You should consider the following risk factors, in addition to the other information presented or incorporated by reference into this Annual Report on Form 10-K, in evaluating our business and any investment decision relating to our securities.

 

We have no operating history upon which to evaluate our business, and we are subject to all of the risks and uncertainties frequently encountered with start-up enterprises.

The Company was founded as a Minnesota corporation in January 2006. As a result, we have no significant operating history upon which to evaluate our likelihood of success. Currently, we have only one customer, Bally’s Park Place, Inc., which began use of one full-week unit of our Winner’s Pot Poker game in June 2008 on a month-to-month basis.  Bally’s added a weekend-only unit in early 2009 and then transitioned use of the full-week unit to a second weekend-only unit in July 2009.   Moreover, our business is subject to all of the risks and uncertainties inherent in establishing a new business. Our results of operations for the years ended December 31, 2008 and 2009 reflect net losses of $282,719 and $167,409, respectively.  Our operations may not be successful, and we may be unable to generate sufficient revenues or achieve profitability. In sum, our likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the establishment of a new business, and the competitive environment in which we operate.

 

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We will need to raise additional capital in the near future to fund our operations, and such capital may not be available to us in sufficient amounts or on acceptable terms.

We will require additional sources of financing before we can generate revenues needed to sustain operations. In particular, management believes that our current cash is sufficient to continue operations through March 2010. Our operations, as currently conducted and anticipated to be conducted, generate costs related to the marketing and distribution of our current products, and ongoing consulting, legal and accounting expenses. Even if we successfully benefit from current or future opportunities, additional financing may be required to expand or continue being involved in such opportunities.

Additional financing could be sought from a number of sources, including but not limited to additional sales of equity or debt securities, or loans from banks, other financial institutions or affiliates of the Company. We cannot, however, be certain that any such financing will be available on terms favorable to us if at all. If additional funds are raised by the issuance of our equity securities, such as through the issuance of stock, convertible securities, or the issuance and exercise of warrants, then the ownership interest of our existing shareholders will be diluted. If additional funds are raised by the issuance of debt or other equity instruments, we may become subject to certain operational limitations, and such securities may have rights senior to the rights of our common shareholders. If adequate funds are not available on acceptable terms, we may be unable to fund the current operations, expansion or growth of our business.

We have a history of operating losses and have received a “going-concern” qualification from our independent registered public accounting firm.

We have incurred operating losses and negative cash flows from operations since inception. As of December 31, 2009, we had an accumulated shareholders’ deficit of approximately $694,000. We generate minimal revenues, and revenues from our one customer decreased beginning in July 2009. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements included in this Annual Report on Form 10-K do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

 

Our independent registered public accounting firm included an explanatory paragraph in their report on our financial statements indicating that such deficit accumulated during the development stage raises substantial doubt as to our ability to continue as a going concern. The likelihood of our success must be considered in light of the expenses, difficulties and delays frequently encountered in connection with development stage businesses and the competitive environment in which we will operate. Our ability to achieve profitability is dependent in large part on placing our Winner’s Pot Poker game into numerous gaming establishments for a considerable period of time. There can be no assurance that the Company will successfully market its Winner’s Pot Poker game or operate profitably.

Our games and any services we may develop may not be accepted, or continue to be accepted, by gaming facilities or consumers.

Our games, even if successfully developed and tested, will be competing against existing games and products for floorspace in the gaming marketplace. There can be no assurance that gaming facilities will agree to license or continue to license our games for play at their facilities, or license any services we may develop for use in the gaming industry.  Moreover, even if successfully developed, tested and marketed to gaming facilities, our games will be competing for player attention against existing games and products that are likely to be more proven in their ability to attract players. There can be no assurance that the gaming-market consumers will accept and play our games or other games using any services we may provide.

Before our games and any gaming-related services we may offer may be used commercially in various jurisdiction, both our Company, including our principal shareholders, officers, directors, and key employees, and the applicable games (and services) themselves must be reviewed by appropriate gaming authorities as part of a licensing process.

Before our games may be played at any gaming facilities (other than during any testing period permitted by applicable regulations), we and our games and any gaming-related services we offer must be licensed by the appropriate gaming authority or authorities. Generally, the process for licensure in the various states is complex and time consuming, and there is no guarantee that we or our games and services will be approved. Furthermore, the financial situation of the Company, as well as the backgrounds of its officers, directors, key employees, and shareholders holding five percent or more of our capital stock will also be reviewed as part of the licensing process. We have little control over the outcome of any license-application process, and our failure or the failure of any of the other above-indicated licensees, for any reason, to obtain licenses that may be necessary for operation in any state or states would likely have a negative impact on our business and prospects. Moreover, any approval of one of our games (or services) does not ensure that we will later be able to receive the necessary licenses for future games or services that we may develop.

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The gaming industry is heavily regulated and changes in regulation by gaming authorities may adversely impact our ability to operate in our existing markets or expand our business.

The manufacture and distribution of gaming machines, development of systems and the conduct of gaming operations are subject to extensive federal, state, local and foreign regulation by various regulatory authorities. Our ability to continue to operate in certain jurisdictions or our ability to expand into new jurisdictions could be adversely affected by: (i) delays in adopting legislation to permit or expand gaming in new and existing jurisdictions; (ii) unfavorable public referenda, such as referenda to increase taxes on gaming revenues; (iii) unfavorable legislation affecting or directed at manufacturers or gaming operators; (iv) adverse findings of non-compliance with applicable governmental gaming regulations, (v) delays in approvals from regulatory agencies; a limitation, conditioning, suspension or revocation of any of our gaming licenses; (vi) unfavorable determinations or challenges of suitability by gaming regulatory authorities with respect to our officers, directors, significant shareholders or key personnel; (vii) the adoption of new laws and regulations, or the repeal or amendment of existing laws and regulations; and (viii) the legalization or deregulation of other forms of gaming that could attract attention away from our games.

The Company currently has only one customer for the licensure of its sole existing product.

The Company currently has only one agreement with one customer, Bally’s Park Place, Inc., respecting that corporation’s Park Place & Boardwalk locations, for the license of the gaming product. The Company may not be able to secure a casino service industry supplier license for its Winner’s Pot Poker game from the Casino Control Commission in the State of New Jersey.  In addition, we may not be able to maintain our license arrangement with Bally’s Park Place. The loss of our license arrangement could, in the absence of other opportunities, significantly and negatively affect the Company’s business prospects.

None

 

ITEM 4         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

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PART II

 

ITEM 5

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed for trading on the over-the-counter bulletin board under the symbol “POKR.OB.”  The transfer agent and registrar for our common stock is Florida Atlantic Stock Transfer, 7130 NobHill Road, Tamarac, Florida 33321.  The following table sets forth the high and low bid prices for our common stock as reported by the OTC Bulletin Board in 2009.  The Company’s common shares did not begin trading on the OTC Bulletin Board until May 2009.  These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions.  Trading in the Company’s common stock during the period represented was sporadic, exemplified by low trading volume and many days during which no trades occurred.

		Market Price (High/Low)
For the Fiscal Year		2009
First Quarter		$	-
Second Quarter		$	0.15 – 0.03
Third Quarter		$	0.06 – 0.02
Fourth Quarter		$	0.06 – 0.06

Holders

As of the date of this filing, we had approximately 180 holders of record of our common stock.

Dividends

We have not paid any dividends on our common stock and do not anticipate paying any such dividends in the near future. Instead, we intend to use any earnings for future acquisitions and expanding our business. Nevertheless, at this time there are no restrictions on our ability to pay dividends on our common stock other than those arising under the Minnesota Business Corporations Act.

Securities Authorized for Issuance Under Equity Compensation Plans

As of December 31, 2009, Poker Magic, Inc. had no outstanding options, warrants or other rights to purchase any equity securities of the Company under any equity compensation plan or “individual compensation arrangement” (as defined in Item 201 of Regulation S-K).  Furthermore, as of the date of this filing, the Company is not a party to any equity compensation plan, nor is the Company obligated under any “individual compensation arrangement” to issue any options, warrants, rights or other securities. Nevertheless, the Company is not required by applicable state law or the listing standards of any self-regulatory agency (e.g., the OTC Bulletin Board, NASD, AMEX or NYSE) to obtain the approval of its security holders prior to issuing any such compensatory options, warrants or other rights to purchase securities of the Company.

