additional working capital will be available or, if available, will be on terms acceptable to it. If the Company is unable to raise additional capital or expand its credit facilities, the Company’s ability to conduct business and achieve its growth objectives would be negatively impacted.

Note 3. Discontinued Operations

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

The results of operations and related non-recurring costs associated with the amusement business have been presented as discontinued operations for all periods. Additionally, the assets and liabilities of the discontinued operations have been segregated in the accompanying consolidated balance sheets. The statements of operations for the discontinued operations for the years ended December 31, 2012 and 2011 consisted of the following:

	Years Ended
	December 31,
	2012		2011

Revenue	$	151,555	$	179,381
Cost of revenue		88,312		238,205
Gross profit (loss)		63,243		(58,824	)
Operating expenses		10,980		110,208
Net income (loss) from discontinued operations	$	52,263	$	(169,032	)

Cost of revenue for the year ended December 31, 2011 included nonrecurring charges of $166,000 related to lower of cost or market adjustments resulting from the Company’s decision to offer deep discounts significantly below book value to facilitate final liquidation of remaining inventory.

Operating expenses of discontinued operations consist primarily of selling expenses, shipping charges, bad debts, and product certification expenses.

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

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

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

Note 4. Accounts Receivable

Accounts receivable at December 31, 2012 and 2011 consist of the following:

	December 31,			December 31,
	2012			2011

Accounts receivable	$	980,438		$	872,703
Allowance for doubtful accounts		(185,669	)		(146,183	)
Accounts receivable, net	$	794,769		$	726,520

Note 5. Inventory

Inventory at December 31, 2012 and 2011 consist of the following:

	December 31,			December 31,
	2012			2011

Raw materials and components	$	1,227,914		$	698,576
Gaming systems in process		193,515			374,638
Finished goods		100,060			926,889
Reserve		(178,539	)		(237,297	)
Inventory, net	$	1,342,950		$	1,762,806

Note 6. Prepaid Expenses and Other Assets

Prepaid expenses and other assets at December 31, 2012 and 2011 consist of the following:

	December 31,		December 31,
	2012		2011

Prepaid expenses	$	37,280	$	54,012
Stock issuance commitment fee, net		-		45,282
Other		29,708		48,193
Prepaid expenses and other assets	$	66,988	$	147,487

Deferred licensing fees, net	$	121,318	$	173,153
Other		50,180		50,180
Other assets	$	171,498	$	223,333

Note 7. Gaming Systems

Gaming systems at December 31, 2012 and 2011 consist of the following:

	December 31,			December 31,
	2012			2011
Gaming systems	$	7,210,226		$	6,473,043
Less: accumulated depreciation		(5,517,175	)		(5,368,710	)
Gaming systems, net	$	1,693,051		$	1,104,333

Note 8. Property and Equipment

Property and equipment at December 31, 2012 and 2011 consist of the following:

	December 31,			December 31,
	2012			2011

Equipment	$	458,094		$	456,715
Leasehold improvements		202,508			202,508
Capitalized software		157,067			157,067
		817,669			816,290
Less: accumulated depreciation		(790,702	)		(777,435	)
Property and equipment, net	$	26,967		$	38,855

Capitalized software consists of purchased software, consulting and capitalized internal costs related to the purchase and implementation of an internal-use enterprise resource management system. Accumulated depreciation on capitalized software was $157,067 at December 31, 2012 and 2011.

Note 9. Accrued Liabilities

Accrued liabilities at December 31, 2012 and 2011consist of the following:

	December 31,		December 31,
	2012		2011

Accrued professional fees	$	-	$	62,736
Accrued legal settlement		175,000		125,000
Inventory received, not invoiced		116,566		-
Other liabilities and customer deposits		173,734		281,222
Accrued liabilities	$	465,300	$	468,958

Note 10. Debt

The Company’s outstanding debt balances as of December 31, 2012 and 2011consist of the following:

	December 31,		December 31,
	2012		2011

SVB Credit Facility	$	-	$	-
Founders' Loan		300,000		700,000
Total debt		300,000		700,000
Current portion of debt		59,571		-
Long-term portion of debt	$	240,429	$	700,000

SVB Credit Facility. We maintain a credit facility with Silicon Valley Bank to support our working capital needs (the “SVB Credit Facility”). As of March 1, 2013, we entered into the “Seventh Amendment to Loan and Security Agreement”, which extended the maturity date for the facility to January 16, 2014. Maximum advances are determined based on the composition of our eligible accounts receivable and inventory balances with a facility limit of $625,000. The SVB Credit Facility bears interest at an annual rate equal to the greater of 6.5% or prime plus 2.0%.

