NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 1. Nature of Business and Basis of Presentation
PokerTek, Inc. (the “Company”) and its subsidiaries are engaged in developing, manufacturing 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, including PokerTek Mexico S DE RL DE CV and PokerTek Canada, Inc. 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.
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, 2013 and December 31, 2012, the Company recorded an allowance for doubtful accounts of $117,000 and $185,700, 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 $0.7 million during the fiscal years ended December 31, 2013 and December 31, 2012, 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, 2013 and 2012 were $800 and $16,500, 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.
The Company derives its revenue primarily from the lease or sale of its electronic gaming tables and from maintenance, installation and support services related to those products. The Company accounts for revenue using the guidance in Accounting Standards Codification (“ASC”) Topic 605,
“
Revenue Recognition
”
and recognizes revenue only when all of the following criteria have been satisfied:
|
·
persuasive evidence of an arrangement exists
|
|
·
the customer
’
s price is fixed and determinable; and
|
|
·
collectability is reasonably assured.
|
The Company’s arrangements with its customers generally include a combination of hardware, software and services. The Company also follows the guidance 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 amended the accounting for multiple-deliverable arrangements to provide guidance on how the deliverables in an arrangement should be separated and requires revenue to be allocated using the relative selling price method.
For contracts considered multiple-deliverable arrangements, 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. The Company determines the allocation of arrangement consideration at inception on the basis of each unit’s relative selling price.
The Company’s multiple-deliverable product offerings generally include both the sale and lease of gaming system hardware with embedded software, and the provision of professional services and post contract services (“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.
When a sale or lease arrangement contains multiple deliverables, the Company allocates revenues to each unit of accounting based on the selling price hierarchy specified in ASC Topic 605:
|
·
|
Vendor specific objective evidence (
“
VSOE
”
).
When available, VSOE must be used to determine the selling price of a deliverable. The Company has not been able to establish VSOE for its deliverables as it does not sell its products separately regularly and/or has only a limited sales history.
|
|
·
|
Third-party evidence (
“
TPE
”
).
When VSOE is not available, the Company then determines whether TPE is available. TPE is determined based on competitor prices for similar deliverables when sold separately. The Company is unable to reliably determine and verify the pricing of similar competitor products on a stand-alone basis and has not been able to establish TPE for its deliverables.
|
|
·
|
Best estimate of selling price (
“
BESP
”
).
When TPE is not available, then the BESP is used. AS the Company has not established VSOE or TPE for its deliverables, it 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 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.
For the Company’s sales of gaming systems with multiple deliverables, revenue is generally recognized for the hardware and embedded software unit of accounting at time of delivery based on the relative selling price method (using BESP). Revenue related 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 gaming system (i.e., the hardware and embedded software unit of accounting). 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.
The Company’s lease arrangements are generally accounted for as operating leases as the terms are typically less than 75% of the economic life of the leased product, 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. Otherwise, the lease arrangements would be accounted for as capital leases. 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 with participation features, 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 that leased 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 occasionally sells certain products and services on a stand-alone basis such as the sale of complete gaming system with no services (a rare occurrence), the sale of spare parts, and of 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.
The Company makes judgments and uses estimates in recognizing revenue, include the allocation of proceeds from multiple-deliverable arrangements to individual units of accounting, the determination of BESP, the estimated useful lives of its gaming systems, and the appropriate timing or deferral of revenue recognition.
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.
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.
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 net loss per share was the same as basic net loss per share for all periods presented, since the effects of any potentially dilutive securities are excluded as they are antidilutive due to the Company’s net losses. The following were excluded from the computation of diluted net loss per share for 2013 and 2012 as their inclusion would be antidilutive:
|
·
|
Stock options to purchase 724,703 shares of common stock as of both December 31, 2013 and December 31, 2012;
|
|
·
|
253,312 and 356,000 restricted stock units as of December 31, 2013 and December 31, 2012, respectively; and
|
|
·
|
60,000 common stock purchase warrants as of both December 31, 2013 and December 31, 2012.
|
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, 2014 through the date these consolidated financial statements were issued for subsequent events requiring recognition or disclosure in the financial statements.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In March 2013, the FASB issued ASU No. 2013-05,
“Foreign Currency Matters - Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”
(“ASU No. 2013-05”) which permits companies to release cumulative translation adjustments into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into earnings only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. ASU No. 2013-05 is effective for annual reporting periods beginning on or after December 15, 2013. The Company does not expect it will have a significant impact on its consolidated results of operations, financial condition and cash flows.
