Company Quick10K Filing
Quick10K
Lightning Gaming
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
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PAGP Plains Gp Holdings 3,910
TDOC Teladoc 3,720
DCOM Dime Community Bancshares 717
BKS Barnes & Noble 361
RUBI Rubicon Project 311
HSDT Helius Medical Technologies 62
TLF Tandy Leather Factory 50
RSKIA George Risk Industries 0
SDEV Security Devices International 0
LGTG 2018-12-31
Item 8. Financial Statements
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
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. Notes Payable - Related Party
Note 6. Commitments
Note 7. Stockholders' Equity
Note 8. Revenue
Note 9. Income Taxes
Note 10. Related Party Transactions
Note 11. Recently Issued Pronouncements
Note 12. Subsequent Event
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accountant Fees and Services.
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10-K Summary
EX-21.1 s22-20304_ex211.htm
EX-23.1 s22-20304_ex231.htm
EX-31.1 s22-20304_ex311.htm
EX-31.2 s22-20304_ex312.htm
EX-32 s22-20304_ex321.htm

Lightning Gaming Earnings 2018-12-31

LGTG 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 s22-20304_10k.htm FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One) Form 10-K

þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2018
OR
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from 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)

 

(I.R.S. Employer

Identification No.)

     

23 Creek Circle

Boothwyn, PA

  19061
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(610) 494 5534

Securities registered pursuant to Section 12(b) of the Act: None

 

Name of Each Exchange on Which Registered: None

 

Securities registered pursuant to Section 12(g) of the Act:

Common stock, par value $0.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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 o   Accelerated filero
Non-accelerated filer o (Do not check if a smaller reporting company)  

Smaller reporting company x

Emerging growth company o

 

 

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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 by Rule 12b-2 of the Act). Yes ☐ No ☒

 

There is no public market for the registrant's stock. As of March 28, 2019, there were no published bid or asked prices for the stock or sales of stock known to the registrant that would provide a basis for reporting market value. The number of shares of the registrant’s (voting) Common Stock, par value $0.001 per share, outstanding as of March 28, 2019 was 4,649,383. The number of shares of the registrant’s Nonvoting Common Stock, par value $0.001 per share, outstanding as of March 28, 2019 was 33,300,000. The number of shares of the registrant’s Preferred Stock, par value $0.001 per share, outstanding as of March 28, 2019 was -0-.

 

     

 

 

 

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  TABLE OF CONTENTS
     Page
PART I - COMPANY INFORMATION
 
Item 1. Business 4
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 18
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Mine Safety Disclosures 18

 

PART II - FINANCIAL INFORMATION
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
Item 6. Selected Financial Data 19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
 

Item 8.      Financial Statements  

 

1 Report of Independent Registered Public Accounting Firm 29
2 Consolidated Balance Sheets as of  December 31, 2018 and 2017; 30
3 Consolidated Statements of Operations for the years ended December 31, 2018 and 2017; 32
4 Consolidated Statements of Stockholders’ Equity  for the years ended December 31, 2018 and 2017; 33
5 Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017; 34
6 Notes to Consolidated Financial Statements 35
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49
Item 9A. Controls and Procedures 50
Item 9B. Other Information 51

 

PART III – CORPORATE GOVERNANCE INFORMATION

 
Item 10. Directors, Executive Officers and Corporate Governance 51
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 55
Item 13. Certain Relationships and Related Transactions, and Director Independence 56
Item 14. Principal Accountant Fees and Services 57
Item 15. Exhibits and Financial Statement Schedules 57
Item 16. Form 10-K Summary 57
       

 

     

 

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PART I

Item 1. Business.

 

Lightning Poker, Inc. (“Lightning Poker”) was incorporated in Pennsylvania in 2005 under the name Pokermatic, Inc. and succeeded to the business of Pokermatic, LLC, a Pennsylvania limited liability company formed in 2004. Lightning Gaming, Inc. (the “Company”) was incorporated on March 1, 2007 and on January 29, 2008, completed a merger with Lightning Poker (the “Merger”) which became a wholly owned subsidiary of the Company. Lightning Slot Machines, LLC (“Lightning Slots”) was formed in 2008 to leverage the Company’s existing gaming licenses. The Company, through Lightning Poker and Lightning Slots, manufactures and markets gaming products to casinos, card rooms, cruise ships, other gaming and lottery venues. Its executive offices are located at 23 Creek Circle, Boothwyn, Pennsylvania, 19061.

 

The following discussion of the Company’s business includes the business of Lightning Poker and Lightning Slots. 

     

  

Products

 

In 2009, the Company 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. Our games combine advanced graphics and digital music to create an engaging player experience. 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

 

We seek to develop games and gaming machines that offer high entertainment value to casino patrons and generate greater revenues for casinos than the machines offered by our competitors. Our games are based on licensed, well-recognized brands, cartoon characters and proprietary, non-branded themes.

 

When we expanded our products to include slot machines, we embarked on an initiative to market to additional Native American jurisdictions as well as the commercial casino marketplace and cruise lines. We currently have 236 video slot machines placed in 32 casinos in 58 jurisdictions. We are working to secure licensing to place our slot machines in a number of new jurisdictions across North America. The licensing process includes specific jurisdictional approvals from the appropriate testing laboratory and regulatory agency.

 

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To date, we have secured 58 regulatory gaming licenses, including 41 from Native American tribes. We offer our video slot machine products in 16 state jurisdictions. We expect to be licensed in several additional jurisdictions during 2019 and over the next several years.

 

Our first product was The Lightning Poker Table ("Poker Table"), a fully automated electronic poker table that enabled up to ten players to make their wagers and game decisions via individual touch-screen betting stations. It utilized a software application written in Java, which runs on a Linux-based multi-game table platform. Our Poker Table received Gaming Laboratories Incorporated ("GLI") certification for a casino version of Texas Hold'em, Omaha, Omaha High/Low, and Tournament poker. In 2008, we developed a newer version of the Poker Table, which eliminated the need for a separate, stand-alone cash station and allowed for cash management at the table.

 

We ceased production of the Poker Table in 2010 and were able to utilize tables in stock that had previously been out on lease, to fulfill sales and lease orders obtained after then. During 2018, we determined that the Poker Tables in stock had no further use to the Company and no resale or scrap value, and wrote off the cost of the tables which had a net book value of $-0-. As of March 28, 2019, all Poker Table leases have been terminated and there are no remaining tables in stock.  

