UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2014
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period __________  to __________

 

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

 

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

 

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

 

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

 

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

 

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

 

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

(Do not check if a smaller reporting company) 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,652,474 common shares as of April 30, 2014; 4,500,000 Series A Nonvoting Capital Stock shares as of April 30, 2014

 

 

 

 

 

 

 

 

 

 

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	14
Item 3.	Quantitative and Qualitative  Disclosures About Market Risk	18
Item 4.	Controls and Procedures	19
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	20

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

1	Consolidated  Balance Sheets as of  March 31, 2014 (unaudited) and December 31, 2013 (audited);
2	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013;
3	Unaudited Consolidated  Statements of Cash Flows for the three months ended March 31, 2014 and 2013;
4	Notes to Consolidated Condensed Financial Statements.

 

 

 

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		March 31,  2014				December 31, 2013
		(unaudited)				(audited)
Assets
Current Assets
Cash		$	241,502			$	462,200
Accounts receivable, net			325,593				297,820
Inventory			110,714				116,503
Prepaid expenses			231,199				102,130
Total Current Assets			909,008				978,653
Property and Equipment, net			906,206				984,951
Other Assets			8,193				8,193
License fees, net of accumulated amortization			147,583				172,017
Total Assets		$	1,970,990			$	2,143,814
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable		$	295,940			$	293,227
Accrued expenses			145,165				204,660
Total Current Liabilities			441,105				497,887
Long Term Debt and Other Liabilities
Long term notes payable			14,500,000				14,500,000
Interest payable and other liabilities			6,802,949				6,513,223
Other long term liabilities			35,807				41,926
Fair value of warrants and convertible feature of long term debt			31,794				31,794
Total Long Term  Debt and Other Liabilities			21,370,550				21,086,943
Commitments (Note 6)
Stockholders' Deficit
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares authorized, 4,500,000 shares issued and outstanding			4,500				4,500
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,660,285 shares issued and 4,652,474 shares outstanding			4,661				4,661
Additional paid in capital			7,631,625				7,628,404
Accumulated deficit			(27,473,640	)			(27,070,770	)
Treasury stock, 7,811 shares, at cost			(7,811	)			(7,811	)
Total Stockholders’ Deficit			(19,840,665	)			(19,441,016	)
Total Liabilities and Stockholders’ Deficit		$	1,970,990			$	2,143,814
See Notes to Consolidated Condensed Financial Statements

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2014 and 2013

		March 31,  2014				March 31, 2013
		(unaudited)				(unaudited)
Revenues
Lease and license fees		$	896,994			$	816,624
Sales of gaming products and parts			27,151				68,000
Total revenues			924,145				884,624
Costs and operating expenses
Cost of products sold			—				32,528
Operating expenses			189,221				254,976
Research and development			118,908				107,852
Selling, general and administrative expenses			531,430				423,868
Depreciation and amortization			197,730				213,762
Total costs and operating expenses			1,037,289				1,032,986
Operating loss			(113,144	)			(148,362	)
Non-operating expense
Net interest expense			(289,726	)			(305,062	)
Net loss		$	(402,870	)		$	(453,424	)
Net loss per common share including Series A Nonvoting shares-basic and diluted		$	(0.04	)		$	(0.05	)
Weighted average Series A Nonvoting shares outstanding-basic and diluted			4,500,000				4,500,000
Weighted average common shares outstanding-basic and diluted			4,652,474				4,652,474
See Notes to Consolidated Condensed Financial Statements

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2014 and 2013

		March 31,  2014				March 31, 2013
		(unaudited)				(unaudited)
Net Cash Used in Operating Activities		$	(168,516	)		$	(218,434	)
Cash Flows From Investing Activities
Purchase of equipment			(79,433	)			(101,256	)
Proceeds from sale of equipment			27,000				68,000
(Increase) decrease in license fees			251				(143,499	)
Net Cash Used in Investing Activities			(52,182	)			(176,755	)
Cash Flows From Financing Activities
Net Proceeds from issuance of Notes			—				500,000
Net Cash Provided By Financing Activities			—				500,000
Net Increase (Decrease) in Cash			(220,698	)			104,811
Cash - Beginning of period			462,200				187,782
Cash - End of period		$	241,502			$	292,593
Supplemental Disclosure of Non-Cash Financing Activities:
Inventory transferred to fixed assets		$	15,370			$	12,751
See Notes to Consolidated Condensed Financial Statements

 

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

March 31, 2014

 

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 (the “Poker Table”) to commercial and tribal casinos, card clubs, and other gaming and lottery venues. Lightning Poker’s Poker Table is designed to improve economics for casino operators while improving overall player experience.

