News Column

Note 2. Operations and Liquidity Management

August 14, 2014

Historically, the Company has incurred net losses and used cash from financing activities to fund its operations in each annual period since inception.

As of June 30, 2014, the Company's cash balances totaled approximately $364 thousand and availability under the SVB Credit Facility (see Note 10 "Debt") was approximately $292 thousand. Cash used in operations for the six months ended June 30, 2014 was approximately $1 thousand. The level of additional capital needed to fund operations and the Company's ability to conduct business on a standalone basis for the next 12 months is influenced primarily by the following factors: 5



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the pace of growth in the Company's recurring-revenue gaming business, the

related investments in inventory and the level of spending on development and

regulatory efforts;

the level of investment in development and approval of new products, entry

into new markets, and investments in regulatory approvals;

its ability to control growth of operating expenses as its business grows the

business and expands with new products in new markets;

its ability to negotiate and maintain favorable payment terms with customers

and vendors;

its ability to access the capital markets and maintain availability under its

credit line;

demand for its products, and the ability of its customers to pay on a timely

basis; and general economic conditions as well as political events and legal and regulatory changes. The Company's operating plans as an independent company for 2014 included placing existing inventory, entering new markets, commercializing new products and accelerating revenue growth while controlling operating expense and working capital levels. On April 29, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), with Multimedia Games, Inc., a Delaware corporation ("MGAM"), and 23 Acquisition Co., a North Carolina corporation and wholly owned subsidiary of MGAM ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company, and the separate corporate existence of Merger Sub will thereupon cease, and the Company will continue as the surviving corporation (the "Surviving Corporation") and a wholly owned subsidiary of MGAM (the "Merger"). The Merger Agreement was unanimously approved by the Company's Board of Directors (the "Board"), based on the recommendation of a Special Committee of the Board (the "Special Committee") that was formed to evaluate and negotiate the terms of a sale of the Company. (See Note 17 "Merger with Multimedia Games, Inc."). The Company believes that the Merger will also have a significant effect on its cash requirements during 2014 as it will incur additional legal, banking and other professional fees and merger related costs in addition to its planned expenditures. In order to fund its operation and merger-related costs through the closing of the Merger, in July 2014, the Company entered into the Note Agreement with MGAM, the Founders' Loan Payment Deferral Agreement with Arthur L. Lomax and the Executive Salary Deferral Agreements with its chief executive officer and its president (see Note 10 "Debt," Note 17 "Merger with Multimedia Games, Inc." and Note 18 "Subsequent Events.") The Company may seek to raise additional capital, expand its credit facility or seek additional capital sources to fund operations and merger-related expenses. The Company cannot assure you that, in the event it needs additional working capital, adequate additional working capital will be available or, if available, will be on terms acceptable to it. If the Company is unable to raise additional capital or expand its credit facilities or close the Merger, the Company's ability to conduct business, complete the proposed merger and achieve its other objectives could be negatively impacted. Note 3. Discontinued Operations



The statements of operations for the discontinued operations for the three and six months ended June 30, 2014 and 2013 consisted of the following:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenue $ - $ - $ - $ 535 Cost of revenue - - - - Gross profit - - - 535 Operating expenses - - - -



Net income from discontinued operations $ - $ -

$ - $ 535 6



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Note 4. Accounts Receivable Accounts receivable at June 30, 2014 and December 31, 2013 consisted of the following: June 30, December 31, 2014 2013 Accounts receivable $ 503,279$ 910,920 Allowance for doubtful accounts (80,589 ) (116,971 ) Accounts receivable, net $ 422,690$ 793,949 Note 5. Inventory Inventory at June 30, 2014 and December 31, 2013 consisted of the following: June 30, December 31, 2014 2013 Raw materials and components $ 1,080,799$ 1,182,150 Gaming systems in process 436,167 331,536 Finished goods 208,235 116,114 Reserve (237,746 ) (215,099 ) Inventory, net $ 1,487,455$ 1,414,701 Long-Term inventory 619,915 545,070 Current inventory $ 867,540$ 869,631 Note 6. Prepaid Expenses and Other Assets Prepaid expenses and other assets at June 30, 2014 and December 31, 2013 consisted of the following: June 30, December 31, 2014 2013 Prepaid expenses $ 57,691$ 62,924 Other 29,484 27,390 Prepaid expenses and other assets $ 87,175$ 90,314 Deferred licensing fees, net $ 49,939$ 60,560 Other 48,679 50,180 Other assets $ 98,618$ 110,740 7



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Note 7. Gaming Systems Gaming systems at June 30, 2014 and December 31, 2013 consisted of the following: June 30, December 31, 2014 2013 Gaming systems $ 6,512,004$ 6,716,864 Less: accumulated depreciation (5,523,567 ) (5,491,933 ) Gaming systems, net $ 988,437$ 1,224,931 Note 8. Property and Equipment Property and equipment at June 30, 2014 and December 31, 2013 consisted of the following: June 30, December 31, 2014 2013 Equipment $ 464,863$ 462,404 Leasehold improvements 208,387 208,387 Capitalized software 157,067 157,067 830,317 827,858 Less: accumulated depreciation (804,686 ) (800,134 ) Property and equipment, net $ 25,631$ 27,724 Note 9. Accrued Liabilities Accrued liabilities at June 30, 2014 and December 31, 2013 consisted of the following: June 30, December 31, 2014 2013 Inventory received, not invoiced 167,425



