Company Quick10K Filing
Quick10K
Lightning Gaming
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-07-17 Enter Agreement, Off-BS Arrangement
CIB Bancolombia 11,730
OMF Onemain Holdings 4,580
GEL Genesis Energy 2,610
GWRS Global Water Resources 204
VOC VOC Energy Trust 99
ATXI Avenue Therapeutics 74
CNAT Conatus Pharmaceuticals 30
TRPO Tropic International 0
JRVS Imine 0
GEN Genesis Healthcare 0
LGTG 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 1. Financial Statements.
Note 1. Nature of Business and Summary of Significant Accounting Policies
Note 2. Inventory
Note 3. Property and Equipment
Note 4. License Fees
Note 5. Notes Payable
Note 6. Leases
Note 7. Commitments
Note 8. Stockholders' Equity
Note 9. Revenue
Note 10. Income Taxes	
Note 11. Concentration of Risk - Major Customers
Note 12. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 s22-20511_ex311.htm
EX-31.2 s22-20511_ex312.htm
EX-32 s22-20511_ex32.htm

Lightning Gaming Earnings 2019-03-31

LGTG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 s22-20511_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
  For the quarterly period ended March 31, 2019  
   
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  ¨  No  x  

 

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

 

  Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
  Smaller reporting company  x Emerging Growth Company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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: 4,649,383 shares of (voting) Common Stock as of May 15, 2019; 33,300,000 shares of Nonvoting Common Stock as of May 15, 2019; and -0- shares of Series A Nonvoting Capital Stock as of May 15, 2019

 

 

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 19
Item 3. Quantitative and Qualitative  Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Mine Safety Disclosures 24
Item 5. Other Information 24
Item 6. Exhibits 24

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

 1 Consolidated  Balance Sheets as of  March 31, 2019 (unaudited) and December 31, 2018 (audited);  
 2 Unaudited Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018;  
 3 Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018;  
 4 Notes to Consolidated Condensed Financial Statements.  

 

 

2 

 

 

 

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

  

March 31,

 2019

 

December 31,

2018

   (unaudited)  (audited)
Assets          
Current Assets          
       Cash  $715,422   $565,461 
Accounts receivable, net   406,776    415,466 
Inventory   627,364    584,221 
Prepaid expenses   162,962    124,887 
       Deposits with vendors   556,517    553,760 
Total Current Assets   2,469,041    2,243,795 
           
Property and Equipment, net   2,302,606    1,497,373 
           
Right-of-Use asset - building   158,828    —   
Other assets   8,193    8,193 
License fees, net of accumulated amortization   8,506    9,339 
           
Total Assets  $4,947,174   $3,758,700 
           
See Notes to Consolidated Condensed Financial Statements          

 

3 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)

 

 

  

March 31,

 2019

 

December 31,

2018

   (unaudited)  (audited)
Liabilities and Stockholders’ Equity          
Current Liabilities          
       Accounts payable  $198,644   $191,751 
       Accrued expenses   140,606    98,241 
       Income tax payable   27,362    23,000 
       Current portion of lease liability   93,317    —   
       Current portion of long-term debt   867,251    572,298 
       Accrued interest   24,120    12,891 
Total Current Liabilities   1,351,300    898,181 
           
Long-Term Debt and Other Liabilities          
       Long-Term Notes Payable   1,630,609    1,178,113 
       Long-Term Lease Liability   94,724    —   
       Other Long Term Liabilities   —      32,344 
Total Long-Term Debt and Other Liabilities   1,725,333    1,210,457 
           
Total Liabilities   3,076,633    2,108,638 
           
Commitments (Note 7)          
           
Stockholders' Equity          
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares authorized, -0- shares issued and outstanding   —      —   
           
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,916,285 shares issued and 4,649,383 outstanding   4,917    4,917 
           
Nonvoting common stock: $0.001 par value; authorized 50,000,000 shares; 33,300,000 issued and outstanding   33,300    33,300 
           
Additional paid in capital   30,484,132    30,467,906 
       Accumulated deficit   (28,630,997)   (28,835,250)
Treasury stock, 266,902 shares, at cost   (20,811)   (20,811)
Total Stockholders’ Equity   1,870,541    1,650,062 
           
Total Liabilities and Stockholders’ Equity  $4,947,174   $3,758,700 
           
See Notes to Consolidated Condensed Financial Statements          

 

 

 

4 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2019 and 2018

 

 

  

March 31,

 2019

 

March 31,

2018

   (unaudited)  (unaudited)
Revenues          
       Lease and license fees  $865,499   $548,360 
       Sales of gaming products and parts   727,138    447,433 
Total revenues   1,592,637    995,793 
           
Costs and operating expenses          
       Cost of products sold   413,803    35,184 
       Operating expenses   118,308    112,658 
       Research and development   108,111    91,948 
       Selling, general and administrative expenses   541,809    424,340 
       Depreciation and amortization   105,246    18,026 
Total costs and operating expenses   1,287,277    682,156 
           
