UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q








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





For
the Quarterly Period Ended September 30, 2009





OR





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


For
the transition period from
_____________________to______________________





Commission
File Number: 000-51572










PokerTek,
      Inc.


(Exact
name of registrant as specified in its charter)




North
      Carolina
            
            61-1455265(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)1150
      Crews Road, Suite F, Matthews, North Carolina 28105(Address
      of principal executive offices) (Zip
Code)





(704)
  849-0860(Registrant’s
      telephone number, including area
code)








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





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (check one):




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





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o  No x




As of
November 13, 2009, there were 14,011,710 shares outstanding of the registrant’s
common stock.









POKERTEK,
INC.
  TABLE
OF CONTENTS
  
 PagePART
      I – FINANCIAL INFORMATIONItem 1.
              
              Financial Statements
              
              1Item 2.
              
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              
              16Item 3.
              
              Quantitative and Qualitative Disclosures about Market
      Risk
              
              23Item 4T.
              
              Controls and Procedures
              
              23PART
      II – OTHER INFORMATIONItem 1.
              
              Legal Proceedings
              
              24Item 1A.
              
              Risk Factors
              
              24Item 4.
              
              Submission of Matters to a Vote of Security
      Holders
              
              24Item 6.
              
              Exhibits
              
              26Signatures
              
              26Exhibit Index
              
              27




POKERTEK,
      INC.CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenue:License
      and service fees
              
              $
              1,344,191
              
              
              $
              1,521,341
              
              
              $
              3,937,345
              
              
              $
              4,463,280Product
      sales
              
              
              217,490
              
              
              
              2,772,144
              
              
              
              1,279,236
              
              
              
              6,871,791Total
      revenue
              
              
              1,561,681
              
              
              
              4,293,485
              
              
              
              5,216,581
              
              
              
              11,335,071Direct
      cost of revenue:Depreciation
      of PokerPro systems
              
              
              663,633
              
              
              
              676,135
              
              
              
              2,002,041
              
              
              
              1,902,713Amortization
      of deferred product costs
              
              
              29,069
              
              
              
              -
              
              
              
              29,069
              
              
              
              -Cost
      of product sales
              
              
              193,509
              
              
              
              2,088,570
              
              
              
              1,071,947
              
              
              
              5,042,443Total
      direct cost of revenue
              
              
              886,211
              
              
              
              2,764,705
              
              
              
              3,103,057
              
              
              
              6,945,156Operating
      Expenses:Selling,
      general and administrative
              
              
              1,302,398
              
              
              
              2,132,956
              
              
              
              4,790,911
              
              
              
              6,831,297Research
      and development
              
              
              279,642
              
              
              
              603,845
              
              
              
              934,963
              
              
              
              2,136,413Share-based
      compensation expense
              
              
              220,964
              
              
              
              368,553
              
              
              
              590,341
              
              
              
              892,185Depreciation
              
              
              62,434
              
              
              
              50,735
              
              
              
              192,982
              
              
              
              150,720Total
      operating expenses
              
              
              1,865,438
              
              
              
              3,156,089
              
              
              
              6,509,197
              
              
              
              10,010,615Operating
      loss
              
              
              (1,189,968
              )
              
              
              (1,627,309
              )
              
              
              (4,395,673
              )
              
              
              (5,620,700
              )Interest
      expense, net
              
              
              (76,403
              )
              
              
              (50,576
              )
              
              
              (257,674
              )
              
              
              (24,078
              )Net
      loss before income taxes
              
              
              (1,266,371
              )
              
              
              (1,677,885
              )
              
              
              (4,653,347
              )
              
              
              (5,644,778
              )Income
      tax provision
              
              
              (19,117
              )
              
              
              (75,150
              )
              
              
              (83,087
              )
              
              
              (198,623
              )Net
      loss
              
              $
              (1,285,488
              )
              
              $
              (1,753,035
              )
              
              $
              (4,736,434
              )
              
              $
              (5,843,401
              )Net
      loss per common share - basic and diluted
              
              $
              (0.11
              )
              
              $
              (0.16
              )
              
              $
              (0.42
              )
              
              $
              (0.53
              )Weighted
      average common shares outstanding - basic and diluted
              
              
              11,811,726
              
              
              
              10,934,464
              
              
              
              11,287,756
              
              
              
              10,934,464




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




1




POKERTEK,
      INC.CONSOLIDATED
      BALANCE SHEETSSeptember
      30, 2009Assets
              
              (unaudited)
              
              
              December
      31, 2008Current
      assets:Cash
      and cash equivalents
              
              $
              1,109,527
              
              
              $
              1,481,530Investments
              
              
              -
              
              
              
              3,900,000Accounts
      receivable, net
              
              
              1,065,035
              
              
              
              1,600,464Inventory
              
              
              2,948,192
              
              
              
              3,547,099Deferred
      product costs, net
              
              
              235,131
              
              
              
              -Prepaid
      expenses and other assets
              
              
              124,164
              
              
              
              213,222Total
      current assets
              
              
              5,482,049
              
              
              
              10,742,315Other
      assets:PokerPro
      systems, net
              
              
              1,947,556
              
              
              
              3,821,376Property
      and equipment, net
              
              
              456,239
              
              
              
              599,772Deferred
      product costs, net
              
              
              308,575
              
              
              
              -Other
      assets
              
              
              459,845
              
              
              
              542,214Total
      assets
              
              $
              8,654,264
              
              
              $
              15,705,677Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
              
              $
              612,591
              
              
              $
              1,590,681Accrued
      liabilities
              
              
              623,330
              
              
              
              859,179Deferred
      revenue
              
              
              303,863
              
              
              
              194,051Long-term
      debt, current portion
              
              
              25,635
              
              
              
              2,889,261Total
      current liabilities
              
              
              1,565,419
              
              
              
              5,533,172Long-term
      liabilities:Deferred
      revenue
              
              
              119,509
              
              
              
              -Long-term
      debt
              
              
              819,186
              
              
              
              2,038,635Total
      long-term liabilities
              
              
              938,695
              
              
              
              2,038,635Total
      liabilities
              
              
              2,504,114
              
              
              
              7,571,807Commitments
      and contingenciesShareholders'
      equity:Preferred
      stock, no par value per share; authorized 5,000,000,
                none
      issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, no par value per share; authorized 100,000,000
                shares,
      issued and outstanding 13,762,886  shares at
                September
      30, 2009 and 11,021,429 at December 31, 2008
              
              
              -
              
              
              
              -Additional
      paid-in capital
              
              
              45,212,047
              
              
              
              42,459,333Accumulated
      deficit
              
              
              (39,061,897
              )
              
              
              (34,325,463
              )Total
      shareholders' equity
              
              
              6,150,150
              
              
              
              8,133,870Total
      liabilities and shareholders' equity
              
              $
              8,654,264
              
              
              $
              15,705,677




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




2


POKERTEK,
      INC.CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY(UNAUDITED)Common
      StockShares
            
            
            Value
            
            
            Additional

              Paid-in
      Capital
            
            
            Accumulated

              Deficit
            
            
            Total
      Shareholders' EquityBalance,
      December 31, 2007
            
            
            10,934,464
            
            
            $
            -
            
            
            $
            41,353,220
            
            
            $
            (26,686,690
            )
            
            $
            14,666,530Stock
      warrants exercised
            
            
            86,965
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Share-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            1,106,113
            
            
            
            -
            
            
            
            1,106,113Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,638,773
            )
            
            
            (7,638,773
            )Balance,
      December 31, 2008
            
            
            11,021,429
            
            
            
            -
            
            
            
            42,459,333
            
            
            
            (34,325,463
            )
            
            
            8,133,870Net
      proceeds from private placement of common stock
            
            
            686,090
            
            
            
            -
            
            
            
            500,000
            
            
            
            -
            
            
            
            500,000Stock
      issued as payment for inventory
            
            
            565,000
            
            
            
            -
            
            
            
            480,250
            
            
            
            -
            
            
            
            480,250Conversion
      of debt to common stock
            
            
            1,445,784
            
            
            
            -
            
            
            
            1,200,000
            
            
            
            -
            
            
            
            1,200,000Stock
      issued as payment for interest
            
            
            44,583
            
            
            
            -
            
            
            
            33,124
            
            
            
            -
            
            
            
            33,124Share-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            539,340
            
            
            
            -
            
            
            
            539,340Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,736,434
            )
            
            
            (4,736,434
            )Balance,
      September 30, 2009
            
            
            13,762,886
            
            
            $
            -
            
            
            $
            45,212,047
            
            
            $
            (39,061,897
            )
            
            $
            6,150,150




The
accompanying notes are an integral part of these consolidated financial
statements
  3




POKERTEK,
      INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)Nine
      months ended September 30,2009
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (4,736,434
              )
              
              $
              (5,843,401
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              2,195,023
              
              
              
              2,053,433Amortization
              
              
              29,069
              
              
              
              -Share-based
      compensation expense
              
              
              590,341
              
              
              
              892,185Provision
      for accounts and other receivables
              
              
              41,962
              
              
              
              11,485Changes
      in assets and liabilities:Accounts
      and other receivables
              