156,075

Other liabilities and customer deposits 244,469 154,051 Accrued liabilities $ 411,894$ 310,126 Note 10. Debt



The Company's outstanding debt balances as of June 30, 2014 and December 31, 2013 consisted of the following:

June 30, December 31, 2014 2013 SVB Credit Facility $ - $ - Founders' Loan 217,523 240,429 Total debt 217,523 240,429 Current portion of debt 85,781 70,822 Long-term portion of debt $ 131,742$ 169,607 8



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SVB Credit Facility. The Company maintains a credit facility with Silicon Valley Bank to support its working capital needs (the "SVB Credit Facility"). As of February 27, 2014, the Company entered into the Eighth Amendment to Loan and Security Agreement, which extended the maturity date of the facility to January 15, 2015. Maximum advances under the SVB Credit Facility are determined based on the composition of the Company's eligible accounts receivable and inventory balances with a facility limit of $625,000. The SVB Credit Facility bears interest at an annual rate equal to the greater of 6.5% or prime plus 2.0%. Based on the Company's accounts receivable and inventory levels at June 30, 2014, as of such date availability as calculated under the terms of the SVB Credit Agreement was approximately $292,000, and no amounts were 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 June 30, 2014, the Company was in compliance with these covenants. The SVB Credit Facility is collateralized by security interests in substantially all of the assets of the Company and is senior to the Founders' Loan (described below).



As of June 30, 2014, there were no amounts drawn under the SVB Credit Facility.

Founders' Loan. On March 24, 2008, the Company entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Lyle A. Berman, James T. Crawford, Arthur L. Lomax and Gehrig H. White (collectively, the "Lenders"), all of whom were founders of PokerTek and members of its Board of Directors at the time. Pursuant to the terms of the Note Purchase Agreement, the Lenders loaned $2.0 million to the Company (the "Founders' Loan"). The Founders' Loan contains no restrictive covenants and is collateralized by security interests in 18 PokerPro systems. Such security interests have been subordinated to the SVB Credit Facility. On April 28, 2014, the Company and Arthur L. Lomax, entered into an Amendment to the Second Amended and Restated 9% Secured Promissory Note (the "Second Amended and Restated Promissory Note"), due December 31, 2016, made by the Company and held by Mr. Lomax (the "Note Modification Agreement"), to amend and restate the acceleration provision of the Second Amended and Restated Promissory Note. As amended, the outstanding principal of and accrued and unpaid interest on the Second Amended and Restated Promissory Note will automatically become immediately due and payable upon a Change in Control Transaction (as defined in the Second Amended and Restated Promissory Note). Prior to the amendment and restatement, the outstanding principal of and accrued and unpaid interest on the Second Amended and Restated Promissory Note would have automatically become immediately due and payable upon the Company's execution of an agreement, including the Merger Agreement (see Note 17 "Merger with Multimedia Games, Inc."), that provides for a Change in Control Transaction. On July 16, 2014, the Company and Arthur L. Lomax entered into the Founders' Loan Payment Deferral Agreement pursuant to which Mr. Lomax has agreed to defer all payments due to him pursuant to the Second Amended and Restated Promissory Note for the period commencing June 1, 2014 through and including December 31, 2014. (See Note 18 "Subsequent Events.") As of June 30, 2014, the carrying value of the Founders' Loan was $217,523 and its approximate fair value was $226,000. For the six month periods ended June 30 2014 and June 30, 2013, the Company made $22,906 and $26,472, respectively, of principal payments in cash and $6,957 and $13,231, respectively, in aggregate interest payments in cash. Loan Agreement with MGAM. On July 16, 2014, the Company and MGAM entered into a Promissory Note Agreement (the "Note Agreement"), pursuant to which MGAM agreed to loan the Company up to $400,000 between July 16, 2014 and December 31, 2014. (See Note 18 "Subsequent Events."). Note 11. Employee Benefit Plan The Company has established a salary deferral plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. The plan allows eligible employees to defer up to 96% of their annual compensation, subject to annual limitations imposed by the Internal Revenue Service pursuant to the authority granted to it under Section 401(k). The Company matches the employee contributions as follows: 100% on the first 3% of the deferred amount and 50% on the next 2% of the deferred amount. For the three months ended June 30, 2014 and 2013, the Company's expenses related to the 401K Plan were $13,945 and $12,215, respectively. For the six months ended June 30, 2014 and 2013, the Company's expenses related to the 401K Plan were $28,995 and $23,742, respectively. Note 12. Shareholders' Equity (See Note 17 "Merger with



Multimedia

Games, Inc.")

Common Stock. There are 40,000,000 shares, no par value, of the Company's common stock ("Common Stock") authorized, of which 9,421,403 and 9,363,434 shares were outstanding as of June 30, 2014 and December 31, 2013, respectively.