 

Recent Sales of Unregistered Securities

On June 30, 2009, we issued a total of 62,500 shares of common stock to three individuals in consideration of consulting services rendered to the Company.  The services rendered were accounting and marketing services and such services were valued in the aggregate at $1,875.  The Company offered and sold the shares in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933.  In this regard, the Company relied on representations from the recipients of the shares that they were (i) acquiring the shares for investment purposes only and not with a view toward distribution, and (ii) either alone or through a purchaser representative, knowledgeable and experienced in financial and business matters such that they were capable of evaluating the risks of the investment.  In addition, all certificates representing the shares offered and sold contained a restrictive legend indicating that such shares constituted “restricted securities” under the Securities Act of 1933.

On June 30, September 30, and December 31, 2009, we issued shares of common stock to our Chief Executive Officer (aggregating to 500,000 shares) and Chief Financial Officer (aggregating to 500,000 shares) for officer compensation.  The Company offered and sold the shares in reliance on the exemption from registration set forth in Sections 4(2) and 4(6) of the Securities Act of 1933.  In this regard, the recipients of the shares were (i) “accredited investors” as defined in Rule 501 under the Securities Act and (ii) executive officers of the Company.  In addition, all certificates representing the shares offered and sold contained a restrictive legend indicating that such shares constituted “restricted securities” under the Securities Act of 1933.

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ITEM 6

SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below should be read in conjunction with our audited  financial statements, and notes thereto, filed together with this Form 10-K.

 

Forward-Looking Statements

 

Some of the statements made in this section of our report are forward-looking statements. These forward-looking statements generally relate to and are based upon our current plans, expectations, assumptions and projections about future events.  Our management currently believes that the various plans, expectations, and assumptions reflected in or suggested by these forward-looking statements are reasonable.  Nevertheless, all forward-looking statements involve risks and uncertainties and our actual actions or future results may be materially different from the plans, objectives or expectations, or our assumptions and projections underlying our present plans, objectives and expectations, which are expressed in this report.  An example of specific factors that might cause our actual results to differ from our current expectations include but are not limited to:

·

Our lack of a significant prior operating history to provide our management with a basis to better evaluate certain likelihoods

·

Our need for additional financing

·

The significant risk that our game may not be accepted by casinos or gaming establishments or, ultimately, by gaming consumers and enthusiasts

·

Our inability to obtain required registrations, licenses and approvals with or from appropriate state gaming authorities

·

Changes in legal and regulatory regimes applicable to our business or our games

·

Our inability to effectively protect our intellectual property, or

·

Our inability, for any reason, to retain our executive management personnel.

The foregoing list is not exhaustive.  In light of the foregoing, prospective investors are cautioned that the forward-looking statements included in this filing may ultimately prove to be inaccurate—even materially inaccurate.  Because of the significant uncertainties inherent in such forward-looking statements, the inclusion of such information should not be regarded as a representation or warranty by Poker Magic, Inc. or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever.

Results of Operations

Item		2009				2008				% Change  (Year Over Year)				% of 2009  Net Loss				% of 2008  Net Loss
Revenues		$	6,050				3,325				82.0	%			(3.6	)%			(1.2	)%
Cost of Revenues			12,916				36,773				(64.9	)%			7.7	%			13.0	%
Operating Expenses:
General Operating Expenses			9,812				55,390				(82.3	)%			5.8	%			19.6	%
Legal and Accounting Expenses			96,050				139,892				(31.3	)%			57.4	%			49.5	%
Executive Management Compensation			54,000				56,000				(3.6	)%			32.3	%			19.8	%
Other Income (Expense)			(681	)			2,011				(133.9	)%			0.4	%			(0.7	)%
Net Loss		$	167,409				282,719				(40.8	)%			N/A				N/A

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As the table above demonstrates, during 2009 and 2008 we had revenues of $6,050 and $3,325 respectively and incurred $12,916 and $36,773, respectively, in revenue-related costs.  We currently have one contract with one client.  Our cost of revenues primarily include advertising, amortization and royalty expenses.

During both 2009 and 2008, we were focused primarily on efforts to (i) ensure temporary regulatory approval and compliance of the Winner’s Pot Poker game, and (ii) obtain the agreement of casinos and gaming establishments to provide gaming table space to the Winner’s Pot Poker game.  During 2008, we also focused on completing the process of filing and amending our Registration Statement on Form 10 (originally filed with the SEC on January 29, 2008) in response to comments received from the SEC.  Amendments to our Registration Statement were completed and filed with the SEC on March 11 and August 6, 2008.

During 2009 and 2008, we incurred selling, general and administrative expenses aggregating $159,862 and $251,282 respectively, a decrease of 36.4%.  A discussion of the various components of our general and administrative expenses for 2009 and 2008 appears below.

General Operating Expenses.  Our general operating expenses, which primarily include consulting, stock transfer fees, travel and miscellaneous office supply expenses, decreased from $55,390 for the year ended December 31, 2008 to $9,812 for the year ended December 31, 2009 due to a significant reduction in consulting fees and travel-related expenses.

Legal and Accounting Expenses.  Our legal and accounting expenses decreased from $139,892 in 2008 to $96,050 in 2009, or 31.3%.  This significant decrease was due to expenses in 2008 relating to amending our Registration Statement on Form 10, working with broker-dealers to complete an application with FINRA and obtain our trading symbol, both of which were one-time events, and our initial Sarbanes-Oxley compliance efforts.  As we continue to seek gaming regulatory compliance and licenses, prepare and file periodic reports with the SEC under the Securities and Exchange Act of 1934, and generally seek to comply with the various legal, accounting and governance rules and regulations applicable to public reporting companies, we anticipate our professional fees expenses will constitute the majority of our general operating expenses during fiscal 2010.

Executive Management Compensation.  Executive management compensation aggregated to $54,000, which consisted of $42,000 in share issuance and $12,000 in contributed capital, for the year ended December 31, 2009 compared to $56,000, which consisted of $10,000 in share issuance and $46,000 in contributed capital, for the year ended December 31, 2008.  We presently expect that compensation expense for our executive management in fiscal 2010 will remain consistent with our fiscal 2009 as we plan to continue to issue shares in lieu of cash payment for the services they render to the Company in their executive capacities.

For the year ended December 31, 2008, our net loss was $282,719 compared to our net loss of $167,409 for the year ended December 31, 2009, a decrease of 40.8%.  As indicated in the table above, this decrease is attributable to reductions in our cost of revenues and decreased selling, general and administrative expenses as previously discussed.

Our officer compensation expense in both fiscal years 2009 and 2008 was a combination of stock issuance and contributed capital.  Our consultant expense in both fiscal years 2009 and 2008 was a combination of cash payments and stock issuance.  We anticipate that compensation expense for executive management to be in the form of shares, and consultant service compensation in fiscal 2010 to remain stable with fiscal 2009 levels and continue to be a combination of cash payments and issuance of shares as we continue to conserve cash resources for other revenue-related and operating expenses anticipated in fiscal 2010.  Furthermore, we do not anticipate hiring employees in the near future and expect instead, where necessary or appropriate, to continue to rely on services provided by consultants

We anticipate that our professional expenses will remain stable during fiscal 2010 as we gained process efficiencies in 2009 which minimized our professional expenses to the extent feasible.  Nevertheless, as we seek gaming regulatory compliance and licenses, we anticipate incurring additional expenses relating to the applications, licensing and compliance process.  In fact, we expect that any future revenues that may be gained from licenses obtained in 2010 will be completely offset by expenses relating to the application, licensing and compliance process.

 

 

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Liquidity and Capital Resources

The net loss for 2009 was $167,409 or $0.02 per share, compared with a loss in 2008 of $282,719 or $0.03 per share.

 

Summary cash flow data is as follows:

 

	Year Ended December 31,
	2009				2008
Cash flows provided (used) by :
Operating activities		$	(87,986	)		$	(179,386	)
Investing activities			-				-
Financing activities			(51,667	)			287,500
Net increase (decrease) in cash			(139,653	)			108,114
Cash, beginning of period			145,117				37,003
Cash, end of period		$	5,464			$	145,117

 

The decrease in cash used in operating activities was primarily the result of a reduction in overall operating expenses, including advertising and travel expenses, completing one-time tasks, thereby reducing legal and professional services costs, such as our gaming application with the State of New Jersey, amending our Registration Statement on Form 10, working with broker-dealers to complete an application with FINRA and obtain our trading symbol.  We also compensate consultants through issuance of shares when possible to preserve our cash.