              
              493,467
              
              
              
              (1,058,583
              )Prepaid
      expenses and other assets
              
              
              171,427
              
              
              
              (107,109
              )Inventory
              
              
              1,079,157
              
              
              
              (514,417
              )PokerPro
      systems
              
              
              (128,221
              )
              
              
              (1,099,155
              )Deferred
      product costs
              
              
              (572,755
              )
              
              
              -Accounts
      payable and accrued expenses
              
              
              (1,231,816
              )
              
              
              458,572Deferred
      revenue
              
              
              229,321
              
              
              
              140,400Net
      cash used in operating activities
              
              
              (1,839,479
              )
              
              
              (5,066,590
              )Cash
      flows from investing activities:Purchases
      of property and equipment
              
              
              (49,449
              )
              
              
              (119,583
              )Sale
      of investments
              
              
              3,900,000
              
              
              
              2,050,000Net
      cash provided by investing activities
              
              
              3,850,551
              
              
              
              1,930,417Cash
      flows from financing activities:Proceeds
      from long-term debt
              
              
              -
              
              
              
              2,000,000Proceeds
      from short-term debt
              
              
              -
              
              
              
              2,620,086Repayments
      of short-term debt
              
              
              (2,865,357
              )
              
              
              (173,641
              )Proceeds
      from issuance of common stock, net of expenses
              
              
              500,000
              
              
              
              -Repayments
      of capital lease
              
              
              (17,718
              )
              
              
              (5,485
              )Net
      cash provided by (used in) financing activities
              
              
              (2,383,075
              )
              
              
              4,440,960Net
      increase (decrease) in cash and cash equivalents
              
              
              (372,003
              )
              
              
              1,304,787Cash
      and cash equivalents, beginning of year
              
              
              1,481,530
              
              
              
              1,229,980Cash
      and cash equivalents, end of period
              
              $
              1,109,527
              
              
              $
              2,534,767Supplemental
      Disclosure of Cash Flow InformationCash
      paid for:Interest
              
              $
              164,567
              
              
              $
              129,751Income
      taxes
              
              $
              106,919
              
              
              $
              178,055Non-cash
      transactions:Issuance
      of common shares in satisfaction of long-term debt
              
              $
              1,200,000
              
              
              $
              -Issuance
      of common shares as payment for inventory
              
              $
              480,250
              
              
              $
              -Issuance
      of common shares as payment of interest
              
              $
              33,124
              
              
              $
              -Capital
      lease obligation
              
              $
              -
              
              
              $
              52,034


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




4





POKERTEK,
INC.


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Note
1.    Nature of Business and Basis of
Presentation
 
 Nature
of Business
 
 PokerTek,
Inc. (“PokerTek” or the “Company”) is engaged in the development, manufacture
and marketing of electronic poker-related products for use in the gaming and
amusement markets.
 
 The
Company currently has two product lines, PokerPro® gaming products and Heads-Up
ChallengeTM amusement products.
 
 The
PokerPro system consists of electronic poker table(s) and related peripheral
equipment providing commercial casinos, tribal casinos, cruise ships and card
clubs with a fully-automated poker-room environment designed to improve the
profitability of poker by enhancing the operator’s revenue opportunities and
decreasing startup and operating costs.  Heads-Up ChallengeTM is an
innovative amusement platform that enables two players to compete head to head
against each other for entertainment purposes in non-gambling venues such as
bars and restaurants.
 
 Basis
of Presentation and Significant Accounting Policies
 
 The
accompanying consolidated financial statements include the accounts of PokerTek,
Inc. and its consolidated subsidiary.  All significant intercompany
transactions and accounts have been eliminated.
 
 These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
Certain reclassifications have been made to prior periods’ financial information
to conform to the current period presentation. There were no material changes
during the most recent fiscal quarter in the Company’s significant accounting
policies as described in the Annual Report.
 
 The
accompanying consolidated financial statements have been prepared without audit
and are presented in accordance with Article 8-03 of Regulation
S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles in the United
States (“U.S. GAAP”) for annual financial statements. In the opinion of
management, these consolidated financial statementsinclude all adjustments,
which consist only of normal recurring adjustments, necessary for a fair
statement of the Company’s results of operations for the periods
presented.  The results of operations for the three and nine months
ended September 30, 2009 are not necessarily indicative of the results to be
expected for the entire year.
 
 Recent
Accounting Pronouncements
 
 In October
2009, the Financial Accounting Standards Board (“FASB”) issued guidance which
amended the accounting requirements regarding revenue recognition for software.
The objective of this update is to address the accounting for revenue
arrangements that contain tangible products and software. This guidance is
effective for fiscal years beginning on or after June 15, 2010 and allows
for either prospective or retrospective application, with early adoption
permitted. We are currently evaluating the impact that adoption of this guidance
will have on the Company’s consolidated financial statements.
 
 In October
2009, the FASB issued guidance which amended the accounting requirements
regarding revenue recognition.  The objective of this update is to
address the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than as a
combined unit.  This guidance is effective for fiscal years beginning
on or after June 15, 2010 and allows for either prospective or
retrospective application, with early adoption permitted. We are currently
evaluating the impact that adoption of this guidance will have on the Company’s
consolidated financial statements.
  5
 In August
2009, the FASB issued guidance on measuring liabilities at fair
value.  The guidance addresses restrictions on the transfer of a
liability and clarifies how the price of a traded debt security should be
considered in estimating the fair value of the issuer’s
liability.  The guidance is effective for our fourth quarter period
beginning October 1, 2009. We are currently evaluating the impact that
adoption of this guidance will have on the Company’s consolidated financial
statements.
 
 In June
2009, the FASB adopted the FASB Accounting Standards Codification as the single
source of authoritative non-governmental GAAP.  This codification
supersedes all previously issued accounting pronouncements and consolidates
technical accounting literature.  This codification was effective for
interim and annual reporting periods ending after September 15, 2009. The
adoption and application the FASB codification did not have any effect on the
Company's results of operations, financial condition, or cash
flows.  References to superceded accounting pronouncements have been
replaced with references to the Codification sections and/or plain English
explanations.
 
 In May
2009, the FASB issued guidance requiring disclosures regarding subsequent events
for events or transactions that occur after the balance sheet date but before
the financial statements are issued, for public companies, and requires
disclosure of the date through which an entity has evaluated subsequent
events.  This guidance was effective for interim reporting periods
ending after June 15, 2009.  Management has evaluated all significant
events and transactions occurring after September 30, 2009 through November 13,
2009, the date we issued these financial statements.  During this
period, we did not have any recognizable subsequent events.  The
adoption and application of this guidance did not have any effect on the
Company's results of operations, financial condition, or cash
flows.
 
 In April
2009, the FASB issued guidance requiring disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements, as well as disclosures in summarized
financial information at interim reporting periods. This statement was effective
for interim reporting periods ending after June 15, 2009, and its adoption
did not have a material effect on the Company’s results of operations, financial
condition or cash flows.
 
 Note
2. Investments in Auction Rate Securities (“ARS”)
 
 As of
December 31, 2008, the Company held investments in ARS, as well as a Rights
Option issued by UBS Financial Services, giving the Company the right to put the
ARS investments back to UBS at par for a specified period of time beginning on
January 2, 2009.
 
 On January 5, 2009, the Company
exercised its rights under the UBS Rights Offering to sell the ARS investments
to UBS at par.  As a result, the Company received $3.9 million from
the sale of the ARS investments, liquidated its outstanding UBS Credit Facility
in the amount of $2.9 million, which resulted in $1.0 million in net proceeds to
the Company.  Since the investments were redeemed at par, there was no
realized gain or loss associated with this transaction.  The Company
has no remaining ARS investments and the UBS Credit Facility has been
terminated.
 