Warrants. As of June 30, 2014, the following common stock purchase warrants were outstanding:

20,000 common stock warrants at an exercise price of $2.50 with an expiration

date of March 31, 2015 issued in connection with a private placement in May

2010; and



40,000 common stock warrants at an exercise price of $2.75 with an expiration

date of December 29, 2015 issued in connection with the LPC transaction.

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Preferred Stock. There are 5,000,000 authorized shares of preferred stock, none of which were outstanding as of June 30, 2014 and December 31, 2013.

Stock Incentive Plans. The Company's shareholders have approved stock incentive plans, authorizing the issuance of stock option, restricted stock, restricted stock units ("RSUs") and other forms of equity compensation. Pursuant to the approved stock incentive plans, 232,559 shares remained available for future grant as of June 30, 2014. The Company has historically issued stock options and restricted shares as compensation, although it has the authority to use other forms of equity compensation instruments in the future. Principal assumptions used in determining the fair value of option awards include the following: (a) expected future volatility for the Company's stock price, which is based on the Company's historical volatility, (b) expected dividends, (c) expected term and forfeiture rates, based on historical exercise and forfeiture activity, and (d) the risk-free rate is the rate on U.S. Treasury securities with a maturity equal to, or closest to, the expected life of the options. The assumptions used to determine the fair value of option awards for the periods ended June 30, 2014 and December 31, 2013 were as follows: June 30, December 31, 2014 2013 Expected Volatility 93% % 94% - 97% Expected Dividends 0 0 Expected Term 6 yrs 6 yrs Risk-free Rate 1.64% - 1.68% % 0.82% - 1.60 A summary of Stock Option activity and changes during the six months ended June 30, 2014 is as follows: Weighted Average Aggregate Remaining Instrinsic Shares Exercise Price Contractual Term Value Stock Options Outstanding at December 31, 2013 724,720 $ 4.68 Granted - - Exercised - Forfeited - - Expired - - Outstanding at June 30, 2014 724,720 $ 4.68 5.0 $ (2,435,201 ) Exercisable at June 30, 2014 715,316 $ 4.37 5.1 $ (2,184,281 ) A summary of RSU activity and changes during the period ended June 30, 2014 is as follows: Weighted Average Remaining Contractual Grant Date Restricted Stock Units (RSU's) Shares Term Fair Value Nonvested at December 31, 2013 253,312 $ 189,984 Granted 300,000 408,000 Vested (77,750 ) (61,423 ) Forfeited - Nonvested at June 30, 2014 475,562 3.9 $ 536,622 10



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Note 13. Income Tax Provisions For the three months ended June 30, 2014 and 2013, the Company recognized a tax provision of $0 and $11,939, respectively. For the six months ended June 30, 2014 and 2013, the Company recognized a tax provision of $0 and $46,020, respectively. These provisions are based principally on the Company's estimated foreign income tax withholding liability, which is attributable to revenues generated outside of the United States. The effective rates for the periods ending June 30, 2014 and 2013 differ from the U.S. federal statutory rate principally due to the tax benefit arising from the Company's net operating losses that are fully offset by the valuation allowance established against the Company's deferred tax assets and deferred tax liabilities. Note 14. Related Party Transactions Office Lease. The Company currently leases its office and manufacturing facility from an entity owned and controlled by the Company's President and Vice Chairman of the Board of Directors. The entity purchased the building while the Company was already a tenant. The lease terms were negotiated on an arm's length basis and are consistent with the rent paid by other tenants in the building and comparable market rents in the area. (See Note 16 "Commitments and Contingencies.")



Founders' Loan. The Company has a loan outstanding with a member of the Board. (See Note 10 "Debt." And Note 18 "Subsequent Events.")

Note 15. Segment Information The Company reports segment information based on the "management approach". The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments. Following the Company's exit from its amusement business, the Company's operations are entirely focused on gaming products. Based on the criteria specified in ASC Topic 280, Segment Reporting, the Company has one reportable segment. The results of operations for the amusement products have been reported as discontinued operations for all periods presented. Revenues by geographic area are determined based on the location of the Company's customers. For the three months ended June 30, 2014 and 2013, revenues from customers outside the United States accounted for 31.4% and 28.3% of consolidated revenue, respectively. For the six months ended June 30, 2014 and 2013, revenues from customers outside the United States accounted for 29.6% and 28.5% of consolidated revenue, respectively. For the three and six months ended June 30, 2014 and 2013 the following are the revenues and long-lived assets by geographic area: For Three Months Ended June 30, For Six Months Ended June 30, 2014 2013 2014 2013 Revenue: United States $ 652,207$ 1,149,664$ 1,454,106$ 2,141,371 Other Americas 252,516 374,723 521,191 746,228 Europe 32,730 35,482 65,364 50,632 Other International 13,800 44,354 25,174 57,112 $ 951,253$ 1,604,223$ 2,065,835$ 2,995,343 December 31, June 30, 2014 2013



Long-lived assets, end of period:

United States $ 475,630$ 450,714 Other America's 464,506 718,982 Europe 131,384 157,035 Other International 41,166 36,664 $ 1,112,686$ 1,363,395 11



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Note 16. Commitments and Contingencies Leases. The Company leases its corporate office and manufacturing facility from an entity owned and controlled by the Company's President and Vice Chairman of the Board of Directors. The lease expires on August 31, 2016. (See Note 14 "Related Party Transactions.") Rent expense for the three months ended June 30, 2014 and 2013 was $33,750 and $33,750, respectively. Rent expense recorded for the leased space for the six months ended June 30, 2014 and 2013, was $67,500 and $67,500 respectively. Rent income for the three months ended June 30, 2014 and 2013 was $4,800 and none, respectively. Rent income for the six months ended June 30, 2014 and 2013 was $9,600 and none, respectively.



