10-Q 1 s22-16368_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
  For the quarterly period ended September 30, 2015  
   
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
  For the transition period __________  to __________  

 

  Commission File Number: 000-52575  
     
  Lightning Gaming, Inc.  
  (Exact name of registrant as specified in its charter)  

 

Nevada   20-8583866
(State or other jurisdiction of incorporation or organization)    (IRS Employer Identification No.)

 

  23 Creek Circle, Boothwyn, Pa 19061  
  (Address of principal executive offices)  
     
  (610) 494-5534  
  (Registrant’s telephone number)  

 

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

 

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

 

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

 

  Large accelerated filer  ¨ Accelerated filer  ¨  
  Non-accelerated filer    ¨ Smaller reporting company  x  

(Do not check if a smaller reporting company) 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,788,474 Voting Common Stock shares as of October 31, 2015; 33,300,000 Nonvoting Common Stock shares as of October 31, 2015; -0- Series A Nonvoting Preferred Capital Stock shares as of October 31, 2015

 

 

1
 

 

 

  TABLE OF CONTENTS
     Page
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative  Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
 
PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 25
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 25

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

 1 Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014 (audited);  
 2 Unaudited Consolidated Statements of Operations for the three months ended September 30, 2015 and 2014;  
 3 Unaudited Consolidated Statements of Operations for the nine months ended September 30, 2015 and 2014;  
 4 Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2015 and 2014;  
 5 Notes to Consolidated Financial Statements.  

 

 

2
 

 

 

 

Item 1. Financial Statements.

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

  

September 30,

2015 

 

December 31,

2014

   (unaudited)  (audited)
           
Assets          
Current Assets          
       Cash  $387,443   $274,547 
Accounts receivable, net   408,767    359,486 
Inventory   164,795    132,561 
Prepaid expenses   153,905    202,503 
Total Current Assets   1,114,910    969,097 
           
Property and Equipment, net   520,157    819,489 
           
Other Assets   8,193    8,193 
License fees, net of accumulated amortization   37,598    95,058 
            
Total Assets  $1,680,859   $1,891,837 
            

(Continued)

 

 

 

 

3
 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

  

September 30,

2015 

 

December 31,

2014

   (unaudited)  (audited)
           
Liabilities and Stockholders' Equity (Deficit)          
Current Liabilities          
       Accounts payable  $130,591   $158,665 
       Accrued expenses   108,866    213,959 
Total Current Liabilities   239,457    372,624 
           
Long Term Debt and Other Liabilities          
       Long term notes payable   —      14,750,000 
Interest payable and other liabilities   —      7,677,826 
Other long term liabilities   58,761    46,313 
Fair value of warrants and convertible feature of long term debt   —      26,945 
Total Long Term Debt and Other Liabilities   58,761    22,501,084 
            
Commitments (Note 6)          
           
Stockholders' Equity (Deficit)          
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares authorized, -0- and 4,500,000 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively   —      4,500 
           
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,916,285 and 4,660,285 shares issued and 4,788,474 and 4,532,474 shares outstanding as of September 30, 2015 and December 31, 2014, respectively   4,917    4,661 
           
Nonvoting common stock: $0.001 par value; authorized 50,000,000 shares; 33,300,000 and -0- shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively   33,300    —   
           
Additional paid in capital   30,348,857    7,633,255 
       Accumulated deficit   (28,990,622)   (28,610,476)
      Treasury stock, 127,811 shares, at cost   (13,811)   (13,811)
Total Stockholders’ Equity (Deficit)   1,382,641    (20,981,871)
           
Total Liabilities and Stockholders’ Equity (Deficit)  $1,680,859   $1,891,837 
            
See Notes to Consolidated Financial Statements          

 

 

 

4
 

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2015 and 2014

 

 

  

September 30,
2015

 

September 30,

2014

   (unaudited)  (unaudited)
Revenues          
       Lease and license fees  $740,500   $927,764 
       Sales of gaming products and parts   171,945    3,080 
Total revenues   912,445    930,844 
           
Costs and operating expenses          
 Cost of products sold   32,426    —   
       Operating expenses   176,420    203,730 
       Research and development   136,271    148,227 
       Selling, general and administrative expenses   546,649    545,414 
       Depreciation and amortization   129,713    184,988 
Total costs and operating expenses   1,021,479    1,082,359 
           
Operating loss   (109,034)   (151,515)
           
Non-operating expense          
       Net interest expense   (309)   (290,164)
Net loss  $(109,343)  $(441,679)
Net loss per common share including Series A Nonvoting shares-basic and diluted  $(0.00)  $(0.05)
Weighted average Series A Nonvoting shares outstanding-basic and diluted   1,760,870    4,500,000 
Weighted average common shares outstanding-basic and diluted   4,717,648    4,652,474 
Weighted average nonvoting common shares outstanding-basic and diluted   20,269,565    —   
           
See Notes to Consolidated Financial Statements          

 

 

 

5
 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2015 and 2014

 

 

  

September 30,
2015

 

September 30,

2014

   (unaudited)  (unaudited)
Revenues          
       Lease and license fees  $2,610,572   $2,739,571 
       Sales of gaming products and parts   230,231    87,031 
Total revenues   2,840,803    2,826,602 
           
Costs and operating expenses          
       Cost of products sold   33,911    24,333 
       Operating expenses   575,183    599,183 
       Research and development   386,194    387,935 
       Selling, general and administrative expenses   1,524,293    1,505,176 
       Depreciation and amortization   412,824    572,846 
Total costs and operating expenses   2,932,405    3,089,473 
           
Operating loss   (91,602)   (262,871)
           
