Note 12. Shareholders’ Equity (See Note 17 “Subsequent Events”)
Common Stock.
There are 100,000,000 shares, no par value, of the Company’s common stock (“Common Stock”) authorized, of which 9,363,434 and 9,363,434 shares were outstanding as of March 31, 2014 and December 31, 2013, respectively.
Warrants
As of March 31, 2014, the following common stock purchase 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.
|
Preferred Stock.
There are 5,000,000 authorized shares of preferred stock, none of which were outstanding as of March 31, 2014 and December 31, 2013.
Stock Incentive Plan
The Company’s shareholders have approved stock incentive plans, authorizing the issuance of stock option, restricted stock, restricted stock units (“RSUs”) and other forms of equity compensation. Pursuant to the approved stock incentive plans, 232,559 shares remained available for future grant as of March 31, 2014. The Company has historically issued stock options and restricted shares as compensation, although it has the authority to use other forms of equity compensation instruments in the future.
Principal assumptions used in determining the fair value of option awards include the following: (a) expected future volatility for the Company's stock price, which is based on the Company’s historical volatility, (b) expected dividends, (c) expected term and forfeiture rates, based on historical exercise and forfeiture activity, and (d) the risk-free rate is the rate on U.S. Treasury securities with a maturity equal to, or closest to, the expected life of the options. The assumptions used to determine the fair value of option awards for the periods ended March 31, 2014 and December 31, 2013 were as follows:
|
March 31,
|
|
December 31,
|
|
2014
|
|
2013
|
Expected Volatility
|
93%
|
|
94% - 97%
|
Expected Dividends
|
0
|
|
0
|
Expected Term
|
6 yrs
|
|
6 yrs
|
Risk-free Rate
|
1.15%
|
|
0.82% - 1.60%
|
A summary of Stock Option activity and changes during the three months ended March 31, 2014 is as follows:
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Remaining Contractual Term
|
|
|
Aggregate Intrinsic Value
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
724,720
|
|
|
$
|
4.68
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
724,720
|
|
|
$
|
4.68
|
|
|
|
5.3
|
|
|
$
|
(2,630,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2014
|
|
|
715,316
|
|
|
$
|
4.37
|
|
|
|
5.3
|
|
|
$
|
(2,377,417
|
)
|
A summary of RSU activity and changes during the period ended March 31, 2014 is as follows:
|
|
|
|
Weighted Average
|
|
Restricted Stock Units (RSUs)
|
|
Shares
|
|
Remaining Contractual Term
|
|
Grant Date Fair Value
|
|
Nonvested at December 31, 2013
|
|
|
253,312
|
|
|
|
$
|
189,984
|
|
Granted
|
|
|
300,000
|
|
|
|
|
345,000
|
|
Vested
|
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
Nonvested at March 31, 2014
|
|
|
553,312
|
|
4.2
|
|
$
|
534,984
|
|
Note 13. Income Tax Provisions
For the three months ended March 31, 2014 and 2013, the Company recognized a tax provision of $0 and $34,081, respectively. These provisions are based principally on the Company’s estimated foreign income tax withholding liability, which is attributable to revenues generated outside of the United States.
The effective rates for the periods ending March 31, 2014 and 2013 differ from the U.S. federal statutory rate principally due to the tax benefit arising from the Company’s net operating losses that are fully offset by the valuation allowance established against the Company’s deferred tax assets and deferred tax liabilities.
Note 14. Related Party Transactions
Office Lease
The Company 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 three months ended March 31, 2014 and 2013 were $33,750 and $33,750, respectively (See Note 16 “Commitments and Contingencies.”).
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 a loan outstanding with a member of its board of directors. (See Note 10 “Debt.” And Note 17 “Subsequent Events.”)
Note 15. Segment Information
The Company reports segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. Following the Company’s exit from its amusement business, the Company’s operations are entirely focused on gaming products. Based on the criteria specified in ASC Topic 280, Segment Reporting, the Company has one reportable segment. The results of operations for the amusement products have been reported as discontinued operations for all periods presented.
