10-Q 1 s22-15761_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 March 31, 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  x    No  ¨

 

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: 4,607,474 common shares as of April 30, 2015; 4,500,000 Series A Nonvoting Capital Stock shares as of April 30, 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 16
Item 3. Quantitative and Qualitative  Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures 21
Item 5. Other Information 21
Item 6. Exhibits 21

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

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

 

 

2
 

 

 

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

  

March 31,

2015

(unaudited)

 

December 31,

2014

(audited)

Assets          
Current Assets          
       Cash  $380,221   $274,547 
Accounts receivable, net   420,429    359,486 
Inventory   113,663    132,561 
Prepaid expenses   194,142    202,503 
Total Current Assets   1,108,455    969,097 
           
Property and Equipment, net   736,185    819,489 
           
Other Assets   8,193    8,193 
License fees, net of accumulated amortization   66,700    95,058 
           
Total Assets  $1,919,533   $1,891,837 
            
Liabilities and Stockholders' Deficit          
Current Liabilities          
       Accounts payable  $212,483   $158,665 
       Accrued expenses   154,173    213,959 
Total Current Liabilities   366,656    372,624 
           
Long Term Debt and Other Liabilities          
       Long term notes payable   14,750,000    14,750,000 
Interest payable and other liabilities   7,972,483    7,677,826 
Other long term liabilities   68,605    46,313 
Fair value of warrants and convertible feature of long term debt   26,945    26,945 
Total Long Term  Debt and Other Liabilities   22,818,033    22,501,084 
           
Commitments (Note 6)          
           
Stockholders' Deficit          
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares authorized, 4,500,000 shares issued and outstanding   4,500    4,500 
           
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,735,285 and 4,660,285 shares issued and 4,607,474 and 4,532,474 shares outstanding as of March 31, 2015 and December 31, 2014, respectively   4,736    4,661 
           
Additional paid in capital   7,634,183    7,633,255 
Accumulated deficit   (28,894,764)   (28,610,476)
Treasury stock, 127,811 shares, at cost   (13,811)   (13,811)
Total Stockholders’ Deficit   (21,265,156)   (20,981,871)
           
Total Liabilities and Stockholders’ Deficit  $1,919,533   $1,891,837 
            
See Notes to Consolidated Condensed Financial Statements          

 

 

3
 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2015 and 2014

 

 

  

March 31,

2015

(unaudited)

 

March 31,

2014

(unaudited)

Revenues          
       Lease and license fees  $973,398   $896,994 
       Sales of gaming products and parts   5,346    27,151 
Total revenues   978,744    924,145 
           
Costs and operating expenses          
       Operating expenses   198,637    189,221 
       Research and development   119,544    118,908 
       Selling, general and administrative expenses   505,882    531,430 
       Depreciation and amortization   144,311    197,730 
Total costs and operating expenses   968,374    1,037,289 
           
Operating income (loss)   10,370    (113,144)
           
Non-operating expense          
       Net interest expense   (294,658)   (289,726)
Net loss  $(284,288)  $(402,870)
Net loss per common share including Series A Nonvoting shares-basic and diluted  $(0.03)  $(0.04)
Weighted average Series A Nonvoting shares outstanding-basic and diluted   4,500,000    4,500,000 
Weighted average common shares outstanding-basic and diluted   4,533,307    4,652,474 
           
See Notes to Consolidated Condensed Financial Statements          

 

 

 

4
 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2015 and 2014

 

 

  

March 31,

2015

(unaudited)

 

March 31,

2014

(unaudited)

       
Net Cash Provided by (Used in) Operating Activities  $135,306   $(168,516)
           
Cash Flows From Investing Activities          
       Purchase of equipment   (37,149)   (79,433)
       Proceeds from sale of equipment   2,267    27,000 
       Decrease in license fees   4,500    251 
           
Net Cash Used in Investing Activities   (30,382)   (52,182)
           
Cash Flows From Financing Activities          
        Issuance of common stock   750    —   
           
Net Cash Provided by Financing Activities   750    —   
           
Net Increase (Decrease) in Cash   105,674    (220,698)
           
Cash - Beginning of period   274,547    462,200 
           
Cash - End of period  $380,221   $241,502 
           
Supplemental Disclosure of Non-Cash Financing Activities:          
           
Inventory transferred to fixed assets  $—     $15,370 
           
See Notes to Consolidated Condensed Financial Statements          

 

 

5
 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

March 31, 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   Garfield
  Popeye’s Bonus Voyage   Jungle Book
  Popeye’s Seven Seas     Golden Egg
  Blondie’s Penny Bonanza   Just Jackpots
  Hagar the Horrible   Duck Dynamite
  Beetle Bailey   Candy Cash
  Pink Panther   Olive Oyl’s Jumbo Stacks
Swamp Fever   Jumbo Fish Stacks
    Vampires Fortune   Lightning Lotto
    Penny Palooza   Slotto
    Snow White   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 months ended March 31, 2015 are not necessarily indicative of the results to be expected for the entire year.

