Attached files
file | filename |
---|---|
EX-10.2 - EX102 - LAS VEGAS GAMING INC | ex102.htm |
EX-10.3 - EX103 - LAS VEGAS GAMING INC | ex103.htm |
EX-31.2 - EX312 - LAS VEGAS GAMING INC | ex312.htm |
EX-31.1 - EX311 - LAS VEGAS GAMING INC | ex311.htm |
EX-10.4 - EX104 - LAS VEGAS GAMING INC | ex104.htm |
EX-32.1 - EX321 - LAS VEGAS GAMING INC | ex321.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x |
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended:
|
September
30, 2009
|
o
|
OR
|
|
TRANSITION
REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For
the transition period from:
|
to
|
Commission
file number:
|
000-30375
|
Las
Vegas Gaming, Inc.
|
|||
(Exact
name of registrant as specified in its charter)
|
|||
Nevada
|
88-0392994
|
||
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
||
3980
Howard Hughes Pkwy., Suite 450, Las Vegas, Nevada 89169
|
|||
(Address
of principal executive offices)
|
|||
(702)
871-7111
|
|||
(Issuer’s
telephone number)
|
|||
(Former
name, former address and former fiscal year, if changed since last
report)
|
|||
Check
whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
o
|
|||
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). Yes oNo o
|
|||
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o Accelerated
filer o
Non-accelerated
filer o (do
not check if smaller reporting
company) Smaller
reporting company x
|
|||
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No
x
|
|||
APPLICABLE
ONLY TO CORPORATE ISSUERS
|
|||
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest
|
|||
practicable
date:
|
15,081,846 shares of Common Stock Series A, $.001 par value, as of
September 30, 2009
|
LAS
VEGAS GAMING, INC.
FORM
10-Q
|
Page
|
|
PART I – FINANCIAL
INFORMATION
|
||
Item
1.
|
2
|
|
2
|
||
3
|
||
5
|
||
7
|
||
8
|
||
Item
2.
|
18
|
|
Item
3.
|
25
|
|
Item
4T.
|
25
|
|
PART II – OTHER
INFORMATION
|
||
Item
1.
|
26
|
|
Item
1A.
|
26
|
|
Item
2.
|
26
|
|
Item
3.
|
26
|
|
Item
4.
|
26
|
|
Item
5.
|
26
|
|
Item
6.
|
27
|
______________
PlayerVision,
RoutePromo, NumberVision, WagerVision, AdVision, Nevada Numbers, The Million
Dollar Ticket, and Nevada Keno are our trademarks. This report may
contain trademarks and trade names of other parties, corporations, and
organizations.
PART
I – FINANCIAL INFORMATION
Item
1. Financial
Statements
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
|
||||||||
December
31,
|
September
30,
|
|||||||
2008
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 497,529 | $ | 44,786 | ||||
Investment
in marketable securities
|
5,068 | - | ||||||
Accounts
receivable, net of allowance of $578 and $9,347
|
576,847 | 300,235 | ||||||
Inventories
|
454,026 | 420,516 | ||||||
Prepaid
expenses, deposits and other
|
79,881 | 145,626 | ||||||
Jackpot
reserve deposits
|
1,230,761 | 218,628 | ||||||
|
2,844,112 | 1,129,791 | ||||||
Equipment,
net of accumulated depreciation of $1,238,738 and
$1,140,610
|
924,256 | 634,001 | ||||||
Other
assets
|
||||||||
Goodwill
|
2,371,178 | 1,740,843 | ||||||
Trademarks,
copyrights, patents, software, and other identifiable intangibles, net
of
|
||||||||
accumulated
amortization of $1,165,742 and $1,362,724
|
278,330 | 718,187 | ||||||
Other
long term assets
|
56,451 | 70,151 | ||||||
$ | 6,474,327 | $ | 4,292,973 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Note
payable
|
$ | - | $ | 1,500,000 | ||||
Amount
due to Gaming Arts, LLC
|
- | 239,683 | ||||||
Advances
from officers and major shareholders
|
600,000 | 75,000 | ||||||
Accounts
payable and accrued expenses
|
1,624,740 | 2,362,788 | ||||||
Current
portion of long-term debt
|
11,957 | 7,363 | ||||||
Deferred gain on sale of bingo | - | 165,666 | ||||||
Current
portion of progressive jackpot liability
|
1,555,360 | 1,596,360 | ||||||
3,792,057 | 5,946,860 | |||||||
Long-term
debt
|
23,119 | 17,181 | ||||||
Conditionally
redeemable equity
|
||||||||
Series
B convertible preferred stock, $.001 par, 50,000 shares issued
and
|
||||||||
outstanding
|
250,000 | 250,000 | ||||||
250,000 | 250,000 | |||||||
Stockholders'
equity
|
||||||||
Convertible
preferred stock, $.001 par, 10,000,000 shares authorized (all
classes):
|
||||||||
Series
E: 810,800 shares authorized, 810,800 shares issued and
outstanding
|
811 | 811 | ||||||
Series
F: 200,000 shares authorized, 200,000 and 0 shares
issued and outstanding
|
200 | - | ||||||
Series
G: 150,000 shares authorized, 150,000 shares issued and outstanding,
respectively
|
150 | 150 | ||||||
Series
H: 98,500 shares authorized, 98,500 shares issued and
outstanding
|
99 | 99 | ||||||
Series
I: 4,693,878 shares authorized, 4,693,878 shares issued and
outstanding
|
4,694 | 4,694 | ||||||
Common
stock (including Series A): $.001 par, 90,000,000 shares
|
||||||||
authorized,
14,849,690 and 15,081,846 shares issued and outstanding
|
14,850 | 15,082 | ||||||
Additional
paid-in capital
|
44,160,702 | 44,300,772 | ||||||
Less
due from employees and stockholders
|
(188,245 | ) | (182,245 | ) | ||||
Deficit
|
(41,584,110 | ) | (46,060,431 | ) | ||||
2,409,151 | (1,921,068 | ) | ||||||
$ | 6,474,327 | $ | 4,292,973 | |||||
The
accompanying notes are an integral part of these financial
statements.
|
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||
THREE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
|
||||||||
|
||||||||
2008
|
2009
|
|||||||
Revenues
|
||||||||
Casino
games
|
$ | 709,195 | $ | 411,394 | ||||
Product
sales
|
254,369 | 250,527 | ||||||
Other
|
238,393 | 278,647 | ||||||
1,201,957 | 940,568 | |||||||
Costs
and expenses
|
||||||||
Casino
games
|
519,682 | 253,764 | ||||||
Product
costs
|
133,112 | 135,600 | ||||||
Other
|
304,652 | 227,859 | ||||||
957,446 | 617,223 | |||||||
Gross
operating income
|
244,511 | 323,345 | ||||||
Other
operating expenses
|
||||||||
Selling,
general, and administrative
|
1,502,973 | 936,078 | ||||||
Research
and development
|
371,517 | 189,501 | ||||||
Depreciation
and amortization
|
200,137 | 131,190 | ||||||
2,074,627 | 1,256,769 | |||||||
Operating
loss
|
(1,830,116 | ) | (933,424 | ) | ||||
Other
income and expense
|
||||||||
Finance
costs
|
(490,440 | ) | (55,311 | ) | ||||
Interest
and other income
|
2,233 | 6 | ||||||
Net
loss
|
(2,318,323 | ) | (988,729 | ) | ||||
Preferred
stock dividends
|
(52,500 | ) | (211,096 | ) | ||||
Net
loss attributed to common stockholders
|
$ | (2,370,823 | ) | $ | (1,199,825 | ) | ||
Net
loss per share attributed to common stockholders
|
$ | (0.17 | ) | $ | (0.07 | ) | ||
Weighted
average shares outstanding
|
13,689,403 | 15,081,846 | ||||||
The
accompanying notes are an integral part of these financial
statements.
|
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||
NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
|
||||||||
|
||||||||
2008
|
2009
|
|||||||
Revenues
|
||||||||
Casino
games
|
$ | 1,868,701 | $ | 1,395,959 | ||||
Product
sales
|
927,738 | 781,876 | ||||||
Other
|
716,283 | 866,697 | ||||||
3,512,722 | 3,044,532 | |||||||
Costs
and expenses
|
||||||||
Casino
games
|
1,840,511 | 1,165,665 | ||||||
Product
costs
|
451,310 | 406,650 | ||||||
Other
|
888,378 | 719,898 | ||||||
3,180,199 | 2,292,213 | |||||||
Gross
operating income
|
332,523 | 752,319 | ||||||
Other
operating expenses
|
||||||||
Selling,
general, and administrative
|
4,865,008 | 3,707,806 | ||||||
Research
and development
|
1,070,057 | 372,684 | ||||||
Depreciation
and amortization
|
628,846 | 401,519 | ||||||
6,563,911 | 4,482,009 | |||||||
Operating
loss
|
(6,231,388 | ) | (3,729,690 | ) | ||||
Other
income and expense
|
||||||||
Finance
costs
|
(1,612,902 | ) | (69,647 | ) | ||||
Interest
and other income (expense)
|
(89,156 | ) | (27,895 | ) | ||||
Net
loss
|
$ | (7,933,446 | ) | $ | (3,827,232 | ) | ||
Preferred
stock dividends
|
(84,000 | ) | (649,089 | ) | ||||
Net
loss attributed to common stockholders
|
$ | (8,017,446 | ) | $ | (4,476,321 | ) | ||
Net
loss per share attributed to common stockholders
|
$ | (0.61 | ) | $ | (0.29 | ) | ||
Weighted
average shares outstanding
|
13,249,905 | 15,062,484 | ||||||
The
accompanying notes are an integral part of these financial
statements.
