Attached files
file | filename |
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EX-10.1 - EX101 - LAS VEGAS GAMING INC | ex101.htm |
EX-31.2 - EX312 - LAS VEGAS GAMING INC | ex312.htm |
EX-31.1 - EX311 - LAS VEGAS GAMING INC | ex311.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:
|
March
31, 2010
|
|
OR
|
o
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TRANSITION
REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
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For
the transition period from:
|
to
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Commission
file number:
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000-30375
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Las
Vegas Gaming, Inc.
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|||
(Exact
name of registrant as specified in its charter)
|
|||
Nevada
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88-0392994
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||
(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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||
3980
Howard Hughes Pkwy., Suite 450, Las Vegas, Nevada 89169
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|||
(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:
|
15,009,149
shares of Common Stock Series A, $.001 par value, as of March 31,
2010
|
LAS
VEGAS GAMING, INC.
FORM
10-Q
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Page
|
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PART I – FINANCIAL
INFORMATION
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Item
1.
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3
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3
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4
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5
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7
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8
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Item
2.
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17
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Item
3.
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22
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Item
4T.
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22
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PART II – OTHER
INFORMATION
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Item
1.
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23
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Item
1A.
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24
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Item
2.
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24
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Item
3.
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24
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Item
4.
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24
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Item
5.
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24
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Item
6.
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24
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______________
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.
Item 1. Financial Statements.
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December
31,
|
March
31,
|
|||||||
ASSETS
|
2009
|
2010
|
||||||
Current
assets
|
(Unaudited)
|
|||||||
Cash
|
$ | 5,293 | $ | 4,610 | ||||
Accounts
receivable, net
|
336,352 | 159,098 | ||||||
Inventories
|
223,287 | 192,167 | ||||||
Prepaid
expenses, deposits and other
|
34,311 | 113,791 | ||||||
Jackpot
reserve deposits
|
218,628 | 219,519 | ||||||
|
817,871 | 689,185 | ||||||
Equipment,
net
|
505,486 | 479,114 | ||||||
Goodwill
|
1,413,901 | 1,413,901 | ||||||
Patents
and other intangibles, net
|
757,267 | 735,393 | ||||||
Other
|
42,212 | 40,030 | ||||||
$ | 3,536,737 | $ | 3,357,623 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
||||||||
Current
liabilities
|
||||||||
Due
to stockholders and officers
|
$ | 1,555,000 | $ | 2,672,847 | ||||
Due
to buyer of bingo business
|
494,342 | 458,892 | ||||||
Accounts
payable
|
1,017,375 | 937,815 | ||||||
Accrued
salaries
|
391,122 | 558,855 | ||||||
Accrued
dividends
|
994,607 | 1,397,171 | ||||||
Operating
lease reserve
|
- | 325,234 | ||||||
Progressive
jackpot liability
|
1,612,946 | 228,496 | ||||||
Other
|
265,276 | 445,021 | ||||||
6,330,668 | 7,024,331 | |||||||
Long-term
debt, net of current portion
|
16,266 | 29,868 | ||||||
Conditionally
redeemable Series B Convertible Preferred Stock, 50,000 shares issued and
outstanding
|
250,000 | 250,000 | ||||||
6,596,934 | 7,304,199 | |||||||
Stockholders'
equity (deficiency)
|
||||||||
Preferred
Stock, $.001 par, 10,000,000 shares authorized:
|
||||||||
Series
E: 810,800 shares issued and outstanding
|
811 | 811 | ||||||
Series
G: 150,000 shares issued and outstanding
|
150 | - | ||||||
Series
H: 98,500 shares issued and outstanding
|
99 | 99 | ||||||
Series
I: 4,693,878 shares issued and outstanding
|
4,694 | 4,694 | ||||||
Common
Stock, $.001 par value, 90,000,000 shares authorized:
|
||||||||
Common
Stock, $.001 par value, 90,000,000 shares authorized,
14,974,149 and 15,009,149 shares of series A issued and
outstanding
|
14,974 | 15,009 | ||||||
Additional
paid-in capital
|
44,245,949 | 43,592,194 | ||||||
Deficit
|
(47,326,874 | ) | (47,559,383 | ) | ||||
(3,060,197 | ) | (3,946,576 | ) | |||||
$ | 3,536,737 | $ | 3,357,623 |
See
notes to unaudited consolidated financial statements.