As of December 31, 2009, we had $5,464 cash on hand and current liabilities of $55,414, of which $40,873 is note and interest payable to Lantern Advisers, LLC, a Minnesota limited liability company owned equally by Douglas Polinsky and Joseph A. Geraci, II (each of whom is an officer and director of the Company).  As of the date of this filing, our management believes we have sufficient capital to continue operations through March 2010.  Thereafter, we expect we will require additional capital.  If we are unable to obtain additional financing when needed, we may be required to abandon our business or our status as a public reporting company.

Management continues to aggressively pursue other business opportunities for the Company including continued marketing of its Winner’s Pot Poker game, seeking additional investment capital, and merger opportunities with other businesses.  However, there is no guarantee that management will be successful in their endeavors and may be required to abandon our business or our status as a public reporting company.

Presently, we anticipate that additional financing could be sought from a number of sources, including but not limited to additional sales of equity or debt securities, or loans from banks, other financial institutions or affiliates of the Company. We cannot, however, be certain that any such financing will be available on terms favorable to us if at all. If additional funds are raised by the issuance of our equity securities, such as through the issuance of stock, convertible securities, or the issuance and exercise of warrants, then the ownership interest of our existing shareholders will be diluted. If additional funds are raised by the issuance of debt or other equity instruments, we may become subject to certain operational limitations, and such securities may have rights senior to the rights of our common shareholders. If we are unable to obtain additional financing when needed, we may be required to abandon our business or our status as a public reporting company.

 

Our primary non-cash asset at December 31, 2009 was intellectual-property rights and trademarks, which are the foundation for our product offerings.  We currently own the rights to United States Patent Number 5,839,732, issued on November 24, 1998, that relates to our current Winner’s Pot Poker table game.  This patent was acquired from Select Video, Inc., a Delaware corporation, pursuant to an Asset Purchase Agreement dated March 10, 2006.  In addition, we own a federally registered trademark for “WINNER’S POT POKER,” Registration Number 2,172,043, issued on July 7, 1998, which was acquired pursuant to that same agreement. Finally, we own registered trademarks for “POKER MAGIC” and to “AC (ATLANTIC CITY) STUD POKER,” which we also acquired pursuant to the Asset Purchase Agreement with Select Video.  Other than the trademark “Poker Magic” which we have adopted as our corporate name, we do not have any current plans for the sale or license of such other trademarks.  We do not have any currently pending applications for un-issued patents, trademarks or copyrights.  The expiration dates of our patent rights vary based on their filing and issuance dates.

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Trends and Uncertainties

 

As a development-stage company involved in the gaming business, we believe we can identify certain broad trends in our revenues and expenses, and components thereof.  We also believe that the most significant risks and uncertainties surrounding our business relate to revenues and expenses, and regulatory and financing matters. These trends and uncertainties are discussed below.

Revenues

As indicated above, from inception through December 31, 2009 (and presently), the Company has been primarily focused sequentially on the acquisition of the intellectual property forming the basis for its Winner’s Pot Poker table game and, thereafter, efforts to ensure at least temporary regulatory compliance of the game and obtain the agreement of casinos and gaming establishments to provide gaming table space to the Winner’s Pot Poker game.

These efforts culminated in our license agreement with Bally’s Park Place, Inc. d/b/a/ Bally’s Atlantic City, permitting Bally’s, on a non-exclusive basis, to use one unit of the Winner’s Pot Poker game on a trial basis at no charge until such time that the New Jersey Casino Control Commission ended the test period for the game. We entered into that license agreement on December 26, 2007. We had earlier (on August 22, 2007) secured the issuance of temporary rules and amendments governing the implementation of Winner’s Pot Poker in Atlantic City casinos. The amendments and rules added Winner’s Pot Poker to the list of authorized table games in New Jersey, governed the physical characteristics of the Winner’s Pot Poker game layout, defined the card deck for use with the Winner’s Pot Poker game, specified the terms of the use of the cards during Winner’s Pot Poker game play, and contained technical proposals governing the operation of Winner’s Pot Poker. We had also earlier obtained a transactional waiver from the New Jersey Casino Control Commission for the licensure requirement applicable to casino service industry (CSI), which waiver permitted us to legally license to Bally’s Park Place, Inc. the play of our Winner’s Pot Poker game in Bally’s Atlantic City casinos.

After a successful trial period, we amended our license agreement with Bally’s Park Place, Inc. on June 26, 2008. Under the amended license agreement, Bally’s Park Place, Inc. pays the Company a license fee in the amount of (i) $475 per month for the right to use our Winner’s Pot Poker game in the Atlantic City casinos for up to seven days per week, and (ii) $200 per month for the right to use of our Winner’s Pot Poker game in the Atlantic City casinos on weekends only during that month. The amendment currently contemplates the licensure of only two Winner’s Pot Poker game units—one for the seven days per week use and the other for the weekend-only use. This amendment was entered into after the adoption by the New Jersey Casino Control Commission of temporary regulations governing the rules of the Winner’s Pot Poker game. The amended license agreement is a month-to-month agreement that may be cancelled by either party at any time.  The month-to-month character of this licensing arrangement, which is currently our only revenue-generating license, presents a material uncertainty in our ability to accurately forecast revenues for 2010.

Since approximately May 2006, we have also been focused on securing Winner’s Pot Poker licensing arrangements with various other casinos and gaming establishments. In particular, our management has met with the management or representatives of numerous casinos or gaming establishments during the past year in an effort to secure additional licensing arrangements.  To date, our licensing efforts have been focused on entering into such agreements with casinos and gaming establishments in Minnesota, New Jersey and Nevada.

Based on our recent amendment of the license agreement with Bally’s Park Place, Inc., we began to recognize revenue from operations during fiscal 2008. Given that the present terms of the license agreement, as amended, provide only that Bally’s Park Place, Inc. will license the right to use two game units of our Winner’s Pot Poker product, we do not expect that our initial revenues will be significant. Instead, we expect that we must continue to market our game to casinos and gaming establishments that present suitable opportunities for us, and that the most efficient way for us to begin generating more significant revenues will be to consummate a definitive license agreement with Harrah’s Entertainment or some other enterprise that involves a wider group of gaming-related affiliates and establishments. For example, Harrah’s Entertainment, indirectly (through subsidiaries and other affiliates) operates approximately 40 casinos across the United States.  It is extremely difficult to anticipate, however, how much success we will have in our efforts to license our games to establishments other than Bally’s Park Place, Inc., if any at all, and thereby generate additional revenues.

Expenses

As indicated above under the caption “Results of Operations,” our selling, general and administrative expenses overall decreased in 2009 over 2008 and are expected to remain stable in 2010.  However, we expect to make applications and seek gaming regulatory compliance and licenses that will increase that component of our selling, general and administrative expenses for 2010.  Because our business has a short operating history and our present revenues are limited, in general it is difficult to accurately forecast our expenses and impact of those expenses on our operating results.

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Regulation

Currently, we have yet to obtain the final licensure required in the states of Nevada, New Jersey and Minnesota, which jurisdictions have been the focus of our marketing efforts thus far.  In particular, we expect that we will require at least the following licenses, registrations and approvals in the near future to permit us to license our gaming products to casinos and gaming establishments in the relevant jurisdictions:

·

Casino service industry (CSI) supplier license issued by the New Jersey Casino Control Commission (which license would be more broad and flexible than the current transactional waiver which the Company has thus far secured from the New Jersey Casino Control Commission)

·

Distribution licenses permitting us to distribute Winner’s Pot Poker game units (i.e., table layouts) to casinos and gaming establishments in Nevada, issued by the Nevada State Gaming Control Board

·

Distribution licenses permitting us to distribute Winner’s Pot Poker game units to casinos and gaming establishments in Minnesota, and

·

Registration with the Nevada Gaming Commission as a publicly traded company.

In addition, we will likely require positive results from suitability reviews (generally focusing on financial stability, honesty, character and integrity) of our executive management and other key personnel or significant shareholders conducted by the Nevada Gaming Commission and similar state agencies in other jurisdictions. We intend to continue working with the New Jersey Casino Control Commission and other state regulatory authorities to obtain the above-described and other registrations and licenses that we deem necessary or desirable as market opportunities come to light.