     

 

Distribution

 

All sales are handled through the Company’s seasoned and experienced in-house sales team who are located in those areas in which we are strategically seeking market share. The Company believes it is very important for its sales people to have regular contact with the casino decision makers. As our footprint in the market expands, additions to sales staff will be necessary to maximize customer interaction.  

     

 

Revenue Models

 

We have three different revenue models for the products that we offer to our customers:

 

Lease model
Sale model
Revenue sharing model

 

The majority of our customers utilize a lease program whereby we receive a fixed daily rate per slot machine. Typical lease agreements involve a month-to-month term and are cancellable upon thirty days written notice.

 

In an outright sale of our gaming machines, we receive cash for the entire purchase price. We will typically use this model in situations where there is a strong customer preference for an outright purchase or in situations where leasing to a customer may be impractical due to geographic or financial reasons. All expenses pertaining to the sale are recorded as they are incurred.

 

Our third model is a revenue sharing model, where we place our gaming machines on the floor of the casino and participate in a portion of the revenue generated. Typical revenue sharing agreements involve a month-to-month term and certain agreements provide for a minimum and maximum monthly payment.

 

There are also instances in which a lease may be 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 and the agreed upon sales price is shown as sales revenue when the lease is converted to a sale.

     

 

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Manufacture of Products

 

Cabinets for our slot machines are produced by a third-party manufacturer. The gaming software and artwork is created in our Boothwyn facility. The software and motherboard are loaded into the cabinets and the printed glass, topper, and any ancillary items are installed, if not already done so. The games are then tested and shipped from our Boothwyn, Pennsylvania facility.

     

 

Competition

 

The gaming machine market is highly competitive and is characterized by the continual introduction of new games and new technologies. Our ability to compete successfully in this market is dependent, in large part, upon our ability to:

 

    develop and offer games with higher earnings performance than the games and gaming machines from our competitors;
    create an expanding and constantly refreshed portfolio of games;
    identify and develop or obtain rights to commercially marketable intellectual properties;
    adapt our products for use with new technologies;

    implement product innovation and reliability;
    offer mechanical and electronic reliability;

    generate brand recognition;
    implement effective marketing and customer support; and

    offer competitive prices and lease terms.

 

There are many companies in the world that manufacture slot machines for legalized gaming markets. Of these companies, we believe that Aristocrat, International Gaming Technology PLC (“IGT”), Konami Co. Ltd., Evri Holdings, Inc., Aruze Gaming, Novomatic Group of Companies, AGS L.L.C. and Scientific Games Corporation have a majority of this worldwide market.

 

Our competitors vary in size from small companies with limited resources to large multi-national corporations with greater financial, marketing and product development resources than we have. The larger competitors have an advantage in being able to spend greater amounts to develop new technologies, games, and products, however we have the advantage of being able to react to market conditions more rapidly and bring new games to market much quicker than our larger competitors.  

     

 

Intellectual Property

 

Our trademark for “Lightning Poker” is registered with the U.S. Patent and Trademark Office. We have registered the www.LightningPoker.net and www.LTGaming.com Internet domain names.

 

From time to time we use a number of licensed trademarks and we routinely enter into license agreements for the use of intellectual properties and technologies in our products. These agreements generally provide for royalty advances and license fee payments when the agreements are signed and minimum commitments, which are cancellable in certain circumstances. The trademarks, logos, trade names, and product names used herein, other than ours, are the property of their respective owners. The licensor typically must inspect and approve any use of the licensed property. In addition, each license typically provides that the licensor retains the right to exploit the licensed property for all other purposes, including the right to license the property for use with any products not related to gaming machines.

 

     

 

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Gaming Regulations and Licensing

 

Regulatory Overview

 

Generally, the manufacture, sale and use of gambling devices are subject to extensive federal, state, local and, in some jurisdictions, tribal regulation. In order to sell and distribute our products to our target markets we, along with our customers, must comply with the applicable regulations of each jurisdiction in which we operate, including certain foreign jurisdictions. We expect it to take up to 12 months or longer from the date of the submission of our application to obtain regulatory approval in some jurisdictions. As of March 28, 2019, we have a total of 58 regulatory gaming licenses for our products, including regulatory gaming licenses in Native American jurisdictions, and we are preparing to file applications for several additional licenses in North America.

 

It is possible that the approval of our gaming products will take much longer than we expect or that our gaming products will not be approved in the jurisdictions where we intend to operate, in which case we will be unable to generate revenues in such jurisdictions. The laws and regulations of the jurisdictions in which we intend to operate are subject to amendment and reinterpretation from time to time, and therefore it is possible that even if our gaming products are approved at one time, their use may be restricted, conditioned or prohibited in the future.

 

A total of 40 states and provinces in Canada allow casino-type gambling. We will not sell or distribute our gaming products in states or provinces that prohibit casino gambling.

 

The following is a brief description of the material regulations that may apply to us in some of the jurisdictions in which we intend to market and sell our products.

 

If a state requires that the Company, as well as our products, obtain regulatory approval, we will be required to submit detailed financial and operating reports and furnish any other information the state may require. Our officers, directors, certain key employees and any person having a material relationship with us may also have to qualify with the state and obtain a finding of suitability. Our beneficial owners, especially beneficial owners of more than 5% of our outstanding Common Stock, may also be required to obtain a finding of suitability.

 

If a gaming authority in any jurisdiction fails to find any of our officers, directors or significant shareholders suitable, we may be prohibited from leasing, licensing or selling our products in that jurisdiction.

 

A finding of suitability is generally determined based upon a myriad of facts and circumstances surrounding the entity or individual in question and many gaming authorities have broad discretion in determining whether a particular entity or individual is suitable. We are unaware of circumstances that would prevent a gaming authority from finding any of our officers, directors or significant shareholders suitable.

 

If any of our officers, directors or significant shareholders is not found suitable in a jurisdiction requiring a finding of suitability, we would be prevented from leasing, licensing or selling our products in that jurisdiction as long as the person in question remained an officer, director, or a significant shareholder. Such an occurrence would likely delay introduction of our products into such jurisdiction or prevent us from introducing our products in such jurisdiction altogether. Depending on how material any such jurisdictions are to our plan of operations, failure to obtain such findings of suitability could have a material adverse effect on our results of operations. In addition, a finding that one of our officers, directors or significant shareholders is not suitable in any jurisdiction may hinder our ability to obtain necessary regulatory approvals in other jurisdictions. Conversely, however, a finding of suitability by one or more gaming authorities does not ensure that similar suitability determinations will be obtained from any other gaming authorities.