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
THREE
MONTHS ENDED MARCH 31, 2009 AND 2010 (UNAUDITED)
2009
|
2010
|
|||||||
Revenues
|
||||||||
Casino
games
|
$ | 75,664 | $ | 11,568 | ||||
Product
sales
|
97,291 | 108,818 | ||||||
Other
|
266,271 | 186,454 | ||||||
439,226 | 306,840 | |||||||
Costs
and expenses
|
||||||||
Casino
games
|
124,280 | 6,591 | ||||||
Product
costs
|
56,523 | 45,903 | ||||||
Other
|
262,416 | 105,694 | ||||||
443,219 | 158,188 | |||||||
Gross
operating income (loss)
|
(3,993 | ) | 148,652 | |||||
|
||||||||
Other
operating expenses
Provision
for lease abandonment
|
- | 325,234 | ||||||
Other
selling, general, and administrative
|
1,464,749 | 705,631 | ||||||
Research
and development
|
20,458 | 23,156 | ||||||
Depreciation
and amortization
|
135,608 | 73,494 | ||||||
|
1,620,815 | 1,127,515 | ||||||
Operating
loss
|
(1,624,808 | ) | (978,863 | ) | ||||
Other
income and expense
|
||||||||
Interest
expense
|
(11,541 | ) | (106,087 | ) | ||||
Other
|
(2,614 | ) | 1,751 | |||||
Loss
from continuing operations
|
(1,638,963 | ) | (1,083,199 | ) | ||||
Income
from discontinued operations:
|
||||||||
(including
gain on sale of bingo assets of $68,991 in 2010)
|
178,648 | 11,768 | ||||||
Net
loss
|
(1,460,315 | ) | (1,071,431 | ) | ||||
Preferred
stock dividends
|
(223,932 | ) | (510,411 | ) | ||||
Net
loss attributed to common stockholders
|
$ | (1,684,247 | ) | $ | (1,581,842 | ) | ||
Net
loss per common share
|
$ | (0.11 | ) | $ | (0.11 | ) | ||
Weighted
average shares outstanding
|
15,023,440 | 15,000,399 |
See
notes to unaudited consolidated financial statements
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIENCY)
THREE
MONTHS ENDED MARCH 31, 2009 AND 2010 (UNAUDITED)
Series E Convertible
Preferred
Stock
|
Series F Convertible
Preferred
Stock
|
Series G Convertible
Preferred
Stock
|
Series H Convertible
Preferred
Stock
|
Series I
Convertible
Preferred
Stock
|
Common
Stock
(Including
Series A)
|
Additional
Paid-In
Capital
|
Less Due From
Officers and
Stockholders
|
Deficit
|
||||||||||||||||||||||||||||
Balances,
January 1, 2009
|
$ | 811 | $ | 200 | $ | 150 | $ | 99 | $ | 4,694 | $ | 14,850 | $ | 44,160,702 | $ | (188,245 | ) | $ | (41,584,110 | ) | ||||||||||||||||
Net loss
|
(1,460,315 | ) | ||||||||||||||||||||||||||||||||||
Series F, G, and
I preferred stock
dividends payable
|
(223,932 | ) | ||||||||||||||||||||||||||||||||||
Issuance of warrants
for services
|
139,747 | |||||||||||||||||||||||||||||||||||
Other stock
based
compensation
|
20 | (20 | ) | |||||||||||||||||||||||||||||||||
Redemption of
Series F
Preferred Stock
|
(200 | ) | (999,800 | ) | ||||||||||||||||||||||||||||||||
Reissuance of
Series
Preferred
Stock
|
200 | 998,000 | ||||||||||||||||||||||||||||||||||
Collection of
amounts
receivable from
employees
and
stockholders
|
3000 | |||||||||||||||||||||||||||||||||||
Sale of
Common Stock
|
225 | 562,275 | ||||||||||||||||||||||||||||||||||
Balances,
March 31, 2009
|
$ | 811 | $ | 200 | $ | 150 | $ | 99 | $ | 4,694 | $ | 15,095 | $ | 44,862,704 | $ | (185,245 | ) | $ | (43,268,357 | ) |
See notes to unaudited
consolidated financial statements
Series E Convertible
Preferred
Stock
|
Series F Convertible
Preferred
Stock
|
Series G Convertible
Preferred
Stock
|
Series H Convertible
Preferred
Stock
|
Series I
Convertible
Preferred
Stock
|
Common
Stock
(Including
Series A)
|
Additional
Paid-In
Capital
|
Less Due From
Officers and
Stockholders
|
Deficit
|
||||||||||||||||||||||||||||
Balances,
January 1, 2010,
as previously
reported
|
$ | 811 | $ | - | $ | 150 | $ | 99 | $ | 4,694 | $ | 14,974 | $ | 44,245,949 | $ | - | $ | (47,326,874 | ) | |||||||||||||||||
Adoption of new
accounting
principle
|
1,349,332 | |||||||||||||||||||||||||||||||||||
Balances,
January 1, 2010,
as restated
|
(45,977,542 | ) | ||||||||||||||||||||||||||||||||||
Net loss
|
(1,071,430 | ) | ||||||||||||||||||||||||||||||||||
Dividends
Payable
Preferred Stock I
|
(510,411 | ) | ||||||||||||||||||||||||||||||||||
Issuance of stock
options and
warrants for
services
|
8,630 | |||||||||||||||||||||||||||||||||||
Issuance of
Common Stock
|
35 | 87,465 | ||||||||||||||||||||||||||||||||||
Cancellation of
Series
G
Preferred Stock
|
(150 | ) | (749,850 | ) | ||||||||||||||||||||||||||||||||
Balances,
March 31, 2010
|
$ | 811 | $ | - | $ | - | $ | 99 | $ | 4,694 | $ | 15,009 | $ | 43,592,194 | $ | - | $ | (47,559,383 | ) |
See notes to unaudited consolidated
financial statements
LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
THREE
MONTHS ENDED MARCH 31, 2009 AND 2010 (UNAUDITED)
2009
|
2010
|
|||||||
Operating
activities
|
||||||||
Loss
from continuing operations
|
$ | (1,638,963 | ) | $ | (1,083,199 | ) | ||
Deferred
gain recognized on sale of bingo business
|
- | (68,991 | ) | |||||
Marketable
security received for licensing fee
|
5,068 | - | ||||||
Depreciation
and amortization of equipment
|
70,473 | 51,619 | ||||||
Bad
debt expense
|
29,154 | 7,617 | ||||||
Capitalization
of PlayerVision costs
|
(320,607 | ) | - | |||||
Amortization
of debt issuance cost and intangibles
|
65,470 | 21,875 | ||||||
Stock-based
compensation to employees and consultants
|
139,747 | 96,129 | ||||||
Other
|
879 | 2,182 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
183,453 | (31,838 | ) | |||||
Inventories
|
(2,708 | ) | (51,081 | ) | ||||
Prepaid
expenses, deposits and other
|
(94,408 | ) | 61 | |||||
Accounts
payable
|
(427,813 | ) | (57,175 | ) | ||||
Accrued
salaries
|
(22,458 | ) | 167,733 | |||||
Reserve
for operating lease
|
- | 325,234 | ||||||
Progressive
jackpot liability
|
24,250 | 9,738 | ||||||