Revenues by geographic area are determined based on the location of the Company’s customers. For the three months ended March 31, 2014 and 2013, revenues from customers outside the United States accounted for 28.1% and 28.7% of consolidated revenue, respectively. For the three months ended March 31, 2014 and 2013 the following are the revenues and long-lived assets by geographic area:
|
|
For Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Revenue:
|
|
|
|
|
|
|
United States
|
|
$
|
801,899
|
|
|
$
|
991,707
|
|
Other Americas
|
|
|
268,675
|
|
|
|
371,506
|
|
Europe
|
|
|
32,633
|
|
|
|
15,150
|
|
Other International
|
|
|
11,375
|
|
|
|
12,758
|
|
|
|
$
|
1,114,582
|
|
|
$
|
1,391,121
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Long-lived assets, end of period:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
434,957
|
|
|
$
|
450,714
|
|
Other America's
|
|
|
611,979
|
|
|
|
718,982
|
|
Europe
|
|
|
145,899
|
|
|
|
157,035
|
|
Other International
|
|
|
38,434
|
|
|
|
36,664
|
|
|
|
$
|
1,231,269
|
|
|
$
|
1,363,395
|
|
Note 16. Commitments and Contingencies
Leases
The Company leases its corporate office and manufacturing facility from an entity owned and controlled by the Company’s President and Vice Chairman of the Board of Directors. The lease expires on August 31, 2016. (See Note 14 – “Related Party Transactions.”) Rent expense for the three months ended March 31, 2014 and 2013 was $33,750 and $33,750, respectively. Rent income for the three months ended March, 31, 2014 and 2013 was $4,800 and none, respectively.
Legal Proceedings
The Company is subject to claims and assertions in the ordinary course of business. Legal matters are inherently unpredictable and the Company’s assessments may change based on future unknown or unexpected events.
The Company is not a party to any material legal proceeding as of the date hereof.
Note 17. Subsequent Event
Merger Agreement
On April 29, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Multimedia Games, Inc., a Delaware corporation (“Parent”), and 23 Acquisition Co., a North Carolina corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, and the separate corporate existence of Merger Sub will thereupon cease, and the Company will continue as the surviving corporation (the “Surviving Corporation”) and a wholly owned subsidiary of Parent (the “Merger”). The Merger Agreement was unanimously approved by the Board of Directors of the Company (the “Board”), based on the recommendation of a Special Committee of the Board (the “Special Committee”) that was formed to evaluate and negotiate the terms of a sale of the Company.
At the time the Merger becomes effective pursuant to the terms and conditions of the Merger Agreement and under North Carolina law (the “Effective Time”): (a) each share of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time will be converted into and become one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation, (b) each share of common stock of the Company issued and outstanding immediately prior to the Effective Time (other than shares owned by the Company, Parent or Merger Sub and shares owned by shareholders of the Company who have perfected and not withdrawn a demand for appraisal rights under North Carolina law) will automatically be cancelled and converted into the right to receive $1.35 in cash, without interest (the “Merger Consideration”), and (c) each option outstanding (whether or not then vested or exercisable) that represents the right to acquire shares of Common Stock will be cancelled and terminated whereby the holder of any such option to acquire Common Stock shall receive an amount for each such option equal to the excess, if any, of (i) the Merger Consideration over (ii) the exercise price payable in respect of such share of Common Stock issuable upon exercise of such option.
The Merger Agreement contains customary representations, warranties and covenants. The consummation of the Merger is subject to customary conditions, including, without limitation, (a) approval by the holders of a majority of the outstanding shares of Common Stock entitled to vote on the Merger and (b) the absence of any law, order, injunction or other legal restraint prohibiting the Merger. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of the other party’s representations and warranties (subject to customary qualifiers), and (ii) the other party’s compliance with its covenants and agreements contained in the Merger Agreement (subject to customary qualifiers). In addition, the obligation of Parent and Merger Sub to consummate the Merger is conditioned upon (1) certain required consents having been obtained, (2) the receipt of certain approvals from gaming regulators, (3) holders of not more than five percent (5%) of the outstanding shares of Common Stock having exercised their appraisal rights, and (4) there not being any Company Material Adverse Effect (as defined in the Merger Agreement).