In July 2013, the FASB issued ASU No. 2013-11,
“Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740)”
(“ASU No. 2013-11”) to provide explicit guidance and eliminate the diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU No. 2013-11 is effective for annual reporting periods beginning on or after December 15, 2013. The Company does not expect it will have a significant impact on its consolidated results of operations, financial condition and cash flows.
Recently issued accounting pronouncements adopted in the current year
In December 2011, the FASB issued ASU No. 2011-11,
"Disclosures about Offsetting Assets and Liabilities"
("ASU No. 2011-11") to require new disclosures about offsetting assets and liabilities which requires an entity to disclose information about financial instruments that have been offset and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. ASU No. 2011-11 is for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company adopted this guidance as of January 1, 2013 with no significant impact on its consolidated results of operations, financial condition and cash flows.
In February 2013, the FASB issued ASU No. 2013-02,
“Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”
(“ASU No. 2013-02”) to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU No. 2013-02 is effective for annual reporting periods beginning on or after December 15, 2012. The Company adopted this guidance as of January 1, 2013 with no significant impact on its consolidated results of operations, financial condition and cash flows
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.
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. Over the past four 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, 2013, the Company’s cash balance was $415,500 and cash available under its credit line was $470,000. Cash used in operations for the year ended December 31, 2013 was $135,363 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 level of investment in development and approval of new products, entry into new markets, and investments in regulatory approvals;
|
|
·
|
its ability to control growth of operating expenses as it grows the business and expands with new products in new markets;
|
|
·
|
its ability to negotiate and maintain favorable payment terms with customers and vendors;
|
|
·
|
its ability to access the capital markets and maintain availability under its credit line;
|
|
·
|
demand for its products, and the ability of its customers to pay on a timely basis; and
|
|
·
|
general economic conditions as well as political events and legal and regulatory changes.
|
The Company’s operating plans for 2014 include placing existing inventory, entering new markets, commercializing 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 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, 2013 and 2012 consisted of the following:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
535
|
|
|
$
|
151,555
|
|
Cost of revenue
|
|
|
-
|
|
|
|
88,312
|
|
Gross profit
|
|
|
535
|
|
|
|
63,243
|
|
Operating expenses
|
|
|
-
|
|
|
|
10,980
|
|
Net income from discontinued operations
|
|
$
|
535
|
|
|
$
|
52,263
|
|
Operating expenses of discontinued operations consist primarily of selling expenses, shipping charges, bad debts, and product certification expenses.
The Company has completed the disposition of the assets of its discontinued operation and does not expect to realize additional income or loss or cash flows from discontinued operations in future periods.