Legal Proceedings. The Company is subject to claims and assertions in the ordinary course of business. Legal matters are inherently unpredictable and the Company's assessments may change based on future unknown or unexpected events.

The Company is a party to several lawsuits related to the Merger and the transactions contemplated by the Merger Agreement. A description of the lawsuits is included in Note 17 "Merger with Multimedia Games, Inc., Certain Litigation related to Merger."



Note 17. Merger with Multimedia Games, Inc.

On April 29, 2014, the Company entered into the Merger Agreement, with MGAM, and Merger Sub, pursuant to which Merger Sub will merge with and into the Company, and the separate corporate existence of Merger Sub will thereupon cease, and the Company will continue as the surviving corporation and a wholly owned subsidiary of MGAM . The Merger Agreement was unanimously approved by the Board based on the recommendation of the Special Committee that was formed to evaluate and negotiate the terms of a sale of the Company. At the time the Merger becomes effective pursuant to the terms and conditions of the Merger Agreement and under North Carolina law (the "Effective Time"): (a) each share of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time will be converted into and become one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation, (b) each share of common stock of the Company issued and outstanding immediately prior to the Effective Time (other than shares owned by the Company, MGAM or Merger Sub and shares owned by shareholders of the Company who have perfected and not withdrawn a demand for appraisal rights under North Carolina law) will automatically be cancelled and converted into the right to receive $1.35 in cash, without interest (the "Merger Consideration"), and (c) each option outstanding (whether or not then vested or exercisable) that represents the right to acquire shares of Common Stock will be cancelled and terminated whereby the holder of any such option to acquire Common Stock shall receive an amount for each such option equal to the excess, if any, of (i) the Merger Consideration over (ii) the exercise price payable in respect of such share of Common Stock issuable upon exercise of such option. The Company's stockholders approved the Merger on July 24, 2014 at a special meeting of Company's stockholders. The Merger Agreement contains customary representations, warranties and covenants. The consummation of the Merger is subject to customary conditions, including, without limitation, (a) approval by the holders of a majority of the outstanding shares of Common Stock entitled to vote on the Merger and (b) the absence of any law, order, injunction or other legal restraint prohibiting the Merger. Moreover, each party's obligation to consummate the Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of the other party's representations and warranties (subject to customary qualifiers), and (ii) the other party's compliance with its covenants and agreements contained in the Merger Agreement (subject to customary qualifiers). In addition, the obligation of MGAM and Merger Sub to consummate the Merger is conditioned upon (1) certain required consents having been obtained, (2) the receipt of certain approvals from gaming regulators, (3) holders of not more than five percent (5%) of the outstanding shares of Common Stock having exercised their appraisal rights, and (4) there not being any Company Material Adverse Effect (as defined in the Merger Agreement). From the date of the Merger Agreement, subject to certain exceptions, the Company is subject to customary "no-shop" restrictions on its ability to solicit or respond to alternative takeover proposals from third parties, furnish information to and engage in discussions with third parties regarding alternative takeover proposals, recommend an alternative takeover proposal or enter into an agreement with respect to an alternative takeover proposal. The Merger Agreement contains certain termination rights for the Company and MGAM, including the right of the Company under certain circumstances to terminate the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement) and enter into a definitive agreement with respect thereto. Upon termination of the Merger Agreement under specified circumstances, 12