 

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A state regulator may have the authority to disapprove a change in our officers, directors and key employees. Some corporate transactions, including those that may be advantageous to our shareholders, may require prior approval of various state regulators. These states may also require our products to undergo rigorous testing, a field trial and a determination as to whether our products meet strict technical standards set forth in the applicable state regulations.

 

The failure to comply with any requirements imposed by state regulators or required by state law could prevent us from selling our products in such state, subject us to criminal and civil penalties, substantial fines, and adversely affect our business.

 

Tribal Casinos

 

Numerous Native American tribes have become engaged in or have licensed gaming activities on Native American tribal lands as a means of generating revenue for tribal governments. Gaming on Native American tribal lands, including the terms and conditions under which gaming equipment can be sold or leased to Native American tribes, is or may be subject to regulation under the laws of the tribes, the laws of the host state, and the Indian Gaming Regulatory Act of 1988 (“IGRA”), which includes regulation and oversight by the National Indian Gaming Commission (“NIGC”) and the Secretary of the United States Department of the Interior (“Interior Secretary”). Furthermore, gaming on Native American lands may also be subject to the provisions of statutes relating to contracts with Native American tribes, which are also administered by the Interior Secretary.

 

The IGRA requires that the tribe and the host state enter into a written agreement called a tribal-state compact, that specifically authorizes Class III gaming. The compact must be approved by the Interior Secretary, with the notice of approval published in the Federal Register. Tribal-state compacts vary from state to state. Many require that equipment suppliers meet ongoing registration and licensing requirements of the state and/or the tribe and some impose background check requirements on the officers, directors, principals and shareholders of gaming equipment suppliers. Under the IGRA, tribes are required to regulate gaming on their tribal lands under ordinances approved by the NIGC. These ordinances may impose standards and technical requirements on hardware and software and may impose registration, licensing and background check requirements on gaming equipment suppliers and their officers, directors, principals and shareholders.

 

We have the required licenses to manufacture and distribute our products in the Native American jurisdictions in which we do business.

 

The United States Department of Justice ("DOJ"), the primary law enforcement entity responsible for enforcing the federal law that restricts or prohibits certain gaming devices and activities, namely the Federal Gambling Devices Act of 1962, which is commonly known as the Johnson Act, has traditionally taken a broad view as to what constitutes a gambling device prohibited by the Johnson Act. We believe the Johnson Act is inapplicable to the use of our gaming products, but it is possible that the DOJ would disagree with our position. In that event, the DOJ might institute criminal and civil proceedings against us, and a court might rule that the Johnson Act prohibits the use of our gaming products by tribal casinos unless the tribe and state have entered into an appropriate tribal-state compact. Any such proceedings could interfere with our ability to obtain regulatory approvals in other jurisdictions.

 

Additionally, certain tribes require gaming lab certification for devices such as our gaming products before the casino will agree to purchase or lease the devices. Gaming lab certification requires meeting certain technical specifications and standards and can be difficult and time consuming. It is possible this process will take longer than we anticipate for a particular jurisdiction, or we may never obtain gaming lab certification for a particular jurisdiction.

 

Federal Regulation

 

We are required to register annually with the Criminal Division of the DOJ in connection with the sale, distribution or operation of gaming equipment. The Johnson Act makes it unlawful, in general, for a person to manufacture, transport or receive gaming machines

 

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or components across state lines unless that person has first registered with the U.S. Attorney General. We also have various record-keeping and equipment-identification requirements imposed by this act. Violation of the Johnson Act may result in seizure and forfeiture of the equipment, as well as other penalties.

 

We believe the Johnson Act is inapplicable to the use of our gaming products. However, the DOJ has traditionally taken a broad view as to what constitutes a gambling device prohibited by the Johnson Act, and may disagree with our position on the Johnson Act.

     
 

Research and Development

 

We currently conduct research and development activities primarily to develop new gaming platforms and content and to add enhancements to our existing product lines. We believe our ability to deliver differentiated, appealing products to the marketplace is based on our research and development investments and we expect to continue to make such investments in the future. These research and development costs consist primarily of salaries and benefits and consulting fees.

 

Our research and development expenses were $383,494 and $367,348 during the fiscal years ended December 31, 2018 and 2017, respectively.

 

Significant Customers, Foreign Revenues and Foreign Assets

 

For the years 2018 and 2017, there was no revenue from customers outside the United States. For the years 2018 and 2017, four and three casino customers accounted for 56% and 18%, respectively, of our revenues. One customer which was a group of casinos under common control represented approximately 7% and 12% of our 2018 and 2017 revenues, respectively. As of December 31, 2018 and 2017, we had no long-lived assets outside the United States. As of December 31, 2018 and 2017, four casino customers accounted for 52% and 43%, respectively, of our net accounts receivable.

 

Employees

 

As of March 28, 2019, we had 12 full-time and 2 part-time employees as well as one consultant that provides engineering and game design services on a part-time basis. We consider our relationships with our employees to be satisfactory. None of our employees is covered by a collective bargaining agreement.  

     

 

Item 1A. Risk Factors.

 

Our business is subject to a variety of risks. The following risk factors could result in a material adverse effect upon our business, financial condition, results of operations, and ability to implement our business plan. Many of these events are outside of our control.

 

Risks Relating to our Business

 

We have a limited operating history on which to evaluate our business.

 

With the exception of the current year, we are a company that has generated operating revenue lower than operating costs since inception and are in the relatively early stages of switching our business focus from the manufacture of Poker Tables to slot machines. We are continually developing and testing new game software and new slot machine themes which may not appeal to customers and are in the early stages of a new cabinet design deployment. Our business model is unproven and the lack of meaningful historical financial data makes it difficult to evaluate our prospects. To the extent that we are able to implement our business plan, our business will be subject to all of the problems

 

 

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that typically affect a business with a limited operating history, such as unanticipated expenses, capital shortfalls, delays in program development and possible cost overruns.