 

6
 

 

 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Condensed 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 and card clubs. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flows to support our operations during 2015, 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. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it 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 March 31, 2015 and December 31, 2014 was $4,000.

 

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, 2016, 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;

·         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.

 

7
 

 

 

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

 

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

 

Recent Accounting Pronouncements (Continued)

 

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.

 

Note 2.  Inventory

 

Inventory consists of the following:

  

March 31,

2015

 

December 31,

2014

Finished products  $1,685   $1,685 
Raw materials and work in process   111,978    130,876 
Inventory  $113,663   $132,561 

 

 

 

8
 

 

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

 

Note 3.  Property and Equipment

 

Property and equipment consist of the following:

   March 31,
2015
   December 31,
2014
 
Equipment, principally gaming equipment under lease  $4,219,497   $4,213,187 
Delivery truck   28,140    28,140 
Furniture and fixtures   76,459    75,177 
Leasehold improvements   91,794    91,794 
Property and equipment   4,415,890    4,408,298 
Less accumulated depreciation   (3,679,705)   (3,588,809)
Property and equipment, net  $736,185   $819,489 

 

 

Note 4.  License Fees

 

License fees consist of the following:

   March 31,
2015
   December 31,
2014
 
Purchased licenses  $338,005   $342,505 
Less accumulated amortization   (271,305)   (247,447)
License fees, net  $66,700   $95,058 

 

Purchased licenses are amortized over 3 years.

 

 

Note 5.  Debt

 

Notes payable, long term consists of the following:

   Warrants   March 31,
2015
   December 31,
2014
 
                
The Co-Investment Fund II, L.P. (“CI II”)   12,151,385   $14,750,000   $14,750,000 
                

 

 

 

 

Substantially all of the Company’s assets are pledged as collateral on debt and all of the notes are due on June 30, 2017 with interest at 8% on each note payable at maturity.

 

In accordance with various loans obtained by the Company, CI II holds warrants to purchase the following maximum number of shares of common stock as of March 31, 2015:

 

Maximum Number of Shares 

Price per

Share

  Expiration Date
 8,901,385   $1.00   April 12, 2016
 1,000,000   $1.00   January 17, 2017
 1,000,000   $1.00   July 6, 2017
 500,000   $1.00   January 30, 2018
 500,000   $1.00   May 6, 2018
 250,000   $1.00   October 8, 2019
 12,151,385         

 

9
 

 

 

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

 

Note 5.  Debt (Continued)

 

The purchase price of the common stock is subject to adjustment from time to time pursuant to the anti-dilution provisions of the respective warrant agreements. Also, certain notes in the amount of $8,750,000 and related accrued interest of $4,121,195 at March 31, 2015 contain a right to convert the principal amount of the note and accrued interest into shares of common stock at the discretion of the note holder on the same terms and conditions of the next equity offering.

 

See Note 7, Stockholders’ 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 March 31, 2015 and 2014 was $35,930 and $30,772, respectively.

 

Future minimum lease payments are as follows:

 

Year Ending December 31,  Amount
 2015   $79,362 
 2016    96,915 
 2017    99,337 
 2018    101,821 
 2019    104,366 
 2020 and thereafter    125,099 
     $606,900 

 

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 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

 

10
 

 

 

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

 

Note 6. Commitments (Continued)

 

three years with the Company’s right to extend the agreement for an additional five years upon payment of minimum royalties. The agreement is currently on a month-to-month basis.

 

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 runs 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.

 

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 March 31, 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 

 

As of March 31, 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 

 

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

 

Note 7.  Stockholders’ Deficit

 

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 March 31, 2015   1,198,000   $1.64 
Options available for grant under the Stock Plan at March 31, 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 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 three months ended March 31, 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 March 31, 2015 and 2014 was $253 and $3,221, respectively.

 

The following table summarizes information with respect to stock options outstanding at March 31, 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 2.7 $1.64 -    1,192,000  2.7 $1.63 -

 

 

12
 

 

 

 

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

 

Note 7.  Stockholders’ Deficit (Continued)

 

Stock Option Plan (Continued) 

 

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 March 31, 2015, there was approximately $340 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan. The cost is expected to be recognized over a weighted-average period of .4 years.