Operating income  $305,360   $313,637 
           
Non-operating expense          
       Interest expense   (94,807)   (2,466)
Net income before income taxes   210,553    311,171 
       Income tax expense   6,300    —   
Net income  $204,253   $311,171 
Net income per common share - basic  $0.01   $0.01 
Net income per common share - diluted  $0.00   $0.01 
Weighted average Series A Nonvoting shares outstanding-basic and diluted   —      —   
Weighted average Common shares outstanding - basic   4,649,383    4,654,383 
Weighted average Common shares outstanding - diluted   4,924,383    5,029,383 
Weighted average Nonvoting Common shares outstanding - basic   33,300,000    33,300,000 
Weighted average Nonvoting Common shares outstanding - diluted   37,268,889    37,240,000 
           
See Notes to Consolidated Condensed Financial Statements          

 

 

5 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2019 and 2018

 

 

  

March 31,

 2019

 

March 31,

 2018

   (unaudited)  (unaudited)
       
Net Cash Provided by Operating Activities  $312,157   $343,458 
           
Cash Flows From Investing Activities          
       Purchase of equipment   (909,645)   (16,721)
           
Net Cash Used in Investing Activities   (909,645)   (16,721)
           
Cash Flows From Financing Activities          
       Proceeds from notes payable   925,432    —   
       Repayment of notes payable   (177,983)   —   
           
Net Cash Provided by Financing Activities   747,449    —   
           
Net Increase in Cash   149,961    326,737 
           
Cash - Beginning of period   565,461    276,111 
           
Cash - End of period  $715,422   $602,848 
           
Supplemental Information:          
Cash paid for:          
     Interest  $83,578   $2,466 
     Income taxes  $1,938   $—   
     Operating leases  $25,876   $25,245 
           
See Notes to Consolidated Condensed Financial Statements          

 

6 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

March 31, 2019

 

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

 

Nature of Business:

 

Lightning Gaming, Inc. (the “Company”) was incorporated on March 1, 2007 and on January 29, 2008, completed a merger with Lightning Poker, Inc. (“Lightning Poker”) which became a wholly-owned subsidiary of the Company.

 

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

 

In 2008, the Company, as the sole member, established Lightning Slot Machines, LLC (“Lightning Slots”) through which it commenced the design, manufacture, marketing, sale and operation of video slot machines to customers in various gaming jurisdictions. The current slot machine products are:

 

·Popeye · Jumbo Fish Stacks
·Popeye’s Bonus Voyage · Jungle Book
·Popeye’s Seven Seas · Jungle Jackpots
· Olive Oyl’s Jumbo Stacks · Just Jackpots
·Flash Gordon · Lightning Lotto
·Garfield · Penny Palooza
·Around the World in 80 Days · Screaming Links Multi
·Beauty and the Beast · Si Shou
·Candy Cash · Si Xiang
·Cash Flow · Slotto
·Cinderella · Snow White
·Duck Dynamite · Swamp Fever
·Fins N Wins · Swamp Frenzy
·Golden Egg · Vampires Fortune
·Goyaate · Year of the Horse
·Great Balls of Fire · Ye Xian
·Hao Yun · Zhang Jiao
·Hua Mulan · Zuo Ci

 

Our gaming products feature advanced graphics and engaging games based on licensed, well-recognized brands, cartoon characters and proprietary non-branded themes.

 

Our consolidated financial statements include the accounts of the Company, including Lightning Poker and Lightning Slots. All inter-company accounts and transactions have been eliminated.

 

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, 2019 (“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

 

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)

 

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, 2018 was derived from the Company’s audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the entire year.

 

The accompanying consolidated condensed 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 had net income for the three months ended March 31, 2019, realized a significant increase in revenue for the period ending March 31, 2019 versus March 31, 2018, and has maintained and sustained working capital surpluses. The generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to distribute its products and successfully market them to more casinos and gaming venues. The Company has increased the number of lease contracts during 2019, and based on our current performance, financial condition, cash flow projections, anticipated revenues and financing agreements, we believe we have sufficient cash flows to support our operations for the next twelve months, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects for expansion. 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.

 

During the most recent fiscal quarter, the Company adopted Accounting Standard Codification 842 (“ASC 842”) with regards to lease accounting as described more fully below.

 

The Company has a reserve for uncollectible accounts of $14,217 and $6,593 as of March 31, 2019 and December 31, 2018, respectively. Except for this reserve, the Company believes its receivables are collectible. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change. Recoveries of receivables previously written off are recorded as revenue when recovered. Delinquency of accounts receivable is determined based on contractual terms. The Company does not charge interest on its past due receivables. During the three months ended March 31, 2019 and 2018, respectively, the Company wrote off $7,624 and $-0- considered to be uncollectible.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB finalized the accounting standard and issued an update under the Leases topic. The update provides for major changes by lessees in that a lessee must recognize on its statement of financial position both an asset (“right-of-use”), representing its right to use the underlying asset, and a lease liability for all leases, other than short-term leases with terms of twelve months or less. The guidance defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset. Differentiation between finance and operating leases still remains however the most notable difference from previous guidance is recognizing the asset and liability on the statement of financial position for operating leases.