Non-operating expense          
       Net interest expense   (294,967)   (869,836)
       Change in value of warrants   6,424    —   
Net loss  $(380,145)  $(1,132,707)
Net loss per common share including Series A Nonvoting shares-basic and diluted  $(0.03)  $(0.12)
Weighted average Series A Nonvoting shares outstanding-basic and diluted   3,576,923    4,500,000 
Weighted average common shares outstanding-basic and diluted   4,620,152    4,652,474 
Weighted average nonvoting common shares outstanding-basic and diluted   6,830,769    —   
           
See Notes to Consolidated Financial Statements          

 

 

 

 

6
 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2015 and 2014

 

 

  

September 30,
2015

 

September 30,

2014

   (unaudited)  (unaudited)
       
Net Cash Used in Operating Activities  $(15,177)  $(7,513)
           
Cash Flows From Investing Activities          
       Purchase of equipment   (82,028)   (316,756)
       Proceeds from sale of equipment   217,266    83,000 
       (Increase) decrease in license fees   (7,915)   4,746 
           
Net Cash Provided by (Used in) Investing Activities   127,323    (229,010)
           
Cash Flows From Financing Activities          
        Issuance of common stock   750    —   
           
Net Cash Provided by Financing Activities   750    —   
           
Net Increase (Decrease) in Cash   112,896    (236,523)
           
Cash - Beginning of period   274,547    462,200 
           
Cash - End of period  $387,443   $225,677 
           
Supplemental Disclosure of Non-Cash Financing Activities:          
           
Non-cash transactions from conversion of debt, accrued interest and warrants to stockholders’ equity          
Issuance of common stock  $181   $—   
Issuance of nonvoting common stock   28,800    —   
Extinguishment of loan principal   (14,750,000)   —   
Extinguishment of accrued interest on loans   (7,972,795)   —   
Conversion of warrants   (20,521)   —   
Contribution of additional paid in capital from conversion   22,714,335    —   
   $—     $—   
           
Inventory transferred to fixed assets  $—     $15,370 
           
See Notes to Consolidated Financial Statements          

 

 

 

 

7
 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015

 

Note 1.   Nature of Business and Summary of Significant Accounting Policies

 

Nature of Business:

 

Lightning Gaming, Inc. (the “Company”) was incorporated on March 1, 2007 and on January 29, 2008, completed a merger with Lightning Poker, Inc. (“Lightning Poker”) which became a wholly owned subsidiary of the Company.

 

Lightning Poker was formed to manufacture and market a fully automated, proprietary electronic poker table (the “Poker Table”) to commercial and tribal casinos, card clubs, and other gaming and lottery venues. Lightning Poker’s Poker Table is designed to improve economics for casino operators while improving overall player experience.

 

In 2008, the Company, as the sole member, established Lightning Slot Machines, LLC (“Lightning Slots”) through which it commenced the design, manufacture, marketing, sale and operation of video slot machines to customers in various gaming jurisdictions. The current slot machine products are:

 

 

·Popeye · Around the World in 80 Days
·Popeye’s Bonus Voyage · Garfield
·Popeye’s Seven Seas · Jungle Book
·Blondie’s Penny Bonanza · Golden Egg
·Hagar the Horrible · Just Jackpots
·Beetle Bailey · Duck Dynamite
·Pink Panther · Candy Cash
·Swamp Fever · Olive Oyl’s Jumbo Stacks
·Vampires Fortune · Jumbo Fish Stacks
·Penny Palooza · Lightning Lotto
·Snow White · Slotto
·Fins N Wins · Year of the Horse

  

Our gaming products feature advanced graphics and engaging games based on licensed, well-recognized brands, cartoon characters and proprietary non-branded themes.

 

Our consolidated financial statements include the accounts of the Company, including Lightning Poker and Lightning Slots. All inter-company accounts and transactions have been eliminated in consolidation.

 

Basis of Presentation:

 

The unaudited interim financial statements contained herein should be read in conjunction with the Company’s annual report on Form 10-K filed on March 27, 2015 (“Form 10-K”). The accompanying interim financial statements are presented in accordance with the requirements of Article 8.03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, accordingly, do not include all the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) with respect to annual financial statements. The interim consolidated condensed financial statements have been prepared in accordance with the Company’s accounting practices described in the Form 10-K but have not been audited. In management’s opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods presented. The balance sheet data as of December 31, 2014 were derived from the Company’s audited financial statements, but do not include all disclosures required by GAAP. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the entire year.

 

8
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 1.  Nature of Business and Summary of Significant Accounting Policies (Continued)

 

Basis of Presentation (Continued)

 

The accompanying financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. The Company has limited capital resources and the Company has experienced net operating losses and negative cash flows from operations since inception. Conditions have been improving and the Company expects these conditions to continue to improve, however the generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to obtain the regulatory approvals required to distribute its products and successfully market them to more casinos. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flows to support our operations during the remainder of the year and through 2016, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all.

 

In addition, the Company’s ability to sell or lease its products on a large scale may require additional financing for working capital. There is no assurance that the Company would be able to obtain such financing, if at all, on reasonable terms. If the Company needs additional funding and is unable to obtain it, the Company’s financial condition would be adversely affected. In that event, the Company would have to postpone or discontinue planned operations and projects. The Company’s continuance as a going concern is dependent upon these factors, among others. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

There were no material changes during the most recent fiscal quarter in the Company’s significant accounting policies described in the Form 10-K.

 

The allowance for doubtful accounts at September 30, 2015 and December 31, 2014 was $10,000 and $4,000, respectively.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board issued converged guidance on recognizing revenue from contracts with customers. The new guidance removes inconsistencies in current revenue recognition requirements, provides a framework for addressing revenue issues, improves comparability of revenue recognition across industries, entities and jurisdictions, and provides more useful information to users of financial statements through improved disclosure requirements. This guidance replaces the numerous GAAP revenue recognition requirements that are industry specific and establishes the principles to report about the nature, timing, and uncertainty of revenue from contracts with customers to users of financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the Company is assessing the impact it will have on our financial statements.