 

We have a history of losses. We may be unable to generate sufficient net revenue in the future to achieve or sustain profitability.

 

We generated a $1,019,060 net income for the year, however we have accumulated losses of $28,835,250 through the year ended December 31, 2018. To implement our business plan and generate the increased revenues necessary to achieve profitability, we must gain broad market acceptance of our products. The market for our products is heavily regulated. We must obtain regulatory approvals for our Company and our products in many additional jurisdictions, including some jurisdictions where we have not yet filed applications. In addition to the usual risks associated with the introduction of a new product, the timing of our revenue generation will be driven, in part, by our ability to gain broad market acceptance of our products in those jurisdictions where we are able to distribute our products, our receipt of regulatory approvals in additional jurisdictions, and our entry into definitive agreements with customers in those jurisdictions. For the reasons discussed in this Risk Factors section and elsewhere in this report, we might not generate significant revenues to achieve profitability in the foreseeable future or at all. Even if we achieve profitability, we might not be able to sustain or increase it on a quarterly or annual basis. Our failure to do so would adversely affect our business and may require us to raise additional capital or incur additional debt, which may be very difficult given the current state of the gaming industry, capital markets and the overall economy.

 

Our success in the gaming industry depends in large part on our ability to expand further into the slot machine market and new geographical markets. Our further expansion into these markets will present new challenges and risks that could adversely affect our business and results of operations.

 

As we seek to expand further into the slot machine market and new geographical markets, we expect to encounter business, legal, operational and regulatory uncertainties, many of which are similar to those we faced in our Poker Table deployment. As a result, we may encounter legal and regulatory challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact on planned revenues or costs associated with this expansion. If we are unable to effectively develop and operate within these new markets, then our business, operating results and financial condition would be impaired.

 

Successful growth in new markets may require us to make changes to our products to ensure that they comply with applicable regulatory requirements, and will require us to obtain additional licenses. Our ability to affect these changes and obtain the required licenses is subject to a great degree of uncertainty and may never be achieved.

 

Generally, our ability to further expand into the slot machine market and enter new geographical markets involves a number of business uncertainties, including:

 

  whether our resources and expertise will enable us to effectively operate and grow in such new markets;
  whether our internal processes and controls will continue to function effectively;
  whether we have enough experience to accurately predict revenues and expenses in these new markets;
  whether we will be able to successfully compete against larger companies who dominate the markets that we are trying to enter; and
  whether we can timely perform under our agreements in these new markets because of other unforeseen obstacles.

 

 

 

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If we are unable to keep pace with rapid innovations in new technologies or product design and deployment, or if we are unable to quickly adapt our development and manufacturing processes to compete, our business and results of operations could be negatively impacted.

 

Our success is dependent on our ability to develop and sell our products that are attractive not only to our customers, but also to their customers, the end players. If our slot machines do not appeal to customers, or do not meet or sustain revenue and profitability expectations, our slot machines may be replaced by our competitors’ machines. Additionally, we may be unable to enhance existing slot machines in a timely manner in response to changing regulatory, legal or market conditions or customer requirements, or new products or new versions of our existing products may not achieve acceptance in new or existing markets. Therefore, our future success depends upon our ability to design and market technologically sophisticated products that meet our customers’ needs regarding, among other things, ease of use and adaptability, and are unique and entertaining such that they achieve high levels of player appeal and sustainability. If we fail to keep pace with our competitors, our business could be adversely affected and a decrease in demand for our products could also result in inventory obsolescence charges.

 

The demands of our customers and the preferences of the end players are continually changing. As a result, there is constant pressure to develop and market new game content and technologically innovative products. As our revenues are heavily dependent on the earning power and life span of our games, we face increased pressure to design and deploy new and successful game themes to maintain our revenue stream and remain competitive. Our ability to develop new and innovative products could be adversely affected by:

 

  the failure of our new gaming products to become popular with end players;
  a decision by our customers in particular or the gaming industry in general to decline to purchase our new slot machines or to cancel or return previous orders in anticipation of newer technologies;
  an inability to roll out new games on schedule as a result of delays in regulatory approval in the applicable jurisdictions, or otherwise; and
  an increase in the popularity of competitors' games.

 

If we cannot adapt our manufacturing to meet the needs of our product innovations, or if we are unable to increase our production capacity in a timely manner, our business could be negatively impacted.

 

If we fail to obtain or maintain gaming licenses and regulatory approvals, we will be unable to operate our business and license or sell our products.

 

The manufacture and distribution of gaming machines are subject to extensive federal, state, local and tribal regulation. Some jurisdictions require licenses, permits and other forms of approval for gaming devices. Most, if not all, jurisdictions also require licenses, permits and documentation of suitability, including evidence of financial stability, for the manufacturers and distributors of such gaming devices and for their officers, directors, significant shareholders and key personnel. Our failure to obtain regulatory approval in any jurisdiction will prevent us from distributing our products and generating revenue in that jurisdiction. Obtaining such approval is a time-consuming and costly process and cannot be assured. Although a manufacturer of gaming devices may pursue entity regulatory approval with regulators of tribal casinos at the same time that it pursues regulatory approval for its gaming devices, states that license commercial casinos require that a manufacturer obtain entity regulatory approval before seeking approval for gaming devices. This might result in additional time and expense associated with obtaining regulatory approvals. Even after incurring significant time and expense seeking such regulatory approvals, we may not be able to obtain them.

 

If we fail to obtain a necessary registration, license, approval or finding of suitability in a given jurisdiction, we would likely be prohibited from distributing our products in that jurisdiction. In addition, some jurisdictions require license holders to obtain government approval before engaging in some transactions, such as business combinations, reorganizations, stock offerings and repurchases. We may not be able to obtain all necessary registrations, licenses, permits, approvals or findings of suitability in a timely manner, or at all. Our failure to obtain in a timely manner regulatory approvals in jurisdictions that are material to us, whether individually or in the aggregate, would have a material adverse effect on our net revenue and delay or prevent market acceptance of our products.

 

 

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If we fail to obtain or maintain gaming licenses and regulatory approvals for our officers, directors and significant shareholders, we might be unable to operate our business and license or sell our products.