In general, we have little control over the various licensing, registration and suitability review processes and outcomes in the various states. It is possible that we may not be able to obtain required or desired licenses, registrations or approvals suitably fast enough to exploit potential opportunities with casinos or gaming establishments. It is also possible that our applications for licenses, registrations or findings of suitability may be rejected by state regulatory authorities.

Financing

As discussed above under the caption “Liquidity and Capital Resources,” our management believes we have sufficient capital to continue operations through March 2010.  Thereafter, we expect we will require additional capital.  Our current forecast for financing needs is largely based on our understanding of the expenses we anticipate incurring in our efforts to comply with gaming regulatory and public reporting company disclosure requirements.  In this regard, we note that our current forecasts are largely based on our past experience with other enterprises and proposed budgets proposed by our professional consultants.  If our actual expenses significantly exceed our present expectations we will likely require additional financing prior to March 2010.

Once needed, we cannot be certain that any required additional financing will be available on terms favorable to us, if at all.  This is especially true in light of the current poor state of the U.S. capital markets and the continuing weakened state of the general economy.  If, however, we are able to raise additional funds by the issuance of our equity or equity-linked securities, including through the issuance and exercise of warrants, our existing shareholders will experience dilution of their ownership interest.  If additional funds are instead raised by the issuance of debt or other senior or preferred equity instruments such as preferred stock, we may be subject to certain limitations in our operations, and such securities may have rights senior to those of our holders of common stock.  If adequate funds are not available on acceptable terms, we may be unable to expand, develop or enhance products or to respond to competitive pressures.  If we are unable to obtain additional financing when needed, we may be required to abandon our business or our status as a public reporting company.

Capital Expenditures

The Company did not have and does not plan to have any material commitments for capital expenditures in 2009 or 2010.  Given the Company’s business model, investment in capital resources is not required beyond inventory of its game, which is produced in small quantities on an as-needed basis once a license agreement has been executed.

Going Concern

We have incurred operating losses, accumulated deficit and negative cash flows from operations since January 10, 2006 (inception). As of December 31, 2009, we had an accumulated deficit of approximately $694,000. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements included in this filing do not include any adjustments related to recoverability and classification of asset carrying amounts, or the amount and classification of liabilities that might result, should we be unable to continue as a going concern. Our ability to continue as a going concern ultimately depends on achieving profitability, producing revenues or raising additional capital to sustain operations. Although we intend to obtain additional financing to meet our cash needs and to support the revenue-generating process, we may be unable to secure any additional financing on terms that are favorable or acceptable to us, if at all.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, nor are we a party to any contract or other obligation not included on its balance sheet that has, or is reasonably likely to have, a current or future effect on our financial condition.

 

Critical Accounting Policies

Critical accounting policies are policies that are both most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Our critical accounting policies relate to (a) revenue recognition and (b) the determination of impairment of long-lived and intangible assets.

Revenue Recognition

Our policy for the recognition of revenue is a critical accounting policy.  The Company recognizes revenue from sales under a license agreement when the following four criteria are met:  (1) there exists persuasive evidence of an arrangement (e.g., a fully executed license agreement); (2) delivery of the Winner’s Pot Poker game, felt and instructions has been made and the licensee thereafter becomes responsible to replace such materials in the event of damage or normal wear and tear; (3) the price is fixed or determinable; and (4) the ability of the Company to collect amounts owed is reasonably assured.

 

Determination of Impairment of Long-Lived and Intangible Assets

Our policy regarding the determination of impairment of long-lived and intangible assets is another critical accounting policy.  In this regard, our management reviews the Company’s long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived or intangible asset may not be recoverable.  If indications of impairment are present and the estimated future undiscounted cash flows are less than the carrying value of the asset under scrutiny, the value of that asset will be adjusted appropriately.  No impairment indicators were present as of December 31, 2009 or December 31, 2008.

Use of Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates.

 

 

ITEM 8         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Item		Page
Report of Independent Registered Public Accounting Firm on Financial Statements		19
Balance Sheets – December 31, 2009 and December 31, 2008		20
Statements of Operations – Years ended December 31, 2009, December 31, 2008 and Period from January 10, 2006 (inception) to December 31, 2009		21
Statements of Shareholders’ Equity (Deficit) – Years ended December 31, 2009, December 31, 2008 and Period from January 10, 2006 (inception) to December 31, 2009		22
Statements of Cash Flows – Years ended December 31, 2009, December 31, 2008 and Period from January 10, 2006 (inception) to December 31, 2009		28
Notes to Financial Statements		29

 

 

18

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Poker Magic, Inc.

Wayzata, Minnesota

We have audited the accompanying balance sheets of Poker Magic, Inc. (a development stage company) as of December 31, 2009 and 2008, and the related statements of operations, shareholders' equity (deficit) and cash flows for the years then ended and the period from January 10, 2006 (inception) to December 31, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Poker Magic, Inc. as of December 31, 2009 and 2008 and the results of its operations and cash flows for the years then ended and the period from January 10, 2006 (inception) to December 31, 2009, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 7 to the financial statements, the Company has incurred a net loss during the development stage and requires additional working capital, which raises substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are described in Note 7 as well.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Baker Tilly Virchow Krause, LLP

Minneapolis, Minnesota

February 26, 2010

 

 

19

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Poker Magic, Inc.

(A Development Stage Company)

Balance Sheets

		December 31, 2009				December 31, 2008
ASSETS
Current Assets
Cash		$	5,464			$	145,117
Inventory			1,621				750
Prepaid Expense			-				2,916
Total Current Assets			7,085				148,783
Intangible Assets, Net of Amortization			10,340				18,611
Total Assets		$	17,425			$	167,394
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts Payable		$	13,446				2,016
Accrued Royalty			120				166
Notes Payable Related Party – short-term			40,000				-
Interest Payable			873				-
Deferred Revenue			975				-
Total Current Liabilities			55,414				2,182
Total Liabilities			55,414				2,182
Shareholders’ Equity (Deficit)
Common Stock, $.001 par value: Authorized 250,000,000 shares:  Issued and outstanding 9,963,224 and 9,267,391 shares.			9,963				9,267
Additional Paid-in Capital			644,877				681,365
Deficit Accumulated During the Development Stage			(692,829	)			(525,420	)
Total Shareholders’ Equity (Deficit)			(37,989	)			165,212
Total Liabilities and Shareholders’ Equity (Deficit)		$	17,425			$	167,394

 

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

 

 

20

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Poker Magic, Inc.

(A Development Stage Company)

Statements of Operations

 

		Year Ended December 31, 2009				Year Ended December 31, 2008				Period from January 10, 2006 (inception) to December 31, 2009
Revenues		$	6,050			$	3,325			$	9,375
Cost of Revenue			12,916				36,773				49,689
Gross Loss			(6,866	)			(33,448	)			(40,314	)
Operating Expenses: Selling, General and Administrative			159,862				251,282				653,845
Operating Loss:			(166,728	)			(284,730	)			(694,159	)
Other Income (Expense)
Interest Income			192				2,011				2,203
Interest Expense			(873	)			-				(873	)
Total Other Income (Expense)			(681	)			2,011				1,330
Net Loss		$	(167,409	)		$	(282,719	)		$	(692,829	)
Basic and diluted net loss per common share		$	(0.02	)		$	(0.03	)		$	(0.09	)
Weighted-average number of common shares outstanding			9,342,722				8,523,587				7,795,348

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

 

 

21

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Poker Magic, Inc.

(A Development Stage Company)

Statements of Shareholders’ Equity (Deficit)

For the years ended December 31, 2009 and 2008 and for the

Period from January 10, 2006 (inception) to December 31, 2009

		Common Stock								Additional Paid-In				Subscription				Deficit Accumulated During the Development				Total Shareholders’ Equity
		Shares				Amount				Capital				Receivable				Stage				(Deficit)
Balance at inception January 10, 2006			-			$	-			$	-			$	-			$	-			$	-
Issuance of restricted common stock to a founder and a member of the Board of Directors on January 10, 2006 for cash and a subscription receivable for $0.001 per share, net cash to the company $1,000 and a subscription receivable for $1,500			2,500,000				2,500				-				(1,500	)			-				1,000
Issuance of common stock for purchase of Select Video intangible assets valued at $0.001 per share on March 10, 2006			3,022,991				3,023				-				-				-				3,023
Issuance of common stock for cash of $0.25 per share on May 9, 2006			100,000				100				24,900				-				-				25,000
Issuance of common stock for liabilities assumed at $0.25 per share on May 23, 2006			60,000				60				14,940				-				-				15,000
Issuance of common stock for cash of $0.25 per share on May 23, 2006			100,000				100				24,900				-				-				25,000
Issuance of common stock for consulting services at $0.25 per share on May 23, 2006			22,000				22				5,478				-				-				5,500
Issuance of common stock for cash of $0.25 per share on May 24, 2006			100,000				100				24,900				-				-				25,000

 

 

22

---

 

Poker Magic, Inc.