 

 

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)

 

For finance leases, lessees are required to:

1.Recognize a right-of-use asset and a lease liability in the statement of financial position which is initially measured at the present value of the lease payments;
2.Recognize interest in the statement of comprehensive income on the lease liability separately from amortization of the right-of-use asset; and
 3.Classify in the statement of cash flows repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities.

  

For operating leases, lessees are required to:

1.Recognize a right-of-use asset and a lease liability in the statement of financial position which is initially measured at the present value of the lease payments;
2.Recognize a single lease cost, generally allocated over the lease term on a straight-line basis; and
3.Classify all cash payments in the statement of cash flows as operating activities.

 

Under the update, lessor accounting for leases remains largely unchanged providing that lessor accounting is aligned with changes made to the lessee accounting guidance and key aspects under the revenue recognition guidance.

 

The amendments in this update as well as the targeted and codification improvements issued in July 2018, became effective for fiscal and interim periods beginning after December 15, 2018. The Company adopted this guidance, referred to as ASC 842, effective January 1, 2019 using the optional transition method and has elected the package of practical expedients permitted under the transition guidance which allows, among other things, the carryforward of the historical lease classification. In addition, the Company has elected to use the hindsight practical expedient to determine the lease term for existing leases, and has elected to keep leases with a term of 12 months or less off of the balance sheet.

 

The Company has determined that one lease agreement for its corporate offices, as described in more detail in Note 6, Leases, falls under the scope of this guidance as an operating lease. A balance sheet adjustment to record the amounts remaining on the lease as the Right-of-Use Asset, Lease Liability and to eliminate the balance remaining in the deferred rent as of January 1, 2019 was made and there was no effect to prior periods. Payments under this lease are recognized in the consolidated condensed Statements of Operations on a straight-line basis.

 

In November 2016, the FASB issued an update under the Statement of Cash Flows topic which applies to entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts described as restricted cash or restricted cash equivalents, and that the amounts generally described as restricted cash and restricted cash equivalents be included in the beginning-of-period and end-of-period total amounts shown on the statement.

 

The amendments in this update became effective for interim periods and fiscal years beginning after December 15, 2017 and did not have a material impact on our financial statements.

 

9 

 

 

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

 

Note 2.  Inventory

 

Inventory consists of the following:

  

March 31,

2019

 

December 31,

2018

Finished products  $423,105   $403,080 
Raw materials and work in process   204,259    181,141 
Inventory  $627,364   $584,221 

 

Inventory is stated at the lower of cost using the first-in, first-out method, or net realizable value.

 

During 2018, the Company started using a new slot machine cabinet design for lease and sale. The cabinets, which are manufactured by a third-party and include monitors, toppers, stands and certain electronic components, are shown as finished products. Raw materials primarily consist of the flash drives, motherboards, spare parts and interchangeable electronic components for the slot machines.

 

 

Note 3.  Property and Equipment

 

Property and equipment consist of the following:

  

March 31,

2019

 

December 31,

2018

Equipment, principally gaming equipment under lease  $4,087,359   $3,208,481 
Delivery truck   28,140    28,140 
Furniture and fixtures   104,314    104,314 
Leasehold improvements   91,794    91,794 
Property and equipment   4,311,607    3,432,729 
Less accumulated depreciation   (2,009,001)   (1,935,356)
Property and equipment, net  $2,302,606   $1,497,373 

 

Depreciation expense related to the property and equipment included in the consolidated condensed Statements of Operations was $104,413 and $15,526 for the three months ended March 31, 2019 and 2018, respectively.

 

 

Note 4.  License Fees

 

License fees consist of the following:

  

March 31,

2019

 

December 31,

2018

Purchased licenses  $351,605   $351,605 
Less accumulated amortization   (343,099)   (342,266)
License fees, net  $8,506   $9,339 

 

The weighted average useful life of purchased licenses is 3 years. Amortization expense included in the consolidated condensed Statements of Operations relating to the purchased licenses was $833 and $2,500 for the three months ended March 31, 2019 and 2018, respectively.

 

10 

 

 

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

 

Note 4.  License Fees (Continued)

 

Estimated amortization expense related to recorded license fees is as follows:

 

Year Ending December 31,  Amount
 2019   $2,950 
 2020    3,333 
 2021    2,223 
     $8,506 

 

 

Note 5.  Notes Payable

 

On July 17, 2018, the Company entered into a Master Loan Agreement (the “Loan”) with PDS Gaming LLC (“PDS” or the “Lender”) to make a series of advances under the Loan in the principal amount of up to $2,500,000 for the purposes of financing the purchase or manufacturing of equipment. The Loan will be evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and secured by a Security Agreement dated of even date with the Loan, between the Company and the Lender (the “Security Agreement”) granting a security interest to the Lender in all of the Company’s right, title and interest in and to personal property, tangible and intangible, wherever located or situated and whether now owned or acquired or created. The Loan will be advanced, in parts, pursuant to the Loan and in the amounts of each Note during the advance period which expires on July 17, 2019. Each subsequent advance will be made at the Lender’s sole and absolute discretion.