 

In August 2014, the FASB issued guidance regarding disclosures in the presentation of financial statements when the uncertainty exists about an entity’s ability to continue as a going concern. The update provides guidance in GAAP about management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Along with requiring management’s assessment of the entity’s ability to continue as a going concern, the guidance provides:

 

·         a definition for the term “substantial doubt”;

·         requires an evaluation every reporting period including interim periods;

·         provides principles for considering the mitigating effect of management’s plans;

 

9
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 1.  Nature of Business and Summary of Significant Accounting Policies (Continued)

 

Recent Accounting Pronouncements (Continued)

 

·         requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans;

·         requires an express statement and other disclosures when substantial doubt is not alleviated; and

·         requires an assessment for a period of one year after the date that the financial statements are issued.

 

The amendment is effective for the annual and interim periods ending after December 15, 2016. The Company is assessing the impact this guidance may have on our financial statements.

 

In November 2014, the FASB issued an amendment under the derivatives and hedging topic. The amendment clarifies how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. In evaluating the nature of a host contract, the amendment states that an entity should assess the substance of the relevant terms and features when considering how to weight those terms and features. Specifically, the assessment of the substance should include consideration of the characteristics of the terms and features themselves, the circumstances under which the hybrid financial instrument was issued, and the potential outcomes of the hybrid financial instrument. The amendment is effective for the fiscal years and interim periods beginning after December 15, 2015. The Company is assessing the impact this guidance may have on our financial statements.

 

In January 2015, the FASB issued an update under the income statement topic, eliminating from GAAP the concept of an extraordinary item which required an entity to separately classify, present and disclose extraordinary events and transactions. Although the separate classification has been eliminated, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendment is effective for the fiscal years and interim periods beginning after December 15, 2015. The guidance will be applied prospectively to transactions and events meeting the criteria.

 

In April 2015, the FASB issued an update under the interest topic, requiring the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by this update. The amendment is effective for the fiscal years and interim periods beginning after December 15, 2015. The Company is assessing the impact this guidance may have on our financial statements.

 

In April 2015, the FASB added guidance to the Intangibles – Goodwill and Other – Internal-Use Software subtopic in order to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The update states that when a cloud computing arrangement includes a software license, the customer should account for a software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendment is effective for the fiscal years and interim periods beginning after December 15, 2015. The Company is assessing the impact this guidance may have on our financial statements.

 

In July 2015, the FASB issued an update under the inventory topic which more clearly articulates the requirements for the measurement and disclosure of inventory, stating that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in this update do not apply to inventory that is measured using last-in, first-out (“LIFO”) or the retail inventory

 

10
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 1.  Nature of Business and Summary of Significant Accounting Policies (Continued)

 

Recent Accounting Pronouncements (Continued)

 

method. The amendment is effective for the fiscal years beginning after December 15, 2016 and interim periods beginning after December 15, 2017. The Company is assessing the impact this guidance may have on our financial statements.

 

 

Note 2.  Inventory

 

Inventory consists of the following:

  

September 30,

2015

 

December 31,

2014

Finished products  $7,151   $1,685 
Raw materials and work in process   157,644    130,876 
Inventory  $164,795   $132,561 

 

 

Note 3.  Property and Equipment

 

Property and equipment consist of the following:

  

September 30,

2015

 

December 31,

2014

Equipment, principally gaming equipment under lease  $4,139,573   $4,213,187 
Delivery truck   28,140    28,140 
Furniture and fixtures   90,524    75,177 
Leasehold improvements   91,794    91,794 
Property and equipment   4,350,031    4,408,298 
Less accumulated depreciation   (3,829,874)   (3,588,809)
Property and equipment, net  $520,157   $819,489 

 

Note 4.  License Fees

 

License fees consist of the following:

  

September 30,

2015

 

December 31,

2014

Purchased licenses  $350,420   $342,505 
Less accumulated amortization   (312,822)   (247,447)
License fees, net  $37,598   $95,058 

 

Purchased licenses are amortized over 3 years.

 

 

Note 5.  Debt

 

Notes payable, long term consists of the following:

   Warrants 

September 30,

2015

 

December 31,

2014

                
The Co-Investment Fund II, L.P. (“CI II”)   —     $—     $14,750,000 
                

 

11
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 5.  Debt (Continued)

 

On August 6, 2015, the Company entered into an agreement with CI II in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including warrants to purchase a maximum of 12,151,385 shares of Company stock, as well as the 4,500,000 shares of Preferred Series A Nonvoting Capital Stock then outstanding, were converted into 181,000 shares of Voting Common Stock, par value $0.001, and 33,300,000 shares of Nonvoting Common Stock, par value $0.001, of the Company. Upon the conversion, all notes, loans, accrued interest, and warrants due to CI II were terminated in their entirety and all obligations were extinguished.

 

Substantially all of the Company’s assets had been pledged as collateral on debt and all of the notes were due on June 30, 2017 with interest at 8% on each note payable at maturity. In May 2015, the lender agreed to suspend the accrual of interest on all of the notes outstanding, effective April 1, 2015, in anticipation of converting its debt and related obligations to equity in the transaction described above.

 

See Note 7, Stockholders’ Equity (Deficit), and Note 9, Related Party Transactions, for more information on debt and warrant transactions.

 

Note 6. Commitments

In November 2009, the Company entered into a lease agreement for its corporate offices which became effective in January 2010 for a term of sixty-seven months. In September 2014, the lease was amended to include the following: 1) an extension of the lease term to February 28, 2021; 2) modification of the minimum annual and monthly rents for the extended lease term; 3) a rent abatement period of six months commencing October 1, 2014; and 4) an option to extend the term for a period of five years.