|
LAS VEGAS GAMING, INC. AND SUBSIDIARIES | |||||||||||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||||||||||||
NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2009 | |||||||||||||||||||||||||||||||||||||||||||||
Common
Stock
|
Additional
|
Less
due from
|
|||||||||||||||||||||||||||||||||||||||||||
Convertible
Preferred Stock
|
Including
|
Paid-In
|
officers
and
|
||||||||||||||||||||||||||||||||||||||||||
Series
A
|
Series
C
|
Series
D
|
Series
E
|
Series
F
|
Series
G
|
Series
H
|
Series
I
|
Series
A
|
Capital
|
stockholders
|
Deficit
|
||||||||||||||||||||||||||||||||||
Balances,
December 31, 2007
|
$ | - | $ | 35 | $ | 125 | $ | 744 | $ | - | $ | - | $ | - | $ | 12,563 | $ | 26,497,097 | $ | (235,414 | ) | $ | (28,562,419 | ) | |||||||||||||||||||||
Net
loss
|
(7,933,446 | ) | |||||||||||||||||||||||||||||||||||||||||||
Dividends
Payable Preferred Stock F, G, and I
|
(84,000 | ) | |||||||||||||||||||||||||||||||||||||||||||
Exercise
of warrants and options
|
93 | 108,705 | (8,412 | ) | |||||||||||||||||||||||||||||||||||||||||
Issuance
of warrants
|
337,470 | ||||||||||||||||||||||||||||||||||||||||||||
Other
stock based compensation
|
255 | 509,079 | 52,000 | ||||||||||||||||||||||||||||||||||||||||||
Cash
received
from
employees
and
stockholders
|
9,000 | ||||||||||||||||||||||||||||||||||||||||||||
Conversion
of
Series
B
Convertible
Preferred
Stock
to
|
254 | 253,996 | |||||||||||||||||||||||||||||||||||||||||||
Common
Stock Series A
|
|||||||||||||||||||||||||||||||||||||||||||||
Conversion
of
Series C
Convertible
Preferred
Stock
to
|
(35 | ) | 175 | (140 | ) | ||||||||||||||||||||||||||||||||||||||||
Common
Stock Series A
|
|||||||||||||||||||||||||||||||||||||||||||||
Conversion
of
Series D
Convertible
Preferred
Stock
to
|
(125 | ) | 125 | ||||||||||||||||||||||||||||||||||||||||||
Common
Stock Series A
|
|||||||||||||||||||||||||||||||||||||||||||||
Sale
of Series E Convertible Preferred Stock
|
67 | 334,933 | |||||||||||||||||||||||||||||||||||||||||||
Sale
of Series F Convertible Preferred Stock
|
200 | 639,872 | |||||||||||||||||||||||||||||||||||||||||||
Sale
of Series G Convertible Preferred Stock
|
150 | 479,904 | |||||||||||||||||||||||||||||||||||||||||||
Sale
of Series H Convertible Preferred Stock
|
99 | 492,402 | |||||||||||||||||||||||||||||||||||||||||||
Sale
of Common Stock to employees
|
55 | 110,667 | |||||||||||||||||||||||||||||||||||||||||||
Sale
of Common Stock
|
500 | 629,374 | |||||||||||||||||||||||||||||||||||||||||||
Balances,
September 30, 2008
|
$ | - | $ | - | $ | - | $ | 811 | $ | 200 | $ | 150 | $ | 99 | $ | 14,020 | $ | 30,393,359 | $ | (182,826 | ) | $ | (36,579,865 | ) |
The
accompanying notes are an integral part of these financial
statements.
Convertible
Preferred Stock
|
Common
Stock
|
Additional
|
Less
due from
|
|||||||||||||||||||||||||||||||||||||||||||||
Including
|
Paid-In
|
officers
and
|
||||||||||||||||||||||||||||||||||||||||||||||
Series
A
|
Series
C
|
Series
D
|
Series
E
|
Series
F
|
Series
G
|
Series
H
|
Series
I
|
Series
A
|
Capital
|
stockholders
|
Deficit
|
|||||||||||||||||||||||||||||||||||||
Balances,
January 1, 2009
|
$ | - | $ | - | $ | - | $ | 811 | $ | 200 | $ | 150 | $ | 99 | $ | 4,694 | $ | 14,850 | $ | 44,160,702 | $ | (188,245 | ) | $ | (41,584,110 | ) | ||||||||||||||||||||||
Net
loss
|
(3,827,232 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends
Payable Preferred Stock F, G, and I
|
(649,089 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance
of stock options and
warrants
for services
|
559,712 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance
of common stock to
reimburse
for legal expenses
|
27 | 17,863 | ||||||||||||||||||||||||||||||||||||||||||||||
Cancellation
of Common Stock
|
(20 | ) | 20 | |||||||||||||||||||||||||||||||||||||||||||||
Cancellation
of Series F Preferred Stock
|
(400 | ) | (1,999,600 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Re-issuance
of Series F Stock
|
200 | 999,800 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash
received from employees
and
stockholders
|
6,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Sale
of Common Stock
|
225 | 562,275 | ||||||||||||||||||||||||||||||||||||||||||||||
Balances,
September 30, 2009
|
$ | - | $ | - | $ | - | $ | 811 | $ | - | $ | 150 | $ | 99 | $ | 4,694 | $ | 15,082 | $ | 44,300,772 | $ | (182,245 | ) | $ | (46,060,431 | ) | ||||||||||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
|
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2009
|
||||||||
2008
|
2009
|
|||||||
Operating
activities
|
||||||||
Net
loss
|
$ | (7,933,446 | ) | $ | (3,827,232 | ) | ||
Marketable
security received for licensing fee
|
42,444 | 5,068 | ||||||
Depreciation
and amortization of equipment
|
266,462 | 204,539 | ||||||
Loss
on disposal of assets
|
72,040 | 25,445 | ||||||
Bad debt expense | - | 39,385 | ||||||
Amortization
of debt issuance costs and intangibles
|
1,653,545 | 196,980 | ||||||
Fair
market value adjustment of debt derivative liability
|
(141,307 | ) | - | |||||
Stock-based
compensation to employees and consultants
|
689,113 | 567,602 | ||||||
Other
|
(1,724 | ) | (13,698 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
28,789 | 150,759 | ||||||
Inventories
|
64,105 | 21,353 | ||||||
Prepaid
expenses, deposits and other
|
88,418 | (65,746 | ) | |||||
Accounts
payable and accrued expenses
|
1,266,471 | 170,386 | ||||||
Advances from Gaming Arts, LLC | - | 239,683 | ||||||
Progressive
jackpot liability
|
560,918 | 41,000 | ||||||
Deferred gain on sale of bingo | - | 165,666 | ||||||
Net
cash (used in) operating activities
|
(3,344,172 | ) | (2,078,810 | ) | ||||
Investing
activities
|
||||||||
Purchase
of property, equipment, and software
|
(248,619 | ) | (95,436 | ) | ||||
Proceeds
from sale of equipment
|
55,250 | 6,150 | ||||||
Proceeds
from sale of Bingo
|
- | 832,251 | ||||||
Capitalize
Player Vision 3 engineering costs
|
- | (631,899 | ) | |||||
Jackpot
reserve deposits
|
(1,298,640 | ) | 1,012,133 | |||||
Net
cash provided by (used in) investing activities
|
(1,492,009 | ) | 1,123,199 | |||||
Financing
activities
|
||||||||
Dividend
payments on Series F preferred stock
|
- | (32,877 | ) | |||||
Redemption
of Series F preferred stock
|
- | (2,000,000 | ) | |||||
Re-issuance
of Series F preferred stock
|
- | 1,000,000 | ||||||
Redemption
of Series B preferred stock
|
(137,500 | ) | - | |||||
Repayment
of debt
|
(61,747 | ) | (7,755 | ) | ||||
Sale
of Series E convertible preferred stock
|
335,000 | - | ||||||
Sale
of Series F convertible preferred stock
|
640,072 | - | ||||||
Sale
of Series G convertible preferred stock
|
480,054 | - | ||||||
Sale
of Series H convertible preferred stock
|
492,501 | - | ||||||
Advances
from officers and major shareholders
|
2,100,000 | 300,000 | ||||||
Repayment
of advances from shareholders
|
- | (825,000 | ) | |||||
Increase
in notes payable
|
- | 1,500,000 | ||||||
Exercise
of warrants and options for common stock
|
100,387 | - | ||||||
Collection
of stock subscription receivables
|
9,000 | 6,000 | ||||||
Sale
of common stock
|
740,596 | 562,500 | ||||||
Net
cash provided by financing activities
|
4,698,363 | 502,868 | ||||||
Net
(decrease) in cash and cash equivalents
|
(137,818 | ) | (452,743 | ) | ||||
Cash,
beginning of period
|
489,262 | 497,529 | ||||||
Cash,
end of period
|
$ | 351,444 | $ | 44,786 | ||||
Non-cash
investing and financing activities
|
||||||||
Conversion
of Series B Convertible Preferred Stock to
|
||||||||
Common
Stock Series A
|
$ | 254,250 | $ | - | ||||
Conversion
of Series C Convertible Preferred Stock to
|
||||||||
Common
Stock Series A
|
35 | - | ||||||
Conversion
of Series D Convertible Preferred Stock to
|
||||||||
Common
Stock Series A
|
125 | - | ||||||
Exercise
of stock warrants and options increasing subscriptions
receivable
|
8,412 | - | ||||||
Equipment
acquired directly with proceeds of new borrowing
|
34,025 | - | ||||||
Debt
retired through issuance of Common Stock Series A
|
107,500 | - | ||||||
Prepayment
of lease costs through issuance of Common Stock Series
A
|
106,000 | - | ||||||
Accrued
and prepaid interest added to face amount of note due to debt
modification
|
801,250 | - | ||||||
Dividends
declared on Series F, G, and I Preferred Stock
|
84,000 | 649,089 | ||||||
Dividend
paid in Common Stock Series A on Series F Preferred Stock
|
- | (10,000 | ) | |||||
The
accompanying notes are an integral part of these financial
statements
|
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of operations:
Our current principal business is the
delivery of new, linked-progressive, mega jackpot games to the worldwide gaming
industry. Our offering of these types of games has included Nevada
Numbers, Super Bonanza Bingo, Million Dollar Ticket and Gamblers Bonus Million
Dollar Ticket. During the second quarter of 2008, we launched
Gamblers Bonus Million Dollar Ticket in cooperation with one of the larger slot
route operators in Nevada. We subsequently shut this game down on
January 31, 2009. On March 31, 2009, the Company shut down its Nevada
Numbers and Million Dollar Ticket games.