Note 4. Accounts Receivable
Accounts receivable at December 31, 2013 and 2012 consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
910,920
|
|
|
$
|
980,438
|
|
Allowance for doubtful accounts
|
|
|
(116,971
|
)
|
|
|
(185,669
|
)
|
Accounts receivable, net
|
|
$
|
793,949
|
|
|
$
|
794,769
|
|
Note 5. Inventory
Inventory at December 31, 2013 and 2012 consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Raw materials and components
|
|
$
|
1,182,150
|
|
|
$
|
1,227,914
|
|
Gaming systems in process
|
|
|
331,536
|
|
|
|
193,515
|
|
Finished goods
|
|
|
116,114
|
|
|
|
100,060
|
|
Reserve
|
|
|
(215,099
|
)
|
|
|
(178,539
|
)
|
Inventory, net
|
|
$
|
1,414,701
|
|
|
$
|
1,342,950
|
|
Note 6. Prepaid Expenses and Other Assets
Prepaid expenses and other assets at December 31, 2013 and 2012 consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
62,924
|
|
|
$
|
37,280
|
|
Other
|
|
|
27,390
|
|
|
|
29,708
|
|
Prepaid expenses and other assets
|
|
$
|
90,314
|
|
|
$
|
66,988
|
|
|
|
|
|
|
|
|
|
|
Deferred licensing fees, net
|
|
$
|
60,560
|
|
|
$
|
121,318
|
|
Other
|
|
|
50,180
|
|
|
|
50,180
|
|
Other assets
|
|
$
|
110,740
|
|
|
$
|
171,498
|
|
|
|
|
|
|
|
|
|
|
Note 7. Gaming Systems
Gaming systems at December 31, 2013 and 2012 consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Gaming systems
|
|
$
|
6,716,864
|
|
|
$
|
7,210,226
|
|
Less: accumulated depreciation
|
|
|
(5,491,933
|
)
|
|
|
(5,517,175
|
)
|
Gaming systems, net
|
|
$
|
1,224,931
|
|
|
$
|
1,693,051
|
|
Note 8. Property and Equipment
Property and equipment at December 31, 2013 and 2012 consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
462,404
|
|
|
$
|
458,094
|
|
Leasehold improvements
|
|
|
208,387
|
|
|
|
202,508
|
|
Capitalized software
|
|
|
157,067
|
|
|
|
157,067
|
|
|
|
|
827,858
|
|
|
|
817,669
|
|
Less: accumulated depreciation
|
|
|
(800,134
|
)
|
|
|
(790,702
|
)
|
Property and equipment, net
|
|
$
|
27,724
|
|
|
$
|
26,967
|
|
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, 2013 and 2012.
Note 9. Accrued Liabilities
Accrued liabilities at December 31, 2013 and 2012 consist of the following:
|
|
December,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Accrued legal settlement
|
|
$
|
-
|
|
|
$
|
175,000
|
|
Inventory received, not invoiced
|
|
|
156,075
|
|
|
|
220,670
|
|
Other liabilities and customer deposits
|
|
|
154,051
|
|
|
|
173,734
|
|
Accrued liabilities
|
|
$
|
310,126
|
|
|
$
|
569,404
|
|
Note 10. Debt
The Company’s outstanding debt balances as of December 31, 2013 and 2012 consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
SVB Credit Facility
|
|
$
|
-
|
|
|
$
|
-
|
|
Founders' Loan
|
|
|
240,429
|
|
|
|
300,000
|
|
Total debt
|
|
|
240,429
|
|
|
|
300,000
|
|
Current portion of debt
|
|
|
70,822
|
|
|
|
59,571
|
|
Long-term portion of debt
|
|
$
|
169,607
|
|
|
$
|
240,429
|
|
SVB Credit Facility.
We maintain a credit facility with Silicon Valley Bank to support our working capital needs (the “SVB Credit Facility”). As of February 27, 2014, we entered into the “Seventh Amendment to Loan and Security Agreement”, which extended the maturity date for the facility to January 14, 2015. 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, 2013, as of such date cash available under the SVB Credit Facility was approximately $470,000 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, 2013, the Company was in compliance with these covenants. The SVB Credit Facility is collateralized by security interests in substantially all of the assets of the Company and is senior to the Founders’ Loan (described below).
As of December 31, 2013, 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”) 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”). 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.
The principal balance of the debt outstanding under the Founder’s Loan has been reduced through a series of transactions since 2008. 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 the modifications described above, the unpaid principal balance of the Founders Loan at December 31, 2013 was $240,429. The outstanding principal balance of the Founders Loan, and the interest accruing thereon, is payable as follows:
|
(i)
|
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.
|
|
(ii)
|
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, 2013, the carrying value of the Founders’ Loan was $240,429 and its approximately fair value was $250,000. During 2013 and 2012, the Company made $24,925 and $54,912, respectively, in aggregate interest payments in cash.
Note 11. Employee Benefit Plan
The Company has established a salary deferral plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. The plan allows eligible employees to defer up to 96% of their annual compensation, subject to annual limitations 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, 2013 and 2012, the Company’s expenses related to the plan were $47,900 and $48,900, respectively.
Note 12. Shareholders’ Equity
Common and Preferred Stock
Common Stock.
There are 100,000,000 authorized shares of the Company’s common stock of which 9,363,434 and 8,625,498 were outstanding as of December 31, 2013 and December 31, 2012, respectively.