 

Gaming authorities in some jurisdictions may investigate any individual who has a material relationship with us, and any of our shareholders, to determine whether the individual or shareholder is suitable to those gaming authorities. If a gaming authority in any jurisdiction fails to find any of our officers, directors or significant shareholders suitable, we may be prohibited from leasing, licensing or selling our products in that jurisdiction and it could adversely affect our regulatory approvals in other jurisdictions.

 

A finding of suitability is generally determined based upon a myriad of facts and circumstances involving the entity or individual in question, and many gaming authorities have broad discretion in determining suitability. If any of our officers, directors or significant shareholders are not found suitable in a jurisdiction requiring a finding of suitability, we would be prevented from leasing, licensing or selling our products in that jurisdiction as long as the individual or entity in question remained an officer, director, or significant shareholder. Such an occurrence would likely delay or prevent our introduction of our products into such jurisdiction.

 

Depending on how material such jurisdiction is to our plan of operations, failure to obtain findings of suitability could have a material adverse effect on us. In addition, a finding that one of our officers, directors or significant shareholders is not suitable in any jurisdiction may hinder our ability to obtain or retain regulatory approvals in other jurisdictions. Conversely, however, a finding of suitability by one or more gaming authorities does not ensure that similar suitability determinations will be obtained from any other gaming authorities.

 

Although we can terminate the employment of an officer or remove a director who is not found suitable, such action could disrupt the management of our Company and adversely affect our business and the results of our operations. In addition, the removal of a director may be delayed if such removal requires action on the part of our shareholders.

 

Most of our competitors have greater resources and other advantages, and our failure to remain competitive could adversely affect our ability to retain existing customers and obtain future business.

 

There are a number of companies that offer, manufacture and distribute slot machines. Most of these companies have greater financial resources than we have.

 

The primary challenges to entering a market are the need to establish relationships with the owners and operators of casinos, the requirements for regulatory approvals, and the development of the necessary technology for our products. Our competitors include manufacturers of gaming devices that have already established such relationships and that have received some, if not all, of the regulatory approvals needed to market and sell slot machines in our target markets, and we anticipate that the number of such competitors will increase in the future. Most of our competitors have greater financial resources than we have. Therefore, we anticipate that the challenges to enter into our markets would not pose a significant obstacle for such manufacturers if they sought to compete with us.

 

Competition in the gaming industry is intense due to the number of providers, as well as the limited number of facilities and jurisdictions in which they operate. There are many companies that could introduce directly competitive products in the short term that also have established relationships, and have the potential to develop technology quickly with greater resources than we have.

 

Additionally, our customers compete with other providers of entertainment for their end users’ entertainment budget. Consequently, our customers might not be able to spend new capital on acquiring gaming equipment. Moreover, our customers might reduce their utilization of revenue sharing agreements.

 

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We operate in a very competitive business environment and if we do not adapt our approach and our products to meet this competitive environment, our business, results of operations, and/or financial condition could be adversely impacted.

 

There is intense competition in the gaming products industry, which is characterized by dynamic customer demand and rapid technological advances. We must continually adapt our approach and our products to meet this demand and match these technological advances and if we cannot do so, our business, results of operations, and/or financial condition may be adversely impacted. Conversely, the development of new competitive products or the enhancement of existing competitive products in any market in which we operate could have an adverse impact on our business, results of operations, and/or financial condition. If we are unable to remain dynamic in the face of changes in the market, it could have a material adverse effect on our business, results of operations and financial condition.

 

In general, we compete with other gaming and entertainment products for space on the casino customers’ floor, as well as for our customers' capital and operational spending. Some of the larger gaming supply companies with whom we compete are IGT, Scientific Games and Aristocrat. New competitors may also enter our key markets.

 

Adverse general economic conditions that affect the gaming industry or a reduction in demand for gaming in any of our significant markets may adversely affect our results of operations.

 

Our business operations are affected by national and local economic conditions. The current level of activity in the general economy, or in a region constituting a significant source of our customers, or a reduction in demand for gaming, may harm the health of casino operators and our other customers and result in fewer customers leasing or purchasing our products, which would adversely affect our results.

 

Our growth and ability to access capital markets are subject to a number of economic risks.

 

Financial markets in the United States continue to be cautious. It is possible that unfavorable financial market conditions will continue for a long time or that there will be an even further deterioration in financial markets and confidence in major economies.

 

These financial market conditions affect our business in a number of ways. The diminished availability of credit in financial markets adversely affects the ability of our customers to obtain financing for purchases and operations and could result in a decrease in or cancellation of orders for our products. Financial market conditions could also affect our ability to raise funds in the capital and bank lending markets.

 

Risks that impact our customers may impact us.

 

If fewer players visit our customers' facilities, if such players have less disposable income to spend at our customers' facilities, or if our customers are unable to devote resources to purchasing and leasing our products, there could be an adverse effect on our business. Such risks that affect our customers include, but are not limited to:

 

·adverse economic conditions in gaming markets including recession, economic slowdown, higher airfares and higher energy and gasoline prices;
·global geopolitical events such as terrorist attacks, other acts of war or hostility, and popular uprisings and violence such as those that have been occurring in the Middle East; and
·natural disasters such as major fires, floods, hurricanes, tornadoes, earthquakes, snow storms and tsunamis and their aftermath.

 

 

 

 

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Political, legal and other risks associated with sales in Native American jurisdictions could adversely affect our operating results.

 

Agreements with casinos in Native American jurisdictions may subject us to sovereign immunity risks and could subject us to additional compliance costs.

 

We compete in a single industry and our business may suffer if our products become obsolete or demand for them decreases, including downturns in the gaming industry.

 

We derive substantially all of our revenues from leasing and selling slot machines for the gaming industry. If the gaming industry suffers a significant downturn, our business may materially suffer if our products become obsolete or if use of our products decreases. Our licensing agreements with our customers are typically month-to-month and provide for termination upon 30 days' prior notice by either party. Accordingly, consistent demand for and satisfaction with our products by our customers is critical to our financial condition and future success. Problems, defects or dissatisfaction with our products could cause us to lose customers or revenues from leases with minimal notice. Additionally, our success depends on our ability to keep pace with technological advances in our industry and to adapt and improve our products in response to evolving customer needs and industry trends. If demand for our products weakens due to lack of market acceptance, technological change, competition, regulatory changes, or other factors, it could have a material adverse effect on our business, results of operations and financial condition.