(A Development Stage Company)

Statements of Shareholders’ Equity (Deficit)

For the years ended December 31, 2009 and 2008 and for the

Period from January 10, 2006 (inception) to December 31, 2009

		Common Stock								Additional Paid-In				Subscription				Deficit Accumulated During the Development				Total Shareholders’ Equity
		Shares				Amount				Capital				Receivable				Stage				(Deficit)
Issuance of common stock for cash of $0.25 per share on August 21, 2006			50,000			$	50			$	12,450			$	-			$	-			$	12,500
Issuance of common stock for consulting services at $0.04 per share on December 15, 2006 based on value of services rendered and to be rendered			100,000				100				3,900				-				-				4,000
Issuance of common stock on May 23, 2006 for a sub-scription receivable at $0.25 per share			50,000				50				12,450				(12,500	)			-				-
Net Loss			-				-				-				-				(43,127	)			(43,127	)
Balance as of December 31, 2006			6,104,991				6,105				123,918				(14,000	)			(43,127	)			72,896
Issuance of common stock for consulting services at $0.083 per share on January 15, 2007 based on value of services rendered and to be rendered			600,000				600				49,400				-				-				50,000
Issuance of common stock for officers compensation at $0.096 per share on January 15, 2007 based on value of services rendered and to be rendered			500,000				500				47,500				-				-				48,000
Issuance of common stock for cash of $0.25 per share on July 10, 2007			40,000				40				9,960				-				-				10,000
Issuance of common stock for cash of $0.25 per share on July 23, 2007			40,000				40				9,960				-				-				10,000

 

 

23

---

 

Poker Magic, Inc.

(A Development Stage Company)

Statements of Shareholders’ Equity (Deficit)

For the years ended December 31, 2009 and 2008 and for the

Period from January 10, 2006 (inception) to December 31, 2009

		Common Stock								Additional Paid-In				Subscription				Deficit Accumulated During the Development				Total Shareholders’ Equity
		Shares				Amount				Capital				Receivable				Stage				(Deficit)
Issuance of common stock for payment of note at $0.2354 per share on July 26, 2007			20,000			$	20			$	4,689			$	-			$	-			$	4,709
Payment of subscription receivable on July 27, 2007			-				-				-				1,500				-				1,500
Issuance of common stock for consulting services at $0.083 per share on August 1,2007 based on value of services rendered and to be rendered			100,000				100				8,200				-				-				8,300
Issuance of common stock for consulting services at $0.077 per share on August 1, 2007 based on value of services rendered			65,000				65				4,935				-				-				5,000
Issuance of common stock for consulting services at $0.04 per share on August 1, 2007 based on value of services rendered			25,000				25				975				-				-				1,000
Payment of subscription receivable on October 17, 2007			-				-				-				12,500				-				12,500
Issuance of common stock for consulting services at $0.25 per share on November 26, 2007			50,000				50				12,450				-				-				12,500
Issuance of common stock for cash of $0.25 per share on December 21, 2007			40,000				40				9,960				-				-				10,000
Issuance of common stock for cash of $0.25 per share on December 22, 2007			80,000				80				19,920				-				-				20,000

 

 

24

---

 

Poker Magic, Inc.

(A Development Stage Company)

Statements of Shareholders’ Equity (Deficit)

For the years ended December 31, 2009 and 2008 and for the

Period from January 10, 2006 (inception) to December 31, 2009

		Common Stock								Additional Paid-In				Subscription				Deficit Accumulated During the Development				Total Shareholders’ Equity
		Shares				Amount				Capital				Receivable				Stage				(Deficit)
Net Loss			-			$	-			$	-			$	-			$	(199,574	)		$	(199,574	)
Balance as of December 31, 2007			7,664,991				7,665				301,867				-				(242,701	)			66,831
Issuance of common stock for cash of $0.25 per share on January 10, 2008			100,000				100				24,900				-				-				25,000
Issuance of common stock for cash of $0.25 per share on May 20, 2008			50,000				50				12,450				-				-				12,500
Issuance of common stock for cash of $0.25 per share on May 28, 2008			1,000,000				1,000				249,000				-				-				250,000
Issuance of common stock for consulting services at $0.10 per share on August 26, 2008 based on value of services rendered and to be rendered			200,000				200				19,800				-				-				20,000
Issuance of common stock for consulting services at $0.25 per share on August 26, 2008 based on value of services rendered			10,000				10				2,490				-				-				2,500
Issuance of common stock for consulting services at $0.083 per share on August 26, 2008 based on value of services rendered and to be rendered			120,000				120				9,880				-				-				10,000
Issuance of common stock for consulting services at $0.25 per share on August 26, 2008 based on value of services rendered			50,000				50				4,950				-				-				5,000

 

 

25

---

 

Poker Magic, Inc.

(A Development Stage Company)

Statements of Shareholders’ Equity (Deficit)

For the years ended December 31, 2009 and 2008 and for the

Period from January 10, 2006 (inception) to December 31, 2009

		Common Stock								Additional Paid-In				Subscription				Deficit Accumulated During the Development				Total Shareholders’ Equity
		Shares				Amount				Capital				Receivable				Stage				(Deficit)
Issuance of common stock for consulting services at $0.25 per share on December 16, 2008 based on value of services rendered			40,400			$	40			$	10,060			$	-			$	-			$	10,100
Officers compensation expense as contributed capital			-				-				38,000				-				-				38,000
Issuance of common stock for officers compensation at $0.25 per share on December 31, 2008 based on value of services rendered			32,000				32				7,968				-				-				8,000
Net Loss			-				-				-				-				(282,719	)			(282,719	)
Balance as of December 31, 2008			9,267,391				9,267				681,365				-				(525,420	)			165,212
Redemption of common stock from a non-affiliated shareholder at $0.25 per share on February 25, 2009 based on original issuance cost			(366,667	)			(367	)			(91,300	)			-				-				(91,667	)
Officers compensation expense as contributed capital on March 31, 2009			-				-				12,000				-				-				12,000
Issuance of common stock for officers compensation on June 30, 2009 based on value of services rendered			600,000				600				17,400				-				-				18,000
Issuance of common stock for consulting services on June 30, 2009 based on value of services rendered			62,500				63				1,812				-				-				1,875

 

 

26

---

 

Poker Magic, Inc.

(A Development Stage Company)

Statements of Shareholders’ Equity (Deficit)

For the years ended December 31, 2009 and 2008 and for the

Period from January 10, 2006 (inception) to December 31, 2009

		Common Stock								Additional Paid-In				Subscription				Deficit Accumulated During the Development				Total Shareholders’ Equity
		Shares				Amount				Capital				Receivable				Stage				(Deficit)
Issuance of common stock for officers compensation on September 30, 2009 based on value of services rendered			200,000			$	200			$	11,800			$	-			$	-			$	12,000
Issuance of common stock for officers compensation on December 31, 2009 based on value of services rendered			200,000				200				11,800				-				-				12,000
Net Loss			-				-				-				-				(167,409	)			(167,409	)
Balance as of December 31, 2009			9,963,224			$	9,963			$	644,877			$	-			$	(692,829	)		$	(37,989	)

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

 

27

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Poker Magic, Inc.