 

The Notes will bear interest on the outstanding principal amount at the lesser of the maximum rate or interest rate specified on each note based on a 360 day year. Payments consisting of principal and interest, as well as “Contingent Interest Payments” (“CIP”) of $3.50 per day for each on-line day up to a maximum of 730 on-line days for each unit financed under the Note are due and payable monthly. Each Note matures in 36 months and CIP obligations mature 48 months after the respective closing of each Note.

 

Interest expense and CIP obligations relating to these Notes were $58,320 and $36,487, respectively, for the three months ended March 31, 2019.

 

On March 29, 2019, the Lender agreed to increase the total principal amount that may be borrowed under the Loan from $2,500,000 to $5,500,000. All other terms of the Loan remain unchanged and in full force.

 

Notes payable consist of the following:

 

   Advance Date  Maturity Date  Note Amount  Monthly Payment  Interest
Rate
 

March 31,

2019

 

December 31,

2018

                      
Advance 1  7/17/2018  7/17/2021  $489,989   $16,083    11%  $394,703   $431,407 
Advance 2  9/18/2018  9/18/2021  $723,565   $23,741    11%   618,778    671,986 
Advance 3  11/15/2018  11/15/2021  $662,686   $21,743    11%   586,747    647,018 
Advance 4  1/21/2019  1/21/2022  $581,700   $19,085    11%   553,900    —   
Advance 5  3/29/2019  3/29/2022  $343,732   $11,284    11%   343,732    —   
                                
Total Notes Payable                     2,497,860    1,750,411 
Less: amounts classified as current                  (867,251)   (572,298)
Long-Term Notes Payable                   $1,630,609   $1,178,113 
                                

 

11 

 

 

 

 

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

 

Note 5. Notes Payable (Continued)

 

The following table lists the principal payments due on the Notes as of March 31, 2019:

 

Year Ending December 31,  Amount
 2019   $641,046 
 2020    942,906 
 2021    861,769 
 2022    52,139 
     $2,497,860 

 

 

On May 10, 2019, the Company closed on its next advance (“Advance 6”) under the Loan. In addition, PDS agreed to amend terms of each Note and certain terms and conditions of the Loan Agreement in the Second Amendment to Master Loan Agreement. See Note 12, Subsequent Events, for more information on the Advance 6 transaction and the terms of each amendment.

 

 

Note 6. Leases

 

In November 2009, the Company entered into a lease agreement for its corporate offices which became effective in January 2010 for a term of sixty-seven months. In September 2014, the lease was amended to include the following: 1) an extension of the lease term to February 28, 2021; 2) modification of the minimum annual and monthly rents for the extended lease term; 3) a rent abatement period of six months commencing October 1, 2014; and 4) an option to extend the term for a period of five years.

 

Since the original lease inception, rental expense had been recognized on a straight-line basis over the life of the lease and was recorded as a deferred rent obligation during the abatement period. The deferred rent was reduced by the difference between the rent due and the straight-line expense upon commencement of the rental payments, which was identical to the lease expense that would have been recognized applying the principals under ASC 842. Since there was no difference in the lease versus rent expense calculation, there was no effect to prior periods and the balance sheet adjustment to record the remaining balances in the Right-of-Use Asset of $177,521, Lease Liability of $209,864, and to eliminate the balance remaining in the deferred rent account of $32,343 was made as of January 1, 2019.

 

The following table summarizes the right-of-use asset and lease liability as of March 31, 2019:

 

Right-of-Use Asset   $ 158,828  
         
Lease Liability   
     Current  $93,317 
     Long-Term   94,724 
   $188,041 

 

Lease expense for each of the three months ended March 31, 2019 and 2018 was $22,745.

 

 

 

12 

 

 

 

 

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

 

Note 6. Leases (Continued)

 

The following table summarizes the Company’s scheduled future minimum lease payments as of March 31, 2019:

 

Year Ended December 31:  

 

2019  $78,490 
2020   106,976 
2021   18,124 
Minimum lease payments    203,590 
Less: imputed interest   (15,549)
Present value of minimum lease payments   188,041 
Less: current maturities of lease liability   93,317 
Long-term lease liability  $94,724 

 

 

Note 7. Commitments

 

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. As of March 31, 2019, there are no royalty agreements in place and the Company estimates that there will be no future royalty payments.

 

 

Note 8. Stockholders’ Equity

Stock Option Plans: 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 "2007 Plan") having substantially the same terms. The options were granted at the discretion of the Board of Directors and the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each option was determined by the Board of Directors at the time the option was granted, but in no event less than 100% of the fair market value of the common stock at the time of grant. Options previously granted will not be exercisable after 10 years from the grant date and under the terms of the plan, and no awards may be granted after October 16, 2017.