 

Defects in, and fraudulent manipulation of, our products could reduce our revenue, increase our costs, burden our engineering and marketing resources, involve us in litigation and adversely affect our gaming licenses.

 

Our success will depend, in part, on our ability to avoid, detect and correct software and hardware defects and prevent fraudulent manipulation of our products. Our products are subject to rigorous internal testing, and will be subject to additional testing by regulators in certain gaming jurisdictions. We may not be able to build and maintain products that are free from defects or manipulations and that satisfy these tests. Although we have taken steps to prevent defects and manipulations, our products could suffer such defects and manipulation after they have been widely distributed.

 

Although we do not believe it is likely, it is possible that an individual could breach the security of a casino and fraudulently manipulate its operations. Any such fraudulent manipulation, defects or malfunctions, or any such problems with our slot machines, could result in financial losses for our customers and, in turn, termination of leases, cancellation of orders, product returns and diversion of our resources. Even if our customers do not suffer financial losses, casinos may replace our machines if they do not perform according to expectations. Any of these occurrences could also result in the loss of, or delay in, market acceptance of our products and loss of licenses, leases and sales.

 

In addition, the occurrence of defects in, or fraudulent manipulation of, our products may give rise to claims for lost revenues and related litigation by our customers and may subject us to investigation or other disciplinary action by regulatory authorities that could include suspension or revocation of our regulatory approvals.

 

Our failure to obtain any necessary additional financing would have a material adverse effect on our business.

 

Most of our revenue is derived from leasing our products to customers under operating leases. Our ability to lease our products to customers on a large scale will require us to obtain additional financing necessary for the manufacture of our products. Our inability to obtain financing on terms that would allow us to license our products profitably would hamper our ability to distribute the products on a large scale and may therefore, delay our ability to obtain significant market presence as well as market acceptance of our products.

 

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In addition, if our revenues are not sufficient, or if we incur more than anticipated expenses, we may need to seek additional equity or debt financing. It is uncertain whether we could obtain such financing. Even if such financing is available, it may not be on terms that are favorable to us or in sufficient amounts to satisfy our requirements. If we need, but are unable to obtain, additional financing we may be unable to develop our products, meet customer demand for our products, withstand adverse operating results, or otherwise accomplish our business objectives. More importantly, if we are unable to obtain further financing when needed, our continued operations may have to be scaled down or even ceased and our ability to generate revenues would be negatively affected.

 

We are dependent on intellectual property rights. Therefore, infringement claims against us, patents issued to our competitors, or misappropriation of our trade secrets or other proprietary information may adversely affect us.

 

Our competitors have patents covering, among other things, gaming machine features, bonusing techniques and related technologies. If our products use processes or other subject matter that is claimed under our competitors’ patents, or if other companies obtain patents claiming subject matter that we use, those companies may bring infringement actions against us.

 

Whether a product infringes a patent involves complex legal and factual issues, which can be time-consuming and expensive to resolve. In addition, because patent applications can take many years to be approved, there may be applications now pending of which we are unaware, which may later result in the issuance of patents that our products may infringe upon or that may lead to infringement claims against us. If our product infringes a patent, we could be prevented from distributing the product unless and until we obtain a license or redesign the product to avoid infringement. A license may not be available or may require us to pay substantial royalties. We also may not be successful in redesigning a product to avoid infringement.

 

Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and we may not have the resources to defend against infringement suits brought against us. Furthermore, if we are found to have willfully infringed on another party’s patent, we might be liable for treble damages.

 

Our products utilize trademarks and other intellectual properties licensed from third parties. Our future success may depend upon our ability to obtain, retain or expand licenses for popular intellectual properties in a competitive market. If we cannot renew or expand existing licenses, we may be required to discontinue or limit our use of the products that bear the licensed marks.

 

We also rely on trade secrets and other proprietary information. We enter into confidentiality agreements with our employees and independent contractors regarding our trade secrets and proprietary information, but we cannot be assured that the obligation to maintain the confidentiality of our trade secrets or proprietary information will be honored. Despite various confidentiality agreements and other trade secret protections, our trade secrets and proprietary know-how could become known to, or independently developed by, competitors.

 

The use of our products could result in product liability claims that could be expensive and that could damage our reputation and harm our business.

 

Our business exposes us to the risk of product liability claims. Subject to contractual limitations, we will face financial exposure to product liability claims if our products fail to work properly and cause monetary damage to patrons, casinos or card clubs. In addition, defects in the design or manufacture of our products might require us to recall each product that has been leased. Although we maintain product liability insurance, the coverage limits of policies available to us may not be adequate to cover future claims. If a successful claim is brought against us in excess or outside of our insurance coverage, we may be forced to divert resources from the development of our products, the pursuit of regulatory approvals and other working capital needs in order to satisfy such claims.

 

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We are dependent on the success of our customers and are subject to industry fluctuations.

 

Our success depends on our customers licensing or buying our products to expand their existing operations, replace existing gaming products or equip a new casino. Any slowdown in the replacement cycle may negatively impact our operations. Additionally, to the extent existing or potential customers choose to allocate capital to expenditures other than gaming products, such as real estate acquisitions, hotel furnishings, restaurants and other improvements, or generally to reduce expenditures, particularly in response to current conditions in the gaming industry, we may suffer a material adverse effect on our business, results of operations and financial condition.

 

Certain market risks may affect our business, results of operations and prospects.

 

In the normal course of our business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements, fluctuating commodities markets, higher labor costs, increased fuel prices and collectability of receivables. Further, some of our customers may experience financial difficulties, possibly as a result of conditions in the gaming industry, or may otherwise not pay accounts receivable when due, resulting in increased write-offs. We may incur material losses in these areas in the future.

 

The loss of the services of our Chief Executive Officer (“CEO”) and our President or other key employees, or the failure to attract additional key individuals, could materially and adversely affect our business.

 

Our success will depend on retention of key executives who have been instrumental in our development thus far, and on our ability to attract and retain employees to complete the development or enhancements of our products and to market them widely. We seek to compensate and incentivize our executives and other key employees through competitive salaries and equity incentive compensation, but such compensation may not be sufficient to enable us to retain them or hire new personnel.

 

Our success will depend on the reliability and performance of third-party manufacturers and suppliers.