(A Development Stage Company)

Statements of Cash Flows

		Year Ended December 31, 2009				Year Ended December 31, 2008				Period from January 10, 2006 (inception) to December 31, 2009
Cash flows from operating activities:
Net loss		$	(167,409	)		$	(282,719	)		$	(692,829	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of intangible asset			8,271				8,271				31,017
Common stock issued for services			-				-				6,500
Consulting service expense paid in stock			4,791				59,879				123,841
Officers compensation expense paid in stock			42,000				10,000				98,000
Officers compensation expense as contributed capital			12,000				38,000				50,000
Changes in operating assets and liabilities:
Inventory			(871	)			-				(871	)
Prepaid expense			-				5,101				5,434
Accounts payable			11,430				(18,084	)			13,446
Accrued royalty			(46	)			166				120
Interest payable			873				-				873
Deferred revenue			975				-				975
Net cash used in operating activities			(87,986	)			(179,386	)			(363,494	)
Cash flows from investing activities:
Acquisition of Select Video assets			-				-				(17,000	)
Net cash used in investing activities			-				-				(17,000	)
Cash flows from financing activities:
Proceeds from subscription receivable			-				-				14,000
Proceeds from issuance of common stock			-				287,500				426,000
Redemption of common stock			(91,667	)			-				(91,667	)
Proceeds from note payable related party			40,000				-				40,000
Payment of short-term debt			-				-				(2,375	)
Net cash provided by (used in) financing activities			(51,667	)			287,500				385,958
Net increase (decrease) in cash			(139,653	)			108,114				5,464
Cash, beginning of the period			145,117				37,003				-
Cash, end of the period		$	5,464			$	145,117			$	5,464
Non-cash investing and financing activities:
Acquisition of certain assets and liabilities of Select Video in exchange for common stock
Inventory		$	-			$	-			$	750
Intangible Asset			-				-				24,357
Accounts Payable			-				-				(32,000	)
Note Payable			-								(7,084	)
Stock issued in lieu of cash for note payable			-				-				19,709
Stock issued in lieu of cash for prepaid services			-				47,600				175,400
Stock subscriptions received for common stock			-				-				14,000

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

 

28

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Poker Magic, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2009 and 2008

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of operations and basis of presentation

Poker Magic, Inc. (the “Company”) is a development stage company that was incorporated in the State of Minnesota on January 10, 2006.  Our business consists primarily of marketing and licensing a new form of poker-based table game to casinos and on-line gaming facilities in the United States.

 

Use of estimates

 

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

 

Cash deposits

 

The Company maintains its cash balances in financial institutions.  Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits.

 

Inventory

 

Poker table felt inventory is valued using the lower of cost (first-in, first-out method) or market.

 

Fair value of financial instruments

 

The carrying amounts of certain of the Company’s financial instruments, including cash and accounts payable approximate fair value due to their relatively short maturities.

 

Intangible assets

 

On March 10, 2006, the Company purchased certain assets and assumed certain liabilities of Select Video, Inc. Three patents were acquired as a part of the March 10, 2006 purchase. The patents are stated at cost and are amortized on a straight-line basis over 60 months. Amortization expense was $8,271, $8,271 and $31,017 for the years ended December 31, 2009 and 2008 and the period from January 10, 2006 (inception) to December 31, 2009. Estimated amortization expense for the next two years of patents issued as of December 31, 2009 is as follows:

 

Year Ending December 31,
2010		$	8,271
2011			2,069
Total		$	10,340

 

Impairment of long-lived assets

 

Management reviews the Company’s long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the asset’s value will be adjusted appropriately. No impairment indicators were present as of December 31, 2009 or December 31, 2008.

 

29

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Income taxes

 

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

Revenue recognition

 

Revenue from sales under a license agreement is recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists (fully executed license agreement); 2) delivery of the Winner’s Pot Poker game, felt and instructions have been rendered and for which the licensee is responsible to replace either through damage or normal wear and tear; 3) the price is fixed or determinable; and 4) collectability under the license agreement is reasonably assured.  All revenue for the year ended December 31, 2009 was generated from one customer.  Revenues generated from the licensing of the Winner’s Pot Poker game in New Jersey are not subject to sales and use tax although filing of an annual return is required and completed.

Advertising

Advertising costs are charged to expense when incurred.  Advertising costs were $3,517, $11,447 and $14,964, respectively, for the years ended December 31, 2009, 2008 and the period from January 10, 2006 (inception) to December 31, 2009.

 

Subsequent Events

 

The Company evaluates events occurring after the date of the financial statements for events requiring recording or disclosure in the financial statements.  Any required events have been disclosed in Note 8.

   

NOTE 2—NET LOSS PER COMMON SHARE

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of vested common shares outstanding during the period. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share follows:

		Year Ended December 31, 2009				Year Ended December 31, 2008				Period from January 10, 2006 (inception) to December 31, 2009
Numerator:  Net Loss		$	(167,409	)		$	(282,719	)		$	(692,829	)
Denominator:  Weighted-average number of common shares outstanding			9,342,722				8,523,587				7,795,348
Basic and diluted net loss per common share		$	(.02	)		$	(.03	)		$	(.09	)

The 1,000,000 outstanding warrants at December 31, 2009 and the period from January 10, 2006 (inception) to December 31, 2009 were excluded from the calculation of diluted loss per share as their effects were anti-dilutive due to the Company’s net losses for the periods.

NOTE 3—COMMITMENTS AND CONTINGENCIES

 

The asset purchase agreement with Select Video dated March 10, 2006, provides that when the Company receives any revenue generated by Winner’s Pot Poker and other similar games, Select Video will be entitled to receive an amount equal to five percent (5%) of all gross proceeds generated by these games.

As of December 31, 2009 and December 31, 2008, $120 and $166 were owed to Select Video under this agreement.

NOTE 4—SHAREHOLDERS’ EQUITY (DEFICIT)

 

Common stock

On January 10, 2006, the founders of the Company purchased 2,500,000 shares of common stock for $2,500.

On March 10, 2006, the Company purchased certain assets and assumed certain liabilities of Select Video in exchange for 3,022,991 shares of common stock issued at the deemed fair market value of $.001 per share or $3,023.

On May 23, 2006, the Company issued 60,000 shares of common stock at $0.25 per share in lieu of cash for liabilities assumed.

During 2006, the Company raised additional cash of $87,500 at $0.25 per share through the issuance of 350,000 shares of common stock.

During 2006, the Company issued 22,000 shares to various consultants at $0.25 per share for services rendered.

 

30

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During 2006, the Company issued 100,000 shares valued at $4,000 (value of the services to be provided) for services rendered and to be rendered.

On January 15, 2007, the Company issued 600,000 shares of common stock to two consultants for services to be provided over a 12 month period commencing on January 15, 2007.  These services were valued at $50,000.

On January 15, 2007, the Company issued 500,000 shares of common stock to the two founders for their services to be provided over a 12 month period commencing January 15, 2007.  These services were valued at $48,000.

On July 26, 2007, the Company settled the note payable of $7,084 for a cash payment of $2,375 and the issuance of 20,000 shares of common stock valued at $4,709 for payment in full on the note.

In July 2007, the Company raised cash of $20,000 at $0.25 per share through the issuance of 80,000 shares of common stock.

On August 1, 2007, the Company issued 65,000 shares of common stock for services to be provided over a 12 month period commencing retroactively on June 1, 2007.  These services were valued at $5,000.

On August 1, 2007, the Company issued 100,000 shares of common stock to a consultant for services to be provided over a 12 month period commencing on August 1, 2007.  These services were valued at $8,300.

On August 1, 2007, the Company issued 25,000 shares of common stock for services.  These services were valued at $1,000.

On November 26, 2007, the Company issued 50,000 shares of common stock to a consultant for services to be provided over a 12 month period commencing on November 26, 2007.  These services were valued at $12,500.

In December 2007, the Company raised cash of $30,000 at $0.25 per share through the issuance of 120,000 shares of common stock.

In January 2008, the Company raised cash of $25,000 at $0.25 per share through the issuance of 100,000 shares of common stock.

On May 28, 2008, the Company raised cash of $250,000 at $0.25 per share through the issuance of 1,000,000 shares of common stock together with a warrant, classified as permanent equity, to purchase up to 1,000,000 shares of common stock, which was immediately exercisable.  The warrants do not possess any embedded derivative features.  The exercise price was $0.25 per share if purchased within six months of issuance.  The exercise price increased to $0.425 for months seven through twelve (after the date of issuance) and to $0.50 after twelve months.  The warrant expires on May 27, 2010.

In May 2008, the Company raised cash of $12,500 at $0.25 per share through the issuance of 50,000 shares of common stock.

On August 26, 2008, the Company issued 200,000 shares of common stock to a consultant for services to be provided over a five month period commencing on August 1, 2008.  These services were valued at $20,000.

On August 26, 2008, the Company issued 60,000 shares of common stock for services to be provided over a five month period commencing retroactively on August 1, 2008.  These services were valued at $5,000.