Although
we have focused our business primarily on the development of our proprietary
multimedia delivery system, known as PlayerVision, PlayerVision has not produced
significant revenue to date. We continue to provide equipment,
supplies and casino games for use by our customers in the keno and bingo
segments of the gaming industry (Notes 8a and 12).
2.
Basis of Presentation:
The accompanying consolidated financial
statements have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission, or the SEC, relating to interim financial
statements. Accordingly, certain information normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. For further information, please refer
to our annual financial statements and the related notes included within our
Annual Report on Form 10-K for the year ended December 31, 2008, previously
filed with the SEC, from which the information as of that date is
derived.
The consolidated financial statements
include the accounts of our wholly-owned subsidiaries and an inactive and
immaterial 85%-owned subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation.
The unaudited interim consolidated
financial statements included herein reflect all adjustments that are, in the
opinion of management, necessary to present fairly the financial position and
results of operations for the interim periods presented. Events were
evaluated by management to determine if adjustments to or disclosure in these
interim consolidated financial statements were necessary through the date the
consolidated financial statements were issued, November 23, 2009 (Note
12). The results of operations for the three and nine months ended
September 30, 2009, are not necessarily indicative of results to be expected for
the year.
3.
Jackpot Reserve Deposits:
At December 31, 2008 and September 30, 2009, we had deposit cash amounts of
$1,230,761 and $218,628, respectively, which are restricted, as required by
gaming regulators for funding our various jackpot-oriented games.
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4.
Equipment:
Equipment (Note 8a) consists of the
following:
December
31, 2008
|
September
30, 2009
(Unaudited)
|
|||||||
Production
equipment
|
$ | 1,561,513 | $ | 1,466,267 | ||||
Equipment,
furniture, and fixtures
|
557,855 | 308,344 | ||||||
Leasehold
improvements
|
43,627 | 0 | ||||||
2,162,995 | 1,774,611 | |||||||
Less
accumulated depreciation and amortization
|
1,238,739 | 1,140,610 | ||||||
$ | 924,256 | $ | 634,001 |
5. Other
Intangible Assets:
Other intangible assets (Note 8a)
consist of the following:
December
31, 2008
|
September
30, 2009
(Unaudited)
|
|||||||
Capitalized
PlayerVision engineering costs
|
$ | 651,899 | ||||||
PlayerVision
technology patents
|
$ | 1,016,236 | 996,236 | |||||
Software
|
427,836 | 432,775 | ||||||
1,444,072 | 2,080,910 | |||||||
Less
accumulated amortization
|
1,165,742 | 1,362,723 | ||||||
$ | 278,330 | $ | 718,187 |
The intangible assets are amortized
over their estimated useful lives, which are currently 5 years with the
exception of software which is amortized over three years. We have
not begun amortizing PlayerVision costs as yet and will begin when we get our
product to market. Total amortization for other intangible assets amounted to
$362,026 and $196,980, respectively, for the nine months ended September 30,
2008 and 2009. The estimated aggregate amortization for the remaining
three months of calendar 2009 and the next five years is as follows (presuming
we begin deployment of PlayerVision 3 in January 2010; however, no assurance can
be given that we will begin deployment then, or at all):
2009
|
$ | 53,318 | ||
2010
|
238,062 | |||
2011
|
215,512 | |||
2012
|
211,295 | |||
2013
|
0 | |||
2014
|
0 | |||
$ | 718,187 |
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6.
Debt:
Long term
debt is as follows:
December
31, 2008
|
September
30, 2009
|
|||||||
Other
notes
payable
|
$ | 35,076 | $ | 24,544 | ||||
Less
amounts due within one year
|
11,957 | 7,363 | ||||||
$ | 23,119 | $ | 17,181 |
The $600,000 advance from a stockholder
at December 31, 2008 was paid back in January 2009. An additional
$300,000 was advanced from three principal stockholders. Of this
amount, $225,000 has been paid back as of September 30, 2009. The
buyer of our bingo business, Gaming Arts, LLC (Note 12) has advanced us $239,683
for working capital purposes (Note 12).
On February 13, 2009, we signed a
binding term sheet (“Term Sheet”) with IGT whereby IGT advanced $1.5 million
(“the Advance”) to the Company. On September 4, 2009 (effective June
1, 2009), we signed a Secured Promissory Note for the Advance in favor of IGT
which carries an interest rate of 10% and is due on January 29,
2010. We granted a security interest to IGT in all of our present and
future assets as security for such obligation.
On September
4, 2009 (effective June 1, 2009), the Company and IGT signed a First Addendum to
License and Application Support Agreement and a First Addendum to Intellectual
Property Access Agreement (the “Addendums”). The Addendums
formally amend the License and Application Support Agreement dated September 30,
2008 between the Company and IGT (the “LASA”), and the Intellectual Property
Access Agreement dated September 30, 2008 between the Company and IGT (the
“IPAA”). The amendments to the LASA include: (i) a requirement that the Company
use its best efforts to utilize IGT’s sb (server based) Media Manager as the
default infrastructure for the delivery of the Company’s PlayerVision®
applications, where feasible, (ii) a requirement that the Company provide
development support for IGT sb (server based) applications requested by IGT,
(iii) an amendment to the amount of distribution fees, (iv) a granting to IGT of
a “most favored distributor” status so that IGT is granted the most favorable
terms on the Company’s software distributor rates for its server-based
applications, and (v) a requirement that the Company escrow the source code for
the applications that connect to IGT systems, (vi) a specification that the
Company has a worldwide license to use the IGT SPC Protocol in order to
interface with the IGT Advantage card reader assembly and that any other
installation or use of the IGT SPC Protocol that does not interface with the IGT
Advantage card reader assembly is unlicensed, (vii) a restriction not
to place a secondary display in any location or casino where there is an IGT
system, (viii) a requirement that the Company not compete against IGT in
marketing, offering for use or sale, or installing any IGT EGM peripherals and
the IGT SPC Protocol for use with such IGT EGM Peripherals, and (ix) a
requirement that if the Company decides to purchase such IGT EGM Peripherals, it
shall do so from IGT or its affiliates. IGT will have the right to access the
source code only if the Company becomes insolvent, and IGT’s rights to utilize
such software (if released) will be unlimited. The amendments to the IPAA
include the Company’s agreement that IGT will have the right to initiate,
coordinate, finance and assist in the prosecution, defense and enforcement of
all Company owned intellectual property to which the Company has granted IGT a
right of first refusal.
7. Stockholders'
Equity:
From time to time, the Company issues
shares of common stock and preferred stock through transactions that are exempt
from registration under the Securities Act of 1933 (Securities Act), either
pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation
D. For the nine months ended September 30, 2008, we issued 92,659
shares of Common Stock Series A as a result of the exercise of options and
warrants. Additionally, we issued 254,250 shares of Common Stock
Series A pursuant to the conversion of 50,850 shares of Series B Convertible
Preferred Stock. We also issued 307,996 shares of Common Stock Series
A for salaries, bonuses, services, and board of director fees and 500,000 shares
of Common Stock Series A as part of our sale of Series F and Series G
Convertible Preferred Stock. We also issued 300,000 shares of Common
Stock Series A as the result of conversions of Series C and Series D preferred
shares.
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During the nine months ended September 30, 2009, we issued 232,156 shares of
Common Stock Series A to an investor in return for cash used for working capital
(this is the same investor who invested $1,000,000 in Series E Convertible
Preferred Stock, $1,000,000 in Series F Convertible Preferred Stock, and
$750,000 in Series G Convertible Preferred Stock).
In the first quarter of 2009, we closed
the Gamblers Bonus Million Dollar game due to a lack of ticket
sales. Accordingly, we redeemed the $1,000,000 of Series F Preferred
Stock from our investor. We closed our Million Dollar Ticket Game as well for
the same reason. We also temporarily suspended our Nevada Numbers
game to change the draw to hourly rather than daily. We restarted the
Nevada Numbers game on March 1, 2009 but again suspended it on March 31, 2009
due to a lack of funds to meet our Nevada Gaming bankroll
requirements. This suspension resulted from the change in ownership
at Treasure Island and the new ownership’s decision to not continue bankrolling
our game. The game will remain suspended until we can find
approximately $4 million for the bankroll. When we restarted Nevada
Numbers on March 1, 2009, we restored Series F Convertible Preferred Stock for
$1,000,000 to be used as additional bankroll needed for Nevada Numbers. Due to
the March 31 shutdown, the Nevada Numbers bankroll funds associated with Series
F Convertible Preferred Stock were no longer needed. Therefore, in
April 2009 we again redeemed the Series F Convertible Preferred Stock and the
$1,000,000 was returned to the investor. In addition, in April 2009,
he received another 7,156 shares of Common Stock Series A. These
shares were awarded in lieu of cash dividends and as a reimbursement of legal
fees for the restoration of Series F Convertible Preferred Stock for $1,000,000
to support the restarting of Nevada Numbers.
Series B Convertible Preferred
Stock. Each share of Series B Convertible Preferred Stock is
convertible at any time into Common Stock Series A at the election of the
holders of the Series B Convertible Preferred Stock on a one-to-five
basis. Holders of Series B Convertible Preferred Stock have a
liquidation preference of $5 per share. The Series B has liquidation
preference over holders of Series E, Series G, and Series H Convertible
Preferred Stock.
Series E Convertible Preferred
Stock. Holders of Series E Convertible Preferred Stock are
entitled to receive $5 per share as a liquidation preference after payment of
all existing and future indebtedness and the liquidation preference of Series I
and B Convertible Preferred Stock. Series E and Series G Convertible Preferred
Stock are pari passu in liquidation preference. Series E Convertible Preferred
Stock has a liquidation preference over Series H Convertible Preferred
Stock. During the year ended December 31, 2008, we issued 67,000
shares of our Series E Convertible Preferred Stock raising
$335,000. In February 2008, we closed our Series E Convertible
Preferred Stock offering with a total of 810,800 shares issued and $4,054,000
raised.