 

We currently obtain slot machine cabinets from third party manufacturers. If those manufacturers are unable to meet our requirements, we would be significantly hampered in serving our customers and may miss revenue-generating opportunities. Our inability to contract with third-party manufacturers and suppliers to provide a sufficient supply of our products on acceptable terms and on a timely basis could negatively impact our relationships with existing customers and cause us to lose revenue-generating opportunities with potential customers. In addition, manufacturing costs may increase significantly and we may not be able to successfully recover these cost increases with increased pricing to our customers. Either situation could have an adverse impact on our business, results of operations and financial condition.

 

Attitudes and public policies regarding gaming might change, to our detriment.

 

Gaming has historically experienced backlash from various constituencies and communities. Public tastes are unpredictable and subject to change, and they may be affected by changes in the country’s economic, political and social climate. A change in public tastes or a backlash among certain constituencies or in certain communities could result in reduced popularity of gaming in general, or increased regulation of the gaming industry, either of which could significantly reduce demand.

 

We have been incurring significant additional costs since we became a publicly reporting company in 2008, and we expect this to continue.

 

Our public company compliance costs before we acquired Lightning Poker in January 2008 in the Merger were not substantial, due to our minimal operations before the Merger. Lightning Poker did not operate as a public company before the Merger. As a publicly reporting company with operations since January 2008, we have been incurring, and will continue to incur, significant legal, auditing and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the United States Securities and

 

 

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Exchange Commission (“SEC”), have imposed various requirements on public companies. Our management and other personnel need to devote a substantial amount of time to these matters.

 

Our business is subject to quarterly fluctuation.

 

Our quarterly operating results may vary based on the timing of the opening of new gaming jurisdictions, the opening or closing of casinos, the expansion or contraction of existing casinos, approval or denial of our products and corporate licenses under gaming regulations, the introduction of new products and the mix of lease versus sales revenue. As a result, our operating results could be volatile, particularly on a quarterly basis. 

     

 

Risks Relating to our Common Stock

 

There is no trading market for our common stock, and liquidity of shares of our common stock is limited.

 

There is no public trading market for our common stock, and we do not expect a public trading market to develop in the foreseeable future. Trading in our stock has been minimal, the number of shareholders is relatively small, and there are currently no market makers for our stock. Consequently, holders of our stock may find it difficult to liquidate their investments.

 

Our common stock might never be listed on any stock exchange.

 

We might not attempt to meet, or we might be unable to meet, the initial listing standards of NASDAQ or any other stock exchange. Even if we obtain a listing of our common stock, we might be unable to maintain that listing. Before our stock is so listed, we might seek to have our stock quoted on the OTCQB or OTC Pink marketplaces of OTC Link, where our stockholders may find it more difficult than on a stock exchange to dispose of shares or obtain accurate quotations as to trading price and trading activity. In addition, if we failed to meet criteria set forth in a trading rule issued by the SEC, that rule would impose various practice requirements on broker-dealers who sell our stock to persons other than established customers and accredited investors. This may deter broker-dealers from recommending or selling our stock, which may further reduce its liquidity. This would also make it more difficult for us to raise additional capital.

 

We have never paid dividends on our common stock.

 

We have never paid dividends on our common stock and do not intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of dividends will instead be re-invested into the Company to further our business strategy.

 

Our authorized Preferred Stock could be issued under circumstances that would adversely affect holders of our common stock.

 

Our Articles of Incorporation authorize the issuance of up to 10,000,000 shares of Preferred Stock with designations, rights and preferences determined from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue those shares with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of holders of our common stock. For example, those shares could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company. Although no shares of Preferred Stock are currently outstanding and we have no present intention to issue any shares of Preferred Stock, there is no assurance that we will not do so in the future.

     

 

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Item 1B. Unresolved Staff Comments

 

None.

     

  

Item 2. Properties.

 

We lease office and warehouse space of 11,566 square feet located at 23 Creek Circle, Boothwyn, PA 19061 at a current average rental of $90,979 per year. The lease was renewed in 2014 and expires in February 2021. This is the location of our principal offices and substantially all of our operations. The premises are in good condition and adequate for our foreseeable needs. We believe our property is adequately insured.

     

  

Item 3. Legal Proceedings.

 

None. 

     

  

Item 4. Mine Safety Disclosures.

 

None

     

 

PART II

 

 

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market information. There is currently no established public trading market for our common stock and we do not expect such a market to develop in the foreseeable future. Trading in our stock to date has been minimal and we have no reliable basis for reporting trading prices or bid prices.

 

Holders of record. On March 28, 2019, there were 73 shareholders of record of our common stock and one shareholder of record of our Nonvoting Common Stock. We have no information that indicates the number of beneficial owners is materially higher.

 

Dividend policy. We have never declared or paid cash dividends on our stock. We intend to retain any future earnings to finance the growth and development of our business and do not intend to pay any cash dividends on our stock in the foreseeable future. Payment of dividends in the future, if any, will be made at the discretion of our Board of Directors. Such decisions will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors as our Board of Directors may deem relevant.

 

 

 

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Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth information, as of December 31, 2018, with respect to our stock option plans under which our common stock is authorized for issuance. We have allocated 2,500,000 shares under our 2007 Equity Incentive Plan (the “2007 Plan”) and 5,700,000 under our 2016 Stock Option Plan (the “2016 Plan”).

Plan Category  

Number of securities to be issued upon exercise of outstanding options, warrants and rights

(a)

 

Weighted-average exercise price of outstanding options, warrants and rights

(b)

 

Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))

(c)

Equity compensation plans approved by security holders:              
2007 Plan          275,000 (1)   $ .37   2,225,000
2016 Plan       3,940,000 (2)   $     .13 (3)   1,760,000

 

(1) Stock options in 2007 were granted under Lightning Poker’s 2006 Equity Incentive Plan (the “2006 Plan”). After the Merger those options were exchanged for an equal number of the Company’s stock options under the 2007 Plan on substantially the same terms and conditions. All stock options granted after the Merger were granted under the 2007 Plan and are fully vested. No awards may be granted after October 16, 2017, the expiration date of the 2007 Plan.

 

(2) Stock options were granted on March 8, 2017 to employees with greater than one year of service on that date. All options were granted using a five-year vesting schedule and as of March 28, 2019, no options have been exercised.