From the date of the Merger Agreement, subject to certain exceptions, the Company is subject to customary “no-shop” restrictions on its ability to solicit or respond to alternative takeover proposals from third parties, furnish information to and engage in discussions with third parties regarding alternative takeover proposals, recommend an alternative takeover proposal or enter into an agreement with respect to an alternative takeover proposal.
The Merger Agreement contains certain termination rights for the Company and Parent, including the right of the Company under certain circumstances to terminate the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement) and enter into a definitive agreement with respect thereto. Upon termination of the Merger Agreement under specified circumstances, including termination of the Merger Agreement to accept a Superior Proposal and enter into a definitive agreement with respect thereto, the Company is required to pay Parent a termination fee of up to $650,000. Upon termination of the Merger Agreement by the Company under certain other specified circumstances, Parent and Merger Sub are required to pay the Company a termination fee of $500,000.
The representations, warranties and covenants made in the Merger Agreement (a) have been made only for purposes of the Merger Agreement, (b) have been qualified by confidential disclosures made to Parent and Merger Sub in connection with the Merger Agreement, (c) are subject to materiality qualifications contained in the Merger Agreement which may differ from what may be viewed as material by investors, (d) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement and (e) have been included in the Merger Agreement for the purpose of allocating risk between the contracting parties rather than establishing matters as facts. Investors should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or any of its Subsidiaries (as defined in the Merger Agreement) or Affiliates (as defined in the Merger Agreement). Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding the Company that is or will be contained in, or incorporated by reference into, Forms 10-K, Forms 10-Q and other documents that the Company files with the Securities and Exchange Commission (“SEC”).
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company with the SEC on April 30, 2014, and the terms of which are incorporated herein by reference.
The Board, acting upon the recommendation of the Special Committee, has approved the adoption of the Merger Agreement and consummation of the Merger and recommended adoption of the Merger Agreement and consummation of the Merger by the Company’s shareholders. The transactions contemplated under the Merger Agreement are expected to close in calendar year 2014.
Voting Agreement
As a condition to Parent entering into the Merger Agreement, on April 29, 2014, Lyle A. Berman, James T. Crawford, Joseph J. Lahti, Arthur L. Lomax, Mark D. Roberson, and Gehrig H. White, in each case as a shareholder and/or an option holder of the Company and members of the Company’s management and/or members of the Board, entered into a voting agreement with Parent (the “Voting Agreement”), whereby each shareholder party to the Voting Agreement agreed to vote all of the shares of Common Stock owned beneficially (or of record) by such shareholder, including, but not limited to, any shares of Common Stock that such shareholder has the right to vote due to any agreement, proxy or other similar right (i) in favor of adoption of the Merger Agreement and in favor of the Merger, (ii) against (A) any proposal made in opposition to adoption of the Merger Agreement or in competition or inconsistent with the Merger or any other transaction contemplated by the Merger Agreement, (B) any Company Takeover Proposal (as defined in the Merger Agreement), including a Superior Proposal, (C) any change in the management or the Board of the Company (other than as contemplated by the Merger Agreement), (D) any sale or transfer of a material amount of the assets or capital stock of the Company or any of its subsidiaries, (E) any action, matter, agreement or proposal submitted to shareholders of the Company for approval, if it could reasonably be expected that, or if such shareholder has actual knowledge that the approval of such action, matter, agreement or proposal would result in a breach of any representation, warranty, covenant or agreement or any other obligation of the Company under the Merger Agreement, and (F) any action, proposal, transaction or agreement that is intended or could reasonably be expected to impede, interfere with, delay, discourage, inhibit, postpone, or adversely affect the Merger or the other transactions contemplated by the Merger Agreement. The shareholders who are parties to the Voting Agreement own approximately 36% of the shares entitled to vote on the Merger.
Each of the shareholders has granted to Patrick J. Ramsey and Todd F. McTavish, each in his capacity as an officer of Parent, a proxy to vote all of such shareholder’s shares in accordance with the provisions of the Voting Agreement.