Other
|
(58,447 | ) | 190,208 | |||||
Net
cash used in continuing operating activities
|
(2,046,910 | ) | (419,888 | ) | ||||
Income
from discontinued operations
|
178,648 | 11,768 | ||||||
Net
cash used in operating activities
|
(1,868,262 | ) | (408,120 | ) | ||||
Investing
Activities
|
||||||||
Purchase
of property, equipment, and software
|
(33,684 | ) | - | |||||
Decrease
in jackpot reserve deposits
|
147,030 | - | ||||||
Increase
in jackpot reserve deposits
|
(9,557 | ) | (891 | ) | ||||
Net
cash provided by (used in) investing activities
|
103,789 | (891 | ) | |||||
Financing
activities
|
||||||||
Dividend
payments on Series F preferred stock
|
(32,877 | ) | - | |||||
Redemption
of Series F preferred stock
|
(1,000,000 | ) | - | |||||
Re-issuance
of Series F preferred stock
|
1,000,000 | - | ||||||
Repayment
of debt
|
(2,637 | ) | (2,359 | ) | ||||
Advances
from officers and shareholders
|
1,500,000 | - | ||||||
Repayment
of advances from shareholders
|
(600,000 | ) | - | |||||
Increase
in notes payable
|
212,000 | |||||||
Advances
from buyer of bingo business assets
|
198,687 | |||||||
Collection
of stock subscription receivables
|
3,000 | - | ||||||
Sale
of common stock
|
562,500 | - | ||||||
Net
cash provided by financing activities
|
1,429,986 | 408,328 | ||||||
Net
(decrease) in cash and cash equivalents
|
(334,487 | ) | (683 | ) | ||||
Cash,
beginning of period
|
497,529 | 5,293 | ||||||
Cash,
end of period
|
$ | 163,041 | $ | 4,610 | ||||
Non-cash
investing and financing activities
|
||||||||
Dividends
declared on Series I preferred stock
|
223,932 | 510,411 | ||||||
Equipment
acquired directly with debt proceeds
|
25,247 | |||||||
Series
G preferred stock converted to debt
|
957,847 | |||||||
Bingo
business assets applied to reduce debt
|
304,136 | |||||||
Reduction
of progressive liability for change in method
|
1,349,332 | |||||||
Non
cash advances from Buyer of bingo business assets
|
69,998 |
See
notes to unaudited consolidated financial statements.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of Operations:
Although we have recently focused our
resources and energies on the development of our proprietary multimedia delivery
system, known as PlayerVision, historically our principal business has been the
development and operation of linked-progressive, mega jackpot games, including
Nevada Numbers, Super Bonanza Bingo, and Million Dollar Ticket. On
March 31, 2009, because of the expiration of our contract with Treasure Island
whereby Treasure Island had agreed to maintain the $3.9 million base jackpot
bankroll, we shut down Nevada Numbers and Million Dollar Ticket. We
may restart the games as soon as funding for the $3.9 million base jackpot is
obtained.
To
partially fund our new strategic focus, we also consummated an agreement to sell
our business of distributing bingo equipment and supplies, licensing bingo
games, and certain other activities and rights (Note 5 and 11) effective March
1, 2010. Accordingly, the financial results of our bingo
business have been retroactively reclassified as discontinued operations. In
addition, on November 4, 2009, we entered into an agreement to sell our business
of distributing keno equipment and supplies and operating keno games to Session
Gaming, Inc. for $100,000 and, through March 31, 2010, have received $52,000 of
working capital advances in connection with this
transaction. Consummation of this transaction is contingent upon the
buyer obtaining gaming licenses in various jurisdictions.
2. Basis
of Presentation and Accounting:
The accompanying consolidated financial
statements have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission (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, 2009, previously
filed with the SEC, from which the balance sheet information as of that date is
derived.
The consolidated financial statements
include the accounts of Las Vegas Gaming, Inc. and its wholly-owned subsidiaries
and an inactive and immaterial 85%-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial statements have been prepared assuming that we will
continue as a going concern. However, our reoccurring losses from
operations, insufficient capital, and lack of liquidity raise substantial doubt
about its ability to continue as a going concern. Management’s plans
in regard to these matters are described in Note 7. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
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
subsequent to March 31, 2010, were evaluated by management to determine if
adjustments to or disclosure in these interim consolidated financial statements
were necessary. The results of operations for the three months ended March 31,
2010, are not necessarily indicative of results to be expected for the
year.
3. Jackpot Reserve
Deposits:
At
December 31, 2009 and March 31, 2010, as required by gaming regulators, we had
cash deposits of $218,628 and $219,519, respectively, restricted for funding
various jackpot-oriented games.
4.
Goodwill and Other Intangible Assets:
Goodwill
originated from the September 29, 2008, acquisition of various technologies and
intellectual property from AdLine Network Holdings, Inc. and relate primarily to
our PlayerVision systems. The unamortized cost of other intangibles
consists primarily of engineering costs ($724,160) also related to our
PlayerVision systems. Such engineering costs are expected to be
amortized using the straight-line method over an estimated economic life of five
years commencing following the receipt of laboratory approvals expected during
the third quarter of 2010.