 

In 2009, the Company commenced the design, manufacture, marketing, sale and operation of video slot machines to customers in various gaming jurisdictions. The current slot machine products are:

  

•	Popeye	•	Penny Palooza
•	Popeye’s Bonus Voyage	•	Golden Egg
•	Blondie’s Penny Bonanza	•	Just Jackpots
•	Hagar the Horrible	•	Duck Dynamite
•	Beetle Bailey	•	Candy Cash
•	Pink Panther	•	Olive Oyl’s Jumbo Stacks
•	Swamp Fever	•	Jumbo Fish Stacks
•	Vampires Fortune

 

Our consolidated financial statements include the accounts of the Company, including Lightning Poker and Lightning Slot Machines, 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 28, 2014 (“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, 2013 were derived from the Company’s audited financial statements, but do not include all disclosures required by GAAP. The results of operations for the three months ended March 31, 2014 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 improve. However, 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

 

 

 

 

 

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)

 

successfully market them to casinos and card clubs. Based on our cash flow projections and anticipated revenues, we believe we may require additional capital to support our operations during 2014. If that becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects.

 

The Company’s continuance as a going concern is dependent upon these factors, among others. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have received assurance from a major stockholder to support our operations through June 30, 2015 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 March 31, 2014 and December 31, 2013 was $7,254.

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued authoritative guidance regarding the presentation of unrecognized tax benefits resulting from a net operating loss carryforward, a similar tax loss, or a tax credit carryforward that exist at the reporting date. The guidance requires that when such a benefit exists at the reporting date, it should be presented in the financial statements as a reduction to a deferred tax asset. To the extent the tax benefit is not available, is disallowed by jurisdictional law, or is not intended to be used by the entity at the reporting date, it should be presented as a liability and should not be combined with deferred tax assets. The guidance is effective for fiscal years beginning after December 15, 2013 and the Company does not expect that the adoption of this guidance will have a material impact on our financial statements.

 

In December 2013, the FASB issued an amendment to the Accounting Standards Codification (“ASC”) providing the definition of a Public Business Entity and added the definition to the Master Glossary. There is no effective date for the amendment however the term public business entity will be used in 2014 and future ASC updates. As an entity that is required by the SEC to file and furnish financial statements with the SEC, the Company is considered by definition as a “public business entity”. This amendment does not affect the Company’s existing requirements however it improves applicability of future accounting and reporting guidance by providing a single definition of a public business entity.

 

 

Note 2.  Inventory

 

Inventory consists of the following:

		March 31, 2014				December 31, 2013
Finished products		$	1,685			$	17,055
Raw materials and work in process			109,029				99,448
Inventory		$	110,714			$	116,503

 

 

 

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

 

Note 3.  Property and Equipment

 

Property and equipment consist of the following:

		March 31, 2014				December 31, 2013
Equipment, principally gaming equipment under lease		$	3,833,714			$	3,755,098
Delivery truck			28,140				28,140
Furniture and fixtures			75,177				75,177
Leasehold improvements			91,794				91,794
Property and equipment			4,028,825				3,950,209
Less accumulated depreciation			(3,122,619	)			(2,965,258	)
Property and equipment, net		$	906,206			$	984,951

 

 

Note 4.  License Fees

 

License fees consist of the following:

		March 31, 2014				December 31, 2013
Purchased licenses		$	322,915			$	323,166
Less accumulated amortization			(175,332	)			(151,149	)
License fees, net		$	147,583			$	172,017

 

Purchased licenses are amortized over 3 years.

 

 

Note 5.  Debt

 

Notes payable consists of the following:

		Warrants				March 31, 2014				December 31, 2013
The Co-Investment Fund II, L.P. (“CI II”)			9,401,385			$	11,500,000			$	11,500,000
Stewart J. Greenebaum, LLC (“Greenebaum”)			2,500,000				3,000,000				3,000,000
Total notes payable, long term						$	14,500,000			$	14,500,000

 

Substantially all of the Company’s assets are pledged as collateral on debt and all of the notes are due on June 30, 2015 with interest at 8% on each note payable at maturity.