The foregoing description of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Voting Agreement, a copy of which is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 30, 2014, and the terms of which are incorporated herein by reference.
Founders’ Loan Modification
On April 28, 2014, the Company and Arthur L. Lomax, a director and founder of the Company, entered into an Amendment to the Second Amended and Restated 9% Secured Promissory Note (the “Second Amended and Restated Promissory Note”), Due December 31, 2016, made by the Company and held by Mr. Lomax (the “Note Modification Agreement”), to amend and restate the acceleration provision of the Second Amended and Restated Promissory Note. As amended, the outstanding principal of and accrued and unpaid interest on the Second Amended and Restated Promissory Note will automatically become immediately due and payable upon a Change in Control Transaction (as defined in the Second Amended and Restated Promissory Note). Prior to the amendment and restatement, the outstanding principal of and accrued and unpaid interest on the Second Amended and Restated Promissory Note would have automatically become immediately due and payable upon the Company’s execution of an agreement, including the Merger Agreement, that provides for a Change in Control Transaction.
The foregoing description of the Note Modification Agreement and the Second Amended and Restated Promissory Note does not purport to be complete and is qualified in its entirety by reference to the full text of the Note Modification Agreement and Second Amended and Restated Note, a copy of which is filed as Exhibit 10.2 and Exhibit 10.44, respectively, to the Company’s Current Report on Form 8-K filed with the SEC on April 30, 2014.
Litigation Related to the Merger Agreement
A purported class action on behalf of the Company’s shareholders was filed on May 9, 2014 in the General Court of Justice, Superior Court Division in and for Mecklenburg County, North Carolina, Case No: 14CVS8300, captioned Robert Simmer, on behalf of himself and all others similarly situated, as Plaintiff, v. PokerTek, Inc., Multimedia Games Holding Company, Inc., Multimedia Games, Inc., 23Acquisition Co., James Crawford, Joe Lahti, Lyle Berman, Lou White and Arthur L. Lomax, Defendants (the “Action”). The Company has not received service of process in the Action.
The Action relates to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of April 29, 2014, by and among PokerTek, Inc. (the “Company”), Multimedia Games, Inc., a Delaware corporation (“Parent”), and 23Acquisition Co., a North Carolina corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub shall be merged with and into the Company, and the separate corporate existence of Merger Sub shall thereupon cease, and the Company shall continue as the surviving corporation and a wholly owned subsidiary of Parent (the “Proposed Merger Transaction”).
The Action alleges that the Directors of the Company (the “Directors”) breached their fiduciary duties owed to the shareholders of the Company. It further alleges that Multimedia Games Holding Company, Inc., Parent and Merger Sub aided and abetted the Directors in their breach of their fiduciary duties to the shareholders of the Company.
The Action seeks relief: (i) declaring the Action to be a class action and certifying Plaintiff as the Class representative and his counsel as Class counsel; (ii) declaring and decreeing that the Proposed Merger Transaction was entered into in breach of the fiduciary duties of the individual Defendants and is therefore unlawful and unenforceable, and rescinding and invalidating any Merger Agreement or other agreements that Defendants entered into in connection with, or in furtherance of, the Proposed Merger Transaction; (iii) enjoining, preliminarily and permanently, Defendants, their agents, counsel, employees and all persons acting in concert with them from consummating the Proposed Merger Transaction; (iv) directing the individual Defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of the Company’s shareholders; (v) imposing a constructive trust, in favor of Plaintiff and the Class, upon any benefits improperly received by Defendants as a result of their wrongful conduct; (vi) awarding Plaintiff the costs and disbursements of the Action, including reasonable attorneys’ and experts’ fees; and (vii) granting such other and further equitable relief as the Court may deem just and proper.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including but not limited to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These forward-looking statements are made under the provisions of The Private Securities Litigation Reform Act of 1995. In some cases, words such as “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or other comparable words identify forward-looking statements. Our actual results, performance or experience may differ materially from those expressed or implied by forward-looking statements as a result of many factors, including our critical accounting policies and risks and uncertainties related, but not limited to: the impact of global macroeconomic and credit conditions on our business and the business of our suppliers and customers, overall industry environment, customer acceptance of our products, delay in the introduction of new products, further approvals of regulatory authorities, adverse court rulings, production and/or quality control problems, the denial, suspension or revocation of permits or licenses by regulatory or governmental authorities, changes in laws and regulations affecting the gaming industry, termination or non-renewal of customer contracts, competitive pressures and general economic conditions and our financial condition, including our ability to maintain sufficient liquidity to operate our business. These and all other material risks and uncertainties known to us are described in more detail under the caption “Risk Factors” in Item 1A of Part I of the annual report on Form 10-K for the year ended December 31, 2013, that we filed on March 21, 2014, as well as other reports that we file from time to time with the Securities and Exchange Commission (“SEC”). As a result of these risks and uncertainties, the results or events indicated by these forward-looking statements may not occur. We caution you not to place undue reliance on any forward-looking statement.