Private Placement Transactions
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 “restricted” 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.”)
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.
LPC Transaction
In 2010 the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital, LLC (“LPC”). From 2010 through 2012, 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, 2013 and 2012, all of the shares covered by the registration statement remained had been issued thereunder
Warrants
As of December 31, 2013, 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 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, 2013. The Company has historically issued stock options and restricted shares as compensation, although it has the authority to use other forms of equity compensation instruments in the future.
Principal assumptions used in determining the fair value of option awards include the following: (a) expected future volatility for the Company's stock price, which is based on the Company’s historical volatility, (b) expected dividends, (c) expected term and forfeiture rates, based on historical exercise and forfeiture activity, and (d) the risk-free rate is the rate on U.S. Treasury securities with a maturity equal to, or closest to, the expected life of the options. The assumptions used to determine the fair value of option awards for the years ended December 31, 2013 and 2012 were as follows:
|
|
2013
|
|
2012
|
|
Expected Volatility
|
|
94% - 97%
|
|
95% - 97
|
|
Expected Dividends
|
|
0
|
|
0
|
|
Expected Term
|
|
6 yrs
|
|
6 yrs
|
|
Risk-free Rate
|
|
0.82% - 1.60%
|
|
0.67% - 1.02
|
|
A summary of stock option activity and changes during the year for the year ended December 31, 2013 is as follows:
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Remaining Contractual Term
|
|
|
Aggregate Instrinsic Value
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
724,720
|
|
|
$
|
4.68
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
724,720
|
|
|
$
|
4.68
|
|
|
|
5.5
|
|
|
$
|
(2,696,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
|
701,996
|
|
|
$
|
4.43
|
|
|
|
5.5
|
|
|
$
|
(2,436,600
|
)
|
No options were granted in 2013. The total intrinsic value of options exercised during the years ended December 31, 2013 and 2012 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, 2013, and changes during the year ended December 31, 2013 is presented below:
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Balance at December 31, 2012
|
|
|
70,777
|
|
|
$
|
1.04
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(48,054
|
)
|
|
|
1.15
|
|
Balance at December 31, 2013
|
|
|
22,723
|
|
|
$
|
0.73
|
|
As of December 31, 2013, there was $7,000 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 2013 and 2012 was $301,000 and $352,000, respectively. The total fair value of options vested during the years ended December 31, 2013 and 2012 was $1,458,000 and $1,406,000, respectively. The total intrinsic value of vested options as of December 31, 2013 and 2012 was $0.
A summary of restricted stock activity and changes during the year ended December 31, 2013 is as follows:
|
|
|
|
Weighted Average
|
|
Restricted Stock
|
|
Shares
|
|
Remaining Contractual Term
|
|
Grant Date Fair Value
|
|
Nonvested at December 31, 2012
|
|
|
125,000
|
|
|
|
$
|
106,250
|
|
Granted
|
|
|
-
|
|
|
|
|
-
|
|
Vested
|
|
|
(125,000
|
)
|
|
|
|
(106,250
|
)
|
Forfeited
|
|
|
-
|
|
|
|
|
-
|
|
Nonvested at December 31, 2013
|
|
|
-
|
|
-
|
|
$
|
-
|
|
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, 2013, there was $0 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, 2013 is as follows:
|
|
|
|
Weighted Average
|
|
Restricted Stock Units (RSU's)
|
|
Shares
|
|
Remaining Contractual Term
|
|
Grant Date Fair Value
|
|
Nonvested at December 31, 2012
|
|
|
356,000
|
|
|
|
$
|
267,000
|
|
Granted
|
|
|
85,000
|
|
|
|
|
63,750
|
|
Vested
|
|
|
(187,688
|
)
|
|
|
|
(140,766
|
)
|
Forfeited
|
|
|
-
|
|
|
|
|
-
|
|
Nonvested at December 31, 2013
|
|
|
253,312
|
|
0.8
|
|
$
|
189,984
|
|
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, 2013, there was $121,141 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:
|
|
2013
|
|
|
2012
|
|
Current tax expense:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
42,310
|
|
|
|
86,908
|
|
|
|
|
42,310
|
|
|
|
86,908
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Total income tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
42,310
|
|
|
|
86,908
|
|
|