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including termination of the Merger Agreement to accept a Superior Proposal and enter into a definitive agreement with respect thereto, the Company is required to pay MGAM a termination fee of up to $650,000. Upon termination of the Merger Agreement by the Company under certain other specified circumstances, MGAM and Merger Sub are required to pay the Company a termination fee of $500,000. The representations, warranties and covenants made in the Merger Agreement (a) have been made only for purposes of the Merger Agreement, (b) have been qualified by confidential disclosures made to MGAM and Merger Sub in connection with the Merger Agreement, (c) are subject to materiality qualifications contained in the Merger Agreement which may differ from what may be viewed as material by investors, (d) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement and (e) have been included in the Merger Agreement for the purpose of allocating risk between the contracting parties rather than establishing matters as facts. Investors should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or any of its Subsidiaries (as defined in the Merger Agreement) or Affiliates (as defined in the Merger Agreement). Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company's public disclosures. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding the Company that is or will be contained in, or incorporated by reference into, Forms 10-K, Forms 10-Q and other documents that the Company files with the Securities and Exchange Commission ("SEC"). The Board, acting upon the recommendation of the Special Committee, has approved the adoption of the Merger Agreement and consummation of the Merger and recommended adoption of the Merger Agreement and consummation of the Merger by the Company's shareholders. At a special meeting of the Company's shareholders held on July 24, 2014, shareholders approved the Merger and transactions contemplated by the Merger Agreement. (See Note 18 "Subsequent Events.") The Merger is expected to close in calendar year 2014 subject to the fulfillment of the conditions to closing delineated in the Merger Agreement. Certain Litigation related to the Merger. As described in the Definitive Proxy Statement, dated June 16, 2014, under the heading "Proposal I: The Merger - Litigation Related to the Merger," a purported class action complaint on behalf of the Company's shareholders was filed on May 9, 2014 in the General Court of Justice, Superior Court Division in and for Mecklenburg County, North Carolina, Case No. 14-CVS-8300, captioned Robert Simmer, on behalf of himself and all others similarly situated, Plaintiff, v. PokerTek, Inc., Multimedia Games Holding Company, Inc., Multimedia Games, Inc., 23 Acquisition Co., James Crawford, Joe Lahti, Lyle Berman, Lou White and Arthur L. Lomax, Defendants, and a purported amended class action complaint was filed on June 6, 2014 ("Action #1"). A second purported class action complaint on behalf of the Company's shareholders was filed on May 15, 2014 in the General Court of Justice, Superior Court Division in and for Mecklenburg County, North Carolina, Case No 14-CVS-8911, captioned Jeffrey Weber and James Dabord, individually and on behalf of all others similarly situated, Plaintiff, v. PokerTek, Inc., Multimedia Games Holding Company, Inc., Multimedia Games, Inc., 23 Acquisition Co., James Crawford, Joe Lahti, Lyle Berman, Lou White and Arthur L. Lomax, Defendants, and an purported amended class action complaint was filed on June 6, 2014 ("Action #2"). A third purported class action complaint on behalf of the Company's shareholders was filed on May 16, 2014 in the General Court of Justice, Superior Court Division in and for Mecklenburg County, North Carolina, Case No. 14-CVS-9215, captioned Herald J. Stephens, individually and on behalf of all others similarly situated, as Plaintiff, v. Mark D. Roberson, James T. Crawford III, Joseph J. Lahti, Lyle A. Berman, Gehrig H. White, Arthur L. Lomax, PokerTek, Inc., Multimedia Games, Inc., Multimedia Games Holding Company, Inc. and 23 Acquisition Co., Defendants ("Action #3"). A fourth purported class action complaint on behalf of the Company's shareholders was filed on May 19, 2014 in the General Court of Justice, Superior Court Division in and for Mecklenburg County, North Carolina, Case No 14-CVS-9271, captioned Luis Lobo, individually and on behalf of all others similarly situated, as Plaintiff, v. PokerTek, Inc., James Crawford, Joe Lahti, Lyle Berman, Gehrig White, Lee Lomax, Mark Roberson, Multimedia Games, Inc. and 23 Acquisition Co., Defendants, and an purported amended class action complaint was filed on June 6, 2014 ("Action #4"). A firth purported class action and shareholder derivative complaint on behalf of the Company's shareholders was filed on June 9, 2014 in the General Court of Justice, Superior Court Division in and for Mecklenburg County, North Carolina, Case No 14-CVS-10579, captioned Arkady Sandler, individually and on behalf of all others similarly situated, as Plaintiff, v. Joseph J. Lahti, Lyle A. Berman, Gehrig H. White, Arthur L. Lomax, James T. Crawford III, Multimedia Games, Inc. and 23 Acquisition Co., Defendants and PokerTek, Inc., Nominal Defendant ("Action #5").



Actions #1, #2, #3, #4 and #5 are collectively referred to herein as the Actions. On July 8, 2014, the Actions were consolidated into a single action under the caption of Action #5 (the "Consolidated Action").

On July 10, 2014, a substantially similar shareholder action was filed in the United States District Court for the Western District of North Carolina, captioned Clark v. PokerTek, Inc., Case No. 3:14 cv 00380 (W.D.N.C.) (the "Federal Action" and, together with the Consolidated Action, the "Actions"), alleging breaches of fiduciary duty and aiding and abetting thereof and related violations of federal securities laws relating to the Proposed Transaction. The Company has not received service of process in the Federal Action. 13