Based on the Company’s accounts receivable and inventory levels on December 31, 2012, as of such date availability was approximately $550,000 with no amounts outstanding. The SVB Credit Facility includes covenants requiring the achievement of specified financial ratios and thresholds and contains other terms and conditions customary for this type of credit facility. As of December 31, 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).

As of December 31, 2012, there were no amounts drawn under the SVB Credit Facility.

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 PokerTek and members of our 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 through a series of transactions, including the transaction described below which took place during the year ended December 31, 2012. The Founders’ Loan contains no restrictive covenants and is collateralized by security interests in 18 PokerPro systems. Such security interests have been subordinated to the SVB Credit Facility.

At January 1, 2012, the outstanding balance on the Founders’ Loan was $700,000. 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 outstanding principal balance 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 of its common stock to Gehrig H. White in full satisfaction of the entire outstanding principal balance of Mr. White’s share of the Founders’ Loan, which 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 material terms of the Founders’ Loan are as follows:

(i)	From July 23, 2012 through December 31, 2012, monthly payments continued to be of interest only, calculated at the rate of 9% per annum on the remaining principal balance ($300,000 were due).

(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 December 31, 2012, the carrying value of the Founders’ Loan was $300,000 and its fair value was $310,000. During 2012 and 2011, the Company made $54,912 and $72,665, respectively, in aggregate interest payments in cash.

Capital Lease Obligation. During 2008, the Company entered into a 36-month capital lease, which expired in March 2011, to finance the purchase of a new internal-use ERP system for approximately $73,300. Under the lease, the Company made monthly payments of $2,400 and purchased the ERP system for $101 at the end of the lease term in March 2011.

In September 2010, the Company entered into a 12-month capital lease, which expired in August 2011, to finance the purchase of equipment for $29,000. Under the lease, the Company made monthly payments of $3,500 and purchased the software for $1 at the end of the lease term in August 2011.

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 established by the Internal Revenue Service. 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 years ended December 31, 2012 and 2011, the Company’s expenses related to the plan were $48,900 and $68,500, respectively.

Note 12. Shareholders’ Equity

Common and Preferred Stock

Common Stock. There are 40,000,000 authorized shares of the Company’s common stock of which 8,625,498 and 7,490,124 were outstanding as of December 31, 2012 and December 31, 2011, respectively.

Private Placement Transactions

On May 16, 2011, the Company completed a private placement of 506,161 shares of its common stock to accredited investors yielding aggregate proceeds of $648,440. The investors in the offering included certain of the Company’s executives and members of its Board of Directors including Joe Lahti, Mark Roberson, Lyle Berman, James Crawford and Lou White. These affiliates purchased an aggregate of 191,175 shares of common stock at $1.36 per share, the consolidated closing bid price reported on The NASDAQ Capital Market on May 12, 2011. In addition to the purchases by executives and Board members, non-affiliated accredited investors purchased an aggregate of 314,986 shares of the Company’s common stock at prices ranging from $1.22 to $1.24 per share, representing a 10% discount from the consolidated closing bid prices reported on The NASDAQ Capital Market on May 12, 2011 and May 13, 2011, respectively, the dates on which individual subscriptions were received.

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 the Company’s 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.

During August and September 2012, Gehrig H. White cancelled $400,000 of principal due under the Founders’ Loan as the consideration for share purchases. (See Note 10 “Debt.”)

During 2012 and 2011, the Company issued 0 and 132,008 shares of common stock to members of its Board of Directors for payment of board compensation. The number of shares was determined by dividing board compensation by the closing price on the NASDAQ Capital Market on the last trading day of the quarterly period.