On August 26, 2008, the Company issued 60,000 shares of common stock for services to be provided over a twelve month period commencing retroactively on August 1, 2008.  These services were valued at $5,000.

On August 26, 2008, the Company issued 10,000 shares of common stock for services.  These services were valued at $2,500.

On August 26, 2008, the Company issued 50,000 shares of common stock for services.  These services were valued at $5,000.

On December 16, 2008, the Company issued 40,400 shares of common stock for services.  These services were valued at $10,100.

On December 31, 2008, the Company issued 32,000 shares of common stock for officer compensation.  These services were valued at $8,000.

On February 25, 2009, the Company redeemed, at the request of a non-affiliate shareholder, 366,667 shares of common stock held by a single shareholder at a price of $0.25 per share, for a total amount of $91,667, which was the price originally paid for the redeemed shares.

On June 30, 2009, the Company issued 400,000 shares of common stock for officer compensation with a fair value of $12,000.

 

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On June 30, 2009, the Company issued 200,000 shares of common stock for officer bonus compensation with a fair value of $6,000.

On June 30, 2009, the Company issued 50,000 shares of common stock for consultant service bonus with a fair value of $1,500.

On June 30, 2009, the Company issued 5,000 shares of common stock for services with a fair value of $150.

On June 30, 2009, the Company issued 7,500 shares of common stock for services with a fair value of $225.

On September 30, 2009, the Company issued 200,000 shares of common stock for officer compensation with a fair value of $12,000.

On December 31, 2009, the Company issued 200,000 shares of common stock for officer compensation with a fair value of $12,000.

At December 31, 2009, a total of 9,963,224 shares of common stock were issued and outstanding.  1,000,000 warrants to purchase additional common stock at $0.50 per share are also outstanding as of December 31, 2009, which expire in May 2010.

NOTE 5—INCOME TAXES

       

On January 1, 2008, the Company adopted the guidance for accounting for uncertainty in income tax provisions.  As such, the Company is required to recognize in the financial statements only those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. Interest and penalties are expensed as incurred as operating expenses. The tax years that remain subject to examination by major tax jurisdictions currently are Federal 2007-2009 and State of Minnesota 2007-2009.  The net operating loss carryforwards are subject to examination until they expire.

At December 31, 2009, the Company had federal and state net operating loss carryforward of approximately $629,000 available to offset future taxable income. The Company’s federal and state net operating loss carryforwards will begin to expire in 2026 if not used before such time to offset future taxable income or tax liabilities. The Company’s deferred tax asset is the net operating loss carryforward and the difference in patent amortization expense.  The Company has established a valuation allowance of $277,000 and $198,000 at December 31, 2009 and 2008, respectively, against its deferred tax assets due to uncertainty surrounding the realization of such assets.  The change in valuation allowance for the years ended December 31, 2009 and 2008 was $79,000 and $109,000, respectively, and for the period ended January 10, 2006 (inception) to December 31, 2009 was $277,000.  Current and future changes in the stock ownership of the Company may place limitations on the use of these net operating loss carryforwards.

 

Reconciliation between the federal statutory rate and the effective tax rates is as follows:

 

		Year Ended December 31, 2009				Year Ended December 31, 2008				Period from January 10, 2006 (inception) to December 31, 2009
Federal statutory tax rate			(34.0	)%			(34.0	)%			(34.0	)%
State taxes, net of federal benefit			(6.0	)			(6.0	)			(6.0	)
Valuation Allowance			40.0				40.0				40.0
Effective tax rate			0.0	%			0.0	%			0.0	%

NOTE 6—NOTES PAYABLE RELATED PARTY

On July 30, 2009, Lantern Advisers, LLC, a Minnesota limited liability company owned equally by Douglas Polinsky and Joseph A. Geraci, II (each of whom is an officer and director of the Company), loaned the Company $10,000 under terms and conditions set forth in a related unsecured term promissory note.  The promissory note provides for simple interest to accrue on the unpaid principal balance of the promissory note at the rate of twelve percent (12.0%) per annum, and requires that accrued interest be paid on a monthly basis until July 29, 2010, at which time the entire unpaid principal balance of the promissory note will become due.  The loan was made to provide working capital to the Company.

On October 13, 2009, Lantern Advisers, LLC, a Minnesota limited liability company owned equally by Douglas Polinsky and Joseph A. Geraci, II (each of whom is an officer and director of the Company), loaned the Company $10,000 under terms and conditions set forth in a related unsecured term promissory note.  The promissory note provides for simple interest to accrue on the unpaid principal balance of the promissory note at the rate of 12% per annum, and requires that accrued interest be paid on a monthly basis until October 12, 2010, at which time the entire unpaid principal balance of the promissory note will become due.  The loan was made to provide working capital to the Company.

 

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On December 14, 2009, Lantern Advisers, LLC, a Minnesota limited liability company owned equally by Douglas Polinsky and Joseph A. Geraci, II (each of whom is an officer and director of the Company), loaned the Company $20,000 under terms and conditions set forth in a related unsecured term promissory note.  The promissory note provides for simple interest to accrue on the unpaid principal balance of the promissory note at the rate of 12% per annum, and requires that accrued interest be paid on a monthly basis until December 13, 2010, at which time the entire unpaid principal balance of the promissory note will become due.  The loan was made to provide working capital to the Company.

For the year ended December 31, 2009, the Company has accrued interest and interest expense of $873 related to the notes payable with a related party.

NOTE 7— GOING CONCERN; MANAGEMENT’S PLAN TO FUND WORKING CAPITAL NEEDS

 

The Company incurred net losses of $167,409, $282,719, $692,829 for the years ended December 31, 2009 and 2008 and for the cumulative period from January 10, 2006 (inception) to December 31, 2009, respectively, along with negative cash flows from operating activities.  The Company anticipates significant expenditures during 2010 relating to the marketing its Winner’s Pot Poker game, seeking regulatory approval from Nevada, Minnesota and Oklahoma to license its game in their respective states, and legal and accounting expenses to comply with the requirements of a public reporting company.   As of the date of filing of this report, the Company had approximately $5,550 cash on hand and current liabilities of approximately $4,250.  The Company estimates that it will need approximately $136,000 of cash over the next 12 months to continue operations through 2010.

NOTE 8—SUBSEQUENT EVENT

On January 21, 2010, Lantern Advisers, LLC, a Minnesota limited liability company owned equally by Douglas Polinsky and Joseph A. Geraci, II (each of whom is an officer and director of the Company), loaned the Company $10,000 under terms and conditions set forth in a related unsecured term promissory note.  The promissory note provides for simple interest to accrue on the unpaid principal balance of the promissory note at the rate of 12% per annum, and requires that accrued interest be paid on a monthly basis until January 20, 2011, at which time the entire unpaid principal balance of the promissory note will become due.  The loan was made to provide working capital to the Company.

   

ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

Directors, Executive Officers, Promoters, and Control Persons

Name		Age		Positions
Douglas M. Polinsky		50		Chairman, Chief Executive Officer and President
Joseph A. Geraci, II		40		Director and Chief Financial Officer

Douglas M. Polinsky co-founded Poker Magic, Inc. in January 2006 and since that time has been the Chairman and Chief Executive Officer of the Company. Since 1994, Mr. Polinsky has been the Chief Executive Officer of Great North Capital Consultants, Inc., a financial advisory company which he founded. Great North Capital Consultants advises corporate clients on matters regarding corporate and governance structures, public company acquisitions of private companies and other transaction-related matters, and also make direct investments into public and private companies. Mr. Polinsky earned a Bachelor of Science degree in hotel administration at the University of Nevada at Las Vegas. Mr. Polinsky is presently director of Wizard Software Corporation, a publicly traded corporation (AMEX: W2E).

 

Joseph A. Geraci, II was a co-founder of Poker Magic, Inc. in January 2006 and has been a director and the Chief Financial Officer of the Company since that time. Since February 2002 through the present time, Mr. Geraci has been managing member of Isles Capital, LLC, an advisory and consulting firm that assists small businesses, both public and private, in business development. In March 2005, Mr. Geraci also became the managing member of Mill City Advisors, LLC, the general partner of Mill City Ventures, LP, a Minnesota limited partnership that invests directly into both private and public companies. From January 2005 until August 2005, Mr. Geraci served as the Director of Finance for Gelstat Corporation, a purveyor of homeopathic remedies, based in Bloomington, Minnesota.  From 2000 until December 2004, Mr. Geraci was a broker with Oak Ridge Financial Services, Inc., a Minneapolis-based broker-dealer firm.