 

Options generally vested 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.

 

In order to provide an incentive to designated employees, officers, directors, consultants, independent contractors and other service providers who perform services contributing to the growth of the Company, and by aligning the interests of participants with the interests of stockholders, the Board declared it advisable and in the Company’s best interest and on May 25, 2016, approved the 2016 Stock Option Plan (the “2016 Plan”). The 2016 Plan permits the granting of nonqualified stock options. The shares underlying the options will be shares of the Company’s nonvoting common stock, par value $0.001 per share, and the total aggregate number of shares that may be issued under the 2016 Plan is 5,700,000 shares. The purchase

 

13 

 

 

 

 

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

 

Note 8.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

price of each option will be determined by the Board 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.

 

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.

 

A summary of option transactions in 2019 under the 2007 Plan is as follows:

  

Shares

 

 

Weighted

Average

Exercise Price

Outstanding at December 31, 2018   275,000   $0.37 
Options granted   —      —   
Options exercised   —      —   
Options cancelled   —      —   
Options outstanding at March 31, 2019   275,000   $0.37 

 

There are no awards available for grant remaining under the 2007 Plan.

 

On March 8, 2017, the Board of Directors approved by unanimous written consent, the authorization to grant to employees with at least one year of service, non-qualified stock options to purchase shares of nonvoting common stock of the Company under its 2016 Plan. The options were issued at an exercise price of $.28 per share and vest ratably over five years. The options are subject to the terms and conditions of the 2016 Plan and each individual’s stock option agreement.

 

On November 30, 2018, the Board of Directors, based on current valuation information available, authorized the reduction of the option exercise price to $.13 per share which was determined to be the market price of the Company’s stock on that date. The Company calculated the incremental fair value by calculating the fair value of the options immediately before and immediately after the modification. The fair value of the options immediately before the repricing is based on assumptions (e.g., volatility, expected term, etc.) reflecting the current facts and circumstances on the modification date and therefore, differs from the fair value calculated on the grant date.

 

A summary of option transactions in 2019 under the 2016 Plan is as follows:

  

Shares

 

 

Weighted

Average

Exercise Price

Outstanding at December 31, 2018   3,940,000   $0.13 
Options granted   100,000    0.13 
Options exercised   —      —   
Options cancelled   —      —   
Options outstanding at March 31, 2019   4,040,000   $0.13 
Options available for grant under the 2016 Plan at March 31, 2019   1,660,000      

 

 

14 

 

 

 

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

 

Note 8.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

Stock-based compensation expense is recognized in the consolidated condensed Statements of Operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures. Additional compensation expense arising from the modification of the exercise price is being recognized over the vesting period. Compensation expense related to stock options for the three months ended March 31, 2019 and 2018 was $16,226 and $11,046, respectively.

 

The following table summarizes information with respect to stock options outstanding at March 31, 2019:

 

 

    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
2007 Plan    275,000 0.3 $0.37 -   275,000 0.3 $0.37 -
2016 Plan 4,040,000 8.0 $0.13 -   1,576,000 7.9 $0.13 -

 

The following table summarizes information with respect to stock options outstanding at December 31, 2018:

    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
2007 Plan    275,000 0.5 $0.37 -   275,000 0.5 $0.37 -
2016 Plan 3,940,000 8.2 $0.13 -   788,000 8.2 $0.13 -

 

As of March 31, 2019, all compensation costs related to share-based compensation arrangements granted under the 2007 Plan had been fully recognized. As of March 31, 2019, there was approximately $187,551 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2016 Plan. The cost is expected to be recognized over a weighted-average period of 3.0 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.

 

In computing earnings per share, the Company's Nonvoting Stock is considered a participating security. Each share of Nonvoting Stock has identical rights, powers, limitations and restrictions in all respects as each share of common stock of the Company including the right to receive the same consideration per share payable in respect of each share of common stock, except that holders of Nonvoting Stock shall have no voting rights or powers whatsoever.

 

The following table summarizes the number of dilutive shares outstanding for each of the periods presented which may dilute future earnings per share, and is included in the calculation of diluted earnings per share on the consolidated condensed Statements of Operations:

 

   March 31, 2019  March 31, 2018
Common Stock   275,000    375,000 
Nonvoting Common Stock   4,040,000    3,940,000 
           

 

15 

 

 

 

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

 

Note 8.  Stockholders’ Equity (Continued)

 

The following table reconciles the changes in stockholder’s equity for the three months ended March 31, 2019:

 

   Common Stock  Nonvoting Common Stock  Additional Paid In Capital  Accumulated Deficit  Treasury Stock  Total
Balances at December 31, 2018  $4,917   $33,300   $30,467,906   $(28,835,250)  $(20,811)  $1,650,062 
Net income   —      —      —      204,253    —      204,253 
Stock based compensation   —      —      16,226    —      —      16,226 
Balances at March 31, 2019  $4,917   $33,300   $30,484,132   $(28,630,997)  $(20,811)  $1,870,541 