On March 1, 2013, the Company sold 460,000 shares of its common stock to accredited investors (as defined under the Securities Act of 1933, as amended (the “Act”)) at a price of $1.05 per share (the “Private Placement”), yielding gross proceeds of $483,000 and net proceeds of approximately $474,000. The Private Placement was exempt from the registration requirements of the Act pursuant to Section 4(5) and Rule 506 of Regulation D promulgated under the Act. This private placement transaction occurred subsequent to December 31, 2012 and is therefore not reflected in the accompanying consolidated financial statements.

LPC Transaction

In 2010 the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital, LLC (“LPC”). Since 2010, the Company sold and/or issued an aggregate of 798,373 shares of its common stock and a warrant to purchase an additional 40,000 shares of its common stock at $2.75 per share at any time prior to December 29, 2015, to LPC for an aggregate of $764,594, including 263,511 shares sold in 2012 for gross proceeds of $189,608. The warrant contains a call provision exercisable by the Company in the event the Company’s common stock trades above $7.50 per share for 20 consecutive days.

As of December 31, 2012, zero shares covered by the registration statement remain available for sale.

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.

Warrants

Preferred Stock. There are 5,000,000 authorized shares of preferred stock, none of which are outstanding as of December 31, 2012 and December 31, 2011.

Stock Incentive Plans

The Company’s shareholders have approved stock incentive plans, authorizing the issuance of stock option, restricted stock, restricted stock units (RSU), and other forms of equity compensation. Pursuant to the approved stock incentive plans 617,559 shares remained available for future grant as of December 31, 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 years ended December 31, 2012 and 2011 were as follows:

	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 year for the year ended December 31, 2012 is as follows:

				Weighted Average
	Shares			Exercise Price		Remaining Contractual Term		Aggregate Instrinsic Value
Stock Options
Outstanding at December 31, 2011		856,080		$	4.55
Granted		-			-
Exercised		-
Forfeited		(131,360	)		5.93
Expired		-			-
Outstanding at December 31, 2012		724,720		$	4.68		6.5	$	(2,442,448	)

Exercisable at December 31, 2012		653,943		$	4.63		6.4	$	(2,168,417	)

The weighted-average grant-date fair value of options granted during 2011 was $1.06. No options were granted in 2012. The total intrinsic value of options exercised during the years ended December 31, 2012 and 2011 was zero, as there was no option exercise activity during those periods.

A summary of the status of non-vested options as of December 31, 2012, and changes during the year ended December 31, 2012 is presented below:

	Shares			Weighted Average Grant Date Fair Value
Balance at December 31, 2011		411,072		$	1.39
Granted		-			-
Forfeited		(16,800	)		1.41
Vested		(323,495	)		1.46
Balance at December 31, 2012		70,777		$	1.04

As of December 31, 2012, there was $49,200 of total unrecognized compensation cost related to non-vested options. This cost is expected to be recognized over a weighted-average period of 11.70 months. The amount of related expense calculated using the Black-Scholes option pricing model and recognized in 2012 and 2011 was $352,000 and $553,700, respectively. The total fair value of options vested during the years ended December 31, 2012 and 2011 was $1,406,000 and $1,100,600, respectively. The total intrinsic value of vested options as of December 31, 2012 and 2011 was $0.

A summary of restricted stock activity and changes during the year ended December 31, 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	)			(117,583	)
Forfeited		-				-
Nonvested at December 31, 2012		125,000		0.8	$	79,688

The grant date fair value of restricted stock is based on the closing market price of the stock at the date of grant. Compensation cost is amortized to expense on a straight-line basis over the requisite service periods, which ranged from zero to two years. As of December 31, 2012, there was $79,688 of unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of nine months.

A summary of RSU activity and changes during the year ended December 31, 2012 is as follows:

			Weighted Average
Restricted Stock Units (RSU's)	Shares		Remaining Contractual Term	Grant Date Fair Value
Nonvested at December 31, 2011		-		$	-
Granted		356,000			267,000
Vested		-			-
Forfeited		-			-
Nonvested at December 31, 2012		356,000	1.7	$	267,000

The grant date fair value of restricted stock units is based on the closing market price of the stock at the date of grant. Compensation cost is amortized to expense on a straight-line basis over the requisite service periods, which ranged from eighteen to twenty-four months. As of December 31, 2012, there was $232,102 of unrecognized compensation cost related to non-vested restricted stock units. This cost is expected to be recognized over a weighted average period of approximately twenty months.