 

In accordance with various loans obtained by the Company, the lenders hold warrants to purchase the following maximum number of shares of common stock as of March 31, 2014:

 

CI II				Greenebaum				Price per Share				Expiration Date
	6,401,385				2,500,000			$	1.00			April 12, 2016
	1,000,000				—			$	1.00			January 17, 2017
	1,000,000				—			$	1.00			July 6, 2017
	500,000				—			$	1.00			January 30, 2018
	500,000				—			$	1.00			May 6, 2018
	9,401,385				2,500,000

 

 

 

 

 

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

 

Note 5.  Debt (Continued)

 

The purchase price of the common stock is subject to adjustment from time to time pursuant to the anti-dilution provisions of the respective warrant agreements. Also, certain notes contain a right to convert the principal amount of the note and accrued interest into shares of common stock. Expense recognized for the amortization of the debt discount for the three months ended March 31, 2014 and 2013 related to these warrants was $0 and $23,853 respectively, and was included in interest expense. Expense recognized for the amortization of the debt discount for the three months ended March 31, 2014 and 2013 related to the debt conversion right was $0 and $4,524, respectively, and was included in interest expense.

 

Certain notes in the amount of $8,500,000 and related accrued interest of $3,431,973 at March 31, 2014 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.

 

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

 

 

Note 6. Commitments

In November 2009, the Company entered into a lease agreement for its corporate offices. 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 March 31, 2014 and 2013 was $30,772 and $27,285, respectively.

 

Future minimum lease payments are as follows:

 

Year Ending December 31,				Amount
	2014			$	81,107
	2015				66,254
				$	147,361

 

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 called for minimum annual payments and could be cancelled under certain conditions. An amendment to the license agreement between the Company and Hasbro, Inc. was executed in January 2013, modifying the terms of the guarantee license fee payment for the fifth year of the agreement reducing the fee to $150,000 from $300,000. In addition, the Company’s sell-off rights and rights to continue any leases are null and void upon the termination of the agreement, which was December 31, 2013.

 

In October 2009 the Company entered into an exclusive license agreement with Hearst Holdings, Inc. and King Features Syndicate Division to use the brands POPEYE and related family of characters in gaming devices distributed worldwide excluding the United Kingdom and Japan. The initial term of the agreement was for one year with the Company’s right to extend the agreement for eight additional one-year terms upon payment of minimum royalties. The Company paid the minimum royalties and extended the term of the agreement to December 2013. In April 2013, the Company was granted the right to sublicense the POPEYE brand for distribution to bar and salon customers only in Spain for the remainder of the renewal term. In December 2013, the Company and Hearst Holdings entered into a second renewal agreement extending the license and sublicense renewal term from January 1, 2014 to December 31, 2016. The extension agreement provides the Company the right to extend the agreement for six additional renewal terms upon the payment of $200,000 in minimum royalties.

 

 

 

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

 

Note 6. Commitments (Continued)

 

In June 2011, the Company entered into an exclusive license agreement with MGM/Brandegenuity, LLC to use the images of the Pink Panther and related family of characters in gaming devices distributed in the United States and Canada. The initial term of the agreement is for three years with the Company’s right to extend the agreement for an additional five years upon payment of $250,000 in minimum royalties.

 

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

 

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

 

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

 

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 March 31, 2014, the Company had total license fee commitments and advances made as follows:

 

			Minimum Commitments
Total royalty and license fee commitments		$	84,563
Advances made			(84,563	)
Potential future payments		$	—

 

As of March 31, 2014, the Company had no outstanding or potential minimum future royalty or license commitments.

 

 

Note 7.  Stockholders’ Deficit

 

Stock Option Plan: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants, and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "Stock Plan") having substantially the same terms. The options are granted at the discretion of the Board of Directors and, at December 31, 2013, the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each option will be determined by the Board of Directors at the time the option is granted, but in no event will be less than 100% of the fair market value of the common stock at the time of grant. Options granted will not be exercisable after 10 years from the grant date. Options generally vest at 20% per year starting from the grant date and are fully vested after five years. The options can be exercised in partial or full amounts upon a change in control and at such other times as specified in the award agreements.

 

 

 

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

 

Note 7.  Stockholders’ Deficit (Continued)

 

Stock Option Plan (Continued) 

 

A summary of option transactions in 2014 is as follows:

		Shares				Weighted Average Exercise Price
Outstanding at December 31, 2013			1,548,000			$	1.41
Options granted			—				—
Options exercised			—				—
Options cancelled			—				—
Options outstanding at March 31, 2014			1,548,000			$	1.41
Options available for grant under the Stock Plan at March 31, 2014			952,000

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based upon publicly traded companies with characteristics similar to those of the Company. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted during the three months ended March 31, 2014 and 2013.