 

The following table reconciles the changes in stockholder’s equity for the three months ended March 31, 2018:

 

   Common Stock  Nonvoting Common Stock  Additional Paid In Capital  Accumulated Deficit  Treasury Stock  Total
Balances at December 31, 2017  $4,917   $33,300   $30,384,996   $(29,854,310)  $(19,811)  $549,092 
Net income   —      —      —      311,171    —      311,171 
Stock based compensation   —      —      11,047    —      —      11,047 
Balances at March 31, 2018  $4,917   $33,300   $30,396,043   $(29,543,139)  $(19,811)  $871,310 

 

 

Note 9.  Revenue

 

The Company generates revenue from leasing and selling slot machines and Poker Tables and from sales of parts and certain services relating to the slot machines and Poker Tables. Revenue is recognized on sales of products, net of rebates, discounts and allowances, when an agreement exists, typically an approved sales proposal or contract, or upon receipt of customer’s purchase order, in which the sales price is fixed or determinable, and when the performance obligations under that agreement have been completed. This typically occurs when products are delivered and/or installed and upon receipt of regulatory approval, if required. If multiple units of the products are included in any one sale or lease agreement or ancillary services are provided such as delivery or installation, revenue is allocated to each unit or service based upon its respective fair value against the total contract value, or itemized price within the contract, and revenue recognition is deferred on those units or services until all of the performance obligation requirements under the applicable section(s) of that agreement have been completed.

 

Revenue generated under the leasing model is recognized when the ability to collect is reasonably assured. Lease agreements are based on either a fixed daily or monthly rate, or a pre-determined percentage of the monthly net “rake” or “participation” revenue collected for each Poker Table and slot machine, subject to monthly minimums and maximums. Customers under fixed daily rate agreements are invoiced on the first day of the month at the agreed upon daily rate per unit for the number of days the unit is leased during the month, typically the total number of days in the month. Customers under rake revenue agreements are invoiced when participation reports are remitted to us detailing the monthly per unit per theme information including coin-in, net win, and days on the floor data. Revenue under both of these bases is recorded as lease revenue and recognized in the month to which the lease data pertains.

 

16 

 

 

 

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

 

Note 9.  Revenue (Continued)

 

There may be instances in which a lease is offered to a customer with the option to convert to a sale upon the completion of certain obligations such as a pre-determined paid or reduced-rate lease term and/or a free-trial period. In addition, circumstances may arise in which a customer wishes to purchase machines after being on lease at their facility. In all of these situations, the initial revenue is recorded as lease revenue as described above, and the agreed upon sales price is shown as sales revenue when the lease is converted to a sale and all performance obligations of the sale have been met.

 

For sales of slot machines, a warranty on parts is typically offered which expires after a defined period of time, usually 90 days after delivery or installation date. One slot machine theme conversion per unit sold is also typically offered during the one year period beginning upon the delivery and/or installation of the slot machine, and only if the slot game fails to earn at least eighty percent of the rolling monthly slot machine gaming floor area average for the customer. The game theme must be of the same category approved in the customer's gaming jurisdiction for use in the slot machine and the customer must provide written notice requesting the conversion, including certification of the average that serves as the basis for any such game theme conversion. In addition, the customer must return the original game theme components to the Company upon conversion of the slot game theme.

 

The cost of the warrantied and theme conversion items are borne by the Company. Historically, these costs have been immaterial and are expensed at time of issuance, however the Company has and will continue to assess these post-sales costs to determine whether they constitute performance obligations and should be recorded at time of sale.

 

A contract asset, namely accounts receivable, is recorded when the performance obligations of the Company have been met and the customer has been billed. A contract liability is recorded when the Company has an obligation to transfer products or services to a customer for which consideration has been received. As of March 31, 2019 and December 31, 2018, respectively, there were no performance obligations outstanding and there was no revenue expected to be recognized in future periods related to performance obligations. As such, there were no contract liabilities recorded as of March 31, 2019 or December 31, 2018, respectively.

 

The following table provides a breakdown of the revenue by category as included in the consolidated condensed Statements of Operations:

 

  

Three Months Ended

March 31,

   2019  2018
Lease and license fees:          
Flat daily rate lease  $641,215   $390,919 
Participation lease   224,284    157,441 
   $865,499   $548,360 
           
Sales of gaming products and parts:          
Slot machine sales  $727,138   $426,006 
Installation fees   —      940 
Parts and ancillary items sales   —      20,487 
   $727,138   $447,433 
           

 

 

17 

 

 

 

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

 

Note 9.  Revenue (Continued)

 

The following table provides a breakdown of the lease revenue by product type:

 

  

Three Months Ended

March 31,

   2019  2018
Lease and license fees by product:          
Slot machines  $865,275   $545,346 
Poker Tables   224    3,014 
   $865,499   $548,360 
           

 

 

Note 10.  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, 2019, the Company has available, for federal and state income tax purposes, carryforwards of approximately $12,945,000, which expire at various times through 2037. 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.