Note 13. Income Taxes

The total income tax expense (benefit) provided on pretax income and its significant components were as follows:

	2012		2011
Current tax expense:
Federal	$	-	$	-
State		-		-
Foreign		86,908		50,569
		86,908		50,569
Deferred tax expense (benefit):
Federal		-		-
State		-		-
Foreign		-		-
		-		-
Total income tax expense (benefit):
Federal		-		-
State		-		-
Foreign		86,908		50,569
	$	86,908	$	50,569

A reconciliation of the statutory federal income tax expense (benefit) at 34% to loss before income taxes and the actual income tax expense (benefit) is as follows:

	2012			2011
Federal statutory income tax benefit	$	(270,003	)	$	(615,622	)
Increases (reductions) in taxes due to:
Nondeductible stock-based compensation		55,307			228,108
State taxes, net of federal benefit		(69,142	)		(40,540	)
Change in valuation allowance		(31,330	)		486,361
Other		(55,718	)		(58,307	)
Adjustment to NOL carryovers		370,886
Foreign income tax		86,908			50,569
Income tax expense	$	86,908		$	50,569

Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. The net deferred tax assets and liabilities included in the consolidated financial statements include the following amounts:

	2012			2011
Deferred tax asset:
Start-up costs capitalization	$	85,592		$	94,570
Loss carryforwards		11,583,968			11,325,474
Depreciation		1,626,090			1,714,367
Tax credit carryforwards		521,048			477,255
Share-based compensation expense		227,726			197,486
Accounts receivable		67,907			70,298
Inventory		646,970			924,777
Other		10,029			872
		14,769,330			14,805,099

Deferred tax liability:
Accounts receivable		-			-
Inventory		-			-
Prepaid expenses		(5,643	)		(10,082	)
		(5,643	)		(10,082	)

		14,763,687			14,795,017
Less valuation allowance		(14,763,687	)		(14,795,017	)
Net deferred tax asset	$	-		$	-

As of December 31, 2012 and December 31, 2011, the Company has federal net operating loss carryforwards of approximately $30,896,000 and $29,328,000, respectively, North Carolina net economic loss carryforwards of approximately $14,627,000 and $13,943,000, respectively, California net operating losses in the amounts of approximately $538,000 and $524,000, respectively, Arkansas net economic loss carryforwards of approximately $267,000 and $208,000, respectively, Iowa net economic loss carryforwards of approximately $75,000 and $75,000, respectively, Indiana net economic loss carryforwards of approximately $523,000 and $422,000, respectively, New Jersey net economic loss carryforwards of approximately $5,400 and $4,600, respectively, Michigan net economic loss carryforwards of approximately $105,000 and $92,000, respectively, and Wisconsin net economic loss carryforwards of approximately $51,000 and $17,000, respectively. Included in the federal net operating loss carryforward is a deduction for the exercise of nonqualified stock options. However, the net operating loss attributable to the excess of the tax deduction for the exercised nonqualified stock options over the cumulative expense recorded in the consolidated financial statements is not recorded as a deferred tax asset. The benefit of the excess deduction of $37,000 will be recorded to additional paid in capital when the Company realizes a reduction in its current taxes payable. These carryforwards can be used to offset taxable income in future years, which expire through 2031. The Company also has research and experimentation tax credit carryforwards for federal of approximately $419,000. These credit carryforwards may be used to offset federal income taxes in future years through their expiration in 2027.

The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has assessed its earnings history and anticipated earnings, the expiration date of the carryforwards and other factors and has determined that valuation allowances should be established against the deferred tax assets as of December 31, 2012 and 2011. The change in the valuation allowance of $294,373 for the year ended December 31, 2012 was due to the increase in net deferred tax assets, principally driven by increases in deferred tax assets related to loss carryforwards.