 

Rental expense is recognized on a straight-line basis over the life of the lease and is recorded as a deferred rent obligation during the abatement period. The deferred rent is reduced by the difference between the rent due and the straight-line expense upon commencement of the rental payments. Rental expense under this lease for the three months ended September 30, 2015 and 2014 was $34,475 and $34,330, respectively. Rental expense under this lease for the nine months ended September 30, 2015 and 2014 was $105,156 and $99,432, respectively.

 

Future minimum lease payments are as follows:

 

  Year Ending December 31,   Amount  
  2015   $ 24,028  
  2016     96,914  
  2017     99,337  
  2018     101,821  
  2019     104,366  
  2020 and thereafter     125,099  
      $ 551,565  

 

The Company routinely enters into license agreements for the use of intellectual properties and technologies. These agreements generally provide for royalty advances and license fee payments when the agreements are signed and minimum commitments which are cancelable in certain circumstances.

 

In October 2009, the Company entered into an exclusive license agreement with Hearst Holdings, Inc. and King Features Syndicate Division to use the brands POPEYE and related family of characters in gaming devices distributed worldwide excluding the United Kingdom and Japan. The initial term of the agreement was for one year with the Company’s right to extend the agreement for eight additional one-year terms upon payment of minimum royalties. The Company paid the minimum royalties and extended the term of the agreement to December 2013. In April

 

12
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 6. Commitments (Continued)

 

2013, the Company was granted the right to sublicense the POPEYE brand for distribution to bar and salon customers only in Spain for the remainder of the renewal term. In December 2013, the Company and Hearst Holdings entered into a second renewal agreement extending the license and sublicense renewal term from January 1, 2014 to December 31, 2016. The extension agreement provides the Company the right to extend the agreement for six additional renewal terms upon the payment of minimum royalties during the renewal period.

 

In June 2011, the Company entered into an exclusive license agreement with MGM/Brandegenuity, LLC to use the images of the Pink Panther and related family of characters in gaming devices distributed in the United States and Canada. The initial term of the agreement was for three years with the Company’s right to extend the agreement for an additional five years upon payment of minimum royalties. The agreement has expired and all royalty obligations have been paid in full.

 

In June 2011, the Company entered into a license agreement with Hearst Holdings, Inc. to use the brand Blondie and related family of characters in gaming devices distributed worldwide. The initial term of the agreement was for two years with the Company’s right to extend the agreement for eight additional one-year terms upon payment of minimum royalties. The Company and Hearst Holdings entered into a renewal agreement extending the renewal term from June 1, 2013 to December 31, 2015.

 

In November 2011, the Company entered into a license agreement with Hearst Holdings, Inc. to use the brand Beetle Bailey and related family of characters in gaming devices distributed worldwide. The initial term of the agreement was for two years with the Company’s right to extend the agreement for eight additional one-year terms upon payment of minimum royalties. The Company and Hearst Holdings entered into a renewal agreement extending the renewal term from January 1, 2014 to December 31, 2015.

 

In March 2013, the Company entered into a license agreement with Hearst Holdings, Inc. to use the brand Hagar the Horrible and related family of characters in gaming devices distributed worldwide. The initial term of the agreement ran from April 1, 2013 to June 30, 2015. The Company will have the right to extend the agreement for eight additional one-year terms upon payment of $50,000 in minimum royalties. The agreement is currently on a month-to-month basis.

 

In October 2014, the Company entered into a license agreement with Paws, Inc. to use the brand Garfield and associated family of characters in gaming devices distributed worldwide, except in the embargo countries of Cuba, Iran and Sudan. The initial term of the agreement runs from December 1, 2014 to November 30, 2017 and is subject to a guaranteed minimum royalty of $75,000. In December 2014, the Company paid $25,000 as a non-refundable advance against the guaranteed royalty with an additional $25,000 payable before November 1, 2015 and another $25,000 payable before November 1, 2016. The guaranteed advanced payments are recoupable out of royalties earned on the license.

 

In November 2014, the Company entered into a license agreement with Hearst Holdings, Inc. for the worldwide distribution of gaming devices using Flash Gordon and associated family of characters. The initial term of the agreement runs from November 1, 2014 to October 31, 2017 with royalties based on a percentage of revenues earned on the license, payable on a quarterly basis commencing January 31, 2016.

 

At September 30, 2015, the Company had total license fee commitments and advances made as follows:

    

Minimum

Commitments

 
Total royalty and license fee commitments  $81,250 
Advances made   (31,250)
Potential future payments  $50,000 

 

13
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 6. Commitments (Continued)

 

As of September 30, 2015, the Company estimates that potential future royalty payments will be as follows:

Year ending December 31, 

Minimum

Commitments

 2015   $25,000 
 2016    25,000 
 Potential future payments   $50,000 

 

 

Note 7.  Stockholders’ Equity (Deficit)

 

On July 27, 2015, the Company amended its Articles of Incorporation increasing the authorized number of shares of Common Stock to 150 million, creating a new class of stock called Nonvoting Common Stock, and authorizing the issuance of up to 50 million shares of Nonvoting Common Stock.

 

On August 6, 2015, the Company entered into an agreement with CI II in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including warrants to purchase a maximum of 12,151,385 shares of Company stock, as well as the 4,500,000 shares of Preferred Series A Nonvoting Capital Stock then outstanding, were converted into 181,000 shares of Voting Common Stock and 33,300,000 shares of the newly issued Nonvoting Common Stock of the Company. Upon the conversion, all notes, loans, accrued interest, and warrants due to CI II were terminated in their entirety and all obligations were extinguished.