Series G Convertible Preferred
Stock. The holder of Series G Convertible Preferred Stock is
entitled to receive $5 per share as a liquidation preference pari passu with the
liquidation preference of Series E Convertible Preferred Stock and after payment
of all existing and future indebtedness and the liquidation preference of Series
I and B Convertible Preferred Stock. Series G Convertible Preferred
Stock has a liquidation preference over Series H Convertible Preferred
Stock. On May 9, 2008, we issued 150,000 shares of Series G
Convertible Preferred Stock which carries a cumulative 12% dividend rate payable
on January 1, 2010, immediately after paying IGT their 6.5% dividend on Series I
Preferred Stock. Series G Convertible Preferred stock is convertible
into Common Stock Series A at the lower of $3.50 or 30% off the IPO price, where
“IPO price” means the per share price to the public of any common shares offered
by us that in the aggregate results in capital in excess of $10.0 million being
raised and the shares of a class of our common stock being listed and traded on
a national stock exchange.
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Series H Convertible
Preferred Stock. The holders of Series H Convertible Preferred
Stock are entitled to receive $5 per share as a liquidation preference after
payment of all existing and future indebtedness and the liquidation preference
of Series I, Series B, Series E, and Series G Convertible Preferred
Stock. During the year ended December 31, 2008, we issued 98,500
shares of Series H Convertible Preferred Stock at a price of $5 per share for a
total capital raise of $492,500. The Series H Convertible Preferred
offering closed June 21, 2008. Series H Convertible Preferred stock
is convertible into Common Stock Series A at the lower of $2.50 or 30% off the
IPO price, where “IPO price” means the per share price to the public of any
common shares offered by us that in the aggregate results in capital in excess
of $10.0 million being raised and the shares of a class of our common stock
being listed and traded on a national stock exchange.
Series I Preferred
Stock. On October 1, 2008, IGT signed an investment agreement
as of September 30, 2008, with us for 4,693,878 shares of our Series I Preferred
Stock at $2.45 per share, or a total investment of $11.5 million. The
Series I Preferred Stock is convertible into shares of Common Stock Series A on
a one-for-one basis. The transaction closed on October 24, 2008. IGT
had previously advanced $1.5 million of this total investment pursuant to an
agreement dated July 17, 2008, as amended, so the net proceeds received by the
Company on October 24, 2008 was $10 million. IGT also received a
warrant to purchase 1.5 million shares of Common Stock Series A at an exercise
price of $2.45 per share. The warrant has a three-year term and is
fully vested. The shares of Series I Preferred Stock carry a dividend
rate of 6.5% payable initially on January 1, 2010 and vote on an as converted
basis, on all matters submitted to the Company’s stockholders. Based
on the fully diluted outstanding shares of the Company, IGT is entitled to two
seats on the Company’s Board of Directors, which to date they have not chosen to
fill. In addition, IGT forgave a receivable from the Company from a
prior legal settlement for $614,027. Also on October 1, 2008, we
signed three agreements with IGT which became part of the legal settlement with
IGT: 1) the Retrofit License Agreement, 2) the License and Application Support
Agreement and 3) the Intellectual Property Access Agreement. On
October 14, 2008, the legal case with IGT was dismissed by the Court with
prejudice.
With the additional $10 million of
funding from IGT, we paid in full the CAMOFI note for $6,051,250, together with
accrued interest and a payment penalty amounting to $1,567,272. We
were released from any and all liens and claims that CAMOFI may have against us
and the Registration Rights Agreement was terminated. CAMOFI has
2,675,000 warrants, with “piggy back” registration rights for its 300,000 shares
of our common stock and underlying shares of common stock underlying its
warrants, which registration rights are junior to the registration rights
granted to IGT as part of the Series I Preferred Stock transaction.
In connection with the IGT transaction,
we filed Amended and Restated Certificates of Designation with the Nevada
Secretary of State with respect to our Series B, Series E, Series F, Series G
and Series H Convertible Preferred Stock on October 22, 2008. We also
filed Certificates of Withdrawal of Certificate of Designation with the Nevada
Secretary of State with respect to our Series A, Series C, and Series D
Convertible Preferred Stock on October 3, 2008, as no shares of such series were
then issued or outstanding.
Stock Warrants and Options.
Our 2009 Stock Option Plan (2009 Plan), adopted by our Board of Directors and
approved by our stockholders, allows for the issuance of both qualified and
non-qualified options. The Stock Option Committee of our Board of Directors
administers the 2009 Plan. The 2009 Plan succeeds the 2000 Stock Option Plan
(2000 Plan) that will expire later this year except as to options outstanding
under the 2000 Plan. As of September 30, 2009, there were 1,016,573 qualified
and 65,200 non-qualified options outstanding under the 2009 Plan. As
of September 30, 2008 and 2009, respectively, there were 1,895,900 and 2,545,900
options outstanding under the 2000 Plan. As of September 30, 2008 and
2009, respectively, there were 535,000 and 650,000 non-qualified options
outstanding that were issued outside of the plans. The exercise price
of options issued pursuant to either plan cannot be less than the fair market
value at the time of the grant and vesting is at the discretion of the Stock
Option Committee, though limited to ten years. Only employees and consultants
are qualified to receive qualified options. The stock subject to the
2000 Plan is limited to 2,500,000 shares of Common Stock Series A. The stock
subject to the 2009 Plan is limited to 20% of the sum of the currently
outstanding shares of Common Stock Series A and the outstanding shares of our
preferred stock convertible into Common Stock Series A as of beginning of the
period under consideration.
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
We
have, from time to time, granted common stock, warrants and options to employees
and others as employment incentives, in return for successful capital-raising
efforts or as an inducement to invest in our common or preferred securities, in
return for other services, and in conjunction with the initial capitalization of
our company and business acquisitions. Warrants and options to
purchase 1,662,000 and 1,122,440 shares of Common Stock Series A were issued to
officers, directors and employees during the nine months ended September 30,
2008 and 2009, respectively. Total compensation cost recognized in operations
from grants of options and warrants amounted to $689,113 and $559,712 for the
nine months ended September 30, 2008 and 2009,
respectively. Unrecognized costs related to employee stock options
and warrants outstanding at September 30, 2009 totaled $846,962 and are expected
to be amortized over a weighted average period of three years.
The weighted
average exercise price of our outstanding options and warrants at September 30,
2009, was $2.53. The following table summarizes our stock option and warrant
activity followed by the applicable weighted average prices during the quarter
ended September 30, 2009:
Options/Warrants
|
Weighted
Average
Price
|
|||||||
Balance,
January 1, 2009
|
8,656,209 | $ | 2.46 | |||||
Granted
|
1,112,440 | 2.50 | ||||||
Exercised
|
- | - | ||||||
Forfeited
|
(367,500 | ) | (1.04 | ) | ||||
Balance,
September 30, 2009
|
9,411,149 | $ | 2.53 |
As of
September 30, 2009, 1,560,830 options and warrants are outstanding, but have not
vested. The aggregate intrinsic value of options and warrants at September 30,
2009, is $846,962.
Non-vested
Options
|
Weighted
Average
Price
|
|||||||
Balance,
January 1, 2009
|
1,393,210 | $ | 3.45 | |||||
Granted
|
642,580 | 2.50 | ||||||
Vested
|
(552,860 | ) | (3.56 | ) | ||||
Forfeited
|
- | - | ||||||
Balance,
September 30, 2009
|
1,482,830 | $ | 3.00 |
Non-vested
Warrants
|
Weighted
Average
Price
|
|||||||
Balance,
January 1, 2009
|
110,417 | $ | 2.52 | |||||
Granted
|
15,500 | 2.50 | ||||||
Vested
|
(47,917 | ) | (2.55 | ) | ||||
Forfeited
|
- | - | ||||||
Balance,
September 30, 2009
|
78,000 | $ | 2.50 |
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following table summarizes stock options and warrants outstanding at September
30, 2009, as to number exercisable and average remaining life in
years:
Weighted
Average
|
Weighted
Average
|
|||||||||||||||||||
Exercise
|
Number
|
Remaining
|
Number
|
Remaining
|
||||||||||||||||
Price
|
Outstanding
|
Life
in years
|
Exercisable
|
Life
in years
|
||||||||||||||||
Options
|
$ | 1.00 | 170,000 | 0.25 | 170,000 | 0.25 | ||||||||||||||
$ | 2.00 | 460,000 | 3.54 | 310,000 | 3.54 | |||||||||||||||
$ | 2.50 | 1,748,773 | 4.33 | 740,943 | 4.30 | |||||||||||||||
$ | 3.00 | 100,900 | 0.42 | 100,900 | 0.42 | |||||||||||||||
$ | 4.55 | 25,000 | 0.25 | 25,000 | 0.25 | |||||||||||||||
$ | 5.00 | 1,123,000 | 2.97 | 798,000 | 2.91 | |||||||||||||||
Warrants
|
$ | 1.00 | 110,000 | 2.77 | 110,000 | 2.77 | ||||||||||||||
$ | 1.48 | 2,675,000 | 1.56 | 2,675,000 | 1.56 | |||||||||||||||
$ | 1.50 | 30,000 | 3.59 | 30,000 | 3.59 | |||||||||||||||
$ | 2.00 | 185,000 | .90 | 185,000 | .90 | |||||||||||||||
$ | 2.10 | 23,809 | 1.12 | 23,809 | 1.12 | |||||||||||||||
$ | 2.45 | 1,500,000 | 2.06 | 1,500,000 | 2.06 | |||||||||||||||
$ | 2.50 | 155,667 | 4.02 | 77,667 | 4.00 | |||||||||||||||
$ | 3.00 | 854,000 | 1.31 | 854,000 | 1.31 | |||||||||||||||
$ | 4.00 | 100,000 | 0.37 | 100,000 | 0.37 | |||||||||||||||
$ | 5.00 | 150,000 | 1.53 | 150,000 | 1.53 | |||||||||||||||
9,411,149 | 2.39 | 7,850,319 | 2.07 |
There are
1,560,830 options and warrants that have been issued but not
vested. Of these options and warrants 31,750 will vest during the
remainder of 2009, 804,859 in 2010, 504,859 in 2011, 219,362 in
2012.
8.