The following table summarizes the changes to the amount of unrecognized tax benefits for the years ended December 31, 2012 and 2011:

	2012		2011
Unrecognized tax benefits at January 1	$	418,907	$	418,907

Gross increases—tax positions in prior period		-		-
Gross decreases—tax positions in prior period		-		-
Gross increases—tax positions in current period		-		-
Gross decreases—tax positions in current period		-		-
Settlements		-		-
Unrecognized tax benefits at December 31	$	418,907	$	418,907

The Company files U.S. federal, U.S. state, Canadian and Mexican tax returns. The tax years 2007 through 2012 remain subject to examination by the IRS for U.S. federal tax purposes, as do U.S. state tax returns by the appropriate state taxing authorities, Canadian tax returns by the Canada Revenue Agency and the Mexican tax returns by the Mexican Secretariat of Finance and Public Credit.

The utilization of the Company's net operating losses may be subject to a substantial limitation should a change of ownership occur or have occurred, as defined under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation could result in the expiration of the net operating loss carryforwards before their utilization. Currently, a valuation allowance equal to the total deferred tax assets has been established. As such, any limitation resulting from the expiration of the net operating loss carryforwards would be immaterial to the company's financial condition or results of operations. Prior to any potential utilization, the Company does plan to undertake a detailed study in order to determine any potential §382 limitations. The Company is unable to fully estimate the impact of any such §382 limitations nor has it undertaken the steps necessary to fully estimate the potential benefits that may be available to it from the utilization of net operating losses in future periods.

Note 14. Related Party Transactions

Transactions with Aristocrat International Pty. Ltd

License fees from and equipment sales to Aristocrat International Pty. Ltd (“Aristocrat”) of $62,900 and $0, respectively, were recorded in the year ended December 31, 2012, while $80,800 and $6,350, respectively, were recorded during the year ended December 31, 2011. As of December 31, 2012 and December 31, 2011, $21,000 and $10,200, respectively, were due from Aristocrat and included in accounts receivable 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 initially recorded a liability of $396,500 related to its purchase of inventory. As of December 31, 2012 and December 31, 2011, $323,600 and $323,600, respectfully, remain outstanding to Aristocrat as reflected in the accompanying Consolidated Balance Sheet. These obligations are required to be paid only as the Company receives revenue from the placement of the specified purchased inventory.

As of December 31, 2012 and 2011, Aristocrat owned 0% and 9.6%, respectively, of the Company’s outstanding shares of common stock.

Private Placement Transactions

During 2011 and 2012, the Company completed private placement transactions in which members of the Company’s board and management purchased shares of common stock. In addition, in 2011 and 2012, a board member cancelled principal due under the Founders’ Loan as the consideration for share purchases. (See Note 10 “Debt” and Note 12 “Shareholders’ Equity”.)

Office Lease

The Company currently leases its office and manufacturing facility from an entity owned and controlled by the Company’s President and Vice Chairman of the Board of Directors. The entity purchased the building while the Company was already a tenant. The lease terms were negotiated on an arm’s length basis and are consistent with the rent paid by other tenants in the building and comparable market rents in the area. Rent expense recorded for the leased space for the years ended December 31, 2012 and 2011 were $135,000 and $142,600, respectively.

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

Founders’ Loan

The Company has loans outstanding with members of its board of directors. (See Note 10 “Debt.”)

Other

On October 18, 2012, 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 systems 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 fiscal 2012 and 2011, revenues from customers outside the United States accounted for 23.3% and 39.9% of consolidated revenue, respectively. The following is revenues and long-lived assets by geographic area as of and for the years ended December 31:

	2012		2011
Revenue:
United States	$	3,968,865	$	3,904,778
North America (excluding U.S.)		649,818		1,164,866
Europe		399,933		771,207
Other International		158,663		655,572
	$	5,177,279	$	6,496,423

		2012		2011
Long-lived assets, end of year:
United States	$	884,929	$	1,026,157
North America (excluding U.S.)		742,684		223,882
Europe		163,218		62,021
Other International		100,685		54,461
	$	1,891,516	$	1,366,521

Note 16. Commitments and Contingencies

Leases

The Company leases its corporate office and manufacturing facility under a lease agreement with a term of four years. The lease requires the Company to pay insurance and maintenance. This facility is approximately 14,400 square feet and is located in Matthews, North Carolina. This facility is leased by an entity owned and controlled by the Company’s President and Vice Chairman of the Board of Directors. In February 2013 the Company exercised an option to extend this lease through August 31, 2016. (See Note 14 – “Related Party Transactions.”)