 6
 
 The
following table presents information about the Company's financial assets
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3):
  Level
      3 Auction
                      Rate
      Securities
                    
                    
                    Level
      3 Rights
                      Option
                    
                    
                    Level
      3 TotalBalance
      at December 31, 2008
                    
                    $
                    3,275,710
                    
                    
                    $
                    624,290
                    
                    
                    $
                    3,900,000Sales,
      net
                    
                    
                    (3,275,710
                    )
                    
                    
                    (624,290
                    )
                    
                    
                    (3,900,000
                    )Transfers
      to Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Included
      in accumulated other comprehensive loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at March 31, 2009
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Sales,
      net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Transfers
      to Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Included
      in accumulated other comprehensive loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at June 30, 2009
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Sales,
      net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Transfers
      to Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Included
      in accumulated other comprehensive loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at September 30, 2009
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
  Note
3.    Inventory
 
 Inventory
at September 30, 2009 and December 31, 2008 consisted of the
following:
 September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Raw
      materials and components
                    
                    $
                    1,657,202
                    
                    
                    $
                    1,341,933PokerPro
      systems in process
                    
                    
                    469,296
                    
                    
                    
                    611,974Finished
      goods
                    
                    
                    1,150,252
                    
                    
                    
                    1,859,515Reserve
                    
                    
                    (328,558
                    )
                    
                    
                    (266,323
                    )Inventory,
      net
                    
                    $
                    2,948,192
                    
                    
                    $
                    3,547,099
   Note
4.    Prepaid Expenses and Other Assets
 
 Prepaid
expenses and other assets at September 30, 2009 and December 31, 2008 consisted
of the following:
  September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Prepaid
      expenses
                    
                    $
                    89,961
                    
                    
                    $
                    162,249Other
                    
                    
                    34,203
                    
                    
                    
                    50,973Prepaid
      expenses and other assets
                    
                    $
                    124,164
                    
                    
                    $
                    213,222Deferred
      licensing fees, net
                    
                    $
                    405,462
                    
                    
                    $
                    488,280Other
                    
                    
                    54,383
                    
                    
                    
                    53,934Other
      assets
                    
                    $
                    459,845
                    
                    
                    $
                    542,214
  7
 
 Note
5.    PokerPro Systems
  PokerPro
systems at September 30, 2009 and December 31, 2008 consisted of the
following:
  September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008PokerPro
      systems
                    
                    $
                    7,543,531
                    
                    
                    $
                    8,749,414Less:
      accumulated depreciation
                    
                    
                    (5,595,975
                    )
                    
                    
                    (4,928,038
                    )PokerPro
      systems, net
                    
                    $
                    1,947,556
                    
                    
                    $
                    3,821,376
  PokerPro
systems are transferred from the Company’s inventory account to the PokerPro
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 PokerPro 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
PokerPro systems begins in the month of transfer of each PokerPro system from
the Company’s inventory account to the PokerPro systems account.
 
 As
PokerPro 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 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 PokerPro systems account and
depreciated over their estimated useful life in a manner consistent with new
PokerPro systems described above.
 
 
 Note
6.    Property and Equipment
 
 Property
and equipment at September 30, 2009 and December 31, 2008 consisted of the
following:
  September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Equipment
                    
                    $
                    759,764
                    
                    
                    $
                    722,027Leasehold
      improvements
                    
                    
                    199,948
                    
                    
                    
                    189,917Capitalized
      software
                    
                    
                    157,067
                    
                    
                    
                    155,3871,116,779
                    
                    
                    
                    1,067,331Less:
      accumulated depreciation
                    
                    
                    (660,540
                    )
                    
                    
                    (467,559
                    )Property
      and equipment, net
                    
                    $
                    456,239
                    
                    
                    $
                    599,772
 Capitalized
software consists of purchased software, consulting and capitalized internal
costs related to the purchase and implementation of a new internal-use
enterprise resource management system.  Accumulated depreciation on
capitalized software at September 30, 2009 was $47,935.  The software
portion of this systems investment was financed through a capital lease
obligation (see Note 9, Debt).
  8




Note
7.    Deferred Product Costs
 
 Deferred
product costs at September 30, 2009 and December 31, 2008 consisted of the
following:
  September
      30,
                
                
                December
      31,2009
                
                
                2008Deferred
      product costs - PokerPro systems
                
                $
                72,183
                
                
                $
                -Deferred
      costs - Heads-Up Challenge
                
                
                500,592
                
                
                
                -Less:
      accumulated amortization
                
                
                (29,069
                )
                
                
                -Deferred
      product costs, net
                
                
                543,706
                
                
                
                -Current
      portion of deferred product costs, net
                
                
                235,131
                
                
                
                -Long-term
      portion of deferred product costs, net
                
                $
                308,575
                
                
                $
                -


Deferred
product costs reflect the cost of products which have been delivered and for
which revenue has been deferred in accordance with the Company’s revenue
recognition policy. When the Company’s products have been delivered, but the
revenue associated with the arrangement has been deferred, the Company also
defers the related inventory costs and transfers the balance from inventory to
deferred product costs.  Deferred product costs are amortized as the
related deferred revenue is recognized.





Note
8.    Accrued Liabilities





Accrued
liabilities at September 30, 2009 and December 31, 2008 consisted of the
following:




September
      30,
              
              
              December
      31,2009
              
              
              2008Accrued
      professional fees
              
              $
              105,500
              
              
              $
              117,167Other
      liabilities and customer deposits
              
              
              517,830
              
              
              
              742,012Accrued
      liabilities
              
              $
              623,330
              
              
              $
              859,179




Note
9.    Debt
  The
Company’s outstanding debt balances as of September 30, 2009 and December 31,
2008 consisted of the following:
  September
      30,
                
                
                December
      31,2009
                
                
                2008SVB
      Credit Facility
                
                $
                -
                
                
                $
                -UBS
      Credit Facility
                
                
                -
                
                
                
                2,865,357Founders'
      Loan
                
                
                800,000
                
                
                
                2,000,000Capital
      lease obligation
                
                
                44,821
                
                
                
                62,539Total
      debt
                
                
                844,821
                
                
                
                4,927,896Current
      portion of debt
                
                
                25,635
                
                
                
                2,889,261Long-term
      portion of debt
                
                $
                819,186
                
                
                $
                2,038,635




9




SVB Credit
Facility:  The Company maintains a credit facility with Silicon
Valley Bank to support the Company’s working capital needs (the “SVB Credit
Facility”).  On July 23, 2009, the Company entered into amendments to
the SVB Credit Facility, which extended the maturity date for the facility to
July 23, 2010, adjusted the facility amount to have a Facility Limit of $2.5
million with maximum advances determined based on the composition of our
eligible accounts receivable and inventory balances and modified certain other
provisions of the facility.  The SVB Credit Facility has a one-year
term and bears interest at an annual rate equal to the greater of prime plus
6.5% or prime plus 2.0%.
 
 Based on
the Company’s accounts receivable and inventory levels on September 30, 2009, as
of such date availability was approximately $0.8 million, with no borrowings
outstanding.  The SVB Credit Facility includes covenants requiring the
achievement of specified financial ratios and thresholds and contains other
terms and conditions customary for this type of credit facility.  As of
September 30, 2009, the Company was in compliance with these
covenants.  The SVB Credit Facility is collateralized by security
interests in substantially all of the assets of the Company and is senior to the
Founder’s Loan.
 
 As of
September 30, 2009, there were no amounts drawn under the SVB Credit
Facility.
 
 UBS Credit
Facility:On August 13, 2008, the Company entered into a Credit Line
Agreement (the “Line of Credit”) with UBS Bank USA for a demand revolving line
of credit with respect to the Company’s ARS held in an account with
UBS.   On January 5, 2009, the Company exercised its rights under
the UBS Rights Offering to sell the ARS investments to UBS at par.
  As a
result, the Company liquidated its outstanding UBS Credit Facility in the amount
of $2.9 million.  The Company has no remaining ARS investments and the
UBS Credit Facility has been terminated.
 
 Founders’
Loan:The Company entered into a loan agreement with Lyle A.
Berman, James T. Crawford III, Arthur Lee Lomax and Gehrig H. “Lou” White on
March 24, 2008.  Messrs. Crawford, Lomax and White are the founders of
the Company.  Each of the lenders are also members of our board of
directors, with Mr. Berman serving as Chairman and Mr. White serving as Vice
Chairman.  The $2.0 million loan originally called for cash interest
at 13% with all unpaid principal and interest payable on March 24,
2010.
 
 On July 9,
2009, the Founder’s Loan was amended to provide that monthly interest payments
may be made, at the election of the holder, in our common stock at a 13% annual
interest rate pursuant to a formula or cash at a 9% annual interest
rate.  In addition, the maturity date of the loan was extended to
March 21, 2012.
 
 On
September 10, 2009, the Company entered into an agreement with Lyle A. Berman,
James T. Crawford and Lee Lomax to convert an aggregate $1.2 million principal
amount of the loans into common stock.  Gehrig H. “Lou” White and Lee
Lomax continue to hold $500,000 and $300,000 principal amounts, respectively, of
the loans.
 
 The loan
contains no restrictive covenants and, following the conversion described above,
is collateralized by security interests in 62 PokerPro systems. Such interests
have been subordinated to the SVB Credit Facility.
  As of
September 30, 2009, the carrying value of the Founders’ Loan was $0.8 million
and its fair value was approximately $0.8 million.
 
 Capital Lease
Obligation:  During 2008, the Company entered into capital
lease obligations totaling $73,273 to finance the purchase of a new internal-use
ERP system. These capital lease obligations bear interest at an annual rate of
9.4% and have a term of 36 months, resulting in monthly payments of
$2,396.  At the end of the lease term, the Company has the option to
purchase the software for $101.  The net book value of the assets
under lease at September 30, 2009 was $109,133.  Related depreciation
expense recognized during the three months and nine months ended September 30,
2009 was $13,089 and $39,267, respectively, resulting in accumulated
depreciation of $47,935.
 