 

Stock Option Plan: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants, and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "Stock Plan") having substantially the same terms. The options are granted at the discretion of the Board of Directors and, at December 31, 2014, the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each option will be determined by the Board of Directors at the time the option is granted, but in no event will be less than 100% of the fair market value of the common stock at the time of grant. Options granted will not be exercisable after 10 years from the grant date. Options generally vest at 20% per year starting from the grant date and are fully vested after five years. The options can be exercised in partial or full amounts upon a change in control and at such other times as specified in the award agreements.

 

A summary of option transactions in 2015 is as follows:

  

Shares

 

 

Weighted

Average

Exercise Price

Outstanding at December 31, 2014   1,198,000   $1.64 
Options granted   —      —   
Options exercised   —      —   
Options cancelled   —      —   
Options outstanding at September 30, 2015   1,198,000   $1.64 
Options available for grant under the Stock Plan at September 30, 2015   1,302,000      

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based upon publicly traded companies with characteristics similar to those of the Company. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that

 

 

 

14
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 7.  Stockholders’ Equity (Deficit) (Continued)

 

Stock Option Plan (Continued)

 

options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted during the nine months ended September 30, 2015.

 

Stock-based compensation expense is recognized in the statement of operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures. Compensation expense related to stock options for the three months ended September 30, 2015 and 2014 was $84 and $477, respectively. For the nine months ended September 30, 2015 and 2014, compensation expense related to stock options was $591 and $5,671, respectively.

 

The following table summarizes information with respect to stock options outstanding at September 30, 2015:

  

Options Outstanding   Vested Options
 
 
 
 
Number
Weighted
Average
Remaining
Contractual
Life (Years)
 
Weighted
Average
Exercise
Price
 
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
 
Number
 
Weighted
Average
Contractual
Term (Years)
 
Weighted
Average
Exercise
Price
 
 
Aggregate
Intrinsic
Value
1,198,000 2.2 $1.64 -    1,198,000  2.2 $1.64 -

 

 

 

The following table summarizes information with respect to stock options outstanding at December 31, 2014:

  

Options Outstanding   Vested Options
 
 
 
 
Number
Weighted
Average
Remaining
Contractual
Life (Years)
 
Weighted
Average
Exercise
Price
 
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
 
Number
 
Weighted
Average
Contractual
Term (Years)
 
Weighted
Average
Exercise
Price
 
 
Aggregate
Intrinsic
Value
1,198,000 3.0 $1.64 -    1,192,000  3.0 $1.63 -

  

As of September 30, 2015, all compensation cost related to share-based compensation arrangements granted under the Stock Plan had been fully recognized.

 

Warrants:  In accordance with the loans obtained by the Company, the lender previously held warrants to purchase 12,151,385 shares of the Company’s common stock at a price of $1.00 per share, expiring at various times from April 2016 through October 2019. The purchase price was subject to adjustment from time to time pursuant to the respective provisions of the warrant agreements. The Company calculated the value of warrants at the time of issuance using a Binomial Pricing Model. 

 

On August 6, 2015, the Company entered into an agreement with CI II in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including the warrants described above, as well as the 4,500,000 shares of Preferred Series A Nonvoting Capital Stock then outstanding, were converted into 181,000 shares of Voting Common Stock, par value $0.001, and 33,300,000 shares of Nonvoting Common Stock, par value $0.001, of the Company.

 

 

 

15
 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 7.  Stockholders’ Equity (Deficit) (Continued)

 

Warrants (Continued) 

 

The following table is a summary of the Company’s warrant activity for the nine months ended September 30, 2015:

 

   Warrants
Outstanding
  Weighted
Average
Exercise Price
           
Outstanding at December 31, 2014   12,151,385   $1.00 
Warrants granted   —      —   
Warrants exercised   —      —   
Warrants terminated   12,151,385    1.00 
Warrants outstanding at September 30, 2015   —     $— 

 

The following table summarizes information with respect to warrants outstanding at December 31, 2014:

 

Warrants Outstanding   Vested Warrants
Number Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price

Aggregate
Intrinsic
Value

Number
Weighted
Average
Exercise
Price

Aggregate
Intrinsic
Value
12,151,385 1.7 $1.00 -   12,151,385 $1.00 -

 

The fair value of each warrant is estimated using the Binomial pricing model. The following assumptions were used to determine the fair value of the options prior to their termination on August 6, 2015:

 

    2015  
       
Weighted average volatility   40.7 %  
Expected dividend yield   -    
Expected term (in years)   1.1    
Weighted average risk free interest rate   .4 %  

 

The changes in Level 3 liabilities measured at fair value on a recurring basis are summarized as follows:

 

   Fair Value of
Debt
Conversion Feature
  Fair Value of
Warrants
Balance December 31, 2014  $—     $26,945 
Net change in fair value   —      (6,424)
Warrants terminated   —      (20,521)
Balance September 30, 2015  $—     $—   

 

 

 

 

16
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 8.  Income Taxes

 

The Company recognizes and measures deferred income tax benefits and liabilities based on the likelihood of their realization in future years. A valuation allowance must be established to reduce deferred income tax benefits if it is more likely than not that a portion of the deferred benefits will not be realized.

 

As a result of the recalculation of deductible interest for tax purposes, the Company has available, for federal and state income tax purposes, net operating loss (“NOL”) carryforwards of approximately $24,843,000, which expire at various times through 2035. The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods. The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur.

 

As a result of the cancellation of debt and accrued interest on debt on August 6, 2015, the Company will recognize an attribute reduction of the NOL carryforward effective January 1, 2016 of approximately $11,683,000, reducing the NOL carryforward available as of that date to $13,160,000. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the current financial statements.