5. Short-term
Obligations:
Due to Stockholders and
Officers. On February 13, 2009, we signed a binding term sheet
with IGT, the holder of our Series I convertible preferred stock, whereby IGT
advanced $1.5 million (the “Advance”) to us. The terms of the Advance included
interest calculated at 10% per annum beginning June 1, 2009, with principal and
interest ($1,587,945) due on January 29, 2010, and with all of our present and
future assets serving as collateral (Note 6).
Although we were unable to satisfy this
obligation when due, IGT has cooperated with us, thus far, and not foreclosed
while we explore refinancing and capital raising
alternatives. Due to the default, the interest rate increased
to 18%. Accrued dividends payable to IGT on its Series I Preferred
Stock totaled $886,760 and $1,397,171 at December 31, 2009 and March 31, 2010,
respectively.
On March 23, 2010, in transactions with
Triangle Holdings VI LLC, we borrowed $150,000, repurchased $750,000 of Series G
Preferred Stock, and paid $107,847 of accrued dividends then due by executing a
Secured Second Position Promissory Note for $1,107,847. The
stipulated loan fee associated with this borrowing was $100,000, and the note
bears interest at 10% per annum. Principal and interest are due once
the note, interest, and dividends due IGT have been paid. The
estimated effective interest rate associated with this transaction is
approximately 19%, which management believes approximates current market
rates.
During 2009, we received additional
advances totaling $300,000 from three other stockholders (two were also
officers) with $55,000 remaining due one shareholder / officer at December 31,
2009 and March 31, 2010.
Due to buyer of bingo
business. During 2009, Gaming Arts, LLC, the buyer of our
bingo business, (Note 11) advanced to us $494,342 for working capital purposes
and $458,892 remains outstanding at March 31, 2010
Progressive jackpot
liability. On March 18, 2010, the Financial Accounting
Standards Board (FASB) issued FASB Accounting Standards Codification 924-405,
Casino Jackpot
Liabilities, which states that jackpots on which we can avoid payment do
not meet the definition of a liability until the jackpot is won. This
is effective for years beginning on or after December 15, 2010; however, we
chose, as permitted, to early adopt during the quarter ended March 31,
2010. The effect of the early adoption was to decrease progressive
jackpot liability for base jackpot amounts and deficit at January 1, 2010, by
$1,349,000. The early adoption had no effect on operations and cash
flows for the periods presented.
6. Stockholders'
Equity:
From time to time, we issue shares of
common stock and preferred stock through transactions that are exempt from
registration under the Securities Act of 1933 (the “Securities Act”), either
pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation
D. For the three months ended March 31, 2010, we issued 35,000 shares
of Common Stock Series A as compensation ($87,500) for consulting
services. During the three months ended March 31, 2009, we sold
225,000 shares of Common Stock Series A for $2.50 per share to the same investor
who previously 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 and
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. 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 suspension, 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 associated with the
restoration of Series F Convertible Preferred Stock for $1,000,000.
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.
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.
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 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. 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 uson
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 our stockholders. Based on our fully
diluted outstanding shares, IGT is entitled to two seats on our Board of
Directors, which to date they have not chosen to fill. In addition,
IGT forgave a receivable from us 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: (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. However, CAMOFI
has 2,675,000 warrants, with “piggy back” registration rights for its 300,000
shares of our common stock, 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 (the “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
(the “2000 Plan”) that expired last year except as to options still outstanding
under the 2000 Plan. As of March 31, 2010 there were 566,810 qualified and
54,000 non-qualified options outstanding under the 2009 Plan. As of
March 31, 2010, there were 711,000 qualified and 525,000 non-qualified options
outstanding under the 2000 Plan. 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.
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 234,028 shares of
Common Stock Series A were issued to officers, employees and directors during
the three months ended March 31, 2009. Total compensation cost recognized in
operations from grants of options and warrants amounted to $139,747 and $8,629
for the three months ended March 31, 2009 and March 31, 2010,
respectively. Unrecognized costs related to employee
stock options and warrants
outstanding at March 31, 2010 totaled $381,268 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 March, 31 2010, was $2.39. The following
table summarizes our stock option and warrant activity followed by the
applicable weighted average prices during the quarter ended March 31,
2010:
Options/Warrants
|
Weighted
Average
Price
|
|||||||
Balance,
January 1, 2010
|
8,110,618 | $ | 2.46 | |||||
Granted
|
- | - | ||||||
Forfeited
|
(805,332 | ) | (3.12 | ) | ||||
Balance,
March 31, 2010
|
7,305,286 | 2.39 |
As of
March 31, 2010, 726,661 options and warrants are outstanding, but have not
vested. The aggregate estimated intrinsic value of options and warrants at March
31, 2010, is $381,268.
Non-vested
Options
|
Weighted
Average
Price
|
|||||||
Balance,
January 1, 2010
|
722,358 | $ | 3.02 | |||||
Granted
|
- | - | ||||||
Forfeited/Vested
|
(11,197 | ) | (2.56 | ) | ||||
Balance,
March 31, 2010
|
711,161 | 3.03 |
Non-vested
Warrants
|
Weighted
Average
Price
|
|||||||
Balance,
January 1, 2010
|
15,500 | $ | 2.50 | |||||
Granted
|
- | - | ||||||
Forfeited/Vested
|
- | - | ||||||
Balance,
March 31, 2010
|
15,500 | 2.50 |
The
following table summarizes stock options and warrants outstanding at March 31,
2010, 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
|
||||||||||||||||||||
$ | 2.00 | 10,000 | 3.04 | 10,000 | 3.04 | |||||||||||||||
$ | 2.50 | 1,171,810 | 3.76 | 610,649 | 3.78 | |||||||||||||||
$ | 3.00 | 25,000 | 0.26 | 25,000 | 0.26 | |||||||||||||||
$ | 5.00 | 650,000 | 2.28 | 500,000 | 2.29 | |||||||||||||||
Warrants
|
$ | 1.00 | 90,000 | 2.81 | 90,000 | 2.81 | ||||||||||||||
$ | 1.48 | 2,675,000 | 1.07 | 2,675,000 | 1.07 | |||||||||||||||
$ | 1.50 | 30,000 | 3.10 | 30,000 | 3.10 | |||||||||||||||
$ | 2.00 | 155,000 | 0.49 | 155,000 | 0.49 | |||||||||||||||
$ | 2.10 | 23,809 | 0.62 | 23,809 | 0.62 | |||||||||||||||
$ | 2.45 | 1,500,000 | 1.56 | 1,500,000 | 1.56 | |||||||||||||||
$ | 2.50 | 30,667 | 4.14 | 15,167 | 4.04 | |||||||||||||||
$ | 3.00 | 854,000 | 0.81 | 854,000 | 0.81 | |||||||||||||||
$ | 5.00 | 90,000 | 1.77 | 90,000 | 1.77 | |||||||||||||||
7,305,286 | 1.72 | 6,578,625 | 1.52 |
There are
726,661 options and warrants that have been issued but not vested. Of
these options and warrants 380,672 will vest during the remainder of 2010,
241,869 in 2011, and 104,120 in 2012.
7. Contingencies:
Economic conditions and related risks
and uncertainties. The United States is currently experiencing
a severe and 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 may likely be
significant. In addition, we often carry cash and equivalents, and
restricted jackpot reserves on deposit with financial institutions substantially
in excess of federally-insured limits. The extent of a 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.
Management’s
plans. 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 2010. Accordingly, 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. We are presently in discussions
with possible investors. We are also in negotiations with several
casinos to deploy our technology. Our plan is to ramp up our
PlayerVision 3 sales efforts using to-be-raised capital and to become profitable
six to nine months following an adequate capital infusion through revenue growth
associated with our PlayerVision systems and by keeping our fixed costs
low.
As part
of these efforts, we have also engaged an investment banking firm to assist us
in raising capital and are having discussions with possible strategic
partners. We are also creating a sales deployment pipeline which
should provide momentum to our capital raising efforts. We have initiated major
cost cutting measurements and have sold our bingo business (Note 11) and agreed
to sell our keno business.
Legal matters. On
September 15, 2008, a lawsuit was filed against us, among other defendants
regarding a non-disclosure agreement executed in 2002 pertaining to the
plaintiffs’ gaming concepts. In August, 2009, a Motion of Summary
Judgment was granted and the case was dismissed. An appeal has been
filed by the plaintiffs.
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 (collectively, Adline), and Sam
Johnson, a former officer and employee, alleging breach of an Acquisition
Agreement, breach of a Consulting Agreement, breach of a covenant of good faith
and fair dealing, negligent misrepresentation, common law fraud (fraud in the
inducement/fraudulent misrepresentation), 10b-5 securities violations and
declaratory relief. In response to our Motion to Dismiss on October
16, 2009, the plaintiffs filed a first amended complaint. Since then,
then plaintiffs have filed a second amended complaint with essentially the same
allegations as the first amended complaint, but naming the Chairman of the
Board, the Chief Executive Officer, and Chief Financial Officer individually in
the lawsuit also. 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.
During
February 2010, we closed our Reno office and warehouse facilities and ceased
paying rent. The lease term extends through April
2013. The landlord has filed suit to recover the costs of certain
improvements and lost rentals. Currently, the case is in the early
stages of discovery. However, based on the terms of the lease and
management’s estimate of current market rents and the time that might be
required for the landlord to lease the space, during the quarter ended March 31,
2010, we recorded a provision for loss on the lease abandonment of approximately
$325,000. The undiscounted rents for the remaining lease term total
$467,000.
On
December 22, 2009, a lawsuit was filed by a former officer and employee alleging
a severance benefit of $100,000 and unused vacation time of $29,135 are owed him
and damages in excess of $10,000 to be specifically determined at
trial. We are vigorously defending this lawsuit and 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.
Gaming Regulation and
Licensing. We are licensed with 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.
Adopted
amendments to Regulation 5.115 of the Nevada Gaming Commission, as amended on
November 18, 1999, allow 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 us to date.
Technology Royalty
Agreement. On August 6, 2009, we signed 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 preexisting technology with them which was used in the
development of PlayerVision 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 the our Common Stock Series A contingent upon any change in
control of us.
8. Income
Taxes:
As of
March 31, 2010, net operating loss carryforwards for federal income tax
reporting purposes total approximately $42.5 million and expire between 2013 and
2028. However, because we have not as yet achieved profitable operations,
realization of any future income tax benefit of the net operating loss
carryforwards is not yet viewed by management as more likely than
not. Therefore, the related deferred tax asset of $14.9 million has
been effectively reduced by a 100% valuation allowance. In addition,
we may be limited in our ability to fully utilize our net operating loss
carryforwards and realize any benefit therefrom in the event of any of certain
ownership changes, if any, described in Internal Revenue Code
Section 382.
9. Financial
Instruments:
Our financial instruments consist of
cash, jackpot reserve deposits, progressive jackpot liability, and
debt. Management believes that the estimated fair values of these
financial instruments are approximately equal to book value because of their
short-term nature and/or interest rates approximating current market interest
rates based on Level 2 inputs, as defined in generally accepted accounting
principles.
10. Segment
Information:
We conduct our operations in three
primary business segments: “Casino Games”, “Products” and
“Other.” Included in Casino Games segment are revenues and expenses
associated with our casino-linked and other games. The Products
segment includes activities associated with the distribution of bingo and keno
equipment and supplies and related maintenance agreements. The Other
segment includes primarily keno route operating activities. Operating
results, certain unallocated expenditures, and identifiable assets for these
segments are set forth below.
Three
months ended March 31,
|
||||||||
2009
|
2010
|
|||||||
Revenue
|
||||||||
Casino
Games
|
$ | 75,664 | $ | 11,568 | ||||
Product
Sales
|
97,291 | 108,818 | ||||||
Other
|
266,271 | 186,454 | ||||||
$ | 439,226 | $ | 306,840 | |||||
Operating
income (loss)
|
||||||||
Casino
Games
|
$ | (48,616 | ) | $ | 4,977 | |||
Product
Sales
|
40,768 | 62,915 | ||||||
Other
|
3,855 | 80,760 | ||||||
Unallocated
|
(1,620,815 | ) | (1,127,515 | ) | ||||
$ | (1,624,808 | ) | $ | (978,863 | ) | |||
Identifiable
assets
|
December
31, 2009
|
March
31,
2010
|
||||||
Casino
Games
|
$ | 1,422,438 | $ | 1,263,212 | ||||
Product
Sales
|
265,833 | 127,078 | ||||||
Other
|
201,321 | 226,774 | ||||||
Unallocated
|
1,647,145 | 1,740,559 | ||||||
$ | 3,536,737 | $ | 3,357,623 |
Identifiable
assets of $3,357,623 at March 31, 2010, included recorded goodwill of $1,413,901
that relates to the Unallocated Sales segment from prior
acquisitions.
Three
months ended March 31,
|
||||||||
Capital
expenditures
|
2009
|
2010
|
||||||
Casino
Games
|
$ | 12,472 | $ | - | ||||
Product
Sales
|
754 | - | ||||||
Other
|
- | 25,247 | ||||||
Unallocated
|
20,458 | - | ||||||
$ | 33,684 | $ | 25,247 |
11. Sale
of Assets and Discontinued Operations:
We consummated
the sale of our business of distributing bingo equipment and supplies, keno
intellectual property, and our route promo business assets (referred to as our
bingo business) to United Coin to Gaming Arts, LLC (“GA”) on March 1, 2010, for
$1,050,000. From August 19, 2009, the date of the agreement, to March 1,
2010 when GA had received all required gaming licenses, we continued to operate
such business activities. 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 sub-licensee receives the first $100,000 in net
profits. The gain on the sale of our bingo business amounted to
approximately $69,000 and is included in discontinued bingo business
operations.
The
carrying amounts of the assets acquired and liabilities assumed by GA were as
follows:
Accounts
receivable
|
$ | 86,469 | ||
Inventories
|
188,833 | |||
Equipment
|
64,620 | |||
Goodwill
|
630,335 | |||
$ | 970,257 | |||
Accounts
payable
|
$ | 38,550 | ||
Notes
payable
|
2,778 | |||
$ | 41,328 |
Revenue included in discontinued operations for the three months ended March 31, 2009 and 2010 was $685,000 and $283,000, respectively.
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 (the
“Exchange Act”) and the Private Securities Litigation Reform Act of 1995,
including statements regarding our expected realization of more significant
revenue from PlayerVision during the third 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, 2009. 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 a supplier
of keno and bingo games, systems, and supplies and the developer/provider of
linked-progressive, mega jackpot games to the gaming
industry. However, 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. Subject to our ability to
continue as a going concern, addressed below, we expect revenues associated with
our historical operations to continue to decline as we focus on the deployment
of PlayerVision. 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. We sold our business of distributing bingo equipment and
supplies, keno intellectual property, and route promo assets (collectively
referred to as our bingo business) effective March 1, 2010. We have
also entered into an agreement to sell our business of distributing keno
equipment and supplies and operating keno games (referred to as our keno
business).
In May 2009, we received approval for
nine software applications on our more robust and scalable PlayerVision 3
platform from the Nevada Gaming Control Board laboratory. These
software applications include Beverage-on-Demand, ServiceVision, VoyeurVision,
Live TV, AdVision, YouTube, CasinoTunes, ValetVision, and
BurstVision. We will submit these same applications for Gaming
Laboratories International (GLI) approval, an independent accredited testing
laboratory, in the third quarter of 2010.
Subject to economic uncertainties
discussed herein and our ability to continue as a going concern, as discussed
below, we expect to begin to realize more significant revenue from our
PlayerVision system following GLI approval. This would mark a
significant shift in the type of revenue recognized by
us. No assurance can be given, however, that we will
begin installing our PlayerVision 3 applications or begin realizing revenue from
our PlayerVision system.
For the remainder of 2010, we expect to
continue to incur losses and face competition from larger, more formidable
competitors as we attempt to enter the gaming machine market. We plan
to continue to rely on funds from third party financing sources, if available,
in addition to cash provided by operations to fund expenses necessary to
bringing our PlayerVision system to market and to sustain our other
activities.
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 2010 and, unless
we obtain third-party financing or otherwise raise capital for example through
the sale of assets in the near future, we will be unable to continue
as a going concern. See discussion in “Liquidity and Capital
Resources – 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 March 31, 2010, 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 in generally accepted
accounting principles. Level
3 inputs considered, among others, include the implicit value of our assets
based on current discussions with potential investors and equity and debt
transactions consummated over the past two years, which values indications have
been primarily driven by the perceived profit potential associated with
PlayerVision. Except as discussed in Notes 1 and 11 to our
consolidated financial statements, no asset sales have occurred or are presently
expected and, therefore, no assets are currently classified as held for sale. It
is possible based on evolving 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 and other intangibles, 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 three months ended
March 31, 2010.
Income
Taxes
We have provided a full 100% valuation
allowance for the deferred tax effects of our net operating loss carryforwards
through March 31, 2009 and 2010 because of our history of operating losses and
management’s resultant belief that the current probability of realization of
such benefit is not more likely than not.
Recent
Accounting Pronouncements
No recently
issued accounting pronouncements not yet effective or adopted are
expected to have a material impact on our financial position, results of
operations, or cash flows. For information related to a recently
adopted pronouncement see Note 5 (Progressive Jackpot Liabilities) to the
unaudited consolidated financial statements in Part I, Item 1 of this Quarterly
Report on Form 10Q
Results
of Operations
Three
Months Ended March 31, 2010 Compared with Three Months Ended March 31,
2009.
Revenue. Casino
games revenue for the three months ended March 31, 2010, decreased $64,000 or
84.7%, compared to the three months ended March 31, 2009 due primarily to
discontinuance of Nevada Numbers, Million Dollar Ticket and Gamblers Bonus
Million Dollar Ticket on March 31, 2009.
Product sales for the three months
ended March 31, 2010, increased by $12,000 or 11.8% compared to the three months
ended March 31, 2009 as a result of the timing of keno systems and supplies
sales.
Other revenue for the three months
ended March 31, 2010, decreased by $80,000 or 30.0% compared to the three months
ended March 31, 2009 due to the loss of two of our larger keno route locations
($62,000) and the loss of several keno service contracts ($28,000) in late
2009.
Cost and Expenses. Cost and
expenses of casino games for the three months ended March 31, 2010, decreased by
$118,000 or 94.7% compared to the three months ended, March 31, 2009 also as a
result of the discontinuance of the Nevada Numbers, Gamblers Bonus Million
Dollar Ticket and Million Dollar Ticket and higher gaming licensing fees in
Iowa, Minnesota, and Oklahoma in 2009 ($42,000).
Product cost and expenses for the three
months ended March 31, 2010, decreased $11,000 or 18.8% compared to the three
months ended March 31, 2009, as gross margin on keno systems and supplies
improved from 41.9% to 57.8%.
Other cost and expenses for the three
months ended March 31, 2010, decreased $157,000 or 59.7% compared to the three
months ended March 31, 2009 due to the loss of customers discussed above and
related elimination of service costs including keno service staff reductions
($56,000).
Other Operating Expenses. The
provision for lease abandonment relates to our closing of our Reno location and
defaults under the lease agreement (see Item 1 Legal Proceedings) and amounted
to $325,000 during the three months ended March 31, 2010. Other
selling, general and administrative expenses for the three months ended March
31, 2010, decreased by $759,000 or 51.8%, as legal, auditing and consulting fees
decreased by $109,000 during the three months ended March 31, 2010, compared to
the same period in 2009 primarily as a result of management significantly
cutting back on the use of outside legal and consulting
support. Salaries were reduced by $368,000 during the three months
ended March 31, 2010 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 were reduced by $48,000 during
the three months ended March 31, 2010 versus the same period in the prior year
as a cost reduction measure. Our advertising and marketing expense
was also reduced by $36,000 during the three months ended March 31, 2010 versus
the same period in the prior year as a cost reduction measure.
Research and development costs for the
three months ended March 31, 2010, increased by $3,000 or 13.2% compared to the
three months ended March 31, 2009. All of our engineers except one
were layed off on December 22, 2009. A majority of our engineering
costs during the three months ended March 31, 2009 were capitalized in
connection with enhancements to PlayerVision 3.
Depreciation and amortization for the
three months ended March 31, 2010, decreased $62,000 or 45.8% compared to the
three months ended March 31, 2009, as we entered into an agreement to sell our
bingo assets on August 19, 2009, and discontinued depreciation as of that
date.
Interest expense. Interest
expense for the three months March 31, 2010, increase $95,000 compared to the
three months ended March 31, 2009, as we borrowed $1.5 million from IGT on June
1, 2009.
Liquidity
and Capital Resources
Cash
Flows
Cash used in operating activities
decreased by $1,460,000 for the three months ended March 31, 2010 primarily
because of a smaller net loss ($389,000) and the capitalization of PlayerVision
costs of $321,000 during the three months ended March 31, 2009. Our cash inflows
from financing activities of approximately $408,000 in the three months ended
March 31, 2010, consisted principally of borrowings from
stockholders and the buyers of our bingo and keno
assets.
Capital
Expenditures
There were $25,247 of capital
expenditures during the three months ended March 31, 2010. 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 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. We borrowed $150,000 in late March, 2010 from
a shareholder and have had several borrowings from the buyers of our bingo and
keno businesses, $511,000 remains outstanding at March 31, 2010. We
are presently working with two investment banking firms who are trying to raise
between $5 – 20 million. Management estimates that a minimum of $5
million is needed to adequately launch PlayerVision 3 which is critical to
becoming profitable, and to resolve related matters including, but not limited
to, the satisfaction of past due liabilities and the modification of security
arrangements.
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 our 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 to sustain our
anticipated working capital requirements and our business expansion plans for
the remainder of 2010. 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 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 for the remainder of 2010. 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 2009 and the first three months of 2010 were down
and are expected to remain down for the remainder of 2010, we believe that our
PlayerVision system will provide casinos with additional revenue sources or cost
reductions attractive enough to 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 third 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. An
unexpected 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
$805,172 that have the following payment schedule by calendar year: $299,045 in
2010, $287,954 in 2011, $154,677 in 2012, $59,656 in 2013, and $3,840 in
2014.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
Not required.
Item 4(T). Controls and Procedures.
We maintain disclosure controls and
procedures that are intended to ensure that information required to be disclosed
in our reports under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the SEC’s rules and forms and that
such information is accumulated and communicated to our management, including
the Chief Executive Officer and the Chief Financial Officer.
Our management, including the Chief
Executive Officer and the Chief Financial Officer, has conducted an evaluation
of the effectiveness of disclosure controls and procedures pursuant to Exchange
Act Rule 13a-15(c). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures were not effective given a group of deficiencies collectively
considered to be a material weakness in the internal control over financial
reporting that management and our independent registered accounting firm have
identified as of December 31, 2009 that have not been mitigated as of March 31,
2010.
Among the most significant of these
deficiencies were inadequate segregation of duties, including the need for a
corporate controller and additional accounting personnel. Many of
these deficiencies had the effect of causing undetected material misstatements
in financial reporting to occur that required correction with significant audit
adjustments. In addition, such deficiencies had the potential for
causing further misstatements to occur and not be detected by our internal
control.
Changes in Internal Control over
Financial Reporting
Management believes that the hiring of
a controller and additional accounting personnel will properly address
segregation of duties issues and significant deficiencies in its internal
accounting control system. We will hire these key accounting
personnel with the next round of capital that is raised by us.
PART
II – OTHER INFORMATION
Item 1. Legal Proceedings.
On
September 15, 2008, a lawsuit was filed against us, among other defendants
regarding a non-disclosure agreement executed in 2002 pertaining to the
plaintiffs’ gaming concepts. In August, 2009, a Motion of Summary
Judgment was granted and the case was dismissed. An appeal has been
filed by the plaintiffs.
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, alleging breach of an Acquisition Agreement, breach of a
Consulting Agreement, breach of a covenant of good faith and fair dealing,
negligent misrepresentation, common law fraud (fraud in the
inducement/fraudulent misrepresentation), 10b-5 securities violations and
declaratory relief. In response to our Motion to Dismiss on October
16, 2009, the plaintiffs filed a first amended complaint. Since then,
then plaintiffs have filed a second amended complaint with essentially the same
allegations as the first amended complaint, but naming the Chairman of the
Board, the Chief Executive Officer, and Chief Financial Officer individually in
the lawsuit also. 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.
During
February 2010, we closed our Reno office and warehouse facilities and ceased
paying rent. The lease term extends through April
2013. The landlord has filed suit to recover the costs of certain
improvements and lost rentals. Currently, the case is in the early
stages of discovery. However, based on the terms of the lease and
management’s estimate of current market rents and the time that might be
required for the landlord to lease the space, during the quarter ended March 31,
2010, we recorded a provision for loss on the lease abandonment of approximately
$325,000. The undiscounted rents for the remaining lease term total
$467,000.
On
December 22, 2009, a lawsuit was filed by a former officer and employee alleging
a severance benefit of $100,000 and unused vacation time of $29,135 are owed him
and damages in excess of $10,000 to be specifically determined at
trial. We are vigorously defending this lawsuit and 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 And Use of Proceeds.
During
the three months ended March 31, 2010, we issued 35,000 shares of Common Stock
Series A to a financial consultant. This issuance was 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.
On
January 29, 2010, we defaulted on the $1.5 million note payable due to IGT, our
largest stockholder, which is carried among current liabilities. The
default totaled $1,587,945 including accrued interest since June 1,
2009. Thus far, IGT has cooperated with us and not foreclosed on the
note due to potential funding sources we are in discussions with to pay off the
defaulted amount owed IGT and to provide us with new working
capital. Due to the default, the interest rate increased to 18% on
January 30, 2010.
We are also in default on dividends
payable to IGT of $1,397,171 which is included in accounts payable and accrued
expenses on our Series I Preferred Stock and are in default on our Series G
Convertible Preferred Stock of $107,847 at December 31, 2009 with Triangle
Holdings VI LLC (“Triangle”), a shareholder who has invested in Series E
Preferred Stock and Common Stock Series A also. We executed a Stock
Repurchase Agreement with Triangle on March 23, 2010, for its $750,000 of Series
G Preferred Stock and its $107,847 of accrued dividends. Triangle
also loaned us $150,000 for current working capital purposes on March 22, 2010
and we committed to a $100,000 loan fee for the loan. To securitize
the stock redemption, the accrued dividends, the loan and the loan fee, on March
23, 2010, we signed a Secured Second Position Promissory Note for $1,107,847
with Triangle, which will be due if IGT is paid off their defaulted note,
interest, and dividends.
Item 4. (Removed and Reserved).
Item
5. Other Information.
Not
required.
Item 6. Exhibits
10.1
|
Stock
Repurchase Agreement with Triangle Holdings VI
LLC
|
|||
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
|
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:
|
June
18, 2010
|
By:
|
/s/
Jon D. Berkley
|
|
Jon
D. Berkley
|
||||
Its:
|
President
and Chief Executive Officer
|
|||
(Principal
Executive Officer)
|
||||
Date:
|
June
18, 2010
|
By:
|
/s/
Bruce A. Shepard
|
|
Bruce
A. Shepard
|
||||
Its:
|
Chief
Financial Officer
|
|||
(Principal
Financial Officer)
|
EXHIBIT
INDEX
Exhibit
|
Document
Description
|
|
10.1
|
Stock
Repurchase Agreement with Triangle Holdings VI
LLC
|
|
31.1
|
||
31.2
|
||
32.1
|