 

Stock-based compensation expense is recognized in the statement of operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures. Compensation expense related to stock options for the three months ended March 31, 2014 and 2013 was $3,221 and $3,977, respectively.

 

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

 

Options Outstanding					Vested Options
Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Contractual Term (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value
1,548,000	3.3	$1.41	-		1,408,000	3.3	$1.48	-

 

The following table summarizes information with respect to stock options outstanding at December 31, 2013:

 

Options Outstanding					Vested Options
Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Contractual Term (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value
1,548,000	3.5	$1.41	-		1,408,000	3.5	$1.48	-

 

As of March 31, 2014, there was approximately $5,000 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 .4 years.

 

 

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

 

Note 7.  Stockholders’ Deficit (Continued)

 

Warrants:  In accordance with the loans obtained by the Company, the lenders hold warrants to purchase 11,901,385 shares of the Company’s common stock at a price of $1.00 per share, expiring at various times from April 2016 through May 2018. The purchase price shall be subject to adjustment from time to time pursuant to the respective provisions of the warrant agreements. The Company calculates the value of these warrants at the time of issuance using a Binomial Pricing Model. 

 

The following table is a summary of the Company’s warrant activity for the three months ended March 31, 2014:

 

		Warrants Outstanding				Weighted Average Exercise Price
Outstanding at December 31, 2013			11,901,385			$	1.00
Warrants granted			-				-
Warrants exercised			-				-
Warrants cancelled			-				-
Warrants outstanding at March 31, 2014			11,901,385			$	1.00

 

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

 

Warrants Outstanding					Vested Warrants
Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Exercise Price	Aggregate Intrinsic Value
11,901,385	2.4	$1.00	-		11,901,385	$1.00	-

 

The following table summarizes information with respect to warrants outstanding at December 31, 2013:

 

Warrants Outstanding					Vested Warrants
Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Exercise Price	Aggregate Intrinsic Value
11,901,385	2.6	$1.00	-		11,901,385	$1.00	-

 

For the three months ended March 31, 2014, the weighted average fair value per share of each warrant was $.01.

 

The fair value of each warrant is estimated using the Binomial pricing model, with the following assumptions for the three months ended March 31, 2014:

		2014
Weighted average volatility		41.1	%
Expected dividend yield		-
Expected term (in years)		2.4
Weighted average risk free interest rate		.6	%

 

 

 

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

 

Note 7.  Stockholders’ Deficit (Continued)

 

Warrants (Continued) 

 

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, 2013		$	—			$	31,794
Fair value of warrants issued in 2014			—				—
Net change in fair value			—				—
Balance March 31, 2014		$	—			$	31,794

 

 

Note 8.  Income Taxes

 

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

 

As of March 31, 2014, the Company has available, for federal and state income tax purposes, net operating loss (“NOL”) carryforwards of approximately $18,185,000, which expire at various times through 2034. The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods. The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the financial statements.

 

 

Note 9.  Related Party Transactions

 

In January 2013 and May 2013, the Company borrowed $500,000 on each occurrence from The Co-Investment Fund II, L.P. (“CI II”). The notes are due on June 30, 2015 and include interest at the rate of 8% per annum and may be converted to Nonvoting Stock at $1.00 per share at the discretion of the lender. Warrants to purchase 1,000,000 shares of common stock were issued on these notes in December 2013.

 

During the three months ended March 31, 2014 and 2013 interest expense on all of the loans from CI II and Greenebaum described above amounted to $289,726 and $276,685, respectively. During 2014 and 2013, the Company made no principal or interest payments on those loans.

 

At March 31, 2014, included in the notes held by CI II and accrued interest thereon are notes in the principal amount of $6,500,000 and accrued interest of $2,644,028, which are convertible into shares of our common stock on the same terms and conditions of the next equity offering. Also at March 31, 2014, the notes held by Greenebaum in the principal amount of $2,000,000 and accrued interest of $787,945 are convertible into shares of our common stock on the same terms and conditions of the next equity offering.

 

CI II and Greenebaum hold the following warrants as of March 31, 2014:

 

Holder		Number of Underlying Shares		Weighted Average Exercise Price Per Share
CI II		9,401,385		$1.00
Greenebaum		2,500,000		$1.00

 

 

 

 

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

 

Note 10. Concentration of Risk – Major Customers

 

The Company generated approximately 13% of its revenue from its top three customers for the three months ended March 31, 2014 and 27% of its revenue from its top three customers for the three months ended March 31, 2013.