 Note
10.  Employee Benefit Plan
 
 The
Company has established a salary deferral plan under Section 401(k) of the
Internal Revenue Code covering substantially all employees. The plan allows
eligible employees to defer 3% to 5% of their annual compensation. The Company
matches the contributions equal to 100% on the first 3% of the deferral and 50%
on the deferral from 3% to 5%. For the three months ended September 30,
2009 and September 30, 2008, the Company recorded contribution expense of
$16,862 and $34,323, respectively.  For the nine months ended
September 30, 2009 and September 30, 2008, the Company recorded contribution
expense of $63,953 and $105,475, respectively.
  10
 
 Note
11.  Shareholders’ Equity
 
 Stock
Incentive Plan
 
 Option activity under the Company’s
stock incentive plans for the nine months ended September 30, 2009 was as
follows:
  Weighted
      AverageShares
                
                
                Exercise
                  Price
                
                
                Remaining
      Contractual
                  Term
                
                
                Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2009
                
                
                2,023,263
                
                
                $
                8.06Granted
                
                
                1,563,500
                
                
                
                0.81Exercised
                
                
                -
                
                
                
                -Forfeited
                
                
                (1,485,088
                )
                
                
                8.20Expired
                
                
                -
                
                
                
                -Outstanding
      at September 30, 2009
                
                
                2,101,675
                
                
                $
                2.56
                
                
                
                9.1
                
                
                $
                (3,325,312
                )Exercisable
      at September 30, 2009
                
                
                419,588
                
                
                $
                7.63
                
                
                
                6.3
                
                
                $
                (2,788,737
                )




At the
2009 Annual Meeting held on September 3, 2009, the shareholders approved the
adoption of the 2009 Stock Incentive Plan authorizing up to an additional one
million award grants.
 
 On
September 22, 2009, the Company entered into agreements with ten option holders,
including directors, officers, employees and consultants of the Company, to
issue 832,000 new incentive stock options and contemporaneously cancel an equal
amount of outstanding incentive stock options held by the option
holders.  The new options which were issued have an exercise price of
$0.81 per share of common stock, vest over a period of three years and have an
expiration date of September 11, 2019.
  The
exchange transaction was a negotiated one in which the Company's offer was made
on September 11, 2009, with the exercise price based on the closing bid price on
that date. The option holders were given the opportunity to evaluate the offer
and to accept it effective September 22, 2009.  The new incentive
options were issued in reliance upon an exemption from registration provided by
Section 3(a)(9) of the Securities Act of 1933, as amended, on the basis that the
transactions represented an exchange of securities with the Company's existing
security holders.  Total incremental estimated compensation cost
related to the exchanged stock options was $177,393, calculated in accordance
with SFAS 123R.
  
  Note
12.  Income Taxes
 
 For the
three months ended September 30, 2009 and September 30, 2008, the Company
recognized a tax provision of $19,117 and $75,150, respectively.  For the
nine months ended September 30, 2009 and September 30, 2008, the Company
recognized a tax provision of $83,087 and $198,623,
respectively.  These provisions are based principally on the Company’s
estimated foreign income tax withholding liability which is attributable to the
Company’s Canadian revenues.
  11
 
 The
effective rates for the periods ending September 30, 2009 and 2008 differ from
the U.S. federal statutory rate principally because: (1) the tax benefit arising
from the Company’s net operating losses are fully offset by the valuation
allowance established against the Company’s deferred tax assets: and (2) the
Company incurs withholding taxes in Canada.
 
 Note
13.  Related Party Transactions
 
 Transactions
with Aristocrat
 
 License
fees from and equipment sales to Aristocrat, an affiliate of the Company, of
$100,831 and $107,782, respectively, were recorded in the three months ended
September 30, 2009, while $157,525 and $1,443,603, respectively, were recorded
during the three months ended September 30, 2008.  License fees from
and equipment sales to Aristocrat of $414,283 and $209,806, respectively, were
recorded in the nine months ended September 30, 2009, while $443,250 and
$3,423,907, respectively, were recorded during the nine months ended September
30, 2008.  As of September 30, 2009, $94,838 due from Aristocrat was
included in accounts receivable in the accompanying balance sheet.
 
 Transactions
with GHW Enterprises
 
 GHW
Enterprises is a Heads-Up Challenge operator owned by Gehrig H. “Lou” White, one
of the founders of the Company and the Vice Chairman of our Board of
Directors.  He currently operates 5 units, and the Company recorded
revenue from his company during the 3rd
quarter of 2009 of $194, net of deferrals.  As of September 30, 2009,
$150 due from GHW Enterprises was included in accounts receivable in the
accompanying balance sheet.
 
 Transactions
with ICP Electronics, Inc.
 
 The
Company purchased products and services from ICP Electronics, Inc. for the three
month periods ended September 30, 2009 and September 30, 2008 of $73,671 and
$1,541,055, respectively.  The Company purchased products and services
from ICP Electronics, Inc. for the nine month periods ended September 30, 2009
and September 30, 2008 of $316,014 and $3,534,192, respectively. As of September
30, 2009, ICP Electronics, Inc. had an accounts payable balance of $79,868 due
from the Company which has been paid subsequent to quarter end.  As of
September 30, 2009, the Company has contractual obligations with ICP
Electronics, Inc. totaling $976,222, which is included in the Company’s
contractual obligation table in Item 2 of this report.
 
 As of
September 30, 2009, ICP Electronics, Inc. is the holder of 4.11% of the issued
and outstanding shares of Common Stock of the Company following a stock purchase
transaction whereby the Company issued 565,000 shares of Common Stock in
exchange for inventory valued at $480,250 based on a share price of $0.85 per
share, which was the closing bid price on the day preceding the transaction. In
connection with the stock purchase, the Company agreed to schedule its remaining
purchase commitment with 24 monthly payments of $39,389 starting October 2009,
with such payments being made in exchange for title to additional
inventory.  ICP and the Company also agreed to a second stock purchase
transaction – refer to Note 16, “Subsequent Events.”
 
 Transactions
with Lyle Berman
 
 On
September 3, 2009, Lyle Berman, Chairman of PokerTek’s Board of Directors,
participated in a private placement of the Company’s Common
Stock.  Mr. Berman invested $250,000 to purchase 328,947 shares at
$0.76, the consolidated closing bid price immediately preceding the
transaction.
 
 Office
Lease
 
 The
Company leases its office and manufacturing facility under an annual operating
lease from an entity owned and controlled by the Company’s President and the
Company’s Vice Chairman of the Board of Directors.  The lease expires
in August 2011.  Rent expense recorded for the leased space for the
three months ended September 30, 2009 and September 30, 2008 was $42,600 and
$54,900, respectively.  Rent expense recorded for the leased space for
the nine months ended September 30, 2009 and September 30, 2008 was $146,300 and
$164,700, respectively.  This lease was amended as of June 1, 2009
with rent expense for the aggregate leased space adjusted to equal $14,200 per
month.
  12
 
 Founders’
Loan
  During the
first nine months of 2009, the Company made $136,574 in aggregate interest
payments in cash and issued 44,583 shares of stock in payment of
interest.  1,445,784 shares were issued to certain of the lenders in
connection with the conversion of $1.2 million of the outstanding debt
balance.  Refer to Note 9, “Debt” for a description of the terms of
this loan and further information regarding the principal payments.
 
 Note
14. Segment Information
 
 In
accordance with SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related 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.
 
 The
Company’s business is organized and reported in two segments, PokerPro® and
Heads-Up ChallengeTM, which are described in Note 1,Nature of Business and
Basis of Presentation.    The Heads-Up Challenge amusement
product was launched and began operations during 2007.    The
Company evaluates the performance of its two segments primarily based on revenue
and direct cost of revenue.   The accounting policies of the segments
are the same as those described in Note 1.
  13
 
 The
following provides financial information concerning our reportable segments of
our operations:
  Casino
      Products
                
                
                Amusement
                  Products
                
                
                Corporate
                  and
      Other
                
                
                TotalThree months ended September 30,
      2009Revenue
                
                $
                1,327,603
                
                
                $
                234,078
                
                
                $
                -
                
                
                $
                1,561,681Cost
      of product sales
                
                
                2,161
                
                
                
                191,348
                
                
                
                -
                
                
                
                193,509Depreciation
      and amortization
                
                
                699,147
                
                
                
                31,094
                
                
                
                24,895
                
                
                
                755,136Capital
      expenditures
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Nine months ended September 30,
      2009Revenue
                
                $
                4,046,410
                
                
                $
                1,170,171
                
                
                $
                -
                
                
                $
                5,216,581Cost
      of product sales
                
                
                56,459
                
                
                
                1,015,488
                
                
                
                -
                
                
                
                1,071,947Depreciation
      and amortization
                
                
                2,081,935
                
                
                
                61,139
                
                
                
                81,018
                
                
                
                2,224,092Capital
      expenditures
                
                
                -
                
                
                
                37,738
                
                
                
                11,711
                
                
                
                49,449Assets
                
                
                5,245,537
                
                
                
                2,014,818
                
                
                
                1,393,909
                
                
                
                8,654,264Three months ended September 30,
      2008Revenue
                
                $
                2,791,067
                
                
                $
                1,502,418
                
                
                $
                -
                
                
                $
                4,293,485Cost
      of product sales
                
                
                995,589
                
                
                
                1,092,981
                
                
                
                -
                
                
                
                2,088,570Depreciation
      and amortization
                
                
                698,325
                
                
                
                14,241
                
                
                
                14,304
                
                
                