The Company also leases certain equipment under lease agreements with terms up to two years and storage facilities.

The following is a schedule by year of the future minimum lease payments due under agreements with terms extending beyond one year:

Year Ending December 31,	Amount
2013	$	136,344
2014		135,000
Thereafter		225,000
	$	496,344

Rent expense for the years ended December 31, 2012 and 2011 was $139,300 and $146,600, respectively.

Employment Agreements

The Company has entered into employment agreements with certain officers that include commitments related to base salaries and certain benefits. These agreements have terms of two years.

Reviews and Audits by Regulatory Authorities

The Company’s operations are subject to a number of regulatory authorities, including various gaming regulators, the Internal Revenue Service, and other state and local authorities. From time to time, the Company is notified by such authorities of reviews or audits they wish to conduct. The Company may be subject to other income, property, sales and use, or franchise tax audits in the normal course of business.

Indemnification

The Company has entered into a indemnification agreements with the members of its Board and corporate officers, which provides for indemnification for related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred in any action or proceeding.

The Company also indemnifies its casino customers from any claims or suits brought by a third party alleging infringement of a United States patent, copyright or mask work right. The Company agrees to pay all costs and damages, provided the customer provides prompt written notice of any claim.

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 us in the United States District Court for the District of Nevada by Marvin Roy Feldman. The plaintiff was seeking unspecified monetary damages related to the distribution of PokerPro in Mexico. While the Company believes that the claims were unfounded and that it has several meritorious defenses to these claims, the Company entered into a settlement agreement with the plaintiff on December 3, 2012 to avoid the costs and risks of a trial. The amount of settlement was within the previously reserved range of loss and did not have a material impact on the financial statements as of December 31, 2012.

Compliance with NASDAQ Listing Requirements

On July 11, 2012, the Company received the Notice from NASDAQ 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 the Company’s 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 also stated that the Company had 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 ten consecutive business days prior to the end of the Grace Period.

As of January 7, 2013, the Company’s common stock had achieved a closing bid price of $1.00 or more for 10 consecutive business days as required by NASDAQ. On that date, the Company received written notification from the NASDAQ Listing Qualifications Department that the Company had regained compliance with the minimum closing bid price requirement of $1.00 per share for continued listing of its common stock on the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule Section 5550(a)(2).

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Charged to Other Accounts		Deductions (Chargeoffs)		Balance at End of Period

ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 2012	$	146,183	$	158,117	$	-	$	118,631	$	185,669
Year ended December 31, 2011	$	71,999	$	237,962	$	-	$	163,778	$	146,183

INVENTORY RESERVE
Year ended December 31, 2012	$	237,297	$	41,424	$	-	$	100,182	$	178,539
Year ended December 31, 2011	$	205,583	$	34,473	$	2,758	$	-	$	237,297

EXHIBIT INDEX

Exhibit No.	Description

3.1	Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 filed on August 4, 2005 (No. 333-127181)).

3.2	Bylaws (as amended and restated through July 29, 2005) (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1 filed on August 4, 2005 (No. 333-127181)).

4.1	Specimen Common Stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to our Registration Statement on Form S-1 filed on October 5, 2005(No. 333-127181)).

10.1	Trademark Assignment Agreement among PokerTek, Inc., James Crawford and Gehrig H. White, effective July 13, 2005 (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form S-1 filed on August 4, 2005 (No. 333-127181)).