 

 

Note 9.  Related Party Transactions

 

In October 2014, the Company borrowed $250,000 from CI II to fund the purchase of twenty-five slot machine cabinets and component parts. Prior to the debt conversion on August 6, 2015 as described below, the note was due on June 30, 2017 together with interest at the rate of 8% per annum. The note was convertible into Nonvoting Stock at $1.00 per share at the discretion of the lender. A warrant to purchase 250,000 shares of common stock was issued concurrently with the note.

 

On December 19, 2014, Stewart J. Greenebaum, LLC (“Greenebaum”) sold all of its legal rights, title and interest in and to the stock, notes, including all accrued interest thereon, and warrants held with respect to the Company as of that date to CI II. Among the items transferred were 1,500,000 shares of Series A Nonvoting capital stock, notes of $1,000,000 in principal including accrued interest, convertible notes of $2,000,000 in principal including accrued interest, and warrants to purchase 2,500,000 shares of common stock at $1.00 per share.

 

In May 2015, the lender agreed to suspend the accrual of interest on all of the notes outstanding, effective April 1, 2015, in anticipation of entering into an agreement with the Company to convert its debt outstanding into equity. On August 6, 2015, the Company entered into an agreement with CI II in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including warrants to purchase a maximum of 12,151,385 shares of Company stock, as well as the 4,500,000 shares of Preferred Series A Nonvoting Capital Stock then outstanding, were converted into 181,000 shares of the Company’s Common Stock, par value $0.001 per share, and 33,300,000 shares of the Company’s Nonvoting Common Stock, $0.001 par value per share. Upon the conversion, all notes, loans, accrued interest, and warrants due to CI II were terminated in their entirety and all obligations were extinguished.

 

During the three months ended September 30, 2015 and 2014 interest expense on all of the loans, including those transferred from Greenebaum to CI II as described above, amounted to $312 and $290,164, respectively. Interest on the loans from CI II was $294,970 and $869,836 for the nine months ended September 30, 2015 and 2014, respectively. During 2014, the Company made no principal or interest payments on those loans and, on August 6, 2015, the loans were converted into equity in the transaction as described above.

 

17
 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)

 

Note 10. Concentration of Risk – Major Customers

 

The Company generated approximately 15% of its revenue from its top three customers for the nine months ended September 30, 2015 and 13% of its revenue from its top three customers for the nine months ended September 30, 2014.

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

Throughout this report we make “forward-looking statements,” as that term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include the words “may,” “will,” “could,” “would,” “likely,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “project” and “anticipate” or the negative of such terms and similar words and include all discussions about our ongoing or future plans, objectives or expectations.

 

We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of those safe-harbor provisions. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. You should read this report completely and with the understanding that actual future results may be materially different from what we currently expect.  We do not plan to update forward-looking statements unless applicable law requires us to do so, even though our situation or plans may change in the future. 

 

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section or elsewhere in this report. In light of these and other risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. Factors that might cause our actual results to differ from our expectations, might cause us to modify our plans or objectives, or might affect our ability to meet our expectations include, but are not limited to:  the severe economic downturn that the gaming industry is suffering; the dramatic decline in national and global economic conditions; the tightening of credit in financial markets generally and the particularly severe tightening of them for the gaming industry, which may adversely affect our ability to raise funds through debt or equity financing, and may also adversely affect the ability of our customers to purchase our product and services; our ability to obtain additional gaming licenses; fuel price increases; legislative/regulatory changes; competition; changes in generally accepted accounting principles; and fluctuations in foreign currency exchange rates. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the Securities and Exchange Commission (“SEC”).

 

18
 

 

 

The information contained in this section has been derived from our financial statements and should be read together with the financial statements and related notes contained elsewhere in this report.

 

Overview

 

We were formed to develop and market our Poker Table, which is an electronic poker table that provides a fully automated table gaming experience without a dealer in casinos and card rooms in regulated jurisdictions worldwide. In 2009, we commenced the design, manufacture, marketing, sale and operation of video slot machines to customers in various gaming jurisdictions.

 

The current products are: 

 

·Popeye · Around the World in 80 Days
·Popeye’s Bonus Voyage · Garfield
·Popeye’s Seven Seas · Jungle Book
·Blondie’s Penny Bonanza · Golden Egg
·Hagar the Horrible · Just Jackpots
·Beetle Bailey · Duck Dynamite
·Pink Panther · Candy Cash
·Swamp Fever · Olive Oyl’s Jumbo Stacks
·Vampires Fortune · Jumbo Fish Stacks
·Penny Palooza · Lightning Lotto
·Snow White · Slotto
·Fins N Wins · Year of the Horse

 

When we expanded our products to include slot machines, we embarked on an initiative to market our slot machines to Native American jurisdictions as well as the commercial casino marketplace and cruise lines. Our gaming products feature advanced graphics and engaging games and are based on licensed, well-recognized brands, cartoon characters and proprietary non-branded themes.

 

Our Poker Table is designed to increase revenue and security while helping to reduce the labor costs associated with poker play. Our Poker Table achieves the goal of increasing revenue by allowing a larger number of hands to be played per hour, increasing the “rake” or per-hand fee collected by the operator commensurately. The elimination of a live dealer also reduces labor costs and permits more tables to be operational in jurisdictions where skilled poker dealers are in short supply. In 2008, we developed a newer version of the Poker Table, which eliminated the need for a separate, stand-alone cashless accounting system. The newer version allows for cash management at the Poker Table.

 

Our slot machines are placed into the market using a daily lease model or a revenue sharing model. We have 190 slot machines out on lease or revenue share in 47 different casinos and cruise ships. As of October 31, 2015, we have sold or leased 62 newer version Poker Tables to domestic and international casinos, card rooms, and cruise ships.