 

Warrants:  In accordance with the loans obtained by the Company, the lender holds 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 shall be subject to adjustment from time to time pursuant to the respective provisions of the warrant agreements. The Company calculates the value of these warrants at the time of issuance using a Binomial Pricing Model. 

  

The following table is a summary of the Company’s warrant activity for the three months ended March 31, 2015:

   Warrants Outstanding 

Weighted

Average

Exercise Price

           
Outstanding at December 31, 2014   12,151,385   $1.00 
Warrants granted   —      —   
Warrants exercised   —      —   
Warrants cancelled   —      —   
Warrants outstanding at March 31, 2015   12,151,385   $1.00 

 

The following table summarizes information with respect to warrants outstanding at March 31, 2015:

 

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 1.4 $1.00 -    12,151,385 $.100 -

 

 

13
 

 

 

 

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

 

Note 7.  Stockholders’ Deficit (Continued)

 

Warrants (Continued) 

 

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 -

 

For the three months ended March 31, 2015, the weighted average fair value per share of each warrant was $.01.

 

The fair value of each warrant is estimated using the Binomial pricing model, with the following assumptions for the three months ended March 31, 2015:

   2015
      
Weighted average volatility   40.3%
Expected dividend yield   —   
Expected term (in years)   1.4 
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   —      —   
Balance March 31, 2015  $—     $26,945 

 

  

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 of March 31, 2015, the Company has available, for federal and state income tax purposes, net operating loss (“NOL”) carryforwards of approximately $18,531,000, which expire at various times through 2034. 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. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the financial statements.

 

 

14
 

 

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

 

Note 9.  Related Party Transactions

 

In October 2014, the Company borrowed $250,000 from The Co-Investment Fund II, L.P. (“CI II”) to fund the purchase of twenty-five slot machine cabinets and component parts. The note is due on June 30, 2017 together with interest at the rate of 8% per annum. The note may be converted to 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.

 

During the three months ended March 31, 2015 and 2014 interest expense on all of the loans, including those transferred from Greenebaum to CI II as described above, amounted to $294,658 and $289,726, respectively. During 2015 and 2014, the Company made no principal or interest payments on those loans.

 

At March 31, 2015, included in the notes held by CI II and accrued interest thereon are notes in the principal amount of $8,750,000 and accrued interest of $4,121,195, which are convertible into shares of our common stock on the same terms and conditions of the next equity offering.

 

As of March 31, 2015, CI II holds warrants to purchase up to 12,151,385 shares of common stock at a weighted average exercise price of $1.00 per share.

 

 

Note 10. Concentration of Risk – Major Customers

 

The Company generated approximately 15% of its revenue from its top three customers for the three months ended March 31, 2015 and 13% of its revenue from its top three customers for the three months ended March 31, 2014.

 

 

15
 

 

 

 

 

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 or to refinance our long-term debt that will become due June 30, 2017, 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”).

 

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

 

 

16
 

 

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 in to the market using a daily lease model or a revenue sharing model. We have 271 slot machines out on lease or revenue share in 64 different casinos and cruise ships. As of April 30, 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.

 

We have generated operating revenues and cash from operations, but we have a history of losses since our inception. We incurred a net loss of $284,288 in the three months ended March 31, 2015.

 

 

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

 

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

 

Revenues

 

The Company’s revenues for the three months ended March 31, 2015 were $979,000 compared to $924,000 for the comparable prior year period. The increase in revenues was due to the increase in revenues from the placement of our slot machines.

 

Sales of gaming products, namely slot machines, decreased by $22,000 to $5,000 for the three months ended March 31, 2015 as compared to $27,000 for the three months ended March 31, 2014. Lease and license fees increased by a net of $76,000 (9%) to $973,000 for the three months ended March 31, 2015 as compared to $897,000 for the three months ended March 31, 2014. Our revenue model is based on recurring lease revenue and the placement of 43 additional slot machines in casinos generated a $105,000 increase in lease fees under this model. This was offset by a $29,000 decrease from poker table lease revenue as a result of one poker table return and one converted from a lease to a sale.

 

Cost of Products Sold

 

Cost of products sold were $0 due to the sale of a fully depreciated poker table for the three months ended March 31, 2015 and fully depreciated slot machines for the three months ended March 31, 2014. Gross margin on these sales were 100% for the three months ended March 31, 2015 and 2014.