10.2	PokerTek, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 99 to our Registration Statement on Form S-8 filed on June 6, 2007 (No. 333-143552)).*

10.3	Form of Employee Incentive Stock Option Agreement for PokerTek, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to our Form 10-Q for the quarterly period ending June 30, 2007 filed on August 14, 2007).*

10.4	Form of Employee Nonqualified Stock Option Agreement for PokerTek, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to our Form 10-Q for the quarterly period ending June 30, 2007 filed on August 14, 2007).*

10.5	Form of Director Nonqualified Stock Option Agreement for PokerTek, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to our Form 10-Q for the quarterly period ending June 30, 2007 filed on August 14, 2007).*

10.6	Form of Independent Contractor Nonqualified Stock Option Agreement for PokerTek, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to our Form 10-Q for the quarterly period ending June 30, 2007 filed on August 14, 2007).*

10.7	Form of Restricted Stock Award Agreement for PokerTek, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to our Form 10-Q for the quarterly period ending June 30, 2007 filed on August 14, 2007).*

10.8	PokerTek, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form S-1 filed on August 4, 2005 (No. 333-127181)).*

10.9	Form of Stock Option Agreement for PokerTek, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to our Registration Statement on Form S-1 filed on September 13, 2005 (No. 333-127181)).*

10.10	Form of Non-Employee Director Stock Option Agreement for PokerTek, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K filed on March 6, 2006).*

10.11	PokerTek, Inc. 2004 Stock Incentive Plan (as amended and restated through July 29, 2005) (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-1 filed on August 4, 2005 (No. 333-127181)).*

10.12	Form of Stock Option Agreement for 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-1 filed on August 4, 2005(No. 333-127181)).*

10.13	Note Purchase Agreement by and between PokerTek, Inc. and Lyle A. Berman, James T. Crawford, III, Arthur Lee Lomax and Gehrig H. “Lou” White, dated March 24, 2008 (incorporated by reference to Exhibit 10.4 to our Form 10-Q for the quarterly ended March 31, 2008 filed on May 15, 2008).

10.14	Loan and Security Agreement, effective July 25, 2008, between PokerTek, Inc. and Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to our Form 10-Q for the quarterly period ended June 30, 2008 filed August 14, 2008).

10.15	Export-Import Bank Loan and Security Agreement, dated July 25, 2008, between PokerTek, Inc. and Silicon Valley Bank (incorporated by reference to Exhibit 10.2 to our Form 10-Q for the quarterly period ended June 30, 2008 filed August 14, 2008).

10.16	Borrower Agreement, dated July 25, 2008, made and entered into by PokerTek, Inc. in favor of the Export-Import Bank of the United States and Silicon Valley Bank (incorporated by reference to Exhibit 10.3 to our Form 10-Q for the quarterly period ended June 30, 2008 filed on August 14, 2008).

10.17	First Amendment to Loan and Security Agreement, dated December 23, 2008, between PokerTek, Inc. and Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to our Form 10-Q for the quarterly period ended March 31, 2009 filed on May 14, 2009).

Exhibit No.	Description

10.18	First Amendment to Export-Import Bank Loan and Security Agreement, dated December 23, 2008, between PokerTek, Inc. and Silicon Valley Bank (incorporated by reference to Exhibit 10.2 to our Form 10-Q for the quarterly period ended March 31, 2009 filed on May 14, 2009).

10.19	Second Amendment to Loan and Security Agreement, dated July 23, 2009, between PokerTek, Inc. and Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to our Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009).

10.20	Second Amendment to Export-Import Bank Loan and Security Agreement, dated July 23, 2009, between PokerTek, Inc. and Silicon Valley Bank (incorporated by reference to Exhibit 10.2 to our Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009).

10.21	Indemnification Agreement, dated July 15, 2009, between PokerTek, Inc. and Joseph J. Lahti (incorporated by reference to Exhibit 10.7 to our Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009).

10.22	Indemnification Agreement, dated July 15, 2009, between PokerTek, Inc. and Arthur L. Lomax (incorporated by reference to Exhibit 10.8 to our Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009).

10.23	Indemnification Agreement, dated July 15, 2009, between PokerTek, Inc. and James T. Crawford, III (incorporated by reference to Exhibit 10.9 to our Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009).

10.24	Indemnification Agreement, dated July 15, 2009, between PokerTek, Inc. and Gehrig H. White (incorporated by reference to Exhibit 10.10 to our Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009).