                726,870Capital
      expenditures
                
                
                -
                
                
                
                3,280
                
                
                
                52,822
                
                
                
                56,102Nine months ended September 30,
      2008Revenue
                
                $
                7,424,682
                
                
                $
                3,910,389
                
                
                $
                -
                
                
                $
                11,335,071Cost
      of product sales
                
                
                2,346,116
                
                
                
                2,696,327
                
                
                
                -
                
                
                
                5,042,443Depreciation
      and amortization
                
                
                1,968,813
                
                
                
                41,839
                
                
                
                42,781
                
                
                
                2,053,433Capital
      expenditures
                
                
                9,419
                
                
                
                36,600
                
                
                
                73,564
                
                
                
                119,583Assets
                
                
                7,623,923
                
                
                
                2,695,597
                
                
                
                6,598,110
                
                
                
                16,917,630




Amounts
presented in the column labeled “Corporate and Other” primarily consist of
assets that are not specifically associated with either segment, principally
cash equivalents, investments and other corporate assets.
  REVENUE
BY GEOGRAPHIC AREA
 
 Revenues
by geographic area are determined based on the location of the Company’s
customers. For the three months ended September 30, 2009 and 2008, sales to
customers outside the United States accounted for 26% and 67% of the Company’s
consolidated revenue, respectively.  For the nine months ended
September 30, 2009 and 2008, sales to customers outside the United States
accounted for 32% and 66% of the Company’s consolidated revenue,
respectively.
  14
 
 The
following provides financial information concerning the Company’s revenues by
geographic area:
  Three
      months ended September 30,
                
                
                Nine
      months ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue:United
      States
                
                $
                1,155,944
                
                
                $
                1,431,861
                
                
                $
                3,533,213
                
                
                $
                3,881,394Europe
                
                
                46,084
                
                
                
                688,854
                
                
                
                527,029
                
                
                
                2,936,258Canada
                
                
                187,624
                
                
                
                651,445
                
                
                
                799,078
                
                
                
                2,189,291Australia
                
                
                165,057
                
                
                
                1,496,731
                
                
                
                328,381
                
                
                
                2,250,298Other
      International
                
                
                6,972
                
                
                
                24,594
                
                
                
                28,880
                
                
                
                77,830$
                1,561,681
                
                
                $
                4,293,485
                
                
                $
                5,216,581
                
                
                $
                11,335,071




Note
15. Commitments and Contingencies
 
 Legal
Proceedings
 
 The
Company is subject to claims and assertions in the ordinary course of
business.  Legal matters are inherently unpredictable and the
Company's assessments may change based on future unknown or unexpected
events.
  On August
21, 2009, a complaint was filed against the Company in the United States
District Court for the District of Nevada by Marvin Roy Feldman.  The
plaintiff is seeking unspecified monetary damages related to the Company's
distribution of PokerPro in Mexico.  The Company has retained counsel
and we believe that we have several meritorious defenses.  The Company
intends to defend itself vigorously.
 
 Note
16. Subsequent Events
 
 As of
October 9, 2009, the Company agreed to sell 120,000 shares of its common stock
to ICP Electronics, Inc., a Taiwan corporation (“ICP Electronics”) pursuant to
the Stock Purchase Agreement dated July 31, 2009.  The shares were
valued at a price of $0.90 per share and were exchanged with ICP Electronics in
payment for products and services. As of November 13, 2009, ICP Electronics owns
685,000, or 4.89% of the Company’s outstanding shares.
  15
 
 Item 2.   Management’s Discussion and
Analysis of Financial Condition and Results of Operations
 
 Forward-Looking
Statements
  This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Statements expressing
expectations regarding our future (including pending gaming and patent
approvals) and projections relating to products, sales, revenues and earnings
are typical of such statements and are made under the Private Securities
Litigation Reform Act of 1995.  These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
representations and contentions and are not historical facts and typically are
identified by use of terms such as "may," "will," "should," "could," "expect,"
"plan," "anticipate," "believe," "estimate," "predict," "potential," "continue"
and similar words, although some forward-looking statements are expressed
differently.
 
 All
forward-looking statements are subject to the risks and uncertainties inherent
in predicting the future.  Our actual results may differ materially
from those implied in these forward-looking statements as a result of many
factors, including, but not limited to, overall industry environment, customer
acceptance of our products, delay in the introduction of new products, further
approvals of regulatory authorities, adverse court rulings and litigation costs,
production and/or quality control problems, the denial, suspension or revocation
of permits or licenses by regulatory or governmental authorities, termination or
non-renewal of customer contracts, amendment or termination of our loans,
disruption of our relationships with our suppliers, competitive pressures,
general economic and political conditions, such as political instability, credit
market uncertainty, inflationary pressures, the rate of economic growth or
decline in our principal geographic markets, each of which may be amplified by
recent disruptions in the U.S. and global financial markets, our ability to
access the capital markets, our exposure to foreign currency and operational
complexities associated with foreign operations, and our financial
condition.  These and other risks and uncertainties are described in
more detail in our most recent Annual Report on Form 10-K, as well as other
reports and statements that we file with the Securities and Exchange
Commission.
 
 Forward-looking
statements speak only as of the date they are made and should not be relied upon
as representing our views as of any subsequent date.  We undertake no
obligation to update or revise such statements to reflect new circumstances or
unanticipated events as they occur, except as required by applicable laws, and
you are urged to review and consider disclosures that we make in this and other
reports that we file with the Securities and Exchange Commission that discuss
factors germane to our business.
 
 Overview
  PokerTek,
Inc. is engaged in the development, manufacture and marketing of electronic
poker-related products for use in the gaming and amusement markets.
 
 We
currently have two product lines, PokerPro gaming products and Heads-Up
Challenge amusement products.  The PokerPro system is an electronic
poker table that provides a fully-automated poker-room environment to tribal
casinos, commercial casinos, cruise ships and card clubs.  Heads-Up
Challenge is an innovative heads-up amusement device that enables two players to
compete against each other in a game of Texas Hold’em poker for entertainment
purposes in non-gambling venues such as bars and restaurants.
 
 
 Results
of Operations for the Three Months Ended September 30, 2009 Compared to the
Three Months Ended September 30, 2008
 
 Revenues.Revenues decreased by $2.7 million (64%) to $1.6 million for the three
months ended September 30, 2009 as compared to $4.3 million for the three months
ended September 30, 2008.Revenues declined overall
as our business shifted from a product sale focus, which produces larger
up-front revenues, to a business with heavier emphasis on recurring license
revenues which are spread over time.
 
 License
and service fees decreased by $0.2 million (12%) to $1.3 million for the three
months ended September 30, 2009 as compared to $1.5 million for the three months
ended September 30, 2008.  License and service fees declined as the
number of PokerPro tables deployed on lease declined from the comparable period
of 2008.
  16
  Product
sales decreased by $2.6 million (92%) to $0.2 million for the three months ended
September 30, 2009 as compared to $2.8 million for the three months ended
September 30, 2008.
 
 Sales of
the Heads-Up Challenge amusement product contributed $0.2 million in revenue for
the three months ended September 30, 2009, as compared to $1.5 million in
revenue for the comparable period of 2008.  The decline results from
the shift to recurring revenue contracts as opposed to product sales, as 144
units were placed in the 3rd
quarter of 2009 that were not included as product sales. Demand from our
customers for the Heads-Up Challenge product continued to be affected by a
combination of weak economic conditions and the related impact on the ability of
operators to finance and place amusement products. We sold 50 units during the
quarter ended September 30, 2009 as compared with 331 units during the three
months ended September 30, 2008.
 
 Sales of
casino products for the three months ended September 30, 2009 amounted to
$6,283, a decrease of $1.3 million over the comparable period in
2008.  During the three months ended September 30, 2009, our
international distributor did not place any orders for PokerPro systems as
the Eastern European markets that drove growth during the prior year were
impacted by reduced operator demand.
  Direct Cost of
Revenue.  Direct cost of revenue consists of depreciation,
amortization and direct product costs related to PokerPro systems and Heads-Up
Challenge product sales.  Total direct costs decreased by $1.9 million
(68%) to $0.9 million for the three months ended September 30,
2009.  As a percentage of total revenues, direct cost of revenues was
57% for the three months ended September 30, 2009, and 64% for the comparable
period in 2008.
 
 Depreciation
of PokerPro systems decreased by $12,502 (2%) to $663,633 for the three months
ended September 30, 2009 as compared to $676,135 for the three months ended
September 30, 2008.    Cost of product sales decreased by
$1.9 million (91%) to $0.2 million for the three months ended September 30, 2009
as compared to $2.1 million for the three months ended September 30,
2008.  This decrease in cost of sales was attributable to the lower
unit product sales of both PokerPro and Heads-Up Challenge.
 
 Selling, General
and Administrative Expenses.  Selling, general and
administrative expenses (“SG&A”) decreased by $0.8 million (39%) to $1.3
million for the three months ended September 30, 2009 as compared to $2.1
million for the three months ended September 30, 2008. This decrease was
primarily due to lower salaries and other employee-related expenses as a result
of the headcount reductions and other cost reduction initiatives.  As
a percentage of total revenues, SG&A expenses were 83% of total revenues for
the three months ended September 30, 2009, compared with 50% of total revenues
for the comparable period in 2008 on lower product sale revenues.
 