|
$
|
42,310
|
|
|
$
|
86,908
|
|
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:
|
|
2013
|
|
|
2012
|
|
Federal statutory income tax benefit
|
|
$
|
(102,581
|
)
|
|
$
|
(270,003
|
)
|
Increases (reductions) in taxes due to:
|
|
|
|
|
|
|
|
|
Nondeductible stock-based compensation
|
|
|
(48,404
|
)
|
|
|
55,307
|
|
State taxes, net of federal benefit
|
|
|
159,011
|
|
|
|
(69,142
|
)
|
Change in valuation allowance
|
|
|
(393,282
|
)
|
|
|
(31,330
|
)
|
Imputed Interest Income
|
|
|
69,205
|
|
|
|
|
|
Other
|
|
|
131,882
|
|
|
|
(55,718
|
)
|
Adjustment to NOL carryovers
|
|
|
184,169
|
|
|
|
370,886
|
|
Foreign income tax
|
|
|
42,310
|
|
|
|
86,908
|
|
Income tax expense
|
|
$
|
42,310
|
|
|
$
|
86,908
|
|
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:
|
|
2013
|
|
|
2012
|
|
Deferred tax asset:
|
|
|
|
|
|
|
Start-up costs capitalization
|
|
$
|
73,210
|
|
|
$
|
85,592
|
|
Loss carryforwards
|
|
|
11,200,108
|
|
|
|
11,583,968
|
|
Depreciation
|
|
|
1,516,881
|
|
|
|
1,626,090
|
|
Tax credit carryforwards
|
|
|
563,358
|
|
|
|
521,048
|
|
Share-based compensation expense
|
|
|
201,475
|
|
|
|
227,726
|
|
Accounts receivable
|
|
|
42,222
|
|
|
|
67,907
|
|
Inventory
|
|
|
761,323
|
|
|
|
646,970
|
|
Deferred costs
|
|
|
25,127
|
|
|
|
|
|
Other
|
|
|
3,176
|
|
|
|
10,029
|
|
|
|
|
14,386,880
|
|
|
|
14,769,330
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(16,475
|
)
|
|
|
(5,643
|
)
|
|
|
|
(16,475
|
)
|
|
|
(5,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
14,370,405
|
|
|
|
14,763,687
|
|
Less valuation allowance
|
|
|
(14,370,405
|
)
|
|
|
(14,763,687
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2013 and December 31, 2012, the Company has federal net operating loss carryforwards of approximately $28,810,000 and $30,365,000, respectively, North Carolina net economic loss carryforwards of approximately $13,803,000 and $14,395,000, respectively and other state net operating losses in the amounts of approximately $1,147,000 and $1,397,000, 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 2032. 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, 2013 and 2012. The change in the valuation allowance of ($393,282) for the year ended December 31, 2013 was due to the decrease in net deferred tax assets, principally driven by decreases 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, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
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 2008 through 2013 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 federal and state 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 federal or state net operating loss and credit carryforwards would have no effect on the Company’s consolidated results of operations.
Based on a §382 analysis performed internally by the Company, management believes that no change in ownership has occurred in prior periods. However, at this time, management has not obtained a formal study and would intend to do so prior to any significant utilization of the carryovers. While management does not believe a change in ownership has occurred in prior periods, if a formal study were to find that a change in ownership had in fact occurred, management estimates that the utilization of federal net operating loss and credit carryforwards could potentially be limited to approximately $100,000 to $500,000 per year over the following 19 years. If such a limitation were found to exist, at that time, the company would reduce its gross deferred tax asset and its valuation allowance related to the net operating loss and credit carryforwards to reflect the amounts that could be utilized after limitation.
Note 14. Related Party Transactions
Private Placement Transactions
During 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 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, 2013 and 2012 were $135,000 and $135,000, 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, purchased a 33% interest in Gaming Equipment Rental Co., LLC (“Gaming Equipment”) a customer of the Company at that time, for an investment of $10,000 in cash. Gaming Equipment operated a charity gaming facility in Ohio and leased gaming equipment from the Company. During August 2013, Mr. White and Gaming Equipment Rental Co, LLC entered into Interest Purchase Agreement whereby Mr. White’s initial investment of $10,000 was refunded to him in full by Gaming Equipment and his ownership interest in Gaming Equipment ceased as of that date.