 

 

 

17
 

 

Operating Expenses

 

Operating expenses increased by $10,000 (5%) to $199,000 for the three months ended March 31, 2015, from $189,000 for the three months ended March 31, 2014. This increase was the result of an increase in the monthly straight-line rent expense for the building lease offset by several reductions: 1) the continued transition from licensed to proprietary themes which reduce royalty costs; 2) the reduction in the slot machine activity during the quarter and the costs directly associated with that activity, i.e. freight and installation; and 3) the elimination of bonus expense.

 

Research and Development Expenses

 

Research and development expenses increased by $1,000 (1%) to $120,000 for the three months ended March 31, 2015, from $119,000 for the three months ended March 31, 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. This increase is attributable to the increase in salary and related benefit costs for research and development personnel.

  

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $25,000 (5%) to $506,000 for the three months ended March 31, 2015, from $531,000 for the three months ended March 31, 2014. This decrease was primarily due to lower lab fees associated with the development of slot machine themes and lower regulatory costs associated with applications to new gaming jurisdictions.

 

Depreciation and Amortization

 

Depreciation and amortization decreased by $54,000 (27%) to $144,000 for the three months ended March 31, 2015 from $198,000 for the three months ended March 31, 2014. This decrease was the result of the reduction of depreciation for slot machines that were fully depreciated in 2014.

 

Net Interest Expense

 

Net interest expense increased by $5,000 (2%) to $295,000 for the three months ended March 31, 2015 from $290,000 for the three months ended March 31, 2014 and is attributable to the additional loan issued in October 2014.

 

Liquidity and Capital Resources

      

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. These transactions are described in the discussion of cash flows below:

 

Discussion of Statement of Cash Flows

 

  

Three Months Ended

March 31,

   
   2015   2014   Change 
Net cash provided by (used in) operating activities  $135,306   $(168,516)  $303,822 
Net cash used in investing activities   (30,382)   (52,182)   21,800 
Net cash provided by financing activities   750    —      750 
Net increase (decrease) in cash   105,674    (220,698)  $326,372 
Cash, beginning of year   274,547    462,200      
Cash, end of period  $380,221   $241,502      

 

 

 

18
 

 

 

 

For the three months ended March 31, 2015, cash provided by operating activities increased $304,000 (180%) to $135,000 as compared to cash used in operating activities of $169,000 for the three months ended March 31, 2014. The increase in cash from operating activities was due to the increase in slot machine revenues along with the decreases in the outlay of cash required for license applications and renewals, inventory purchases, and the timing of payments to creditors, suppliers and vendors.

 

Net cash used in investing activities decreased $22,000 (42%) to $30,000 for the three months ended March 31, 2015 from $52,000 for the three months ended March 31, 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 decrease consisted of a $47,000 reduction in both slot machine purchases and investments in brand licenses offset by the decrease in proceeds from the sale of slot machines of $25,000.

 

Net cash provided by financing activities was $1,000 for the three months ended March 31, 2015, an increase of $1,000 from $0 for the three months ended March 31, 2014, which represented the net proceeds from the issuance of common stock to a non-related party during the quarter.

 

Operations and Liquidity Management

 

For the three months ended March 31, 2015, we incurred a net loss of $284,288 however we generated $135,306 in cash from operating activities. At March 31, 2015, our cash balance was $380,221. 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.

 

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 during 2015.

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of March 31, 2015:

 

   Total 

Less than

1 year

  1 - 3 years  3 - 5 years 

More than

5 years

                          
Debt obligations (1)  $22,722,483   $—     $22,722,483   $—     $—   
Operating lease obligations (2)   606,900    103,390    197,468    207,465    98,576 
Royalty fee obligation (3)   50,000    25,000    25,000    —      —   
            Total  $23,379,383   $128,390   $22,944,951   $207,465   $98,576 

 

 

(1) Represents the outstanding principal amount of notes and accrued interest at the rate of 8% annually.
   
(2) Represents operating lease agreements for office and warehouse facilities.
   
(3) Represents guaranteed royalty fee for brand license.

   

Off-Balance Sheet Arrangements

 

As of March 31, 2015, there were no off-balance sheet arrangements.

 

19
 

 

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 had net operating losses and negative cash flows from operations since the Company’s 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 and card clubs. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flows to support our operations during 2015, 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.

 

 

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 March 31, 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 March 31, 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 March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

20
 

 

 

 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 March 31, 2015, we issued 75,000 shares of our $0.001 par value common stock to an unrelated party at $0.01 per share.

 

 

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:  May 12, 2015 Lightning Gaming, Inc.
  By: 

/s/ Brian Haveson                                        

Brian Haveson

President, Chief Executive Officer and Director

 

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