 Research and
Development Expenses.Research and development
expensesdecreased
by $324,203 (54%) to $279,642 for the three months ended September 30, 2009 as
compared to $603,845 for the three months ended September 30, 2008. We continue
to invest in software and hardware development to improve our gaming and
amusement products through the addition of new games and features and to improve
manufacturability.  However, as our Heads-Up Challenge and PokerPro
products are now fully commercialized, we have been able to reduce spending on
pre-production engineering and internal development efforts.
 
 Depreciation.Depreciation
increased by $11,699 (23%) for the three months ended September 30, 2009 to
$62,434 from $50,735 for the comparable period in 2008.  The increase
in depreciation was primarily attributable to depreciation associated with our
investment in capitalized software.
 
 Interest Expense,
net.Interest expense
increased $25,827 (51%) for the three months ended September 30, 2009 to $76,403
from $50,576 for the three months ended September 30, 2008.  We
incurred interest expense for the three months ended September 30, 2009 on the
loan from our founders of $55,767 and recognized loan origination and unused
line fees associated with the credit line from Silicon Valley Bank totaling
$19,494.  In addition, we incurred interest on our capital lease of
$1,143.  During 2008, our interest expense was partially offset by
interest income earned on our ARS investments, which were liquidated on January
5, 2009.
 
 Income
Taxes.Income tax provision was $19,117 for the three months
ended September 30, 2009 and $75,150 in the comparable period of
2008.  The decrease in income tax provision was attributable to
decreased revenue originating from Canada.
  17
 
 Net
Loss.Net loss for the three months ended September 30, 2009
was $1.3 million, an improvement of $0.5 million (27%) from $1.8 million for the
three months ended September 30, 2008.  Net loss per share, basic and
diluted, was $0.11 per share for the three months ended September 30, 2009, an
improvement of $0.05 (31%) per share from net loss per share, basic and diluted,
of $0.16 for the comparable period of 2008.
 
 Net loss
and net loss per share improved over the prior year period as our cost reduction
initiatives more than offset the decline in revenue.
 
 
 Results
of Operations for the Nine Months Ended September 30, 2009 Compared to the Nine
Months Ended September 30, 2008
 
 Revenues.Revenues
decreased by $6.1 million (54%) to $5.2 million for the nine months ended
September 30, 2009 as compared to $11.3 million for the nine months ended
September 30, 2008.   Revenues declined overall as our business
shifted from a product sale focus, which produces larger up-front revenues, to a
business with heavier emphasis on recurring license revenues which are spread
over time.
 
 License
and service fees decreased by $0.5 million (12%) to $3.9 million for the nine
months ended September 30, 2009 as compared to $4.5 million for the nine months
ended September 30, 2008.    License and service fees
declined as the number of PokerPro tables deployed on lease declined from the
comparable period of 2008.
 
 Product
sales decreased by $5.6 million (81%) to $1.3 million for the nine months ended
September 30, 2009 as compared to $6.9 million for the nine months ended
September 30, 2008.
 
 Sales of
the Heads-Up Challenge amusement product contributed $1.2 million in revenue for
the nine months ended September 30, 2009, as compared to $3.9 million in revenue
for the comparable period of 2008. The decline results from the shift to
recurring revenue contracts as opposed to product sales, as 144 units were
placed in the first nine months of 2009 that were not included as product
sales.  Demand from our customers for the Heads-Up Challenge product
continued to be affected by a combination of weak economic conditions and the
related impact on the ability of operators to finance and place amusement
products.  As a result, we sold 301 units during the nine months ended
September 30, 2009 as compared with 871 units during the nine months ended
September 30, 2008.
 
 Sales of
casino products for the nine months ended September 30, 2009 amounted to
$131,936, a decrease of $2.9 million over the comparable period in
2008.  During the nine months ended September 30, 2009, our
international distributor did not place any orders for PokerPro systems as the
Eastern European markets that drove growth during the prior year were impacted
by reduced operator demand and they continue to work through their
inventory.
 
 Direct Cost of
Revenue.  Direct cost of
revenue consists of depreciation of PokerPro systems and the cost of PokerPro
systems sold primarily to Aristocrat and the cost of Heads-Up Challenge product
sales.  Total direct costs decreased by $3.8 million (55%) to $3.1
million for the nine months ended September 30, 2009.  As a percentage
of total revenues, direct cost of revenues was 59% of total revenues for the
nine months ended September 30, 2009, compared with 61% of total revenues for
the comparable period in 2008.
 
 Depreciation
of PokerPro systems increased by $99,328 (5%) to $2.0 million for the nine
months ended September 30, 2009 as compared to $1.9 million for the nine months
ended September 30, 2008.  Cost of product sales decreased by $4.0
million (79%) to $1.1 million for the nine months ended September 30, 2009 as
compared to $5.0 million for the nine months ended September 30,
2008.  This decrease in cost of sales was attributable to the lower
unit product sales of both PokerPro and Heads-Up Challenge.
 
 Selling, General
and Administrative Expenses.  SG&A decreased by $2.0
million (30%) to $4.8 million for the nine months ended September 30, 2009 as
compared to $6.8 million for the nine months ended September 30, 2008. This
decrease was primarily due to lower salaries and other employee-related expenses
as a result of the headcount reductions and other cost reduction
initiatives.  As a percentage of total revenues, SG&A expenses
were 92% of total revenues for the nine months ended September 30, 2009,
compared with 60% of total revenues for the comparable period in 2008 on lower
product sale revenues.
  18
 
 Research and
Development Expenses.Research and development
expensesdecreased
by $1.2 million (56%) to $0.9 million for the nine months ended September 30,
2009 as compared to $2.1 million for the nine months ended September 30, 2008.
We continue to invest in software and hardware development to improve our gaming
and amusement products through the addition of new games and features and to
improve manufacturability.  However, as our Heads-Up Challenge and
PokerPro products are now fully commercialized, we have been able to reduce
spending on pre-production engineering and internal development
efforts.
 
 Depreciation.Depreciation
increased by $42,262 (28%) for the nine months ended September 30, 2009 to
$192,982 from $150,720 for the comparable period in 2008.  The
increase in depreciation was primarily attributable to depreciation associated
with our investment in capitalized software.
 
 Interest Expense,
net.Interest expense,
net increased $233,596 (970%) for the nine months ended September 30, 2009 to
$257,674 from $24,078 for the nine months ended September 30,
2008.  We incurred interest expense in 2009 on the loan from our
founders of $184,697 and recognized loan origination and unused line fees
associated with the credit line from Silicon Valley Bank totaling
$67,651.  In addition, we incurred interest on our capital lease of
$3,843.  During 2008, we earned interest income on our ARS
investments, which were liquidated on January 5, 2009.
 
 Income
Taxes.Income tax provision was $83,087 for the nine months
ended September 30, 2009 and $198,623 for the comparable period of
2008.  The decrease in income tax provision was attributable to
decreased revenue in Canada.
 
 Net
Loss.  Net loss for the nine months ended September 30, 2009
was $4.7 million, an improvement of $1.1 million (19%) from $5.8 million for the
nine months ended September 30, 2008.  Net loss per share, basic and
diluted, was $0.­­42 per share for the nine months ended September 30,
2009, an improvement of $0.11 (21%) per share from net loss per share, basic and
diluted, of $0.53 for the comparable period of 2008.
 
 Net loss
and net loss per share improved over the prior year period as our cost reduction
initiatives more than offset the decline in revenue.
 
 Liquidity
and Capital Resources
 
 We have
incurred net operating losses since inception and operating expenses may
continue to exceed revenues.  We have typically funded our operating
costs, research and development activities, working capital investments and
capital expenditures associated with our growth strategy with proceeds from the
issuances of our common stock, as well as through credit arrangements from
financial institutions and a loan from certain members of our Board of
Directors.  During the three months ended September 30, 2009, we
renewed our credit facility, closed a private placement transaction and entered
into several other transactions to provide additional capital. These
transactions are described in more detail following the discussion of cash flows
below:
  19
 
 Discussion
of Statement of Cash Flows
  Nine
      Months Ended September 30,2009
                
                
                2008
                
                
                ChangeNet
      cash used in operating activities
                
                $
                (1,839,479
                )
                
                $
                (5,066,590
                )
                
                $
                3,227,111Net
      cash provided by investing activities
                
                
                3,850,551
                
                
                
                1,930,417
                
                
                
                1,920,134Net
      cash provided by (used in) financing activities
                
                
                (2,383,075
                )
                
                
                4,440,960
                
                
                
                (6,824,035
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                (372,003
                )
                
                
                1,304,787
                
                
                
                (1,676,790
                )Cash
      and cash equivalents, beginning of year
                
                
                1,481,530
                
                
                
                1,229,980Cash
      and cash equivalents, end of period
                
                $
                1,109,527
                
                
                $
                2,534,767




For the
nine months ended September 30, 2009, net cash used in operating activities was
$1.8 million, as compared to $5.1 million for the nine months ended September
30, 2008, a decrease of $3.2 million.
 