Revenue from Gaming Equipment of $212,760 and $148,258 was recognized for the years ended December 31, 2013 and December 31, 2012, respectively. Effective as of June 30, 2013, the Company and Gaming Equipment agreed to convert $82,055 of trade accounts receivable to an unsecured note with payments due monthly over a 24 month term. On September 7, 2013, Gaming Equipment ceased operations in response to a notice it received from the Attorney General of Ohio. The notice indicated that, in the opinion of the Attorney General of Ohio, any gaming device containing a video screen was deemed to be a slot machine under state regulatory definitions and, therefore, was not permitted under current charity gaming regulations.
As of September 30, 2013, the Company wrote off outstanding accounts and notes receivable totaling $227,198 due from Gaming Equipment as they were deemed to be uncollectible following the closure of the facility. As of December 31, 2012, the accompanying Consolidated Balance Sheets included $78,858 of trade accounts receivable from Gaming Equipment.
Note 15. Segment Information
The Company reports segment information based on the “management approach.” The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. Following the Company’s exit from its amusement business, the Company’s operations are entirely focused on gaming products. Based on the criteria specified in ASC Topic 280, Segment Reporting, the Company has one reportable segment. The results of operations for the amusement products have been reported as discontinued operations for all periods presented.
For the year ended December 31, 2013, five customers accounted for approximately 76.7% of our total revenues from continuing operations, with one accounting for 39.0%, a second accounting for 19.8%, a third accounting for 7.2%, a fourth accounting for 6.1%, and a fifth accounting for 4.6%. 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.
Revenues by geographic area are determined based on the location of the Company’s customers. For fiscal 2013 and 2012, revenues from customers outside the United States accounted for 33.0% and 23.3% of consolidated revenue, respectively. The following is revenues and long-lived assets by geographic area as of and for the years ended December 31:
|
|
2013
|
|
|
2012
|
|
Revenue:
|
|
|
|
|
|
|
United States
|
|
$
|
3,713,969
|
|
|
$
|
3,968,865
|
|
Other Americas
|
|
|
1,375,728
|
|
|
|
649,818
|
|
Europe
|
|
|
191,065
|
|
|
|
399,933
|
|
Other International
|
|
|
265,933
|
|
|
|
158,663
|
|
|
|
$
|
5,546,695
|
|
|
$
|
5,177,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
2012
|
|
Long-lived assets, end of period:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
450,714
|
|
|
$
|
884,929
|
|
Other America's
|
|
|
718,982
|
|
|
|
824,050
|
|
Europe
|
|
|
157,035
|
|
|
|
163,218
|
|
Other International
|
|
|
36,664
|
|
|
|
19,319
|
|
|
|
$
|
1,363,395
|
|
|
$
|
1,891,516
|
|
Note 16. Commitments and Contingencies
Leases
The Company leases its corporate office and manufacturing facility. 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.”)
During the year ended December 31, 2013, the Company, as lessor, leased a portion of the Company’s leased office space under a three-year operating lease agreement. The lease has two, one-year renewal options at rents to be determined at renewal. The lease provides that the lessee is required to make rental payments of $1,600 per month.
The Company also leases certain equipment under lease agreements with terms up to two years and storage facilities.
Information with respect to the rents to be received/paid under the leases described above is summarized as follows:
Year Ending December 31,
|
|
Contractual Operating Lease Receipts
|
|
|
Contractual Operating Lease Payments
|
|
2014
|
|
$
|
19,200
|
|
|
$
|
135,000
|
|
2015
|
|
|
19,200
|
|
|
|
135,000
|
|
2016
|
|
|
11,200
|
|
|
|
90,000
|
|
|
|
$
|
49,600
|
|
|
$
|
360,000
|
|
Rent expense for the years ended December 31, 2013 and 2012 was $135,000 and $135,000, respectively. Rent income for the years ended December, 31, 2013 and 2012 was $8,000 and none, 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.
The Company is not a party to any material legal proceeding as of the date hereof.