 

The current tax provision represents the amount of estimated state taxes payable based on the calculation of the apportioned pre-tax income, net of available state net operating loss deductions.

 

 

Note 11. Concentration of Risk – Major Customers

 

The Company generated approximately 51% and 45% of its revenue from its top three customers for each of the three months ended March 31, 2019 and 2018, respectively.

 

At March 31, 2019, accounts receivable from four casino customers represented 40% of total accounts receivable. At December 31, 2018, accounts receivable from four casino customers represented 52% of total accounts receivable. One customer represented 21% of the total accounts receivable balance as of March 31, 2019 and one customer represented 21% of the accounts receivable balance as of December 31, 2018.

 

 

Note 12. Subsequent Events

 

On May 10, 2019, the Company closed on Advance 6 under the Loan with PDS with modified terms. The advance is evidenced by a Note in the principal amount of $581,700 and bears interest at an annual rate of 11%. Monthly payments of accrued interest only commence on June 10, 2019, and payments consisting of principal and interest of $15,878 commence on October 10, 2019. The Note matures on June 10, 2023 and includes CIP at $3.00 per day for each on-line day up to a maximum of 912 on-line days for each unit financed under the Note. CIP is due and payable monthly.

 

18 

 

 

 

 

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

 

Note 12. Subsequent Events (Continued)

 

Effective April 15, 2019, PDS agreed to amend certain terms and conditions of the Loan Agreement in the Second Amendment to Master Loan Agreement, extending the advance period to 24 months after the initial advance date and changing the terms of the CIP in each Note. Each of the Notes executed prior to May 1, 2019 was amended extending the maturity dates from 36 to 48 months after each advance date, extending the CIP maturity date to 60 months after each advance date, and reducing the CIP from $3.50 to $3.00 per on-line day. The monthly payments under each Note were modified to reflect the extended maturity dates and the CIP days remaining were defined in each Note.

 

 

 

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 economic downturn in the gaming industry; 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, 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.

 

19 

 

 

 

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. Our video slot machines contain games where the casino patron wagers on multiple pay lines and contain secondary bonus games. The current slot machine products are:

 

·Popeye · Jumbo Fish Stacks
·Popeye’s Bonus Voyage · Jungle Book
·Popeye’s Seven Seas · Jungle Jackpots
· Olive Oyl’s Jumbo Stacks · Just Jackpots
·Flash Gordon · Lightning Lotto
·Garfield · Penny Palooza
·Around the World in 80 Days · Screaming Links Multi
·Beauty and the Beast · Si Shou
·Candy Cash · Si Xiang
·Cash Flow · Slotto
·Cinderella · Snow White
·Duck Dynamite · Swamp Fever
·Fins N Wins · Swamp Frenzy
·Golden Egg · Vampires Fortune
·Goyaate · Year of the Horse
·Great Balls of Fire · Ye Xian
·Hao Yun · Zhang Jiao
·Hua Mulan · Zuo Ci

 

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 slot machines are placed into the market using a daily lease model or a revenue sharing model. We have 268 slot machines out on lease or revenue share in 39 different casinos. We are registered as an approved vendor to distribute products to gaming venues located in 16 state jurisdictions.

 

We recognized net income of $204,253 and generated $312,157 of cash from operations in the three months ended March 31, 2019.

 

20 

 

 

 

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

 

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

 

Revenues

 

The Company’s revenues for the three months ended March 31, 2019 were $1,593,000 compared to $996,000 for the comparable prior year period, an increase of $597,000. This increase was attributable to the popularity of our latest game titles under the Screaming Links line of games. Sales of slot machines increased by $280,000 to $727,000 for the three months ended March 31, 2019 as compared to $447,000 for the three months ended March 31, 2018. Lease and license fees increased by a net of $317,000 to $865,000 for the three months ended March 31, 2019 as compared to $548,000 for the three months ended March 31, 2018. The increase in lease revenues was attributable to the increase in the average number of slot machines installed during the period as well as an increase in the average daily rate of those machines, offset by the decrease in recurring Poker Table leases.

 

Cost of Products Sold

 

Cost of products sold for the three months ended March 31, 2019 were $414,000 as compared to $35,000 for the three months ended March 31, 2018. The average cost per unit of the products sold is significantly higher for the newer slot machine cabinet design, averaging $14,000 per machine for 30 units sold in the three months ended March 31, 2019 versus $1,000 per machine for 44 sold in the three months ended March 31, 2018.

 

Operating Expenses

 

Operating expenses increased $5,000 to $118,000 for the three months ended March 31, 2019, from $113,000 for the three months ended March 31, 2018. This increase was primarily the result of the increase in installation and freight costs, due to the increase in the slot machines installed during the period, as well as an increase in personnel costs, offset by the decrease in game conversion costs and the elimination of royalty fees for the period.