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The Company believes that the Actions are without merit and that the defendants committed no breach of any duty, aided or abetted any breach or violated any federal securities laws or other laws in connection with the Proposed Transaction. Further, the Company believes no further disclosure was required to supplement the Definitive Proxy Statement under any applicable rule, statute, regulation or law. However, to eliminate the burden, expense and uncertainties inherent in all such litigation, on July 13, 2014, the defendants entered into a memorandum of understanding (the "Memorandum of Understanding") regarding settlement of the Consolidated Action. The Memorandum of Understanding outlines the terms of the parties' agreement in principle to settle and release all claims which were or could have been asserted in the Consolidated Action and the Federal Action. In consideration for such settlement and release, the parties to the Consolidated Action agreed that the Company would make certain supplemental disclosures to the Definitive Proxy Statement, and those disclosures were made in a Current Report on Form 8-K dated July 13, 2014. The Memorandum of Understanding contemplates that the parties will attempt in good faith to agree promptly upon a stipulation of settlement to be submitted to the assigned Judge of the North Carolina Business Court of the General Court of Justice, Superior Court Division, Mecklenburg County, North Carolina for approval at the earliest practicable time. The stipulation will be subject to customary conditions, including confirmatory discovery and approval by the Court, which will consider the fairness, reasonableness and adequacy of the settlement. The parties have also agreed to negotiate in good faith regarding the amount of attorneys' fees, if any, to be paid to Plaintiffs' counsel. Any amount of agreed attorneys' fees in the stipulation is subject to court approval, and in the event there is no agreement on attorneys' fees or Plaintiffs' counsel seeks an award of fees in excess of the negotiated amount then the Company has reserved the right to object to the requested award of attorneys' fees. Under the terms of the proposed settlement, following final approval by the Court, the Consolidated Action will be dismissed with prejudice. There can be no assurance that the parties will ultimately enter into the stipulation or that the Court will approve the settlement even if the parties were to enter into the stipulation. In such event, or if the Merger is not consummated for any reason, the proposed settlement will be null and void and of no force and effect.



The settlement does not affect the amount of merger consideration to be paid to shareholders in connection with the proposed Merger.

Note 18. Subsequent Events

Shareholder Approval of the Merger. On July 24, 2014, at a special meeting of the Company's shareholders, the Company's shareholders approved the Merger Agreement and the Merger contemplated thereby.

Loan Agreement with MGAM. On July 16, 2014, the Company and MGAM entered into the Note Agreement, pursuant to which MGAM agreed to loan up to $400,000 to the Company between July 16, 2014 and December 31, 2014. Any amount borrowed under the Note Agreement accrues interest at the rate of five (5%) percent per annum payable quarterly in arrears. If any amount is not paid when due, such overdue amount shall bear interest at the rate of fifteen (15%) percent per annum. All unpaid principal and interest will be due and payable on March 31, 2015. The Company may prepay the loan in whole or in part at any time without penalty. On July 18, 2014, $250,000 was advanced by MGAM to the Company under this facility. Founders' Loan Payment Deferral Agreement. On July 16, 2014, the Company entered into an agreement (the "Founders' Loan Payment Deferral Agreement") with Arthur L. Lomax, pursuant to which Mr. Lomax has agreed to defer all payments due to him pursuant to the Second Amended and Restated Promissory Note for the period commencing June 1, 2014 through and including December 31, 2014. The deferred amounts will be payable to Mr. Lomax upon the earliest of: (i) the closing of either (a) the Merger contemplated by the Merger Agreement, or (b) the closing of a transaction in connection with a "Superior Proposal" (as defined in the Merger Agreement); or (ii) January 31, 2015. Executive Officer Salary Deferral Agreement. Each of Mark D. Roberson, the Company's chief executive officer and James T. Crawford, the Company's president and a director, have agreed to defer thirty (30%) percent of the compensation payable pursuant to their respective employment agreements with the Company for the period from June 1, 2014 through and including December 31, 2014 until the earliest of: (i) the closing of either (a) the Merger contemplated by the Merger Agreement, or (b) the closing of a transaction in connection with a "Superior Proposal" (as defined in the Merger Agreement); or (ii) January 31, 2015 (the "Executive Salary Deferral Agreement.") Settlement of Certain Litigation Related to the Merger. As described in Note 16. "Commitments and Contingencies" several purported class action complaints on behalf of the Company's shareholders were filed after the announcement of the Merger Agreement. On July 13, 2014, a Memorandum of Understanding was entered into by the Company relating to the settlement of the Consolidated Action. (See Note 17 "Merger with Multimedia Games, Inc. - Litigation Related to the Merger"). 14



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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 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including but not limited to Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations". These forward-looking statements are made under the provisions of The Private Securities Litigation Reform Act of 1995. In some cases, words such as "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or other comparable words identify forward-looking statements. Our actual results, performance or experience may differ materially from those expressed or implied by forward-looking statements as a result of many factors, including our critical accounting policies and risks and uncertainties related, but not limited to: the impact of global macroeconomic and credit conditions on our business and the business of our suppliers and customers, overall industry environment, customer acceptance of our products, delay in the introduction of new products, further approvals of regulatory authorities, adverse court rulings, production and/or quality control problems, the denial, suspension or revocation of permits or licenses by regulatory or governmental authorities, changes in laws and regulations affecting the gaming industry, termination or non-renewal of customer contracts, competitive pressures and general economic conditions and our financial condition, including our ability to maintain sufficient liquidity to operate our business. These and all other material risks and uncertainties known to us are described in more detail under the caption "Risk Factors" in Item 1A of Part I of the annual report on Form 10-K for the year ended December 31, 2013, that we filed on March 21, 2014, as well as other reports that we file from time to time with the Securities and Exchange Commission ("SEC"). As a result of these risks and uncertainties, the results or events indicated by these forward-looking statements may not occur. We caution you not to place undue reliance on any forward-looking statement. Forward-looking statements speak only as of the date they are made and should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that we make in the reports that we file with the SEC that discuss other factors germane to our business.