 

 

Note 11. Subsequent Events

 

On April 23, 2014, the Company and a former service provider entered into an agreement whereby both parties settled and released all claims regarding disputed work previously performed and the service provider has agreed to discharge all open invoices regarding the disputed work outstanding as of that date. The total amount of the invoices discharged amounted to $110,799 and were reversed and adjusted against the Company’s compliance costs in April 2014.

 

 

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

 

Forward-Looking Statements

 

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

 

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

 

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section or elsewhere in this report. In light of these and other risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. Factors that might cause our actual results to differ from our expectations, might cause us to modify our plans or objectives, or might affect our ability to meet our expectations include, but are not limited to:  the severe economic downturn that the gaming industry is suffering; the dramatic decline in national and global economic conditions; the tightening of credit in financial markets generally and the particularly severe tightening of them for the gaming industry, which may adversely affect our ability to raise funds through debt or equity financing or to refinance our long-term debt that will become due June 30, 2015, and may also adversely affect the ability of our customers to purchase our product and services; our ability to obtain additional gaming licenses; fuel price increases; legislative/regulatory changes; competition; changes in generally accepted accounting principles; and fluctuations in foreign currency exchange rates. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the Securities and Exchange Commission (“SEC”).

 

 

 

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

 

Overview

 

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

 

•	Popeye	•	Penny Palooza
•	Popeye’s Bonus Voyage	•	Golden Egg
•	Blondie’s Penny Bonanza	•	Just Jackpots
•	Hagar the Horrible	•	Duck Dynamite
•	Beetle Bailey	•	Candy Cash
•	Pink Panther	•	Olive Oyl’s Jumbo Stacks
•	Swamp Fever	•	Jumbo Fish Stacks
•	Vampires Fortune

 

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. The newer version allows for cash management at the Poker Table.

 

Our slot machines are placed in to the market using a daily lease model or a revenue sharing model. We have 228 slot machines out on lease or revenue share in 58 different casinos and cruise ships. As of April 30, 2014, we have sold or leased 61 newer version Poker Tables to domestic and international casinos, card rooms, and cruise ships.

 

We are registered as an approved vendor to distribute products to gaming venues located in 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 $402,870 in the three months ended March 31, 2014.

 

 

 

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

 

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

 

Revenues

 

The Company’s revenues for the three months ended March 31, 2014 were $924,000 compared to $885,000 for the comparable prior year period. The increase in revenues was due to the increase in revenues from the placement of our slot machines.

 

Sales of gaming products, namely slot machines, decreased by $41,000 to $27,000 for the three months ended March 31, 2014 as compared to $68,000 for the three months ended March 31, 2013. Although the total sales volume was 60% lower, profit generated from the sale of the units in 2014 was just $27,000, 23% or $8,000 lower than the $35,000 profit generated from the sales in 2013.

 

Lease and license fees increased by a net of $80,000 (10%) to $897,000 for the three months ended March 31, 2014 as compared to $817,000 for the three months ended March 31, 2013. The placement of 50 additional slot machines in casinos generated a $259,000 increase in license fees which was offset by a $179,000 decrease from poker table lease revenue as a result of one-time lease settlements that occurred in 2013.

 

Cost of Products Sold

 

For the three months ended March 31, 2014, cost of products sold decreased $33,000 (100%) as compared to the three months ended March 31, 2013 due to the sale of fully depreciated slot machines. Gross margin on the slot machine sales was 100% for the three months ended March 31, 2014 versus 52% for the three months ended March 31, 2013.

 

Operating Expenses

 

Operating expenses decreased by $66,000 to $189,000 for the three months ended March 31, 2014, from $255,000 for the three months ended March 31, 2013. This decrease was the result of several factors: 1) the transition from licensed to proprietary themes which reduced royalty costs; 2) the reduction in the total number of conversions that occurred during the quarter (55 in 2014 versus 82 in 2013); and 3) the reduction of commission and legal costs associated with the one-time poker table lease revenue settlements made during the first quarter of 2013.

 

Research and Development Expenses

 

Research and development expenses increased by $11,000 to $119,000 for the three months ended March 31, 2014, from $108,000 for the three months ended March 31, 2013. Research and development expenses are primarily related to the development of new gaming equipment themes and technology and consist mainly of payroll and related expenses for programmers and graphic artists. This increase was due to the increase in salary and related benefit costs for research and development personnel.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $107,000 to $531,000 for the three months ended March 31, 2014, from $424,000 for the three months ended March 31, 2013.  This increase was primarily due to higher compliance, regulatory and lab costs and the increase in marketing staff that occurred beginning in the second quarter of 2013.