10.25	Indemnification Agreement, dated July 15, 2009, between PokerTek, Inc. and Mark D. Roberson (incorporated by reference to Exhibit 10.11 to our Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009).

10.26	Amendment No. 1 to a $2.0 million Secured Promissory Note between PokerTek, Inc. and Lyle Berman, Gehrig H. White, James T. Crawford, III, and Arthur L. Lomax, effective as of July 9, 2009 (incorporated by reference to Exhibit 10.14 to our Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009).

10.27	Amendment No. 2 to Secured Promissory Note and Amendment No. 1 to Note Purchase Agreement and Security Agreement, dated September 10, 2009 (incorporated by reference to Exhibit 10.2 to our Form 10-Q for the quarterly period ended September 30, 2009 filed on November 13, 2009).

10.28	PokerTek, Inc. 2009 Stock Incentive Plan (incorporated by reference to Appendix A to our Definitive Schedule 14A filed on August 7, 2009).*

10.29	Third Amendment to Loan and Security Agreement, dated August 27, 2010, between us and Silicon Valley Bank (incorporated by reference to Exhibit 10.2 from our Form 10-Q filed on November 15, 2010).

10.30	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).

10.31	Amendment to the PokerTek, Inc. 2009 Stock Incentive Plan effective as of June 2, 2011 (incorporated by reference to Appendix A to our Definitive Schedule 14A filed on April 29, 2011).*

10.32	Loan Modification Agreement, dated June 2, 2011, by and among us and our founders (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on June 7, 2011).

10.33	Employment Agreement, dated June 2, 2011, between us and Mark D. Roberson (incorporated by reference to Exhibit 10.2 from our Form 8-K filed on June 7, 2011).*

10.34	Employment Agreement, dated June 2, 2011, between us and James T. Crawford (incorporated by reference to Exhibit 10.3 from our Form 8-K filed on June 7, 2011).*

10.35	Office/Warehouse Lease Amendment No. 2 between us and Crawford White Investments, LLC dated August 11, 2011 (incorporated by reference to Exhibit 10.1 from our Form 10-Q filed on August 8, 2011).

10.36	Fifth Amendment to the Loan and Security Agreement between us and Silicon Valley Bank (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on November 14, 2011)

10.37	Sixth Amendment to the Loan and Security Agreement between us and Silicon Valley Bank (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on February 23, 2012).

10.38	Form of Employee Incentive Stock Option Agreement for the PokerTek, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.38 from our Form 10-K for the year ended December 31, 2011 filed on March 27, 2012).*

Exhibit No.	Description

10.39	Form of Employee Nonqualified Stock Option Agreement for the PokerTek, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.39 from our Form 10-K for the year ended December 31, 2011 filed on March 27, 2012).*

10.40	Form of Director Nonqualified Stock Option Agreement for the PokerTek, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.40 from our Form 10-K for the year ended December 31, 2011 filed on March 27, 2012).*

10.41	Form of Independent Contractor Nonqualified Stock Option Agreement for the PokerTek, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.41 from our Form 10-K for the year ended December 31, 2011 filed on March 27, 2012).*

10.42	Form of Restricted Stock Award Agreement for the PokerTek, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.42 from our Form 10-K for the year ended December 31, 2011 filed on March 27, 2012).*

10.43	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 from our Form 8-K filed on July 27, 2012).

10.44	Seventh Amendment to the Loan and Security Agreement between us and Silicon Valley Bank (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on March 7, 2013).

21	List of Subsidiaries (incorporated by reference to Exhibit 21 from our Form 10-K for the year ended December 31, 2011 filed on March 27, 2012).

23	Consent of Independent Registered Public Accounting Firm

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document.**

101.SCH	XBRL Taxonomy Extension Schema.**

101.CAL	XBRL Taxonomy Calculation Linkbase.**

101.DEF	XBRL Taxonomy Extension Definition Linkbase.**

101.LAB	XBRL Taxonomy Extension Label Linkbase.**

101.PRE	XBRL Taxonomy Extension Presentation Linkbase.**

*	Compensatory plan or arrangement or management contract

**	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 Securities Exchange Act of 1934, as amended, 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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PokerTek (PTEK) Inactive 10-K2012 FY Annual report

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