 The
improvement in cash used in operating activities was primarily due to the
reduction in net loss and management of working capital spending.
 
 Our
net loss improved by $1.1 million and our EBITDAS improved by $1.1 million due
primarily to reduced overhead, development and other spending as the Company
shifted its focus from growth in 2008 to cost control in 2009.  We
also significantly reduced spending on inventory for both the PokerPro and
Heads-Up Challenge products.  Favorable operating results and reduced
inventory investments were partially offset by a $1.3 million reduction in
accounts payable and accrued expenses.
 
 Net cash
provided by investing activities was $3.8 million for the nine months ended
September 30, 2009, compared to $1.9 million for the nine months ended September
30, 2008.  Cash provided by investing activities is primarily a
function of investments and redemptions of our auction rate securities (“ARS”)
portfolio which were liquidated in January 2009, and to a smaller degree,
capital expenditures for assets used in our operations.
 
 Net cash
used in financing activities was $2.4 million for the nine months ended
September 30, 2009, primarily due to the repayment of the UBS Credit Facility
which occurred as a result of the sale of the ARS investment, as well as
payments on our capital lease obligation.  For the nine months ended
September 30, 2008, net cash provided by financing activities was $4.4 million,
primarily consisting of a $2.0 million loan from certain members of our Board of
Directors and a $2.4 million loan from UBS Financial Services, Inc.
  During the
quarter, we entered into amendments to our SVB Credit Facility and our Founders
Loan, extending the term of both arrangements and allowing the Founders’ Loan to
be paid in either stock or cash. We also completed a private placement for
$500,000, issuing 686,090 shares.  Lyle Berman, our Chairman, invested
$250,000 to purchase 328,947 shares at $0.76, the consolidated closing bid price
immediately preceding the transaction.  A second investor invested
$250,000 to purchase 357,143 shares at $0.70.  In addition we entered
into a Stock Purchase Agreement with a key vendor to issue common stock in
exchange for inventory and to extend the timing of payments for our purchase
commitments.
  If we
decide to raise additional capital in the equity markets or take other actions,
shareholders could incur significant dilution, or, if we are unable to raise
capital, our ability to effectively operate our business could be
impaired.
  The
Company has $0.8 million of debt outstanding under its Founder’s Loan following
the issuance 1,445,784 shares of common stock to liquidate $1.2 million of the
original $2.0 million loan.  The remaining $0.8 million has a maturity
date of March 21, 2012 and provides that monthly interest payments, at the
election of the holder, may be made in our common stock at a 13% annual interest
rate pursuant to a formula or cash at a 9% annual interest rate.
  20
  The
Company has a credit facility with Silicon Valley Bank to provide working
capital financing.  The credit facility has a maturity date of July
23, 2010 and a Facility Limit of $2.5 million with maximum advances determined
based on the composition of our eligible accounts receivable and inventory
balances.  The credit facility bears interest at an annual rate equal
to the greater of prime plus 6.5% or prime plus 2.0%.  Availability as
of September 30, 2009 was approximately $0.8 million based on the Company’s
accounts receivable and inventory levels, and there were no amounts
drawn.
 
 We have
the ability to impact the timing and extent of our cash needs primarily by
managing the pace of growth in both our PokerPro and Heads-Up Challenge products
and managing our operating expenses. However, we also have significant
contractual obligations and our ability to control both the timing and extent of
the cash needs of the business is not unlimited, particularly in light of the
current economic climate and the capital intensive nature of the PokerPro
business. As we expand our international business, we may also incur additional
import duties, taxes, legal, professional fees, overhead costs and working
capital needs that could impact our ability to grow and manage
liquidity.
  Our intent
is to balance revenue growth with operating expense and working capital
management, while carefully monitoring the impact of growth on our cash needs
and cash balances. Accordingly, reductions in our working capital investments or
declines in demand for our products or continued deterioration in general
economic conditions could impact our ability to grow or to effectively manage
our liquidity needs.
  Based on
the Company’s current capital structure and our anticipated growth plans, we may
continue to explore various alternatives to fund our growth, which may include
raising additional funds through public or private offerings of our securities,
obtaining additional credit facilities, converting our debt, or seeking
alternative sources of financing which may or may not be available on favorable
terms, if at all.  If such sources of capital are not available, we
may seek other avenues to fund the business, including sale/leaseback
arrangements, transitioning our products from a capital intensive leasing
strategy to a product sale strategy, seeking to sell assets of the Company, or
reducing our operations.
  Contractual
Obligations
 
 The table
below sets forth our known contractual obligations as of September 30,
2009:
  Total
                
                
                Less
      than
                  1
      year
                
                
                1
      - 3 years
                
                
                3
      - 5 years
                
                
                More
      than
                  5
      yearsDebt
      obligations(1)
                
                $
                1,010,000
                
                
                $
                84,000
                
                
                $
                926,000
                
                
                $
                -
                
                
                $
                -Operating
      lease obligations(2)
                
                
                332,120
                
                
                
                193,920
                
                
                
                138,200
                
                
                
                -
                
                
                
                -Capital
      lease obligations(3)
                
                
                49,386
                
                
                
                28,747
                
                
                
                20,639
                
                
                
                -
                
                
                
                -Purchase
      obligations(4)
                
                
                1,043,787
                
                
                
                1,043,787
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      long-term liabilities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                2,435,293
                
                
                $
                1,350,454
                
                
                $
                1,084,839
                
                
                $
                -
                
                
                $
                -




(1)
              Represents
      the outstanding principal amount and interest on our Founder’s
      Loan.
 (2)
              Represents
      operating lease agreements for office and storage facilities and office
      equipment.
 (3)
              Represents
      outstanding principal and interest payable under capital lease obligations
      related to our purchase of internal-use ERP
  system.
 (4)
              Represents
      open purchase orders with our vendors, primarily purchase obligations for
      Heads-Up Challenge.
 
 Contractual
obligations decreased to $2.4 million as of September 30, 2009 from $8.1 million
as of December 31, 2008 due principally to the retirement of the UBS Credit
Facility and a decrease in the level of inventory purchase commitments and lease
obligations.
 
 Customer
Dependence
 
 As of
September 30, 2009, five of our customers made up approximately 61% of our total
revenues.  The loss of any of these customers or changes in our
relationship with them could have a material adverse effect on our
business.
  21
  Critical
Accounting Policies
 
 We follow
accounting principles generally accepted in the United States in preparing our
financial statements, which require us to make certain estimates and apply
judgments that affect our financial position and results of operations. We
continually review our accounting policies and financial information
disclosures. A summary of our significant accounting policies that require the
use of estimates and judgments in preparing the financial statements was
provided in our Annual Report on Form 10-K for the year ended December 31, 2008.
During the nine months ended September 30, 2009, there were no material changes
to the accounting policies and assumptions previously disclosed.
 
 Recent
Accounting Pronouncements
 
 In October
2009, the Financial Accounting Standards Board (“FASB”) issued guidance which
amended the accounting requirements regarding revenue recognition for software.
The objective of this update is to address the accounting for revenue
arrangements that contain tangible products and software. This guidance is
effective for fiscal years beginning on or after June 15, 2010 and allows
for either prospective or retrospective application, with early adoption
permitted. We are currently evaluating the impact that adoption of this guidance
will have on the Company’s consolidated financial statements.
 
 In October
2009, the FASB issued guidance which amended the accounting requirements
regarding revenue recognition.  The objective of this update is to
address the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than as a
combined unit.  This guidance is effective for fiscal years beginning
on or after June 15, 2010 and allows for either prospective or
retrospective application, with early adoption permitted. We are currently
evaluating the impact that adoption of this guidance will have on the Company’s
consolidated financial statements.
 
 In June
2009, the FASB adopted the FASB Accounting Standards Codification as the single
source of authoritative non-governmental GAAP.  This codification
supersedes all previously issued accounting pronouncements and consolidates
technical accounting literature.  This codification was effective for
interim and annual reporting periods ending after September 15, 2009. The
adoption and application the FASB codification did not have any effect on the
Company's results of operations, financial condition, or cash
flows.
 
 Subsequent
Events
 
 As of
October 9, 2009, the Company agreed to sell 120,000 shares of its common stock
to ICP Electronics, Inc., a Taiwan corporation (“ICP Electronics”) pursuant to
the Stock Purchase Agreement dated July 31, 2009.  The shares were
valued at a price of $0.90 per share and were exchanged with ICP Electronics in
payment for products and services. As of November 11, 2009, ICP Electronics owns
685,000, or 4.89% of the Company’s outstanding shares.
 
 Off-Balance
Sheet Arrangements
 
 We have no
off-balance sheet arrangements.
  22
 
 Item
3. Quantitative
and Qualitative Disclosures About Market Risk.
 
 Reference
is made to “Part II, Item 7A, Quantitative and Qualitative Disclosures about
Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008.  There have not been significant changes in our
exposure to market risk since December 31, 2008.
 