Contingencies:
a. Economic conditions and related risks
and uncertainties. The United States is currently experiencing a
widespread recession accompanied by, among other things, weakness in the
commercial and investment banking systems resulting in reduced credit and
capital financing availability, and highly curtailed gaming, other recreational
activities and general discretionary consumer spending, and is also engaged in
war, all of which are likely to continue to have far-reaching effects on
economic conditions in the country for an indeterminate period. The
effects and duration of these developments and related risks and uncertainties
on our future operations and cash flows, including our access to capital or
credit financing, cannot be estimated at this time but have been and may
continue to be significant. In addition, we are presently unable to
satisfy our obligations as they come due and do not have enough cash to sustain
our expected working capital requirements for the remainder of 2009 and
2010. To address the going concern
uncertainty, we have engaged an investment banking firm to assist us in raising
capital and are presently in discussion with possible strategic partners in the
gaming industry for an equity investment. We are also creating a
sales deployment pipeline to provide momentum to our capital-raising
efforts. We have also initiated some major cost-cutting measurements
and have sold our bingo and keno businesses (Note
12). However, unless we obtain third-party debt or equity
financing or otherwise raise capital, for example, through the possible sale of
assets, in the near future, we will not be able to continue as a going
concern.
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
We often carry cash and cash
equivalents, including jackpot reserves, on deposit with financial institutions
substantially in excess of federally-insured limits, and the risk of losses
related to such concentrations may be increasing as a result of recent economic
developments and uncertainties discussed in the foregoing
paragraph. The extent of a future loss as a result of uninsured
deposits in the event of a future failure of a bank or other financial
institution, if any, is not subject to estimation at this time.
Moreover, though the two progressive
jackpot games are currently shut down, we may still become liable for the unpaid
progressive portion of each game. That possible liability is
currently $218,628 and is provided for with a deposit in one of our brokerage
accounts.
Based on circumstances described
in the foregoing paragraphs and in Notes
8b-d, below, and the related uncertainties particularly as to the likely success
of management’s plans to continue as a going concern, we are unable to make cash
flow forecasts based on any reasonably objective assumptions. Accordingly, as of
September 30, 2009, impairment evaluations
relative to these assets were based on our expectation of recoverability of at
least their carrying values through a possible sale thereof using fair
value estimates that are based on Level 3 inputs, as defined by generally
accepted accounting principles.
However, except as discussed in Note 12 to our consolidated financial
statements, no such asset sales are presently expected and, therefore, no assets
are currently classified as held for sale. It is possible based on future
developments, even in the near term, that asset impairment writedowns may become
necessary and that they may be significant.
b. Legal Matters. On
September 15, 2008, Steven Brandstetter and J & S Gaming filed a lawsuit
against us, among other defendants, in Department 11 of the Nevada Eighth
Judicial District Court captioned Brandstetter, et al. v. Bally Gaming, Inc., et
al., case no. 08-A-571641-C alleging against us claims of breach of contract,
misrepresentation, breach of fiduciary duty and unjust enrichment regarding a
non-disclosure agreement executed in May 2002 pertaining to the plaintiffs’
gaming concepts. In August, 2009, a Motion for Summary Judgment was
granted in favor of the defendants and the case was dismissed.
On August 26, 2009, a lawsuit was filed
by Adline Network Holdings, LLC, a Georgia Corporation, Adline Media LLC, a
Georgia Limited liability company, Adline Network LLC, a Georgia limited
liability company, and Sam Johnson, a former officer and employee of the
Company, in Department 21 of the Nevada Eighth Judicial District court, case no.
09-A-598004-C alleging breach of an Acquisition Agreement, breach of a
Consulting Agreement, breach of the covenant of good faith and fair dealing,
negligent misrepresentation, fraud/intentional misrepresentation, two 10b-5
securities violations and declaratory relief. We filed a Motion to
Dismiss on October 16, 2009, and a hearing on the Motion to Dismiss is scheduled
for December 2, 2009. We are unable to estimate minimum costs, if
any, to be incurred by us upon the ultimate disposition of this matter and,
accordingly, no provision has been made.
c. Gaming Regulation and
Licensing. We are licensed by the State of Nevada as an
operator of inter-casino-linked systems, supplier and distributor of keno and
bingo products, parts, and service, and as a keno route
operator. From time to time, we seek licensure in other gaming
jurisdictions so that we may similarly participate in the gaming revenue
produced by customers from our products in those
jurisdictions. Failure to comply with applicable gaming regulations,
retain our Nevada licenses, or obtain and retain the necessary licenses in other
jurisdictions, would likely have a material adverse effect on our future
operations and cash flows.
Regulation
5.115 of the Nevada Gaming Commission, as amended, allows licensees to use the
“reserve method” to fund periodic payments of any game, including a race book or
sports pool, tournament, contest, or promotional activity provided that the
licensee complies with certain financial monitoring and reporting requirements
as follows: 1) current ratio of 2:1 and 2) interest coverage ratio of
3:1. We have frequently found it impossible, primarily due to the
absence of earnings, to be in compliance with these ratios and in the past have
been successful in presenting an alternative plan acceptable to the Nevada
Gaming Commission to satisfactorily meet the objectives of the Regulation if not
cure the situation prospectively through expected future raises of
capital. The Nevada Gaming Commission has the right to demand that a
one-year letter of credit be posted when a licensee is not in compliance with
the foregoing financial ratios but has not made any such demand on the Company
to date.
d. Technology Royalty
Agreement. On August 6, 2009, we became obligated under a
Technology Royalty Agreement with Perfect Storm Software, LLC, whose members
include five of our engineers, one of whom is our Chief Technology Officer, who
began employment in 2008 and brought with them preexisting technology that was
used in the development of PlayerVision 3 (PV 3). The Technology
Royalty Agreement calls for (1) a one-time royalty fee of $1,000 due
and payable on the date of execution, (2) an annual license reissue fee in the
amount of $20,000 due and payable on each anniversary of the Effective Date
beginning on the first anniversary, (3) a royalty bonus equal to 5% of net
PlayerVision 3 sales for software licensed products, (4) a royalty bonus equal
to 5% of net sales for hardware utilized to operate software licensed products
where the markup percentage of the hardware is greater than 20%, and (5) a
royalty bonus of 750,000 shares of our Common Stock Series A contingent upon our
change in control.
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9.
Income Taxes:
As of
September 30, 2009, net operating loss carryforwards for federal income tax
reporting purposes total approximately $42.8 million and expire between 2013 and
2028. However, because we have not achieved profitable operations, management is
unable to conclude at this time that realization of any future income tax
benefit of the net operating loss carryforwards accumulated to date is more
likely than not. Therefore, the related deferred tax asset of $14.9
million has been effectively reduced due to our inability to fully utilize our
net operating loss carryforwards, and the realization of any benefit therefrom
would likely be limited pursuant to Internal Revenue Code
Section 382.
10.
Financial Instruments:
The Company’s financial instruments
consist of cash, jackpot reserve deposits, progressive jackpot liability, and
debt. The estimated fair values of these financial instruments are
approximately equal to book value because of their short-term nature and/or
because of interest rates approximating current market interest rates based on
Level 2 inputs, as defined by generally accepted accounting
principles.
11.
Segment Information:
We conduct our operations
in three primary business segments: “Casino Games”, “Products” and
“Other.” Operating results, certain unallocated expenditures, and
identifiable assets for these segments are set forth below.
Nine
months ended September 30,
|
||||||||
2008
|
2009
|
|||||||
Revenue
|
||||||||
Casino
Games
|
$ | 1,868,701 | $ | 1,395,959 | ||||
Product
Sales
|
927,738 | 781,875 | ||||||
Other
|
716,283 | 866,697 | ||||||
$ | 3,512,722 | $ | 3,044,532 | |||||
Operating
income (loss)
|
||||||||
Casino
Games
|
$ | 28,190 | $ | 230,294 | ||||
Product
Sales
|
476,428 | 375,226 | ||||||
Other
|
(172,095 | ) | 146,800 | |||||
Unallocated
|
(6,563,911 | ) | (4,482,010 | ) | ||||
$ | (6,231,388 | ) | $ | (3,729,690 | ) | |||
Identifiable
assets
|
||||||||
Casino
Games
|
$ | 3,974,808 | $ | 1,592,741 | ||||
Product
Sales
|
315,723 | 222,585 | ||||||
Other
|
398,492 | 338,796 | ||||||
Unallocated
|
2,430,445 | 2,138,851 | ||||||
$ | 7,119,468 | $ | 4,292,973 |
Identifiable
assets of $4,292,973 at September 30, 2009, included recorded goodwill of
$1,740,843 that relates to the Product Sales segment from prior
acquisitions.
Nine
months ended September 30,
|
||||||||
Capital
expenditures
|
2008
|
2009
|
||||||
Casino
Games
|
$ | 118,535 | $ | 23,248 | ||||
Product
Sales
|
- | 4,936 | ||||||
Other
|
98,947 | 36,604 | ||||||
Unallocated
|
65,162 | 30,648 | ||||||
$ | 282,644 | $ | 95,436 |
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12.
Sale of Assets:
We completed the
sale of our bingo business, keno intellectual property, and prac (Promotion
marketing software) business to Gaming Arts, LLC (GA) on August 19, 2009, for
$1,050,000. GA also executed a Nevada Numbers License Agreement for
$50,000 for an exclusive license to operate, grant sublicenses and enforce the
Nevada Numbers intellectual property in any non-slot application. In
addition, GA received a non-exclusive license to operate, grant one sublicense,
and enforce the Nevada Numbers intellectual property in any slot machine
application for 50% of the net profits after GA or its sublicensee receives the
first $100,000 in net profits. However, since GA has not received the
necessary regulatory approval to be a gaming operator, the Company continues to
maintain control of these assets and manage them on a day-to-day basis for an
indefinite period pending such approvals. The gain on the sale of these
assets has been deferred pending such approvals. As a result of
significant uncertainty as to the achievement and timing of such
regulatory approvals, we are unable to conclude that the disposition of these
business assets and activities within one year is probable. Therefore, pursuant
to ASC
360-10-45-9, we have not classified such operations of these
businesses as discontinued.