Under the Company’s bylaws, the directors serve for indefinite terms expiring upon the next annual meeting of the Company’s shareholders.

Code of Ethics

On August 5, 2008, our Board of Directors adopted a Code of Ethics for Management and Non-Management Employees, which includes our Company’s principal executive officer and principal financial officer, or persons performing similar functions, as required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002.  Our Code of Ethics is available on our website, www.pokermagicinc.com, and we will provide a copy, without charge, to any shareholder upon written request made to Poker Magic, Inc., Attention: Chief Executive Officer, 130 West Lake Street, Suite 300, Wayzata, MN 55391.

 

Changes to Board of Director Nomination Procedures

 

The Company has not had any material changes to the procedures for shareholder nominations of candidates to serve on our Board of Directors during the fiscal year ended December 31, 2009.

Committees of the Board of Directors; Audit Committee Financial Expert

The Board of Directors of the Company does not have a standing audit, compensation or nominating committee.  Instead, the entire Board of Directors fulfills the functions of such committees.  The Board of Directors has determined that Mr. Joseph A. Geraci, II is an “audit committee financial expert” as such term is defined under Item 407(d)(5) of Regulation S-K.  This determination was based primarily in part on Mr. Geraci’s experience as Director of Finance for Gelstat Corporation.  Neither Mr. Geraci nor the only other member of the Board of Directors—Douglas M. Polinsky—are “independent” as that term is defined in Section 4200(a)(15) of National Association of Securities Dealers’ listing standards.  The Company is not subject to those listing standards because its common stock is not listed for trading on a Nasdaq market or exchange.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, requires the Company’s directors, executive officers and beneficial owners of more than 10% of the common stock of the Company to file with the SEC certain reports regarding their ownership of common stock or any changes in such ownership.  The foregoing reporting persons became subject to these filing requirements in April 2008.  Based on its own review, the Company believes that Douglas M. Polinsky and Joseph A. Geraci, II, each made late filings with respect to transactions occurring during 2009, as follows:  on September 15, 2009, Mr. Polinsky reported on Form 4 his acquisition from the Company of 300,000 shares on , which report was originally due on July 2, 2009; on September 11, 2009, Mr. Geraci reported on Form 4 his acquisition from the Company of 300,000 shares on June 30, 2009, which report was originally due on July 2, 2009; on September 23, 2009, Mr. Geraci reported on Form 4 his open market purchase (through Lantern Advisers, LLC) of 5,000 shares on September 18, 2009, which report was originally due on September 22, 2009; on February 16, 2010, Mr. Polinsky reported on Form 5 his acquisition from the Company of 100,000 shares on September 30, 2009 and 100,000 shares on December 31, 2009, the reports for which were originally due on October 2, 2009 and January 4, 2010, respectively; and on February 16, 2010, Mr. Geraci reported on Form 5 his acquisition from the Company of 100,000 shares on September 30, 2009 and 100,000 shares on December 31, 2009, the reports for which were originally due on October 2, 2009 and January 4, 2010, respectively.

 

ITEM 11

EXECUTIVE AND DIRECTOR COMPENSATION

 

Executive Compensation

Summary Compensation Table

The following table sets forth the total compensation paid by the Company during its two most recent fiscal years ended December 31, 2008 and 2009 to the persons who served as the Company’s President or Chief Executive Officer and Chief Financial Officer during such periods (collectively, the “named executives”).

Name and Principal Position		Year		Salary ($)				Stock Awards ($)				All Other Compensation ($)				Total ($)
Douglas M. Polinsky,		2009		$	0	(1)		$	21,000	(2)			-			$	21,000
Chief Executive Officer		2008		$	4,000	(3)		$	5,000	(4)			-			$	9,000
Joseph A. Geraci, II,		2009		$	0	(1)		$	21,000	(2)			-			$	21,000
Chief Financial Officer		2008		$	4,000	(3)		$	5,000	(4)			-			$	9,000

                                 

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(1)	The named executive did not receive a salary during the year ended December 31, 2009, primarily because the Company did not then have the resources to pay, or commit to pay, such individual a regular market-based salary for his services.  In order to value the services rendered to the Company by the named executive, the Company recorded $6,000 with respect to the named executive (aggregating to $12,000 for both named executives) as additional paid-in capital in lieu of additional stock awards using the fair value of the stock on the date of the grant.
(2)	The named executive received a stock award of $21,000 (aggregating to $42,000 for both named executives). This represents the dollar amount recognized for financial reporting purposes under SFAS 123R with respect to stock grants to the named executive for his services for the current year.
(3)	The named executive received a salary of $4,000 during the year ended December 31, 2008, primarily because the Company did not then have the resources to pay, or commit to pay, such individual a regular market-based salary for his services.  In addition, in order to value the services rendered to the Company by the named executive, the Company recorded $19,000 with respect to the named executive (aggregating to $38,000 for both named executives) as additional paid-in capital in lieu of additional stock awards using the fair value of the stock on the date of the grant.
(4)	The named executive received a stock award of  $3,000 for services rendered in 2008. This represents the dollar amount recognized for financial reporting purposes under SFAS 123R with respect to stock grants to the named executive for his services for the year indicated.  The named executive also received a stock award of $2,000 for services rendered in 2007, which amount is a “carryover” from 2007 (i.e., the stock was issued in 2008 but related to services rendered in 2007) and was also recognized for financial reporting purposes under SFAS 123R for the year indicated.

 

 

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Employment Agreements with Executives

The Company does not currently have employment agreements with Messrs. Polinsky and Geraci, and currently has no plans to enter into employment agreements with such individuals.

 

Outstanding Equity Awards at Fiscal Year End

The Company had no outstanding options, warrants, unvested stock awards or equity incentive plan awards as of December 31, 2009 held by any named executive. In addition, the Company has no options, warrants, unvested stock awards or equity incentive plan awards outstanding and held by any named executive as of the date of this filing.

Director Compensation

The Company did not pay director compensation in 2009; however the Company reimbursed  its directors for their expenses incurred in attending or participating in meetings of the board of directors or other Company-related meetings.

 

ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

The table below sets forth certain information with respect to beneficial ownership of our common stock as of February 24, 2010 (on which date there were an aggregate of 9,963,224 shares of common stock outstanding), by:

·

each director of the Company

·

each named executive (see Item 11 above)

·

all current directors and executive officers of the Company as a group, and

·

each person or entity known by the Company to beneficially own more than 5% of our common stock.

Unless otherwise indicated in the table or its footnotes, the address of each of the following persons or entities is 130 West Lake Street, Suite 300, Wayzata, Minnesota 55391, and each such person or entity has sole voting and investment power with respect to the shares of common stock set forth opposite their respective name.

 

Name		Number of Shares Beneficially Owned (1)				Percentage of Outstanding Shares (1)
Douglas M. Polinsky (2)			2,093,500				21.0	%
Joseph A. Geraci, II (3)			1,866,000				18.7	%
Gary Kostiuk (4) 257 Frog Pond Road Parkertown, NJ  08087			540,000				5.42	%
All current directors and executive officers as a group (5) (two persons)			3,958,500				39.7	%

 

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(1)

Beneficial ownership is determined in accordance with the rules of the SEC and includes general voting power and/or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days of the applicable record date, are deemed outstanding for computing the beneficial ownership percentage of the person holding such options or warrants but are not deemed outstanding for computing the beneficial ownership percentage of any other person.

(2)

Mr. Polinsky is the Company’s Chairman and Chief Executive Officer. Includes 1,250,000 common shares held by Great North Capital Consultants, Inc. (f/k/a Great North Capital Corp.), a Minnesota corporation of which Mr. Polinsky is the sole shareholder, officer and director, 703,500 common shares held individually by Mr. Polinsky, and 140,000 common shares held in the name of two of Mr. Polinsky’s minor children (beneficial ownership of which Mr. Polinsky disclaims).

(3)	Mr. Geraci is a director and the Company’s Chief Financial Officer. Includes 1,675,000 common shares held by Mr. Geraci and 190,000 common shares held individually by Mr. Geraci’s spouse.

(4)	All shares are common shares and are held individually.

 

 

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(5)	Includes Messrs. Polinsky and Geraci.

 

ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE