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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
  For the quarterly period ended September 30, 2012  
   
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
  For the transition period __________  to __________  

 

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

 

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

 

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

 

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

 

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

 

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

 

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

(Do not check if a smaller reporting company) 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,652,474 common and 4,500,000 Series A Nonvoting Capital Stock shares as of November 12, 2012

 

1
 

 

 

  TABLE OF CONTENTS
     Page
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
 
PART II - OTHER INFORMATION
 

Item 1.

Item 1A.

Legal Proceedings

Risk Factors

24

Item 2.

Item 3.

Unregistered Sales of Equity Securities and Use of Proceeds

Defaults Upon Senior Securities

24
Item 4. Mine Safety Disclosures 24
Item 5. Other Information 24
Item 6. Exhibits 25

 

PART I - FINANCIAL INFORMATION

 

Item 1.     Financial Statements

  

1 Consolidated  Balance Sheets as of  September 30, 2012 (unaudited) and December 31, 2011 (audited);  

2

Unaudited Consolidated  Statements of Operations for the three months ended September 30, 2012 and  2011;

 
3 Unaudited Consolidated Statements of Operations for the nine months ended September 30, 2012 and 2011;  
4 Unaudited Consolidated  Statements of Cash Flows for the nine months ended September 30, 2012 and 2011;  
5 Notes to Consolidated Condensed Financial Statements.  

 

 

 

2
 

 

 

 

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

   September 30,
 2012
  December 31,
2011
   (unaudited)  (audited)
Assets          
Current Assets          
         Cash  $389,069  $252,509 
 Accounts receivable, net   147,808    150,884 
 Inventory   305,467    464,306 
 Prepaid expenses   81,747    21,387 
Total Current Assets   924,091    889,086 
           
Property, Plant and Equipment, net   1,016,748    1,098,714 
           
Other Assets   9,745    12,797 
License fees, net of accumulated amortization   394,903    170,575 
           
Total Assets  $2,345,487   $2,171,172 
           
Liabilities and Stockholders' Deficit          
Current Liabilities          
         Accounts payable  $397,298  $870,896 
         Accrued expenses   279,753    768,426 
         Current portion of long term notes payable   13,417,110    —   
         Interest payable   5,100,099    —   
Total Current Liabilities   19,194,260    1,639,322 
           
Long Term Debt and Other Liabilities          
         Long term notes payable   —      13,331,979 
 Interest payable and other liabilities   —      4,290,099 
         Other long term liabilities   71,857    164,629 
         Fair value of warrants and convertible feature of long term debt   10,893    89,050 
Total Long Term  Debt and Other Liabilities   82,750    17,875,757 
           
Commitments          
           
Stockholders' Deficit          
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares authorized, 4,500,000 shares issued and outstanding at September 30, 2012 and 2,500,000 shares issued and outstanding at December 31, 2011   4,500    2,500 
           
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,660,285 shares issued and 4,652,474 shares outstanding at September 30, 2012 and December 31, 2011   4,661    4,661 
           
         Additional paid in capital   7,612,958    5,698,976 
         Accumulated deficit   (24,545,831)   (23,042,233)
         Treasury stock, 7,811 shares, at cost   (7,811)   (7,811)
Total Stockholders’ Deficit   (16,931,523)   (17,343,907)
           
Total Liabilities and Stockholders’ Deficit  $2,345,487   $2,171,172 
           
See Notes to Consolidated Condensed Financial Statements          

 

 

3
 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2012 and 2011

   September 30,
 2012
  September 30,
2011
   (unaudited)  (unaudited)
Revenues          
      License and service fees  $376,532   $319,698 
      Sales of gaming products and parts   4,666    6,519 
Total revenues   381,198    326,217 
           
Costs and operating expenses          
      Cost of products sold   (97,932)   4,155 
      Operating expenses   139,950    492,306 
      Research and development   213,854    246,880 
      Selling, general & administrative expenses   287,808    372,032 
      Depreciation and amortization   219,467    178,920 
Total costs and operating expenses   763,147    1,294,293 
           
Operating loss   (381,949)   (968,076)
           
Non-operating income (expense)          
      Net interest expense   (299,292)   (298,060)
      Change in value of warrants   36,361    45,571 
Net loss  $(644,880)  $(1,220,565)
Net loss per share, including Series A Nonvoting shares-basic and diluted  $(0.07)  $(0.17)
Weighted average Series A Nonvoting shares outstanding-basic and diluted   4,445,652    2,500,000 
Weighted average common shares outstanding-basic and diluted   4,652,474    4,652,474 
           
See Notes to Consolidated Condensed Financial Statements          

 

 

4
 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2012 and 2011

   September 30,
 2012
  September 30,
2011
   (unaudited)  (unaudited)
Revenues          
      License and service fees  $1,388,074   $726,667 
      Sales of gaming products and parts   51,519    92,866 
Total revenues   1,439,593    819,533 
           
Costs and operating expenses          
      Cost of products sold   (408,295)   33,100 
      Operating expenses   318,109    756,485 
      Research and development   535,914    805,359 
      Selling, general & administrative expenses   1,032,764    1,293,165 
      Depreciation and amortization   662,788    504,878 
Total costs and operating expenses   2,141,280    3,392,987 
           
Operating loss   (701,687)   (2,573,454)
           
Non-operating income (expense)          
      Net interest expense   (897,493)   (941,575)
      Change in value of warrants   95,582    125,895 
Net loss  $(1,503,598)  $(3,389,134)
Net loss per share, including Series A Nonvoting shares-basic and diluted  $(0.18)  $(0.58)
Weighted average Series A Nonvoting shares outstanding-basic and diluted   3,759,662    1,217,778 
Weighted average common shares outstanding-basic and diluted   4,652,474    4,652,474 
           
See Notes to Consolidated Condensed Financial Statements          

 

5
 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2012 and 2011

   September 30,
 2012
  September 30,
2011
   (unaudited)  (unaudited)
       
Net Cash Used in Operating Activities  $(1,004,528)  $(1,686,728)
           
Cash Flows From Investing Activities          
      Purchase of equipment   (355,030)   (615,217)
      Increase in license fees   (449,811)   (396,065)
      Proceeds from sale of fixed assets   —      45,000 
           
Net Cash Used in Investing Activities   (804,841)   (966,282)
           
Cash Flows From Financing Activities          
       Net Proceeds from issuance of Series A Nonvoting Capital Stock   1,945,929    1,000,000 
       Net Proceeds from issuance of debt   —      1,000,000 
           
Net Cash Provided By Financing Activities   1,945,929    2,000,000 
           
Net Increase (Decrease) in Cash   136,560    (653,010)
           
Cash - Beginning of period   252,509    1,335,379 
           
Cash - End of period  $389,069   $682,369 
           
Supplemental Disclosure of Non-Cash Financing Activities:          
           
Issuance of Series A Nonvoting Capital Stock in exchange for a note payable and accrued interest  $—     $1,000,000 
Issuance of capital stock warrants in connection with notes payable and Series A Nonvoting Capital Stock  $17,425   $42,405 
Fair value of amendment of warrants  $—     $190,821 
Fair value of convertibility feature of long term debt  $—     $36,190 
           
See Notes to Consolidated Condensed Financial Statements          

 

6
 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

September 30, 2012

 

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

 

Nature of Business:

 

On January 29, 2008, Lightning Gaming, Inc. (formerly known as Red Pearl Acquisition Corp.) (the “Company”) completed a merger (the "Merger") with Lightning Poker, Inc. (“Lightning Poker”). As a result of the Merger, Lightning Poker became a wholly owned subsidiary of the Company.

 

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

 

In 2009 the Company commenced the design, manufacture, marketing, sale and operation of video and reel spinning gaming machines to customers in various gaming jurisdictions. The current products are (i) Video SCRABBLE bonus slot machines, (ii) multi-rack slot machines and (iii) spinning reel slot machines utilizing its licensed brands.

 

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

 

Basis of Presentation:

 

The unaudited interim financial statements contained herein should be read in conjunction with the Company’s annual report on Form 10-K filed on March 30, 2012 (“Form 10-K”). The accompanying interim financial statements are presented in accordance with the requirements of  Article 8.03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, accordingly, do not include all the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) with respect to annual financial statements. The interim consolidated condensed financial statements have been prepared in accordance with the Company’s accounting practices described in the Form 10-K but have not been audited. In management’s opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods presented. The balance sheet data as of December 31, 2011 were derived from the Company’s audited financial statements, but do not include all disclosures required by GAAP. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the entire year.

 

The accompanying financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. The Company has limited capital resources and has had net operating losses and negative cash flows from operations since inception, and expects these conditions to continue for the foreseeable future.

 

The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to obtain the regulatory approvals required to distribute our products and successfully market them to casinos. In January 2012 we issued 1 million shares of Series A Nonvoting Capital Stock (“Nonvoting Stock”) and warrants to purchase 1 million shares of common stock at $1.00 per share for total proceeds

 

 

7
 

 

 

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

 

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

 

Basis of Presentation: (Continued)

 

of $1,000,000. Based on cash flows and revenues through June 30, 2012, we required additional capital to support our operations and in July 2012, we issued 1 million shares of Series A Nonvoting Capital Stock (“Nonvoting Stock”) and warrants to purchase 1 million shares of common stock at $1.00 per share for total proceeds of $1,000,000. Should additional capital be required, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects.

 

The Company’s continuance as a going concern is dependent upon these factors, among others. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have received assurance from a major stockholder to support our operations through June 30, 2014 should such support become necessary.

 

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

 

The allowance for doubtful accounts at September 30, 2012 and December 31, 2011 was $7,254 and $171,060, respectively.

 

Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on how to measure fair value and on what disclosures to provide about fair value measurements. The guidance expands disclosure requirements particularly for Level 3 inputs to include the following:

 

For fair value categorized in Level 3 of the fair value hierarchy:

  1. a quantitative disclosure of the unobservable inputs and assumptions used in the measurement,  
  2. a description of the valuation processes in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period), and
  3. a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.

The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.

 

This guidance was effective for our first quarter of fiscal 2012 and did not have a material impact on our financial statements.

 

In June 2011, the FASB issued guidance on presentation of comprehensive income to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of stockholders' equity, among other items. The guidance requires that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance was effective for our first quarter of fiscal 2012 and as the update only requires a change in presentation, it did not have a material impact on our financial statements.

 

8
 

 

 

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

 

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

 

Recent Accounting Pronouncements: (Continued)

In November 2011, the FASB issued authoritative guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance will be effective for reporting periods beginning on or after January 1, 2013 and the Company does not expect the adoption of this guidance to have a material impact on its financial statements.

 

 

Note 2.   Inventory

 

Inventory consists of the following:

 

   September 30,
2012
  December 31,
2011
Finished products  $54,075   $133,406 
Raw materials and work in process   251,392    330,900 
   $305,467   $464,306 
           

 

Note 3.   Property and Equipment

 

Property and equipment consist of the following:

 

   September 30,
2012
  December 31,
2011
Equipment, principally gaming equipment under lease  $3,109,233   $2,784,383 
Delivery truck   28,140    —   
Furniture and fixtures   71,947    69,907 
Leasehold improvements   91,794    91,794 
Property and equipment   3,301,114    2,946,084 
Less accumulated depreciation   (2,284,366)   (1,847,370)
   $1,016,748   $1,098,714 
           

 

 

Note 4.   License Fees

 

License fees consist of the following:

 

   September 30,
2012
  December 31,
2011
Purchased licenses, software and other  $966,535   $321,724 
Less accumulated amortization   (571,632)   (151,149)
   $394,903   $170,575 
           

The software licenses acquired in 2012, 2009 and 2008 are being amortized over 3 years.

 

9
 

 

 

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

 

Note 5.   Debt

 

Notes payable consists of the following:

 

 

   Warrants    September 30, 2012    December 31,
2011
 
               
The Co-Investment Fund II, L.P. (a)  8,401,385   $10,500,000   $10,500,000 
Stewart J. Greenebaum, LLC (b)  2,500,000    3,000,000    3,000,000 
Total notes payable       13,500,000    13,500,000 
Less: unamortized fair market value of  warrants       (82,890)   (168,021)
Notes payable      $13,417,110   $13,331,979 
Less amounts classified as current       (13,417,110)   —   
Notes payable, long-term      $—     $13,331,979 

 

 

(a)

 

 

 

Notes payable at 8% interest. 6,401,385 warrants to purchase shares of common stock at an exercise price of $1.00 per share through April 12, 2016, 1,000,000 warrants to purchase shares of common stock at an exercise price of $1.00 per share through January 17, 2017, and 1,000,000 warrants to purchase shares of common stock at an exercise price of $1.00 per share through July 6, 2017.

(b)   Notes payable at 8% interest. Warrants to purchase shares of common stock at an exercise price of $1.00 per share through April 12, 2016.
                         

 

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

 

In April 2011 the Company borrowed $1,000,000 from a related party and issued to the related party a warrant to purchase up to 1,000,000 shares of common stock. The interest rate of the loan was 8% per annum. The aggregate fair market value of the warrant at the time it was issued was $3,290. In June 2011 the note was converted into 1,000,000 shares of Nonvoting Stock, with cancellation of all interest and other amounts payable under the note.

 

As of September 30, 2012, the lenders hold warrants to purchase up to 8,901,385 shares of common stock with an expiration date of April 12, 2016 at a price of $1.00 per share, 1,000,000 shares of common stock with an expiration date of January 17, 2017 at a price of $1.00 per share, and 1,000,000 shares of common stock with an expiration date of July 6, 2017 at a price of $1.00 per share. The purchase price is subject to adjustment from time to time pursuant to the anti-dilution provisions of the respective warrant agreements. Also, certain notes contain a right to convert the principal amount of the note and accrued interest into shares of common stock. The aggregate fair market value of the warrants at the time of issuance was $11,928 in January 2012 and $5,497 in July 2012.

 

Expense recognized for the three months ended September 30, 2012 and 2011 related to these warrants was $23,853 and $43,247, respectively, and was included in interest expense. The expense was $71,559 and $121,510 for the nine months ended September 30, 2012 and 2011, respectively, with respect to the warrants and included in interest. Expense for the three months ended September 30, 2012 and 2011 recognized related to the debt conversion right and included in interest expense was $4,524 and $4,524, respectively. The expense related to the debt conversion right and included in interest expense for the nine months ended September 30, 2012 and 2011was $13,572 and $4,524, respectively.

 

Substantially all of the Company’s assets are pledged as collateral on debt.

 

10
 

 

 

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

 

Note 5. Debt (continued)

 

Certain notes in the amount of $7,500,000 and related accrued interest of $2,449,123 at September 30, 2012 are convertible at the discretion of the note holder into shares of the Company’s common stock on the same terms and conditions of the next equity offering.

 

 

Note 6. Commitments

 

In November 2009, the Company entered into a lease agreement for its new corporate offices. The lease was effective in January 2010 and is for a term of sixty-seven months. Rental expense under this lease for the three months ended September 30, 2012 and 2011 was $36,537 and $48,234, respectively. Rental expense under this lease was $38,137 and $141,978 for the nine months ended September 30, 2012 and 2011, respectively.

 

Future minimum lease payments are as follows:

  Year Ending December 31,   Amount  
  2012   $ 26,370  
  2013     108,142  
  2014     108,142  
  2015     66,254  
      $ 308,909  

 

 

In March 2009 the Company entered into an exclusive license agreement with Hasbro, Inc. to use the SCRABBLE brand in gaming devices distributed in the United States and Canada.  The initial term of the agreement is five years with the Company’s right to extend the agreement for two additional five-year terms if certain performance standards are met. The agreement calls for minimum annual payments and may be cancelled under certain conditions.

 

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

 

    In March 2010 the Company entered into a license agreement with Speed Racer Enterprises, Inc. to use the Speed Racer brand and related family of characters in gaming devices distributed worldwide excluding Japan. The initial term of the agreement is five years commencing May 1, 2010 with the Company’s right to extend the agreement for one additional three-year term if certain performance standards are met.

 

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

 

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

 

11
 

 

 

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

 

Note 6. Commitments (Continued)

 

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

 

At September 30, 2012, the Company had total license fee commitments and advances made and potential future royalty and license fee payments as follows:

 

   Minimum
Commitments
Total royalty and license fee commitments  $1,000,313 
Advances made   (672,563)
      
Potential future payments  $327,750 

 

As of September 30, 2012 the Company estimates that potential future royalty payments will be as follows:

 

   Minimum
Commitments
Year ending December 31, 2013   $327,750 

 

In May 2012, the Company favorably settled an arbitration claim with a supplier of software licenses for its poker tables.  As a result, the Company reversed $310,000 of previously accrued expenses related to these poker table software licenses.  This has been reflected as a reduction in cost of products sold for the nine months ended September 30, 2012.

 

 

Note 7.   Stockholders’ Deficit

 

Stockholders’ deficit includes the following transactions:

 

Stock Option Plan: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "Stock Plan") having substantially the same terms. The options are granted at the discretion of the Board of Directors and, at December 31, 2011, the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each option will be determined by the Board of Directors at the time the option is granted, but in no event will be less than 100% of the fair market value of the common stock at the time of grant. Options granted will not be exercisable after 10 years from the grant date. At December 31, 2011 and September 30, 2012, 2,051,000 and 1,856,000 options to purchase shares, respectively, had been granted to certain directors, officers, employees and a consultant of the Company and were still outstanding.

 

Options generally vest at 20% per year starting from the grant date and are fully vested after five years. The options can be exercised in partial or full amounts upon a change in control and at such other times as specified in the award agreements.

 

12
 

 

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

 

Note 7.   Stockholders’ Deficit (Continued)

 

A summary of option transactions in 2012 is as follows:

 

    Shares    Weighted
Average
Exercise Price
 
Outstanding at December 31, 2011   2,051,000   $1.34 
Options granted   —     $—   
Options exercised   —     $—   
Options cancelled   (195,000)  $1.26 
Options outstanding at September 30, 2012   1,856,000   $1.35 
Options available for grant under the Stock Plan at September 30, 2012   644,000      

 

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model.  Expected volatility is based upon publicly traded companies with characteristics similar to those of the Company.  The Company uses historical data to estimate option exercise and employee termination within the valuation model.  The expected term of options granted represents the period of time that options granted are expected to be outstanding.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted during the nine months ended September 30, 2012 and 2011.

 

Stock-based compensation expense is recognized in the statement of operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures.  

 

Compensation expense related to stock options for the three months ended September 30, 2012 and 2011 was $(41,918) and $24,746, respectively. For the nine months ended September 30, 2012 and 2011, compensation expense related to stock options was $(29,945) and $75,244, respectively. An adjustment of $46,412 was recorded in September 2012 with respect to forfeited awards.

 

 The following table summarizes information with respect to stock options outstanding at September 30, 2012:

 

Options Outstanding   Vested Options
  Weighted              
  Average Weighted       Weighted Weighted  
  Remaining Average Aggregate     Average Average Aggregate
  Contractual Exercise Intrinsic     Contractual Exercise Intrinsic
Number Life (Years) Price Value   Number Term (Years) Price Value
1,856,000 2.7 $1.35 -    1,586,000 2.3 $1.46 -

 

The following table summarizes information with respect to stock options outstanding at December 31, 2011:

 

Options Outstanding   Vested Options
  Weighted              
  Average Weighted       Weighted Weighted  
  Remaining Average Aggregate     Average Average Aggregate
  Contractual Exercise Intrinsic     Contractual Exercise Intrinsic
Number Life (Years) Price Value   Number Term (Years) Price Value
2,051,000 4.3 $1.34 -   1,507,000 4.1 $1.44 -

 

 

 

13
 

 

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

 

Note 7.   Stockholders’ Deficit (Continued) 

 

As of September 30, 2012, there was approximately $24,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan.  The cost is expected to be recognized over a weighted-average period of 1.6 years.

 

Warrants:  In accordance with certain agreements, the lenders hold warrants to purchase 8,901,385 shares of common stock with an expiration date of April 12, 2016 at a price of $1.00 per share, 1,000,000 shares of common stock with an expiration date of January 17, 2017 at a price of $1.00 per share, and 1,000,000 shares of common stock with an expiration date of July 6, 2017 at a price of $1.00 per share. The purchase prices are subject to adjustment from time to time pursuant to the provisions of the respective warrant agreements.  The Company accounts for the value of these warrants using a Binomial Pricing Model. 

 

The following table is a summary of the warrant activity for the nine months ended September 30, 2012:

      Weighted
   Warrants  Average
   Outstanding  Exercise Price
           
Outstanding at December 31, 2011   9,009,145   $1.00 
Warrants granted   2,000,000   $1.00 
Warrants exercised   —     $—   
Warrants cancelled   (107,760)  $1.00 
Warrants outstanding at September 30, 2012   10,901,385   $1.00 

 

The following table summarizes information with respect to warrants outstanding at September 30, 2012:

 

Warrants Outstanding   Vested Warrants
  Weighted              
  Average Weighted       Weighted    
  Remaining Average Aggregate     Average Aggregate  
  Contractual Exercise Intrinsic     Exercise Intrinsic  
Number Life (Years) Price Value   Number Price Value  
10,901,385 3.8 $1.00 -   10,901,385 $1.00 -  

 

The following table summarizes information with respect to warrants outstanding at December 31, 2011:

 

Warrants Outstanding   Vested Warrants
  Weighted              
  Average Weighted       Weighted    
  Remaining Average Aggregate     Average Aggregate  
  Contractual Exercise Intrinsic     Exercise Intrinsic  
Number Life (Years) Price Value   Number Price Value  
9,009,145 4.3 $1.00 -   9,009,145 $1.00 -  

 

The weighted average fair value per share of each warrant granted for the three months ended September 30, 2012 was $.01.

 

14
 

 

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

 

Note 7.   Stockholders’ Deficit (Continued) 

 

The fair value of each warrant is estimated on the date of grant using the Binomial pricing model, with the following assumptions for the three months ended September 30, 2012:

   2012
      
Weighted average volatility   43.8%
Expected dividend yield   —   
Expected term (in years)   4.2 
Weighted average risk free interest rate   0.6%

 

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

 

   Fair Value of
Debt Conversion Feature
  Fair Value of
Warrants
Balance December 31, 2011  $20,058   $68,992 
Fair value of warrants issued in 2012   —      17,425 
Net change in fair value   (20,058)   (75,524)
Balance September 30, 2012  $—     $10,893 

 

Note 8.   Income Taxes

 

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

 

As of September 30, 2012, the Company has available, for federal and state income tax purposes, net operating loss (“NOL”) carryforwards of approximately $16,542,000, which expire at various times through 2032.  The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods.  The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the financial statements.

 

 

Note 9.  Related Party Transactions

 

In January 2012, and in an identical transaction in July 2012, the Company sold 1,000,000 shares of Nonvoting Stock for $1,000,000 to The Co-Investment Fund, II, L.P. (“CI II”) and issued a warrant for 1,000,000 shares of our common stock at $1.00 per share (subject to anti-dilution adjustments).

 

In June 2011 we entered into a series of agreements with CI II and Stewart J. Greenebaum, LLC (“Greenebaum”). CI II and Greenebaum each beneficially own more than 5% of our outstanding common stock. CI II is managed by Cross Atlantic Capital Partners Inc. (“Cross Atlantic”) and Donald Caldwell, one of our directors, is the founder and Chief Executive Officer of Cross Atlantic and Frederick Tecce, also one of the Company’s directors, is a managing director and counsel to Cross Atlantic.

 

 

 

15
 

 

 

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

 

Note 9.   Related Party Transactions (Continued) 

 

The transactions with CI II and Greenebaum included, among other things, the following:

 

    conversion of a $1,000,000 promissory note, which we issued to CI II in April 2011, into 1,000,000 shares of Nonvoting Stock, with cancellation of all interest and other amounts payable under the note;
    sale of 1,000,000 shares of Nonvoting Stock to Greenebaum for $1,000,000, and issuance of a warrant for 1,000,000 shares of our common stock at $1.00 per share (subject to anti-dilution adjustments);

 

 

  amendment of ten common stock warrants held by CI II, which were issued between July 2006 and April 2011 and are exercisable for an aggregate of 6,401,385 shares of our common stock, resulting in all of those warrants having an expiration date of April 12, 2016 and an exercise price of $1.00 per share (subject to anti-dilution adjustments);
    amendment of four common stock warrants held by Greenebaum, which were issued between June 2007 and February 2010 and are exercisable for an aggregate of 1,500,000 shares of our common stock, extending the expiration date of all of those warrants to April 12, 2016 and lowering the exercise price to $1.00 per share (subject to anti-dilution adjustments);
    amendment of nine promissory notes held by CI II, issued by Lightning Poker between July 2006 and February 2010 in an aggregate principal amount of $10,500,000, extending the maturity date to June 30, 2013 and fixing at $1.00 per share the price at which $5,500,000 of those notes (plus accrued interest of $1,901,178 as of September 30, 2012) can be converted to our common stock (subject to anti-dilution adjustments);
    In exchange for the amendment and extension of the notes with CI II and Greenebaum, the Company agreed to:

  give preemptive rights to CI II and Greenebaum to maintain their respective percentage ownership of all of our outstanding stock, calculated on a fully-diluted basis; 
  give registration rights and common stock exchange rights to CI II and Greenebaum with respect to their Nonvoting Stock, if we conduct a registered public offering of securities under the Securities Act of 1933, as amended; and
  require us to obtain CI II’s and Greenebaum’s consent in order to engage in various material transactions or to change or add lines of business.

 

The Nonvoting Stock participates with, and is identical to, our common stock except for the absence of voting rights.

 

In April 2011 the Company borrowed $1,000,000 from CI II, with interest at 8% per annum, and we issued to CI II a warrant for 1,000,000 shares of common stock at an exercise price of $2.00 per share (subject to anti-dilution adjustments). In June 2011 the promissory note was converted to Nonvoting Stock and the warrant was amended, as reported above in this Note 9.

 

In February 2010 we entered into an agreement with Greenebaum under which a $1,000,000 note that Lightning Poker issued to Greenebaum in 2007 was converted into 500,000 shares of Nonvoting Stock. All interest and other amounts payable under that note were cancelled.

 

During the three months ended September 30, 2012 and 2011, interest on all of the loans from CI II and Greenebaum described above amounted to $270,000 and $270,000, respectively. Interest on the loans from CI II and Greenebaum was $810,000 and $810,000 for the nine months ended September 30, 2012 and 2011. During 2012 and 2011 the Company made no principal payments on those loans (other than conversion of the April 2011 $1,000,000 note to Nonvoting Stock).

 

 

16
 

 

 

 

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

 

Note 9.   Related Party Transactions (Continued) 

 

Included in the notes held by CI II and accrued interest thereon are notes in the principal amount of $5,500,000 and accrued interest of $1,901,178, which are convertible into shares of our common stock on the same terms and conditions of the next equity offering. Also, the notes held by Greenebaum in the principal amount of $2,000,000 and accrued interest of $547,945 are convertible into shares of our common stock on the same terms and conditions of the next equity offering.

 

As a result of transfers in 2009 and 2010, among CI II, Greenebaum and a former investor, of common stock warrants that were issued in 2007 and 2008 and the surrender of warrants by that former investor, they hold the following warrants as of September 30, 2012:

 

Holder   Number of Underlying Shares   Weighted Average Exercise Price Per Shares
         
CI II   8,401,385   $1.00
Greenebaum   2,500,000   $1.00

 

Note 10. Concentration of Risk – Major Customers

 

The Company generated approximately 17% of its revenue from its top customer for the nine months ended September 30, 2012 and 32% of its revenue from its top two customers for the nine months ended September 30, 2011.

 

 

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

 

Forward-Looking Statements

 

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

 

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

 

17
 

 

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

 

Forward-Looking Statements (Continued)

 

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section or elsewhere in this report.  In light of these and other risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.  Factors that might cause our actual results to differ from our expectations, might cause us to modify our plans or objectives, or might affect our ability to meet our expectations include, but are not limited to:  the severe economic downturn that the gaming industry is suffering; the dramatic decline in national and global economic conditions; the tightening of credit in financial markets generally and the particularly severe tightening of them for the gaming industry, which may adversely affect our ability to raise funds through debt or equity financing or to refinance our long-term debt that will become due June 30, 2013, and may also adversely affect the ability of our customers to purchase our product and services; interest rates; our ability to obtain additional gaming licenses; fuel price increases; legislative/regulatory changes; competition; changes in generally accepted accounting principles; and fluctuations in foreign currency exchange rates. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the Securities and Exchange Commission (“SEC”).

 

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

 

Overview

 

We were formed to develop and market an electronic poker table that provides a fully automated table gaming experience without a dealer in casinos and card rooms in regulated jurisdictions worldwide. In 2009, we commenced the design, manufacture, marketing, sale and operation of video slot machines to customers in various gaming jurisdictions. The current products are (i) SCRABBLE Gems, (ii) SCRABBLE Bonus, (iii) Popeye, (iv) Popeye Bonus Voyage, (v) Speed Racer, (vi) Speed Racer Race to Riches, (vii) Blondie, (viii) Pink Panther, (ix) Beetle Bailey, (x) Vampire’s Fortune, (xi) Swamp Fever and (xii) Penny Palooza. When we expanded our products to include slot machines, we embarked on an initiative to market our slot machines to Native American jurisdictions as well as the commercial casino marketplace and cruise lines.

 

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

 

Our slot machines are placed into the market using a daily lease model or a revenue sharing model. We have 112 slot machines out on lease or revenue share in 31 different casinos and cruise ships.

 

We are registered as an approved vendor to distribute products to gaming venues located in Alberta and British Columbia in Canada and Arizona, California, Connecticut, Florida, Indiana, Iowa, Louisiana, Michigan, Mississippi, Missouri, New Jersey, New Mexico, Oklahoma, and Pennsylvania in the United States.

 

We have generated operating revenues, but we have a history of losses since our inception. We incurred a net loss of $1,503,598 in the nine months ended September 30, 2012.

 

18
 

 

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

 

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

 

Revenues

 

The Company’s revenues for the three months ended September 30, 2012 were $381,000 compared to $326,000 for the comparable prior year period. The increase in revenues was principally due to the increase in revenues of $57,000 from the placement of our slot machines. Sales of gaming products and parts decreased by $2,000 (28%) for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, principally due to lower sales of replacement parts for our poker tables.

 

License and service fees increased by $57,000 (18%) to $377,000 for the three months ended September 30, 2012 as compared to $320,000 for the three months ended September 30, 2011 due to the placement of additional slot machines in casinos.

 

Cost of Products Sold

 

For the three months ended September 30, 2012, cost of products sold decreased $102,000 as compared to the three months ended September 30, 2011 due to the $101,000 reversal of previously accrued commission costs from poker table sales that occurred prior to 2008. 

 

Operating Expenses

 

Operating expenses decreased by $352,000 to $140,000 for the three months ended September 30, 2012, from $492,000 for the three months ended September 30, 2011.  This decrease was primarily the result of the reversal of costs previously accrued and the reduction of activity relating to our poker table business.

 

Research and Development Expenses

 

Research and development expenses decreased by $33,000 to $214,000 for the three months ended September 30, 2012, from $247,000 for the three months ended September 30, 2011. Research and development expenses are related to the development of gaming equipment and occurred primarily in the first and second quarter of 2011 as a result of the development of new slot machine themes.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $84,000 to $288,000 for the three months ended September 30, 2012, from $372,000 for the three months ended September 30, 2011.  This decrease was primarily due to lower regulatory fees and compliance costs.

 

Depreciation and Amortization

 

Depreciation and amortization increased by $ 41,000 to $219,000 for the three months ended September 30, 2012 from $178,000 for the three months ended September 30, 2011. This increase was primarily related to the placement of additional slot machines in casinos.

 

Net Interest Expense

 

Net interest expense increased by $1,000 to $299,000 for the three months ended September 30, 2012 from $298,000 for the three months ended September 30, 2011.

 

 

19
 

 

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

 

Revenue

 

The Company’s revenues for the nine months ended September 30, 2012 were $1,440,000 compared to $820,000 for the comparable prior year period. The increase in revenues was due the increase in license fees earned attributable to the placement of our slot machines during the year.

   

Cost of Products Sold

 

For the nine months ended September 30, 2012, cost of products sold decreased $441,000 to ($409,000) from $33,000 for the nine months ended September 30, 2011. This decrease was due to the $310,000 reversal of previous years’ accrued site license fees from the favorable arbitration claim settlement with a license supplier for our poker tables that occurred in May 2012, as well as $101,000 in additional reversals relating to previously accrued commission costs. 

 

Operating Expenses

 

Operating expenses decreased by $438,000 to $318,000 for the nine months ended September 30, 2012, from $756,000 for the nine months ended September 30, 2011.  This decrease was primarily the result of the elimination of production of poker tables in 2012 partly offset by an increase in placement costs of slot machines into casinos.

 

Research and Development Expenses

 

Research and development expenses decreased by $269,000 to $536,000 for the nine months ended September 30, 2012, from $805,000 for the nine months ended September 30, 2011. Research and development expenses are related to the development of gaming equipment that occurred primarily in the first half of 2011 as a result of the development of new slot machines themes.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $260,000 to $1,033,000 for the nine months ended September 30, 2012, from $1,293,000 for the nine months ended September 30, 2011.  This decrease was primarily the result of lower marketing staff costs, regulatory fees, compliance and maintenance costs.

   

Depreciation and Amortization

 

Depreciation and amortization increased from $505,000 for the nine months ended September 30, 2011 to $663,000 for the nine months ended September 30, 2012. This increase was primarily related to the increased installed base of slot machines during the first six months of 2012 and the last quarter of 2011.

 

 Net Interest Expense

 

Net interest expense decreased from $942,000 for the nine months ended September 30, 2011 to $897,000 for the nine months ended September 30, 2012. This change was due to higher warrant cost as a result of the amendment of terms of the warrants in September 2011 which required the accelerated recognition of amortized costs.

 

 Liquidity and Capital Resources

      

We have incurred net losses since inception.  We have historically funded our operating costs, research and development activities, working capital investments and capital expenditures associated with our growth strategy with proceeds from the issuances of our stock and loans. These transactions are described in more detail following the discussion of cash flows below.

 

20
 

 

Discussion of Statement of Cash Flows

 

   Nine Months Ended
September 30,
   
   2012  2011  Change
Net cash used in operating activities  $(1,005,000)  $(1,687,000)  $682,000 
Net cash used in investing activities   (804,000)   (966,000)   162,000 
Net cash provided by financing activities   1,946,000    2,000,000    (54,000)
Net increase (decrease) in cash   137,000    (653,000)  $790,000 
Cash, beginning of year   252,000    1,335,000      
Cash, end of period  $389,000   $682,000      

 

For the nine months ended September, 2012, net cash used in operating activities decreased $682,000 (40%) to $1,005,000 as compared to $1,687,000 for the nine months ended September 30, 2011. The decrease in the use of cash for operating activities was primarily due to the decrease in costs relating to the poker table business.

 

Net cash used in investing activities decreased $162,000 to $804,000 for the nine months ended September 30, 2012 from $966,000 for the nine months ended September 30, 2011.  Cash used in investing activities is primarily the function of the net investment in property, plant and equipment, principally slot machines, software and brand licenses.

 

Net cash provided by financing activities was $1,946,000 for the nine months ended September 30, 2012.  During 2012 cash provided from financing activities consisted primarily of net proceeds from the sale of 2 million shares of Nonvoting Stock as described below. For the nine months ended September 30, 2011, external funding was required and was obtained through the issuances of notes payable and from the sale of shares of Nonvoting Stock.

 

In January 2012 and in an identical transaction in July 2012, the Company sold 1,000,000 shares of Nonvoting Stock for $1,000,000 to CI II and issued a warrant for 1,000,000 shares of our common stock at $1.00 per share (subject to anti-dilution adjustments).

 

In April 2011 the Company borrowed $1,000,000 from CI II and issued to CI II a warrant to purchase up to 1,000,000 shares of common stock at $2 per share. The loan was for a three-year term, with interest at 8% per annum and the warrants are exercisable through 2016. In June 2011 the promissory note was converted to Nonvoting Stock and the warrant was amended.

 

In June 2011, the Company sold 1,000,000 shares of Nonvoting Stock to Greenebaum for $1,000,000 and issued a warrant for 1,000,000 shares of common stock at $1.00 per share.

 

21
 

 

 

Operations and Liquidity Management.

 

For the nine months ended September 30, 2012, we incurred a net loss of $1,504,000 and used $1,005,000 of cash in operating activities. At September 30, 2012, our cash balance was $389,000.  The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to incrementally increase the installed base of slot machines leased to casinos and cruise lines.

 

Our current cash requirements are between approximately $200,000 to $250,000 per month, principally for salaries, professional services, licenses, marketing, office expenses and the purchase of the hardware components for our products.

 

Based on our cash flow projections and anticipated revenues, we believe we have sufficient capital or financing to support our operations during our 2012 fiscal year. We have received assurance from a major stockholder to support its operations through June 30, 2014 should additional support become necessary.

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of September 30, 2012:

 

   Total  Less than
1 year
  1 - 3 years  3 - 5 years  More than
5 years
                          
Debt obligations (1)  $18,600,099   $18,600,099   $—     $—     $—   
Operating lease obligations (2)   308,909    107,477    201,432    —      —   
Royalty and license fees obligations (3)   327,750    327,750    —      —      —   
            Total  $19,236,758   $19,035,326   $201,432   $—     $—   

 

(1) Represents the outstanding principal and accrued interest amount of notes. Interest accrues at the rate of 8% annually.

 

(2) Represents operating lease agreements for office and warehouse facilities.

 

(3) Represents royalty and license fee commitments for brand licenses.

 

 

Off-Balance Sheet Arrangements

 

As of September 30, 2012, there were no off-balance sheet arrangements.

 

Going Concern

 

The Company’s financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. We have limited capital resources, and have had net operating losses and negative cash flows from operations since the Company’s inception, and the Company expects these conditions to continue for the foreseeable future. The generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to obtain the regulatory approvals required to distribute its products and successfully market them to more casinos and cruise lines. Based on the Company’s cash flow projections and anticipated revenues, the Company believes it has sufficient capital or financing to support its operations during 2012. The Company has received assurance from a major stockholder to support its operations through June 30, 2014 should additional support become necessary.

 

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

 

22
 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

 

Item 4. Controls and Procedures.

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer (“CEO”) as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  As of September 30, 2012, we conducted an evaluation, under the supervision and with the participation of our management of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, we have concluded that as of September 30, 2012, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There were no changes in our internal control over financial reporting during our quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 PART II - OTHER INFORMATION

Item 1.     Legal Proceedings.

None

 

Item 1A. Risk Factors

None

 

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

None

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4.     Mine Safety Disclosures.

Not applicable

 

Item 5.     Other Information.

None

 

 

 

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Item 6.      Exhibits.  

 

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

 

 

SIGNATURES

 

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

 

Date:  November 14, 2012 Lightning Gaming, Inc.
  By: 

/s/ Brian Haveson                                                                             

Brian Haveson

President, Chief Executive Officer and Director

 

 

 

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