We also
executed an agreement for the sale of our keno business to Session Gaming, Inc.
for $100,000 on November 4, 2009. This transaction likewise will not
close until Session Gaming, LLC, has been approved for licensing by the
appropriate gaming authorities in various jurisdictions.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion and analysis
should be read together with our unaudited consolidated financial statements and
the accompanying notes. This discussion contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the
Private Securities Litigation Reform Act of 1995, including statements regarding
our expected realization of more significant revenue from PlayerVision during
the first quarter of 2010 and our expected financial position, business and
financing plans. Some of the forward-looking statements can be identified by the
use of forward-looking terms such as “believes,” “expects,” “may,” “will,”
“should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates,” or
other comparable terms. Forward-looking statements involve inherent risks and
uncertainties which could cause actual results to differ materially from those
in the forward looking statements. Such risks and uncertainties
include any adverse judgment, ruling or order, lack of market acceptance of our
PlayerVision system, our inability to secure additional third-party financing,
the current economic recession, the lack of operating history of our
PlayerVision system, the ability of our competitors to introduce products having
advantages over our PlayerVision system, the failure to obtain regulatory
approval for our PlayerVision modules, restrictions on our ability to install
our PlayerVision system on existing gaming machines, our failure to protect our
intellectual property rights and additional risks discussed herein and elsewhere
in our Form 10-K for the year ended December 31, 2008. We caution
readers not to place undue reliance upon any such forward-looking statements,
which speak only as of the date made. These historical financial
statements may not be indicative of our future performance. (See
“Liquidity and Capital Resources,” below.)
Overview
Historically, we have been one of the
leading suppliers of keno and bingo games, systems, and supplies, a relatively
small market associated with nominal growth and smaller
companies. However, to date, we have devoted a significant portion of
our resources toward the development, regulatory approval, and marketing of our
PlayerVision system. In comparison to the keno and bingo market, we
believe that the potential market for our PlayerVision system, i.e., the gaming machine
market, is much larger and more dynamic. While we continue to provide
equipment, supplies and games for use by our customers in the keno and bingo
segments of the gaming industry, subject to our ability to continue as a going
concern, addressed below, we expect these revenues will continue to decline as
we focus on the deployment of PlayerVision. Also see Note 12 to our
consolidated financial statements. PlayerVision has not had a significant
revenue effect on our financial statements to date. Due primarily to
our focus on the development of our PlayerVision system and other factors, we
have incurred expenses in excess of our revenue and have generated losses to
date.
In May 2009, we received approval for
nine software applications on our PlayerVision 3 platform from the Nevada Gaming
Control Board. These software applications include
Beverage-on-Demand, ServiceVision, VoyeurVision, Live TV, AdVision, YouTube,
CasinoTunes, ValetVision, and BurstVision. We intend to submit these
same applications for Gaming Laboratories International (GLI) approval, an
independent accredited testing laboratory, in the first quarter of
2010.
Based on the foregoing, and other than
the insignificant revenue realized from our early adoption agreements, and
subject to economic uncertainties discussed herein, and subject to our ability
to continue as a going concern, as discussed below, we expect to begin to
realize more significant revenue from our PlayerVision system during the first
quarter of 2010. If achieved, this would mark a significant shift in
the type of revenue recognized by us. If achieved, the anticipated
revenue would be from the installation of hardware associated with our
PlayerVision 3 platform and the licensing of our nine software applications
primarily in Nevada. No assurance can be given, however, that we will
begin installing our PlayerVision 3 applications or begin realizing revenue from
our PlayerVision system during the first quarter of 2010 or at all.
We expect to continue to incur losses
for the remainder of 2009, and we expect to face competition from larger, more
formidable competitors as we attempt to enter the gaming machine
market. Due to continuing expenses related to our PlayerVision
system, in addition to any funds from operations, we must obtain funds from
third party financing sources, if available, to sustain our operations in 2009
and 2010.
We are presently unable to satisfy our
obligations as they come due and do not have enough cash to sustain our
anticipated working capital requirements for the remainder of 2009, and, unless
we obtain third-party financing or raise other capital through the sale of
assets or otherwise in the near future, we will be unable to continue as a going
concern. See discussion in “Liquidity – Outlook” below.
Critical
Accounting Policies and Estimates
The discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with generally
accepted accounting principles. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue, and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. These estimates and
assumptions provide a basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions, and these differences may be material.
We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.
Revenue
Recognition
PlayerVision. Any revenue from
PlayerVision will result from installation fees, activation fees, fees for
services, and revenue sharing arrangements. We will recognize installation and
activation fees for PlayerVision upon installation and recognize the costs
associated with the installation (labor and supplies) at that time. We will
recognize revenue from the revenue sharing arrangements as earned and recognize
maintenance expenses as incurred against the corresponding
revenue. Manufacturing costs will be capitalized and depreciated over
the life of the asset.
Casino Games. As wagers are made within
our inter-linked systems, we recognize our share of each wager made as revenue.
Based on the revenue proceeds, we purchase insurance to fund the base jackpot.
We also estimate the cost for any uninsured base jackpot and the expense for any
progressive jackpot and, accordingly, establish a liability on our balance sheet
as a progressive jackpot liability. For our other casino games, we recognize our
share of revenue upon the sale of each ticket. We have the discretion to
purchase insurance to fund jackpots. We recognize costs associated with
uninsured jackpots as each ticket is sold based on mathematical probabilities
dictated by the odds of the game.
Products. We generally recognize sales
of bingo and keno equipment when installed and sales of supplies when the
products are shipped. Warranty costs and related liabilities associated with
product sales have not been material. We recognize fees from equipment
maintenance contracts sold separately (with no bundled deliverables) evenly over
the term of the contract. Prior to shipment, we include equipment and supplies
in inventories and stated at the lower of cost, as determined on a “first-in
first-out’’ basis, or market.
Other. We include keno revenue from the
operation of a keno route subject to multiple participation agreements in other
revenue in an amount equal to the net win from such gaming activities, which is
the difference between gaming handle and amounts paid to customers. We reflect
amounts due to the owners of the facilities in which the keno games are
conducted (effectively contingent rent) as an expense.
Equipment,
Goodwill and other Intangible Assets
We review the carrying values of
equipment, goodwill and other intangible assets for impairment at least
annually, and whenever events or circumstances indicate the carrying value may
not be recoverable or warrant a revision to the estimated remaining useful
life.
Based on circumstances described in
“Liquidity
and Capital Resources,” below, and the related uncertainties as to the
success of management’s plans to continue as a going concern, we are unable to
make cash flow forecasts based on reasonably objective assumptions. Accordingly,
as of September 30, 2009, impairment evaluations relative to these assets were
based on our expectation of recoverability of at least their carrying values
through a possible sale thereof using fair value estimates that are based
on Level 3 inputs, as defined by generally accepted accounting principles. However,
except as discussed in Note 12 to our consolidated financial statements, no such
asset sales are presently expected and, therefore, no assets are currently
classified as held for sale. It is possible based on future developments, even
in the near term, that asset impairment writedowns may become necessary and that
they may be significant.
Factors used in our evaluations of
potential impairment and estimated recoverable values require significant
judgments about respective estimated useful lives, risk rates, forecasted growth
rates, brand history, expected market growth, competitive environment, market
share, future business prospects and success of our products, including with
respect to goodwill, the identification of reporting units, allocation of
related goodwill, assignment of corporate shared assets and liabilities to
reporting units, and determination of the fair value of each reporting
unit. Changes in these estimates and assumptions could materially
affect the determination of recoverability or fair value. While we believe that
our estimates of recoverable values are reasonable, different assumptions could
materially affect our assessment of useful lives, recoverability and fair
values. Based on the foregoing analysis, we recorded no goodwill or
other impairment charges during the nine months ended September 30,
2009.
Our
intangible assets consist of key patents with a five-year life and software with
a three-year life. PlayerVision 3 costs are being capitalized
as we have proven technological feasibility and, subject to our ability to
continue as a going concern, as discussed above and below, will be depreciated
once our product is brought to market.
Income
Taxes
We have effectively provided a full
100% valuation allowance for the deferred tax effects of our net operating
losses at September 30, 2008 and 2009. We have effectively recorded a 100%
valuation allowance to offset the deferred tax asset resulting from operating
loss carryforwards arising in the current and prior periods that might otherwise
have been recognized since, because of our history of operating losses,
management is unable to conclude at this time that realization of such benefit
is currently more likely than not.
Recent
Accounting Pronouncements
There have been no recent accounting
pronouncements or changes in accounting pronouncements issued, but not yet
effective or early adopted, that are of significance, or potential significance
to the Company.
Results
of Operations
Three
Months Ended September 30, 2009, Compared with Three Months Ended September 30,
2008.
Revenue. Casino
games revenue for the three months ended September 30, 2009, decreased $298,000
or 42.0%, compared to the three months ended September 30, 2008. The
lower casino games revenue principally resulted from a reduction of $132,000 of
revenue for Gamblers Bonus Million Dollar Ticket which was not in existence in
the third quarter of 2009 but was being played in the third quarter of 2008, the
decline of Nevada Numbers and Million Dollar Ticket by $99,000 due to the
discontinuance of the games on March 31, 2009, lower revenue from Super Coverall
Bingo of $279,000 due to the loss of customers in Alabama and Florida, offset by
a $50,000 license fee received from the buyer of our bingo business for a
license to distribute Nevada Numbers.
Product sales for the three months
ended September 30, 2009, decreased by $4,000 or 1.5% compared to the three
months ended September 30, 2008.
Other revenue for the three months
ended September 30, 2009, increased by $40,000 or 16.9% compared to the three
months ended September 30, 2008. Revenue from Keno route and
participation agreements increased by $58,000 for the three months ended
September 30, 2009, compared to the three months ended September 30, 2008, due
to three new route locations being open, two in Las Vegas and one in Oklahoma,
during the three months ended September 30, 2009.
Cost and Expenses. Cost and
expenses of casino games for the three months ended September 30, 2009,
decreased by $266,000 or 51.2% compared to the three months ended, September 30,
2008. The decrease resulted primarily from the discontinuance of the Nevada
Numbers and Million Dollar Ticket games and the decrease in Super Coverall Bingo
as discussed previously.
Product cost and expenses for the three
months ended September 30, 2009, increased $2,500 or 1.9% compared to the three
months ended September 30, 2008, consistent with the stability of product sales
noted above.
Other cost and expenses for the three
months ended September 30, 2009, decreased $77,000 or 25.2% compared to the
three months ended September 30, 2008, because we reduced salary expenses by
$86,000 through headcount reductions in our Keno service staff.
Other Operating Expenses.
Selling, general and administrative expenses for the three months ended
September 30, 2009, decreased by $567,000 or 37.7%, as legal, auditing and
consulting fees decreased by $127,000 during the three months ended September
30, 2009, compared to the same period in 2008 primarily as a result of a
reduction in legal fees resulting from settlement of the IGT lawsuit in October
2008. Board of Directors fees were reduced by $76,000 during the
three months ended September 30, 2009 versus the same period in the prior year
as we have not had the cash available to compensate our
Board. Salaries were reduced by $196,000 during the three months
ended September 30, 2009, versus the same period in the prior year due to the
furlough of eight PlayerVision administrative employees on August 1,
2009. Travel and entertainment cost was reduced by $46,000 during the
three months ended September 30, 2009 versus the same period in the prior year
as a direct result of the furloughs mentioned above and below.
Research and development costs for the
three months ended September 30, 2009, have decreased by $182,000 or 49.0%
compared to the three months ended September 30, 2008, due to the furlough of
seven engineering employees on August 1, 2009.
Depreciation and amortization for the
three months ended September 30, 2009, decreased $69,000 or 34.4% compared to
the three months ended September 30, 2008, as our asset base is older and more
assets are becoming fully depreciated.
Finance Costs. Finance costs
for the three months ended September 30, 2009, decreased $435,000 or 88.7%
compared to the three months ended September 30, 2008, due to the payoff of our
primary third party lender, CAMOFI, in October 2008 with proceeds from equity
capital invested by IGT.
Interest and Other Income.
Interest and other income for the three months ended September 30, 2009,
decreased by $2,000 compared to the three months ended September 30, 2008
due to the Company's lower cash position.
Results
of Operations
Nine
Months Ended September 30, 2009, Compared with Nine Months Ended September 30,
2008.
Revenue. Casino
games revenue for the nine months ended September 30, 2009, decreased $473,000
or 25.3%, compared to the nine months ended September 30, 2008. The
lower casino games revenue principally resulted from a reduction of $236,000 of
revenue for Gamblers Bonus Million Dollar Ticket which was not in existence in
the third quarter of 2009 but was being played in the third quarter of 2008, and
Nevada Numbers and Million Dollar Ticket declined by $248,000 due to the
discontinuance of the game on March 31, 2009 and lower revenue from Super
Coverall Bingo of $38,000 offset by a $50,000 license fee received from the
buyer of our bingo business for a license to distribute Nevada
Numbers.
Product sales for the nine months ended
September 30, 2009, decreased by $146,000 or 15.7% compared to the nine months
ended September 30, 2008. Keno equipment sales amounted to $127,000 for the nine
months ended September 30, 2009 compared to $190,000 during the nine months
ended September 30, 2008. This decrease in Keno equipment sales was due to a
delay by customers to buy new keno systems due to the state of the
economy. Bingo and keno supplies sales also declined by $78,000
during the nine months ended September 30, 2009 versus the same period in the
prior year due to loss of market share.
Other revenue for the nine months ended
September 30, 2009, increased by $150,000 or 20.9% compared to the nine months
ended September 30, 2008. Revenue from Keno route and participation
agreements increased $168,000 for the nine months ended September 30, 2009,
compared to the nine months ended September 30, 2008, due to the opening of
three new route locations, two in Las Vegas and one in Oklahoma, for the entire
nine months ended September 30, 2009, versus only the two new Las Vegas
locations being opened for four months during the nine months ended September
30, 2008.
Cost and
Expenses. Cost and expenses of Casino Games for the nine
months ended September 30, 2009, decreased by $675,000 or 36.7% compared to the
nine months ended September 30, 2008. The decrease resulted primarily
from the discontinuance of the Nevada Numbers and Million Dollar Ticket games
and the decrease in Super Coverall Bingo as previously discussed.
Product cost and expenses for the nine
months ended September 30, 2009, decreased $45,000 or 9.9% compared to the nine
months ended September 30, 2008, consistent with the decline in Keno equipment
sales. Gross margin on product sales has declined from 51.4% to
48.0% as we have had to do more discounting on Keno equipment
sales.
Other costs and expenses for the nine
months ended September 30, 2009, decreased $168,000 or 19.0% compared to the
nine months ended September 30, 2008, because we reduced salary expenses by
$160,000 through headcount reductions in our Keno service staff.
Other Operating
Expenses. Selling, general and administrative expenses for the
nine months ended September 30, 2009, decreased by $1,157,000 or 23.8%, as
legal, auditing and consulting fees decreased by $736,000 during the nine months
ended September 30, 2009, compared to the same period in 2008 primarily as a
result of a reduction in legal fees resulting from settlement of the IGT lawsuit
in October 2008. Board of Directors fees were reduced by $32,000
during the nine months ended September 30, 2009 versus the same period in the
prior year as we have not had the cash available to compensate our
Board. Salaries were reduced by $231,000 during the nine months ended
September 30, 2009 versus the same period in the prior year due to the furlough
of eight PlayerVision administrative employees on August 1,
2009. Travel and entertainment costs were reduced by $110,000 during
the nine months ended September 30, 2009 versus the same period in the prior
year as a cost reduction measure.
Research and development costs for the
nine months ended September 30, 2009, have decreased by $697,000 or 65.2%
compared to the nine months ended September 30, 2008, due to the furlough of
seven engineering employees on August 1, 2009.
Depreciation and amortization for the
nine months ended September 30, 2009, decreased $227,000 or 36.1% compared to
the nine months ended September 30, 2008, because our asset base is older and
more assets have been fully depreciated.
Finance Costs. Finance costs
for the nine months ended September 30, 2009, decreased $1,543,000 or 95.7%
compared to the nine months ended September 30, 2008, due to the payoff of our
primary third party lender, CAMOFI, in October 2008 with proceeds from equity
capital invested by IGT.
Interest and Other Income.
Interest and other income for the nine months ended September 30, 2009,
increased by $61,000 compared to the nine months ended September 30,
2008. The increase was primarily due to the decline in fair
value on our marketable securities of $72,000 during the nine months ended
September 30, 2008.
Liquidity
and Capital Resources
Cash
Flows
Cash used in operating activities
decreased by $2,079,000 for the nine months ended September 30, 2009 primarily
because of our net loss of $3,827,000 offset by noncash charges of $1,039,000, a
decrease in accounts receivable of $151,000, an increase in accounts
payable of $170,000, and an increase in advances from the buyer of our bingo
assets of $240,000. Investing activities consisted principally of net
cash inflows in connection with the reduction in the jackpot reserve deposits of
$1,012,000 because of the discontinuance of the Gamblers Bonus Million Dollar
Ticket game in January 2009, and $832,000 for the sale of our bingo assets
offset by cash outflows for capital expenditures of $727,000. Our
cash inflows from financing activities of $503,000 in the nine months ended
September 30, 2009, consisted principally of $562,500 of new capital from the
sale of Common Stock Series A, a borrowing from IGT for $1,500,000 advances from
stockholders of $300,000 offset by the net redemption of Series F
Convertible Preferred Stock for $1,000,000 following the shutdown of the Nevada
Numbers game and the repayment of shareholder advances of $825,000.
Capital
Expenditures
Capital expenditures increased by
$727,000 for the nine months ended September 30, 2009 compared to the same
period in the prior year as we began capitalizing our PlayerVision 3 engineering
costs prior to the projected rollout to the marketplace of nine new software
applications. For 2010, other than our obligation to pay any jackpots that may
be won, we anticipate that our most significant capital resource requirement
will relate to the purchase of approximately $10 million of PlayerVision control
units for the rollout of our PlayerVision System.
No assurance can be given that we will
be able to purchase sufficient control units or that such control units will be
available at an acceptable price, or at all. No assurance can be
given that we will be able to secure any third-party financing or that such
financing will be available to us on acceptable terms. As discussed
further under the heading Outlook below, it may be difficult for us to secure
additional third-party financing at this time.
Sources
of Capital
We have
traditionally relied on various forms of third party financing in order to
sustain our operations. On February 13, 2009, we signed a binding
term sheet (“Term Sheet”) with IGT whereby IGT advanced $1.5 million (“the
Advance”) to the Company. On September 4, 2009 (effective June 1,
2009), we signed a Secured Promissory Note for the Advance in favor of IGT which
carries an interest rate of 10% and is due January 29, 2010. We sold
our bingo business on August 19, 2009 and received proceeds of $1.1
million. We sold our keno business on November 4, 2009, for $100,000
which, pending regulatory approval, we will receive in the future.
Outlook
The United States has been experiencing
a severe economic recession that, among other things, has curtailed casino
gaming development, activity and profitability, both nationwide and particularly
in our local market, and has resulted in highly reduced availability of credit
and capital financing and heightened economic risks. The effects and duration of
these developments and related uncertainties on the Company’s future operations
and cash flows cannot be estimated at this time but likely will be
significant.
We presently are unable to satisfy
our obligations as they come due and do not have enough cash, inclusive of the
sale of our bingo and keno businesses, to sustain our anticipated working
capital requirements and our business expansion plans for the remainder of
2009. Subject to unforeseen effects of the economic risks and
uncertainties discussed in the foregoing paragraph and to our ability to raise
working capital, we expect to continue for at least the remainder of the
calendar year 2009 and 2010 to incur expenses related to the development and
regulatory approval for the remaining PlayerVision modules and additional
modules presently in development. The further delay of the rollout of our
PlayerVision system and/or the failure to obtain additional third-party
financing, will have material adverse effects on our cash flow, results of
operations and financial condition including significant uncertainty as to our
ability to continue as a going concern. No assurance can be given
that we will be able to secure any third party financing or that such financing
will be available to us on acceptable terms.