Forward-looking statements speak only as of the date they are made and should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that we make in the reports that we file with the SEC that discuss other factors germane to our business.
All references in this Report to “PokerTek”, “we”, “us”, “our” or “the Company” include PokerTek, Inc. and its consolidated subsidiaries.
Company Overview and Business Strategy
We develop, manufacture and market electronic table games and related products for casinos, cruise lines, racinos, card clubs and lotteries worldwide
.
Our products line consists of two primary platforms -- PokerPro and ProCore.
PokerPro is a 10-seat electronic poker table that allows operators to offer cash games, single-table tournaments, and multi-table tournaments with an extensive game library including Texas Hold’em, Omaha, Razz, and Seven Card Stud. Game rules and limits, including blinds, antes, rake structures and house rules, are completely configurable.
ProCore is an electronic table game platform that expands on the PokerPro technology and allows multiple house-banked games to be run on a single, efficient, economical platform. The versatility of the ProCore system allows operators to add new game content as it is released. Several variations of blackjack, baccarat, and related side bets are deployed on this platform. Games and house rules can be customized easily to meet property and regulatory requirements, making it an ideal choice for operators looking to add an automated solution to their gaming floor.
We plan to expand our position in electronic poker market with our PokerPro system. With the addition of the ProCore platform, the addressable opportunities are expanded to include blackjack, baccarat and other house-banked games. The market for electronic poker is a smaller niche where, we believe we enjoy a dominant market position. The market for blackjack, baccarat and specialty house-banked games is larger, but also characterized by more competition. We believe our product offerings have significant advantages over the competition and, as a result, we have the opportunity to expand our dominance in poker while increasing our market share for other electronic house-banked games.
We distribute our gaming products using our internal sales force and select distributors. Our revenue is derived from a recurring revenue participation model, a recurring revenue fixed license fee model or a sale of hardware combined with recurring license and support fees.
We evaluate potential new markets based on a number of criteria, including the legal and regulatory environment, the size of the market overall as well as the size of the gaming industry in that market and the sales and marketing effort required to establish a presence in the subject market. We also segment potential markets into one of three categories: those with no manual table games; those with limited manual table games; and those characterized by greater density of manual table games. We intentionally focus the majority of our sales and marketing effort on those markets that either have no or a limited number of manual table games. We also opportunistically place tables in markets with higher density of manual table games where we believe we offer a value proposition for the operators and players. This approach allows us to narrow our focus, directing our limited resources to those markets that we believe offer the best opportunity for revenue growth and profitability.
We have identified a number of markets worldwide that we believe provide actionable opportunities to grow significantly. We are also monitoring changes in regulation at the state, federal and international level and believe that budgetary, legislative and other factors are creating a favorable environment for expanding the market for gaming in general and electronic table games in particular.
As of March 31, 2014, our installed base consisted of 2,294 gaming positions worldwide, comprised of 2,150 PokerPro and 144 ProCore gaming positions. As of March 31, 2013, our install base consisted of 2,390 gaming positions deployed worldwide comprised of 2,240 PokerPro gaming positions, and 150 ProCore gaming positions.