 

We are registered as an approved vendor to distribute products to gaming venues located in 16 state and Canadian province jurisdictions.

 

19
 

 

 

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

 

(All amounts rounded to the nearest $1,000)

 

Revenues

 

The Company’s revenues for the three months ended September 30, 2015 were $912,000 compared to $931,000 for the comparable prior year period. The decrease in revenues was due to the decrease in lease revenues received from both our slot machines and Poker Tables which was mitigated by the increase in sales of gaming products, namely slot machines.

 

Sales of slot machines increased by $169,000 to $172,000 for the three months ended September 30, 2015 as compared to $3,000 for the three months ended September 30, 2014. This increase was due to the establishment and implementation of an aggressive for-sale market plan using reduced cost cabinets acquired in the second quarter of 2015 to offset the reduction in the leased install base during the quarter.

 

Lease and license fees decreased by $187,000 (20%) to $741,000 for the three months ended September 30, 2015 as compared to $928,000 for the three months ended September 30, 2014. This decrease was as a result of the Poker Table sold in February of 2015 that was previously leased and the expiration of other Poker Table leases, in addition to the reduction of leased slot machines as a result of pressure for our casino customers to reduce lease expense and cut operating costs experienced during the quarter.

 

Cost of Products Sold

 

For the three months ended September 30, 2015, cost of products sold increased by $32,000 (100%) as compared to $0 for the three months ended September 30, 2014. This increase is a direct result of the 11 reduced-cost cabinet slot machine units sold under the for-sale marketing plan. Gross margin on the slot machine sales was $140,000 for the three months ended September 30, 2015 versus $3,000 for the three months ended September 30, 2014.

 

Operating Expenses

 

Operating expenses decreased by $28,000 to $176,000 for the three months ended September 30, 2015, from $204,000 for the three months ended September 30, 2014 as a result of the elimination of the lease commissions on the sold and terminated Poker Table leases and lower freight costs as a result from switching to a carrier with a lower per-load cost and a reduction in the number of units transported.

 

Research and Development Expenses

 

Research and development expenses decreased by $12,000 to $136,000 for the three months ended September 30, 2015, from $148,000 for the three months ended September 30, 2014. Research and development expenses are primarily related to the development of new gaming equipment themes and technology and consist mainly of payroll and related expenses for programmers and graphic artists and the costs to acquire new brands. This decrease was the result of the reduction in payroll and payroll tax and benefit related costs due to the shift of the game designer position from a full-time employee to a part-time subcontractor. In addition, the guaranteed royalties associated with new brands acquired in 2014 were written off as development costs until the brand commenced the generation of revenue in 2015, at which time the royalties were expensed as operating costs.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $2,000 to $547,000 for the three months ended September 30, 2015, from $545,000 for the three months ended September 30, 2014. This increase was the net effect of additional costs associated with the Company’s participation in an annual gaming industry trade show offset by the reduction in lab costs associated with the testing of new game themes experienced during the quarter.

 

 

20
 

 

 

Depreciation and Amortization

 

Depreciation and amortization decreased by $55,000 to $130,000 for the three months ended September 30, 2015 from $185,000 for the three months ended September 30, 2014. This decrease was from assets built and placed in gaming venues in prior years that are now fully depreciated.

 

Net Interest Expense

 

Net interest expense decreased by $290,000 to $0 for the three months ended September 30, 2015 from $290,000 for the three months ended September 30, 2014. This decrease was as a result of the agreement by the lender to discontinue the accrual of interest effective April 1, 2015, and the conversion of the lender’s debt into stockholders’ equity of the Company in August 2015.

 

 

 

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

 

Revenue

 

The Company’s revenues for the nine months ended September 30, 2015 were $2,841,000 compared to $2,827,000 for the comparable prior year period, an increase of $14,000 or 1%. The increase was the net result of the increase in sales of slot machine gaming products during the year of $143,000 offset by the decrease in lease and license fees of $129,000.

   

Cost of Products Sold

 

For the nine months ended September 30, 2015, cost of products sold increased $10,000 to $34,000 from $24,000 for the nine months ended September 30, 2014. This increase was due to the increase in the slot machine units sold during the year. As a result of the reduced-cost cabinets for the slot machines sold, gross margin on units sold increased $134,000 to $196,000 or 85% for the nine months ended September 30, 2015 from $62,000 or 72% for the nine months ended September 30, 2014.

 

Operating Expenses

 

Operating expenses decreased $24,000 to $575,000 for the nine months ended September 30, 2015, from $599,000 for the nine months ended September 30, 2014. The decrease is primarily the result of the elimination of royalties from expired license contracts.

 

Research and Development Expenses

 

Research and development expenses decreased by $2,000 to $386,000 for the nine months ended September 30, 2015, from $388,000 for the nine months ended September 30, 2014. Research and development expenses are related to the development of gaming equipment and consist mainly of payroll and related expenses for programmers and graphic artists and the costs to acquire new brands. This decrease was the result of the reduction in payroll and payroll tax and benefit related costs due to the shift of the game designer position from a full-time employee to a part-time subcontractor.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $19,000 to $1,524,000 for the nine months ended September 30, 2015, from $1,505,000 for the nine months ended September 30, 2014. This increase was the net effect of additional costs associated with the Company’s participation in an annual gaming industry trade show offset by the reduction in lab costs associated with the testing of new game themes.

   

 

 

21
 

 

Depreciation and Amortization

 

Depreciation and amortization decreased $160,000 from $573,000 for the nine months ended September 30, 2014 to $413,000 for the nine months ended September 30, 2015. This decrease was from assets built and placed in gaming venues in prior years that are now fully depreciated.