Given the
current financial market disruptions, credit crisis and economic recession,
including the current downturn in the gaming industry, it is difficult at this
time to obtain any third-party financing on acceptable terms, whether public or
private equity or debt, strategic relationships, capital leases or other
arrangements. In addition, we have significant restrictive covenants
under our recent financing with IGT that may prohibit us, in certain
circumstances, from obtaining third party financing without IGT’s prior written
consent. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional
funds, may require that we relinquish rights to certain of our technologies or
products or agree to other material obligations and covenants.
Although casino gaming development,
activity and profitability for 2008 and the first nine months of 2009 were down
and are expected to remain down for the remainder of 2009 and into 2010, we
believe that if our PlayerVision system is placed in casinos, such casinos will
generate additional revenue and possibly achieve cost
savings. Because of the selling points, we believe that our product
has appeal even in the current depressed gaming environment. Other
than the insignificant revenue realized from our early adoption agreements, we
do not expect to begin to realize revenue from our PlayerVision system until the
first quarter of 2010, though we cannot provide assurance that the
market will ever accept our PlayerVision system. Any failure by us to
install our PlayerVision system within our expected schedule or on terms
acceptable to us will likely have a material adverse impact on our cash flow,
results of operations and financial condition. In addition, we expect
to face competition from larger, more formidable competitors as we enter the
gaming machine market. A lack of market acceptance of our
PlayerVision system, failure to obtain additional financing, or unforeseen
adverse competitive, economic, or other factors may adversely impact our cash
position, and thereby materially adversely affect our financial condition and
business operations.
We presently do not use any derivative
financial instruments to hedge our exposure to adverse fluctuations in interest
rates, foreign exchange rates, fluctuations in commodity prices, or other market
risks, nor do we invest in speculative financial instruments.
Off
Balance Sheet Financing Arrangements
We have operating leases totaling
$1,146,987 that have the following payment schedule by calendar year: $123,266
in 2009, $500,948 in 2010, $324,253 in 2011, $147,804 in 2012, and $49,894 in
2013.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
Not required.
Item 4(T). Controls and Procedures.
We evaluated the effectiveness of our
disclosures controls and procedures as of the end of the period covered by this
report. This evaluation was carried out under the supervision, and
with the participation, of Jon D. Berkley, our Chief Executive Officer, and
Bruce A. Shepard, our Chief Financial Officer. Based on this evaluation, Mr.
Berkley and Mr. Shepard concluded that our disclosure controls and procedures
are effective to ensure the information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934, or the
Exchange Act, is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms.
Mr. Berkley and Mr. Shepard also
concluded that there have been no significant changes in internal controls or in
other factors that have materially affected, or would be reasonably likely to
materially affected, our internal control over financial reporting during the
quarter most recently ended.
PART
II – OTHER INFORMATION
Item 1. Legal Proceedings.
On
September 15, 2008, Steven Brandstetter and J & S Gaming filed a lawsuit
against us, among other defendants, in Department 11 of the Nevada Eighth
Judicial District Court captioned Brandstetter, et al. v. Bally Gaming, Inc., et
al., case no. 08-A-571641-C alleging against us claims of breach of contract,
misrepresentation, breach of fiduciary duty and unjust enrichment regarding a
non-disclosure agreement executed in May 2002 pertaining to the plaintiffs’
gaming concepts. In August, 2009, a Motion for Summary Judgment was
granted in favor of the defendants and the case was dismissed.
On August 26, 2009, a lawsuit was filed
by Adline Network Holdings, LLC, a Georgia Corporation, Adline Media LLC, a
Georgia Limited liability company, Adline Network LLC, a Georgia limited
liability company, and Sam Johnson, a former officer and employee of the
Company, in Department 21 of the Nevada Eighth Judicial District court, case no.
09-A-598004-C alleging breach of an Acquisition Agreement, breach of a
Consulting Agreement, breach of the covenant of good faith and fair dealing,
negligent misrepresentation, fraud/intentional misrepresentation, two 10b-5
securities violations and declaratory relief. We filed a Motion to
Dismiss on October 16, 2009, and a hearing on the Motion to Dismiss is scheduled
for December 2, 2009. We are unable to estimate minimum costs, if
any, to be incurred by us upon the ultimate disposition of this matter and,
accordingly, no provision has been made.
Item 1A. Risk Factors.
Not required.
Item 2. Unregistered Sales of Equity
Securities.
During
the three months ended September 30, 2009, we issued options and warrants to
purchase a total of 425,081 shares of Common Stock Series A to our employees and
members of our board of directors, all with an exercise price of $2.50 per
share, primarily with a three-year vesting schedule and a five-year
life. These issuances were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act in
that the issuance did not involve a public offering.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4. Submission of Matters to a Vote of
Security Holders.
Not Applicable
Item 5. Other Information.
On February 13, 2009, we signed a
binding term sheet (“Term Sheet”) with IGT whereby IGT advanced $1.5 million
(“the Advance”) to the Company. On September 4, 2009 (effective June
1, 2009), we signed a Secured Promissory Note (the “Note”) for the Advance in
favor of IGT which carries an interest rate of 10% and is due on January 31,
2010. We granted a security interest to IGT in all of our present and
future assets as security for such obligation.
On September 4, 2009 (effective June 1,
2009), the Company and IGT signed a First Addendum to License and Application
Support Agreement and a First Addendum to Intellectual Property Access Agreement
(the "Addendums”). The Addendums formally amend the License and
Application Support Agreement dated September 30, 2008 between the Company and
IGT (the “LASA”), and the Intellectual Property Access Agreement dated September
30, 2008 between the Company and IGT (the “IPAA”). The amendments to the LASA
include: (i) a requirement that the Company use its best efforts to utilize
IGT’s sb (server based) Media Manager as the default infrastructure for the
delivery of the Company’s PlayerVision® applications, where feasible, (ii) a
requirement that the Company provide development support for IGT sb (server
based) applications requested by IGT, (iii) an amendment to the amount of
distribution fees, (iv) a granting to IGT of a “most favored distributor” status
so that IGT is granted the most favorable terms on the Company’s software
distributor rates for its server-based applications,
and (v) a
requirement that the Company escrow the source code for the applications that
connect to IGT systems, (vi) a specification that the Company has a worldwide
license to use the IGT SPC Protocol in order to interface with the IGT Advantage
card reader assembly and that any other installation or use of the IGT SPC
Protocol that does not interface with the IGT Advantage card reader assembly is
unlicensed, (vii) a restriction not to place a secondary display in
any location or casino where there is an IGT system, (viii) a requirement that
the Company not compete against IGT in marketing, offering for use or sale, or
installing any IGT EGM peripherals and the IGT SPC Protocol for use with such
IGT EGM Peripherals, and (ix) a requirement that if the Company decides to
purchase such IGT EGM Peripherals, it shall do so from IGT or its affiliates.
IGT will have the right to access the source code only if the Company becomes
insolvent, and IGT’s rights to utilize such software (if released) will be
unlimited. The amendments to the IPAA include the Company’s agreement that IGT
will have the right to initiate, coordinate, finance and assist in the
prosecution, defense and enforcement of all Company owned intellectual property
to which the Company has granted IGT a right of first refusal.
The forgoing descriptions
of the Note and the Addendums are qualified in their entirety by
reference to the complete text of the Note and the Addendums, copies of which
are attached hereto as Exhibits 10.2, 10.3 and 10.4, respectively, and are
incorporated herein by reference.
Item 6. Exhibits
2.1
|
Asset
Purchase Agreement dated August 19, 2009 between the Company and Gaming
Arts, LLC, incorporated by reference to the Company’s Current Report on
Form 8-K/A filed with the Securities and Exchange Commission on August 27,
2009.
|
10.1
|
Technology
Royalty Agreement dated August 6, 2009 between the Company and Perfect
Storm Software, LLC, incorporated by reference to the Company’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
August 19, 2009.
|
10.2
|
Secured
Promissory Note dated June 1, 2009 in favor of IGT.
|
10.3
|
First
Addendum to Intellectual Property Access Agreement between the Company and
IGT dated September 4, 2009 (to be effective June 1,
2009).
|
10.4*
|
First
Addendum to License and Application Support Agreement between the Company
and IGT dated September 4, 2009 (to be effective June 1,
2009).
|
10.5
|
Asset
Purchase Agreement dated November 4, 2009 between the Company and Session
Gaming, LLC, incorporated by reference to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 20,
2009.
|
31.1
|
Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32.1
|
Certifications
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
*Confidential
treatment has been requested for portions of this exhibit. These
portions have been omitted from the exhibit filed with this Quarterly Report on
Form 10-Q and have been filed separately with the Securities and Exchange
Commission.
SIGNATURE
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Las
Vegas Gaming, Inc.
|
||||
(Registrant)
|
||||
Date:
|
November
23, 2009
|
By:
|
/s/
Jon D. Berkley
|
|
Jon
D. Berkley
|
||||
Its:
|
President
and Chief Executive Officer
|
|||
(Principal
Executive Officer)
|
||||
Date:
|
November
23, 2009
|
By:
|
/s/
Bruce A. Shepard
|
|
Bruce
A. Shepard
|
||||
Its:
|
Chief
Financial Officer
|
|||
(Principal
Financial Officer)
|
Exhibit | Document Description | |
2.1
|
Asset
Purchase Agreement dated August 19, 2009 between the Company and Gaming
Arts, LLC, incorporated by reference to the Company’s Current Report on
Form 8-K/A filed with the Securities and Exchange Commission on August 27,
2009.
|
|
10.1
|
Technology
Royalty Agreement dated August 6, 2009 between the Company and Perfect
Storm Software, LLC, incorporated by reference to the Company’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
August 19, 2009.
|
|
10.2
|
||
10.3
|
||
10.4*
|
||
10.5
|
Asset
Purchase Agreement dated November 4, 2009 between the Company and Session
Gaming, LLC, incorporated by reference to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 20,
2009.
|
|
31.1
|
||
31.2
|
||
32.1
|
*Confidential
treatment has been requested for portions of this exhibit. These
portions have been omitted from the exhibit filed with this Quarterly Report on
Form 10-Q and have been filed separately with the Securities and Exchange
Commission.