 

Depreciation and Amortization

 

Depreciation and amortization decreased by $16,000 to $198,000 for the three months ended March 31, 2014 from $214,000 for the three months ended March 31, 2013. This decrease was the result of the reduction of depreciation for poker tables that were fully depreciated in 2013 and the elimination of amortization for the license fee relating to the Hasbro brand that was fully amortized in 2013.

 

 

 

Net Interest Expense

 

Net interest expense decreased by $15,000 to $290,000 for the three months ended March 31, 2014 from $305,000 for the three months ended March 31, 2013. This decrease was as a result of the reduction of expense from fully amortized interest relating to the debt discounts offset by the increase from the additional loans issued in 2013.

 

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:

 

Discussion of Statement of Cash Flows

 

		Three Months Ended March 31,
		2014				2013				Change
Net cash used in operating activities		$	(168,516	)		$	(218,434	)		$	49,918
Net cash used in  investing activities			(52,182	)			(176,755	)			124,573
Net cash provided by financing activities			—				500,000				(500,000	)
Net increase (decrease ) in cash			(220,698	)			104,811				(325,509	)
Cash, beginning of year			462,200				187,782
Cash, end of period		$	241,502			$	292,593

 

For the three months ended March 31, 2014, net cash used in operating activities decreased $50,000 (23%) to $168,000 as compared to $218,000 for the three months ended March 31, 2013. The decrease in the use of cash for operating activities was primarily due to the increase in slot machine revenues.

 

Net cash used in investing activities decreased $125,000 to $52,000 for the three months ended March 31, 2014 from $177,000 for the three months ended March 31, 2013. Cash used in investing activities is primarily the function of the net investment in property and equipment, principally slot machines used in our operations, and brand licenses. This decrease consisted of a $166,000 reduction in both slot machine purchases and investments in brand licenses offset by the decrease in proceeds from the sale of slot machines of $41,000.

 

Net cash provided by financing activities was $0 for the three months ended March 31, 2014, a decrease of $500,000 from $500,000 for the three months ended March 31, 2013, which represented the net proceeds from the issuance of a note payable in January 2013 from CI II.

 

Operations and Liquidity Management

 

For the three months ended March 31, 2014, we incurred a net loss of $402,870 and used $168,516 of cash in operating activities. At March 31, 2014, our cash balance was $241,502. The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to obtain the regulatory approvals required to distribute our products and successfully market them to casinos and card clubs.

 

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

 

 

 

Based on our cash flow projections and anticipated revenues, we believe we may require additional capital or financing to support our operations during our 2014 fiscal year. We have received assurance from a major stockholder to support our operations through June 30, 2015 should such support become necessary.

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of March 31, 2014:

 

		Total				Less than 1 year				1 - 3 years				3 - 5 years				More than 5 years
Debt obligations (1)		$	21,302,949			$	-			$	21,302,949			$	-			$	-
Operating lease obligations (2)			147,361				109,501				37,859				-				-
Total		$	21,450,310			$	109,501			$	21,340,808			$	-			$	-

 

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

 

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

 

 

Off-Balance Sheet Arrangements

 

As of March 31, 2014, 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. Conditions have improved during 2013 and the Company expects these conditions to continue to improve during 2014, however the generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to obtain the regulatory approvals required to distribute its products and successfully market them to more casinos and card clubs. Based on the Company’s cash flow projections and anticipated revenues, the Company believes it may require additional capital or financing to support its operations during 2014. The Company has received assurance from a major stockholder to support its operations through June 30, 2015 should such 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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

 

 

 

 

Item 4. Controls and Procedures.

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer (“CEO”) and Controller as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of March 31, 2014, we conducted an evaluation, under the supervision and with the participation of our management including our CEO and Controller, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and Controller have concluded that as of March 31, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There were no changes in our internal control over financial reporting during our quarter ended March 31, 2014 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

 

 

 

 

Item 6.   Exhibits.  

 

 

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

 

 

 

SIGNATURES

 

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

 

Date:  May 12, 2014	Lightning Gaming, Inc.
	By:	/s/ Brian Haveson                                         Brian Haveson President, Chief Executive Officer and Director

 

 

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