 

Net Interest Expense

 

Net interest expense decreased $575,000 from $870,000 for the nine months ended September 30, 2014 to $295,000 for the nine months ended September 30, 2015. This decrease was as a result of the agreement by the lender to discontinue the accrual of interest effective April 1, 2015, and the conversion of the lender’s debt into stockholders’ equity of the Company in August 2015.

 

Liquidity and Capital Resources

      

Although we have incurred net losses since inception and have historically 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 stock and loans in the past, we are currently generating positive cash flow from the combined operations and investing activities and anticipate that we will have sufficient resources to support our cash needs during the current year and 2016. Our cash flows are discussed in further detail below:

 

Discussion of Statement of Cash Flows

 

  

Nine Months Ended

September 30,

   
   2015  2014  Change
Net cash used in operating activities  $(15,177)  $(7,513)  $(7,664)
Net cash provided by (used in) investing activities   127,323    (229,010)   356,333 
Net cash provided by financing activities   750    —      750 
Net increase (decrease) in cash   112,896    (236,523)  $349,419 
Cash, beginning of period   274,547    462,200      
Cash, end of period  $387,443   $225,677      

 

For the nine months ended September 30, 2015, cash used in operating activities increased $8,000 (102%) to $15,000 as compared to cash used in operating activities of $7,000 for the nine months ended September 30, 2014. The increase in cash used in operating activities was due to the timing of payments to creditors, suppliers and vendors and the receipt of an invoice payment on a large slot machine sale.

 

Net cash provided by investing activities increased $356,000 (155%) to $127,000 for the nine months ended September 30, 2015 from cash used of $229,000 for the nine months ended September 30, 2014. Cash used in investing activities is primarily the function of the net investment in property and equipment, principally slot machines used in our operations, and brand licenses. This increase was the result of the $222,000 reduction in both slot machine purchases and investments in brand licenses in addition to the increase in proceeds from the sale of previously leased slot machines of $134,000.

 

Net cash provided by financing activities was $1,000 for the nine months ended September 30, 2015, an increase of $1,000 from $0 for the nine months ended September 30, 2014, which represented the net proceeds from the issuance of common stock to a non-related party during the year.

 

Operations and Liquidity Management

 

For the nine months ended September 30, 2015, we incurred a net loss of $380,145 however we generated $112,896 in cash from all activities. At September 30, 2015, our cash balance was $387,443. The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to obtain the regulatory approvals required to distribute our products and successfully market them to casinos and card clubs.

 

22
 

 

 

Our current gross cash requirements are between approximately $300,000 to $350,000 per month, principally for salaries, professional services, licenses, marketing, office expenses and the purchase of the hardware components for our products.

 

Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flow to support our operations for the remainder of 2015 and during 2016.

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of September 30, 2015:

 

   Total 

Less than

1 year

  1 - 3 years  3 - 5 years 

More than

5 years

                          
Operating lease obligations (1)  $551,566   $96,314   $199,911   $210,032   $42,310 
Royalty fee obligation (2)   50,000    25,000    25,000    —      —   
            Total  $601,566   $121,314   $224,911   $210,032   $42,310 

 

(1) Represents operating lease agreements for office and warehouse facilities.
   
(2) Represents guaranteed royalty fee for brand license.

 

 

Off-Balance Sheet Arrangements

 

As of September 30, 2015, there were no off-balance sheet arrangements.

 

 

Going Concern

 

The Company’s financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. We have limited capital resources and have experienced net operating losses and negative cash flows since inception. Conditions have been improving and we expect these conditions will continue to improve, however the generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to continue to obtain the regulatory approvals required to distribute its products and successfully market them to more casinos. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flows to support our operations for the remainder of 2015 and during 2016, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all.

 

In addition, the Company’s ability to sell or lease its products on a large scale may require additional financing for working capital. There is no assurance that the Company would be able to obtain such financing, if at all, on reasonable terms. If the Company needs additional funding and is unable to obtain it, the Company’s financial condition would be adversely affected. In that event, the Company would have to postpone or discontinue planned operations and projects. The Company’s continuance as a going concern is dependent upon these factors, among others. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

23
 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

 

Item 4. Controls and Procedures.

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer (“CEO”) and Controller as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of September 30, 2015, we conducted an evaluation, under the supervision and with the participation of our management including our CEO and Controller, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and Controller have concluded that as of September 30, 2015, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There were no changes in our internal control over financial reporting during our quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 PART II - OTHER INFORMATION

 

Item 1.   Legal Proceedings.

 

None

 

 

Item 1A. Risk Factors.

 

None

 

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

On August 6, 2015, we entered into an agreement with The Co-Investment Fund II, L.P. (“CI II”) in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including warrants to purchase a maximum of 12,151,385 shares of Company stock, as well as 4,500,000 shares of Preferred Series A Nonvoting Capital Stock then outstanding, were converted into 181,000 shares of the Company’s Common Stock, par value $0.001 per share, and 33,300,000 shares of the Company’s Nonvoting Common Stock, $0.001 par value per share. Upon the conversion, all notes, loans, accrued interest, and warrants due to CI II were terminated in their entirety and all obligations were extinguished.

 

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The stock was issued without registration under the Securities Act pursuant to the exemption from registration in Section 4(2) of the Securities Act.

 

 

Item 3.  Defaults Upon Senior Securities.

 

None

 

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

 

Item 5.   Other Information.

 

None

 

Item 6.   Exhibits.  

 

 

EXHIBIT NUMBER   EXHIBIT DESCRIPTION  
         
31.1     Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)  
31.2     Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)  
32.1     Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350  

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:  November 12, 2015 Lightning Gaming, Inc.
  By: 

/s/ Brian Haveson                                        

Brian Haveson

President, Chief Executive Officer and Director

 

 

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