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

Company Overview and Business Strategy

We develop, manufacture and market electronic table games and related products for casinos, cruise lines, racinos, card clubs and lotteries worldwide. Our products line consists of two primary platforms -- PokerPro and ProCore.

PokerPro is a 10-seat electronic poker table that allows operators to offer cash games, single-table tournaments, and multi-table tournaments with an extensive game library including Texas Hold'em, Omaha, Razz, and Seven Card Stud. Game rules and limits, including blinds, antes, rake structures and house rules, are completely configurable. ProCore is an electronic table game platform that expands on the PokerPro technology and allows multiple house-banked games to be run on a single, efficient, economical platform. The versatility of the ProCore system allows operators to add new game content as it is released. Several variations of blackjack, baccarat, and related side bets are deployed on this platform. Games and house rules can be customized easily to meet property and regulatory requirements, making it an ideal choice for operators looking to add an automated solution to their gaming floor. As of June 30, 2014, our installed base consisted of 2,188 gaming positions worldwide, composed of 2,050 PokerPro and 138 ProCore gaming positions. As of June 30, 2013, our install base consisted of 2,456 gaming positions deployed worldwide composed of 2,300 PokerPro gaming positions, and 156 ProCore gaming positions. 15



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Results of Operations for the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013. Three Months Ended March 31, 2014 2013 Change Revenue

License and service fees $ 934,294$ 1,225,353



(23.8 %)

Sales of systems and equipment 16,959 378,870

(95.5 %) Total revenue 951,253 1,604,223 (40.7 %) Gross profit 686,367 1,238,314 (44.6 %) Percentage of revenue 72.2 % 77.2 % Operating expenses 1,213,147 1,268,328 (4.4 %) Interest expense, net 7,850 9,470 (17.1 %) Income tax provision - 11,939 (100.0 %)



Net loss from continuing operations (534,630 ) (51,423 )

(939.7 %)

Net loss from discontinued operations - -

0.0 % Net loss $ (534,630 )$ (51,423 ) (939.7 %) Revenue. Revenue decreased by 40.7%, to $1.0 million for the three months ended June 30, 2014 as compared to $1.6 million for the three months ended June 30, 2013. The decrease in total revenue was the result of decreases in both monthly license and service fees, as well as a reduction in the sale of systems and equipment.



Revenue from license and service fees decreased 23.8%. This decrease was attributable to the following factors:

We ceased our operations in Ohio in September 2013 due to a change in local

regulatory interpretations;

We began our exit from the Mexico market during the current quarterly period,

as contemplated by the Merger Agreement;

We reduced gaming tables at several under-performing locations in Canada;

One of our U.S. customers elected to purchase its leased equipment in the

prior year;

One of our U.S. customers temporarily removed leased gaming positions in

connection with a facility remodeling project; and

License and service fee revenue from cruise ships increased as compared with

the prior year period, partially offsetting the changes noted above.

Revenue from systems and equipment sales decreased 95.5%. Activity in the current quarterly period consisted primarily of parts sales to existing customers. The prior year period benefited from a one-time increase in revenue from the election of a United States customer to purchase their leased equipment, which increased product sale revenue in the period ended June 30, 2013 and reduced license and service fees in periods subsequent to the sale. Gross profit. Gross profit decreased by 44.6%, to $0.7 million for the three months ended June 30, 2014 from $1.2 million for the three months ended June 30, 2013. Gross profit margins decreased modestly to 72% for the three months ended June 30, 2014, compared to 77% for the three months ended June 30, 2013. Operating expenses. Operating expenses decreased 4.4%, to $1.2 million for the three months ended June 30, 2014 from $1.3 million for the three months ended June 30, 2013. Operating expenses during the current period include $275 thousand of non-recurring legal, advisory and other expenses resulting from activities related to the Company's proposed Merger. Excluding merger-related expenses, operating expenses for the three months ended June 30, 2014 were $938 thousand, a decline of $330 thousand from the prior year period as reductions in product testing fees, travel, shipping and other operational expenses were partially offset by less favorable overhead absorption and by higher state filing fees and miscellaneous taxes. Interest expense, net. Interest expense decreased by 17.1%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The decrease is primarily attributable to reductions in the outstanding principal balance on the Founders' Loan. 16