 

Research and Development Expenses

 

Research and development expenses increased by $16,000 to $108,000 for the three months ended March 31, 2019, from $92,000 for the three months ended March 31, 2018. 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, software, and consulting fees. This increase is attributable to the increase in payroll and benefit costs associated with the research and development personnel.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $118,000 to $542,000 for the three months ended March 31, 2019, from $424,000 for the three months ended March 31, 2018. This increase was due to several factors: 1) an increase in regulatory and license fees; 2) salary increases and the related increases in payroll costs; 3) an increase in travel, meals and entertainment costs for sales personnel; 4) an increase in lab fees associated with the latest themes on the new cabinet design; and 5) an increase in accounts receivable write offs for uncollectible accounts.

 

Depreciation and Amortization

 

Depreciation and amortization increased by $87,000 to $105,000 for the three months ended March 31, 2019 from $18,000 for the three months ended March 31, 2018. This increase was the result of the increase in fixed assets built and placed in service during the quarter.

 

Interest Expense

 

Interest expense increased $93,000 for the three months ended March 31, 2019, from $2,000 for the three months ended March 31, 2018, to $95,000 as a result of the loan agreement and promissory note advances made during the latter part of 2018 through March 2019.

 

Liquidity and Capital Resources

      

We recognized net income of $204,000 and generated cash flows from operations during the period and funded our working capital investments and capital expenditures associated with our growth strategy with proceeds from loans and proceeds from the sales of our gaming products. These transactions that occurred in the three months ended March 31, 2019 and 2018, respectively, are described in more detail following the discussion of cash flows below:

 

 

21 

 

 

 

Discussion of Statement of Cash Flows

  

Three Months Ended

March 31,

   
   2019  2018  Change
Net cash provided by operating activities  $312,157   $343,458   $(31,301)
Net cash used in investing activities   (909,645)   (16,721)   (892,924)
Net cash provided by financing activities   747,449    —      747,449 
Net increase in cash   149,961    326,737   $(176,776)
Cash, beginning of year   565,461    276,111      
Cash, end of period  $715,422   $602,848      

 

Discussion of Statement of Cash Flows

 

For the three months ended March 31, 2019, cash provided by operating activities decreased $31,000 to $312,000 as compared to $343,000 for the three months ended March 31, 2018. The decrease in cash provided by operating activities was due to the decrease in net income for the period as well as the timing of receipts from customers and payments to creditors, suppliers and vendors.

 

Net cash used in investing activities increased by $893,000, from $17,000 provided by investing activities for the three months ended March 31, 2018 to $910,000 used in investing activities for the three months ended March 31, 2019. Cash used in investing activities is primarily the function of the net investment in property and equipment, principally slot machines used in our operations. This increase in cash used was due to the increase in slot machines purchased and placed in service.

 

Net cash provided by financing activities was $748,000 for the three months ended March 31, 2019, the result of note payable advances taken in January and March 2019.

 

Operations and Liquidity Management

 

For the three months ended March 31, 2019, we recognized net income of $204,000 and we generated $312,000 in cash from operating activities.

 

We have made improvements in performance and experienced an increase in the number of signed recurring lease agreements for our slot machines with our latest theme offerings during the quarter, utilizing our new slot machine cabinet design. In addition, we continue to develop new proprietary and licensed game themes. The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to continue to obtain the regulatory approvals required to distribute our products and successfully market them to casinos and card clubs as well as the development of new slot machine themes and new cabinets.

 

As of March 31, 2019, our cash balance was $715,000 and our current gross cash requirements are between approximately $260,000 to $300,000 per month, principally for salaries, professional services, licenses, marketing, office expenses and approximately $500,000 for the purchase of the hardware components for our products. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flow to support our operations for the next twelve months.

 

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Contractual Obligations

 

The table below sets forth our known contractual obligations as of March 31, 2019:

 

   Total 

Less than

1 year

  1 - 3 years  3 - 5 years 

More than

5 years

                
Lease liability obligations (1)  $188,041   $93,317   $94,724   $—     $—   
Debt obligations (2)   2,497,860    867,251    1,630,609    —      —   
            Total  $2,685,901   $960,568   $1,725,333   $—     $—   

 

 

(1) Represents operating lease agreements for office and warehouse facilities.
   
(2) Represents principal payments on notes payable.

 

 

 

Off-Balance Sheet Arrangements

 

As of March 31, 2019, 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. During the quarter ended March 31, 2019, the Company had net income, cash flows from operations, increased revenues from the quarter ended March 31, 2018, and has maintained and sustained a working capital surplus. The generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to distribute its products and successfully market them to more casinos. Based on our current financial condition, cash flow projections, product development and anticipated revenues, we believe we have sufficient cash flows to support our operations for the next twelve months.

 

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, 2019, 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, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.

 

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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  

 

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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 15, 2019 Lightning Gaming, Inc.
  By: 

/s/ Brian Haveson                                        

Brian Haveson

Chief Executive Officer and Director

 

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