Results of Operations for the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013.
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
License and service fees
|
|
$
|
1,083,881
|
|
|
$
|
1,360,670
|
|
|
|
(20.3
|
%)
|
Sales of systems and equipment
|
|
|
30,701
|
|
|
|
30,451
|
|
|
|
0.8
|
%
|
Total revenue
|
|
|
1,114,582
|
|
|
|
1,391,121
|
|
|
|
(19.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
843,079
|
|
|
|
1,037,572
|
|
|
|
(18.7
|
%)
|
Percentage of revenue
|
|
|
75.6
|
%
|
|
|
74.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,120,744
|
|
|
|
1,188,308
|
|
|
|
(5.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
8,258
|
|
|
|
10,543
|
|
|
|
(21.7
|
%)
|
Income tax provision
|
|
|
-
|
|
|
|
34,081
|
|
|
|
(100.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(285,923
|
)
|
|
|
(195,360
|
)
|
|
|
(46.4
|
%)
|
Net loss from discontinued operations
|
|
|
-
|
|
|
|
535
|
|
|
|
(100.0
|
%)
|
Net loss
|
|
$
|
(285,923
|
)
|
|
$
|
(194,825
|
)
|
|
|
(46.8
|
%)
|
Revenue.
Revenue decreased by 19.9%, to $1.11 million for the three months ended March 31, 2014 as compared to $1.39 million for the three months ended March 31, 2013.
Revenue from license and service fees decreased 20.3%, as increased revenue from cruise ships as compared with the prior year period was more than offset by reductions in revenue from customers in the United States, Canada and Mexico. In the United States, revenue comparisons were impacted by the removal of gaming positions from Ohio, where we ceased doing business in September 2013, the election of a customer to buy out their leased equipment in early 2013, and the temporary removal of leased gaming positions at a customer location in connection with a facility remodeling project. Revenues from Canada and Mexico also declined with a contraction in leased gaming positions at several locations in Ontario, and a decline in game performance and related lease revenue in Mexico.
Revenue from systems and equipment sales was essentially unchanged, reflecting routine sales of miscellaneous parts and equipment during both periods.
Gross profit.
Gross profit decreased by 18.7%, to $0.8 million for the three months ended March 31, 2014 from $1.0 million for the three months ended March 31, 2013. Gross profit margins increased modestly to 76% for the three months ended March 31, 2014, compared to 75% for the three months ended March 31, 2013.
Operating expenses
. Operating expenses decreased 5.7%, to $1.1 million for the three months ended March 31, 2014 from $1.2 million for the three months ended March 31, 2013. Operating expenses were relatively flat overall in comparison to the prior year periods with reductions in product testing fees, travel, shipping and other operational expenses partially offset by less favorable overhead absorption and by higher state filing fees and miscellaneous taxes.
Interest expense, net
.
Interest expense decreased by 21.7%, for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013. The decrease is primarily attributable to reductions in the outstanding principal balance on the Founders’ Loan (defined below).
Income tax provision.
Income tax provision decreased to $0 for the three months ended March 31, 2014, as compared to $34 thousand for the three months ended March 31, 2013. The income tax expenses incurred in the prior year were attributable to withholdings in foreign jurisdictions, which did not occur in the current period.
Net loss from continuing operations.
Net loss from continuing operations for the three months ended March 31, 2014 increased 46.4% to a loss of $286 thousand compared to a loss of $195 thousand for the three months ended March 31, 2013. The increase in net loss from continuing operations was primarily attributable to the reduction in license and service fee revenue.
Net loss from discontinued operations.
We previously completed the disposition of the discontinued operations and had no income or loss from discontinued operations for the three months ended March 31, 2014 and less than $1 thousand for the three months ended March 31, 2013. We do not expect to realize additional income or loss from discontinued operations in future periods.
Net loss.
Net loss for the three months ended March 31, 2014 increased by 46.8% to $286 thousand compared to net loss of $195 thousand for the three months ended March 31, 2013. The increase in net loss from continuing operations was primarily attributable to the reduction in license and service fee revenue.