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Income tax provision. Income tax provision decreased to $0 for the three months ended June 30, 2014, as compared to $12 thousand for the three months ended June 30, 2013. The income tax expenses incurred in the prior year were attributable to withholdings in foreign jurisdictions, which did not occur in the current period. Net loss from continuing operations. Net loss from continuing operations for the three months ended June 30, 2014 increased to $535 thousand compared to $51 thousand for the three months ended June 30, 2013. The increase in net loss from continuing operations was primarily attributable to the reduction in license and service fee revenue and sales of systems and equipment, combined with the incurrence of additional operating expenses related to the merger. Net loss from discontinued operations. We previously completed the disposition of the discontinued operations and had no income or loss from discontinued operations for the three months ended June 30, 2014 and June 30, 2013. We do not expect to realize additional income or loss from discontinued operations in future periods. Net loss. Net loss for the three months ended June 30, 2014 increased to $535 thousand compared to $51 thousand for the three months ended June 30, 2013. The increase in net loss from continuing operations was primarily attributable to the reduction in license and service fee revenue and sales of systems and equipment, combined with the incurrence of additional operating expenses related to the merger. Results of Operations for the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013. Six Months Ended June 30, 2014 2013 Change Revenue License and service fees $ 2,018,175$ 2,586,022 (22.0 %) Sales of systems and equipment 47,660 409,321 (88.4 %) Total revenue 2,065,835 2,995,343 (31.0 %) Gross profit 1,529,446 2,275,884 (32.8 %) Percentage of revenue 74.0 % 76.0 % Operating expenses 2,333,891 2,456,636 (5.0 %) Interest expense, net 16,108 20,013 (19.5 %) Income tax provision - 46,020 (100.0 %) Net loss from continuing operations (820,553 ) (246,785 ) (232.5 %) Net income from discontinued operations 535 (100.0 %) Net loss $ (820,553 )$ (246,250 ) (233.2 %) Revenue. Revenue decreased by 31.0%, to $2.1 million for the six months ended June 30, 2014 as compared to $3.0 million for the six months ended June 30, 2013. The decrease in total revenue was the result of decreases in both monthly license and service fees, as well as a reduction in the sale of systems and equipment.



Revenue from license and service fees decreased 22.0%. This decrease was the result the following factors:

We ceased our operations in Ohio in September 2013 due to a change in local

regulatory interpretations;

We began our exit from the Mexico market during the current quarterly period,

as contemplated by the Merger Agreement;

We reduced gaming tables at several under-performing locations in Canada;

One of our U.S. customers elected to purchase its leased equipment in the

prior year;

One of our U.S. customers temporarily removed leased gaming positions in

connection with a facility remodeling project; and

License and service fee revenue from cruise ships increased as compared with

the prior year period, partially offsetting the changes noted above.

Revenue from systems and equipment sales decreased 88.4%. Activity in the current quarterly period consisted primarily of parts sales to existing customers. The prior year period benefited from a one-time increase in revenue resulting from the election of a U.S. customer to purchase their leased equipment, which increased product sale revenue in the period ended June 30, 2013 and reduced license and service fees in periods subsequent to the sale. 17



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Gross profit. Gross profit decreased by 32.8%, to $1.5 million for the six months ended June 30, 2014 from $2.3 million for the six months ended June 30, 2013. Gross profit margins decreased modestly to 74% for the six months ended June 30, 2014, compared to 76% for the six months ended June 30, 2013. Operating expenses. Operating expenses decreased 5.0%, to $2.3 million for the six months ended June 30, 2014 from $2.5 million for the six months ended June 30, 2013. Operating expenses during the current period include $281 thousand of non-recurring legal, advisory and other expenses resulting from activities related to the proposed Merger. Excluding merger-related expenses, operating expenses for the six months ended June 30, 2014 were $2.1 million, a decline of $404 thousand from the prior year period as reductions in product testing fees, travel, shipping and other operational expenses were partially offset by less favorable overhead absorption and by higher state filing fees and miscellaneous taxes. Interest expense, net. Interest expense decreased by 19.5%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. The decrease is primarily attributable to reductions in the outstanding principal balance on the Founders' Loan. Income tax provision. Income tax provision decreased to $0 for the six months ended June 30, 2014, as compared to $46 thousand for the six months ended June 30, 2013. The income tax expenses incurred in the prior year were attributable to withholdings in foreign jurisdictions, which did not occur in the current period. Net loss from continuing operations. Net loss from continuing operations for the six months ended June 30, 2014 increased to $821 thousand compared to $247 thousand for the six months ended June 30, 2013. The increase in net loss from continuing operations was primarily attributable to the reduction in license and service fee revenue and sales of systems and equipment, combined with the incurrence of additional operating expenses related to the merger. Net loss from discontinued operations. We previously completed the disposition of the discontinued operations and had no income or loss from discontinued operations for the six months ended June 30, 2014 and less than $1 thousand for the six months ended June 30, 2013. We do not expect to realize additional income or loss from discontinued operations in future periods. Net loss. Net loss for the six months ended June 30, 2014 increased to $821 thousand compared to $246 thousand for the six months ended June 30, 2013. The increase in net loss from continuing operations was primarily attributable to the reduction in license and service fee revenue and sales of systems and equipment, combined with the incurrence of additional operating expenses related to the merger.



Liquidity and Capital Resources

We have a history of operating losses and have typically funded our operating costs, research and development activities, working capital investments and capital expenditures associated with our growth strategy with proceeds from the issuances of our common stock and other financing arrangements. In order to finance our operations, we have historically entered into equity transactions to raise capital and also maintained a credit facility, which are described in more detail below and in the notes to our financial statements included elsewhere in this Report.


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