 Item 4T.  Controls and Procedures.
  Disclosure
Controls and Procedures
 
 The
Company maintains disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act), which are designed to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and that such information is accumulated and communicated to the Company’s
management, including its Acting Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
 
 As of
September 30, 2009, an evaluation of the effectiveness of the Company’s
disclosure controls and procedures was conducted under the supervision of, and
reviewed by, the Company’s Acting Chief Executive Officer and Chief Financial
Officer. Based on that evaluation, the Company’s Acting Chief Executive Officer
and Chief Financial Officer has concluded that the Company’s disclosure controls
and procedures were effective as of September 30, 2009, to enable the Company to
record, process, summarize and report in a timely manner the information that
the Company is required to disclose in its Exchange Act reports, and that such
information is accumulated and communicated to the Company’s management,
including its Acting Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosure.
 
 Changes
in Internal Control over Financial Reporting
 
 The
following systems-related significant deficiencies were previously identified
and disclosed in our Annual Report on Form 10-K as of December 31, 2008. While
we are not required by rule to list these significant deficiencies, we believe
that providing this information will enhance the reader’s ability to evaluate
our internal control over financial reporting:
 
 ·
              The
      systems used in tracking and valuing inventory and PokerPro systems do not
      provide effective automated controls and are not integrated with each
      other or with the general ledger.  The lack of integration
      requires manual reconciliations between the
  applications.
 
 ·
              We
      utilized a software package for our general ledger that did not provide
      certain automated general controls, such as the presence of edit reports
      and workflow approvals.  We replaced our general ledger and
      other financial systems during the fourth quarter of 2008, but we had not
      performed sufficient testing to affect management’s assessment of the
      effectiveness of internal control over financial
  reporting.
 
 ·
              Our
      procedures for establishing and modifying system user access privileges is
      not sufficiently documented and subjected to management review to ensure
      that only authorized users have access to our sensitive applications, and
      that those authorized users only have access to appropriate functions
      within those systems.
 
 ·
              Due
      to the relatively small size of the finance department, we lack an
      effective segregation of duties between the disbursement of funds and the
      reconciliation of bank accounts.
 
 These
significant deficiencies have been previously reported to our Audit Committee by
our management and to our independent registered public accounting firm, and we
have continued to provide the Audit Committee with additional reports regarding
the status of these significant deficiencies as of September 30, 2009.  Our
management does not believe that these significant deficiencies are indicative
of a material weakness in our internal control over financial reporting. As
reported in our Annual Report on Form 10-K for the year ended December 31, 2008,
we also implemented a number of compensating controls and those compensating
controls continued to operate as of September 30, 2009.
  23
 
 We
implemented certain financial modules of SAP Business One during the fourth
quarter of 2008 and, during the period ended September 30, 2009, we completed
implementation of the production, inventory, fixed asset, MRP and other
modules.  In connection with the implementation of the new system, we
are currently revising and continuing to evaluate certain internal controls and
are in process of testing those new controls.
 
 We believe
that the changes in our internal control over financial reporting during the
quarter ended September 30, 2009 enhanced our internal control over financial
reporting.  However, we are in process of evaluating and testing those
internal controls and can provide no assurance that implementation of SAP
Business One will fully resolve all significant deficiencies listed
above.
 
 PART
II – OTHER INFORMATION
 
 Item 1.    Legal Proceedings
  On August
21, 2009, a complaint was filed against the Company in the United States
District Court for the District of Nevada by Marvin Roy Feldman.  The
plaintiff is seeking unspecified monetary damages related to our distribution of
PokerPro in Mexico.  We have retained counsel and we believe that we
have several meritorious defenses.  We intend to defend ourselves
vigorously.
  Item 1A. Risk Factors.
  In
addition to the other information set forth in this quarterly report on Form
10-Q and set forth below, you should carefully consider the factors discussed in
Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2008, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form
10-K and our other reports and statements that we file with the SEC, including
those contained in our quarterly reports on Form 10-Q, are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.
 
 We recently made changes to our
Heads-Up Challenge Amusement business, transitioning that business towards a
recurring revenue, operator-direct business model.  The transition to
this new business model introduces risks that we may not be successful or that
this new business model may increase our need for capital.
  We
recently changed our distribution model for the Heads-Up Challenge amusement
business.  We no longer sell the product to distributors on a
non-recurring, one-time sale basis, but instead place units directly with
operators who pay us on a recurring lease basis. If we are unable to attract
sufficiently qualified operators, if those operators are unsuccessful in placing
product, or if those operators fail to pay us, this change could have an adverse
impact effect on us.  In addition, we will collect cash from these
operators on an annuity, recurring basis, expansion of this program could create
cash flow needs that could have an adverse effect on us, or cause us to need to
raise additional capital/
  Item 4. Submission
of Matters to a Vote of Security Holders.
 
 Our Annual
Shareholders’ Meeting was held on September 3, 2009  At the meeting,
our shareholders (i) elected five directors for one-year terms and until their
successors are duly elected and qualified or until their prior death,
resignation, removal or disqualification or until there is a decrease in the
number of directors; (ii) ratified the appointment of McGladrey & Pullen,
LLP as our independent registered public accounting firm for the fiscal year
ending December 31, 2009; (iii) approved the adoption of the 2009 Stock
Incentive Plan; (iv) and approved an amendment to the 2005 Stock Incentive Plan
and the 2007 Stock Incentive Plan to permit the exchange and cancellation of
options that were outstanding under those Plans.
  24
 
 The
following matters were voted upon and approved by the margins
indicated:
  Number
      of Shares1.
                
                Election
      of Directors
                
                Voted
      For
                
                
                WithheldLyle
      Berman
                
                
                6,419,657
                
                
                
                567,760Gehrig
      H. "Lou" White
                
                
                5,937,034
                
                
                
                1,050,383Joseph
      J. Lahti
                
                
                6,435,818
                
                
                
                551,599Arthur
      Lee Lomax
                
                
                6,247,978
                
                
                
                739,439James
      T. Crawford, III
                
                
                5,943,204
                
                
                
                1,044,213
  Number
      of Shares2.
                
                Ratification
      of the selection of McGladrey & Pullen, LLP as our independent
      registered public accounting firm for the fiscal year ending December 31,
      2009
                
                Voted
                  For
                
                
                Voted
                  Against
                
                
                Abstain
                
                
                Broker
      Non-
                  Votes6,957,353
                
                
                
                28,572
                
                
                
                1,492
                
                
                
                -Number
      of Shares3.
                
                Approval
      of the adoption of the 2009 Stock Incentive Plan
                
                Voted
                  For
                
                
                Voted
                  Against
                
                
                Abstain
                
                
                Broker
      Non-
                  Votes4,461,351
                
                
                
                1,116,116
                
                
                
                1,409,950
                
                
                
                -Number
      of Shares4.
                
                Approval
      of the amendment to the 2005 Stock Incentive Plan and its 2007 Stock
      Incentive Plan to permit the exchange and cancellation of options that
      were outstanding under those Plans.
                
                Voted
                  For
                
                
                Voted
                  Against
                
                
                Abstain
                
                
                Broker
      Non-
                  Votes4,456,488
                
                
                
                1,115,979
                
                
                
                1,414,950
                
                
                
                -




25




Item 6.    Exhibits.
  Exhibit No.
                
                Description10.1
                
                Offer
      to Exchange Certain Outstanding Stock Options for New Stock Options, dated
      September 8, 2009 and Election Form.10.2
                
                Amendment
      No. 2 to Secured Promissory Note and Amendment No. 1 to Note Purchase
      Agreement and Security Agreement, dated September 10,
  2009.10.3
                
                Subscription
      Agreements, dated August 28, 2009, relating to the sale of a total of
      686,000 shares of the Registrant's Common Stock.10.4
                
                Stock
      Purchase Agreement between the Registrant and ICP Electronics, Inc., dated
      August 13, 2009.31.1
                
                Certification
      of Acting Chief Executive Officer and Chief Financial Officer pursuant to
      Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                
                Certification
      of Acting Chief Executive Officer and Chief Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.




SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  POKERTEK,
      INC.Date:
      November 13, 2009/s/ Mark D. RobersonMark
      D. RobersonActing
      Chief Executive Officer and Chief Financial
                  Officer(Principal
      Executive Officer, Principal Financial
                  Officer
      and Principal Accounting
Officer)




26




POKERTEK,
INC.
 EXHIBIT INDEX
  Exhibit No.
                
                Description10.1
                
                Offer
      to Exchange Certain Outstanding Stock Options for New Stock Options, dated
      September 8, 2009 and Election Form.10.2
                
                Amendment
      No. 2 to Secured Promissory Note and Amendment No. 1 to Note Purchase
      Agreement and Security Agreement, dated September 10,
  2009.10.3
                
                Subscription
      Agreements, dated August 28, 2009, relating to the sale of a total of
      686,000 shares of the Registrant's Common Stock.10.4
                
                Stock
      Purchase Agreement between the Registrant and ICP Electronics, Inc., dated
      August 13, 2009.31.1
                
                Certification
      of Acting Chief Executive Officer and Chief Financial Officer pursuant to
      Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                
                Certification
      of Acting Chief Executive Officer and Chief Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
  27