 

(3) On November 30, 2018, the Board of Directors determined that it was in the best interests of the Company to approve the reduction in the exercise price of the options granted under the 2016 Plan based on current valuation information available. The market price of the Company’s stock was determined to be $.13 per share and the Board authorized the reduction of the option exercise price to that amount from the original $.28 per share.

     

 

Item 6. Selected Financial Data.

 

Not applicable.

     

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

CAUTIONARY STATEMENT

 

Throughout this report we make “forward-looking statements,” as that term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), 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” or “anticipate” or the negative of such terms and similar words and include all discussions about our ongoing or future plans, objectives or expectations.

 

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 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.

 

 

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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. Specific 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 those identified in Item 1A. “RISK FACTORS”. The historical financial 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 · 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.

 

We are registered as an approved vendor to distribute our gaming products in 58 jurisdictions. We must obtain regulatory approvals in many additional jurisdictions in order to fully effectuate our business plan. We may not receive any such regulatory approvals. Due to these and a variety of other factors, including those described under “RISK FACTORS” in Item 1A. of this report, we may be unable to generate significant revenues or margins, control operating expenses or achieve or sustain profitability in future years.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and

 

 

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related disclosures. On an ongoing basis, we evaluate these estimates, including those related to the valuation of equity awards issued. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that of our significant accounting policies, which are described in Note 1 to our financial statements appearing elsewhere in this report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

 

Revenue Recognition

 

We generate revenue from leasing and selling our slot machines and Poker Tables and from sales of parts and certain services relating to our slot machines and Poker Tables. We recognize revenue on sales of our 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. If multiple units of the products are included in any one sale or lease agreement or ancillary services are provided such as delivery, installation, or placement of the product on the gaming floor (“placement fees”), revenue is allocated to each unit or service based upon its respective fair value against the total contract value, and revenue recognition is deferred on those units or services until each of the performance obligation requirements under the applicable section(s) of that agreement have been completed.

 

Revenue generated under operating leases is recognized when the performance obligation is satisfied. 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.

 

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 will be recorded when the Company has a right to

 

 

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consideration in exchange for products or services that have been transferred to a customer. A contract liability will be recorded when the Company has an obligation to transfer products or services to a customer for which consideration has been received.

 

Research and Development

 

We expense internally-developed software costs in accordance with guidance by the Financial Accounting Standards Board (“FASB”) with respect to research and development costs. All employee and product costs associated with the development of our products are expensed until technological feasibility is reached. Technological feasibility is established when a product design and a working model of the software product have been completed and the completeness of the working model and its consistency with the product design have been confirmed by testing.

 

Equity-based Compensation

 

We account for our stock-based employee compensation awards in accordance with FASB issued guidance on transactions in which an entity exchanges its equity instruments for goods or services. The FASB guidance also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments. We value stock options issued based upon the Black-Scholes option-pricing model and recognize this value as an expense over the period in which the options vest.

 

We estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. Expected volatility is based upon publicly traded companies with similar characteristics as us. We use 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. Non-qualified stock options to purchase 4,015,000 shares of nonvoting common stock were granted during 2017.

 

Income Taxes

 

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The accounting for income taxes involves significant judgments and estimates and deals with complex tax regulations. When recognizable, the recoverability of certain deferred tax assets is based in part on estimates of future income and the timing of temporary differences, and the failure to fully realize such deferred tax assets could result in a higher tax provision in future periods. If, based on available data, future estimated tax liabilities differ materially from our estimates, the resulting difference will be recorded in the period in which they become known.

 

Impairment of Long-lived Assets

 

The Company reviews its long-lived assets, including property and equipment and license fees, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, including definite lived license fees, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets or for identifiable intangibles with finite useful lives. In addition, the Company considers changes in our business strategy and the industry as a whole in assessing recoverability of its long-lived assets. Any resulting impairment loss will be measured and recognized in the period in which the impairment becomes known. Based on the Company’s evaluation, there were no impairments for 2018 and 2017.

 

 

22
 

 

Assessment of Going Concern

 

According to effective accounting pronouncements, the Company is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern for a period of one year after the date that the financial statements are issued, taking into consideration the Company’s current financial condition, conditional and unconditional obligations due within one year and the funds and cash flow necessary to maintain operations. It is management’s responsibility to perform an evaluation for every reporting period presented. The financial statements contained herein were prepared on a going concern basis. The going concern basis assumes that the company will continue in operation for at least the next twelve months from the date our financial statements are issued and based on management’s evaluation, will be able to realize its assets, discharge its liabilities and commitments, and maintain positive working capital in the normal course of business.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued converged guidance on recognizing revenue from contracts with customers. The new guidance removes inconsistencies in current revenue recognition requirements, provides a framework for addressing revenue issues, improves comparability of revenue recognition across industries, entities and jurisdictions, and provides more useful information to users of financial statements through improved disclosure requirements. In general, the update requires that a five-step principles based revenue recognition model be applied in recognizing revenue from contracts with customers:

1.Identify the contract(s) with a customer
2.Identify the performance obligations in the contract
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations in the contract
5.Recognize revenue when (or as) the entity satisfies a performance obligation.

 

This guidance replaces the numerous GAAP revenue recognition requirements that are industry specific and establishes the principles to report about the nature, timing, and uncertainty of revenue from contracts with customers to users of financial statements.

 

Additions to this update were issued by the FASB and IASB in March 2016, clarifying the operability and understandability on principal versus agent considerations. In April 2016, further clarifications were issued on two aspects: identifying performance obligations and clarifying the licensing implementation guidance. An additional update was issued in May 2016, which included a technical correction, clarifying the objective of assessing the collectability criterion, the presentation of sales and other similar taxes collected from customers, specifying that the measurement date for noncash consideration is at contract inception, and practical guidance for applying contract modifications and completed contracts at the transition date. Additional technical corrections and improvements to clarify and correct unintended application of the guidance were issued in December 2016. These updates do not change the core principles of this guidance but rather provide clarification and implementation within the scope of this topic.

 

The guidance became effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective application transition method for any contracts that were not complete as of that date. Although this update required enhancements to the processes related to this guidance and the control activities within them, the updates in this guidance had an immaterial impact on operations and revenue. There were no uncompleted contracts as of January 1, 2018.

 

See Note 8, Revenue, for additional disclosures required under this guidance.

 

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

 

 

23
 

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.

 

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 are effective for fiscal and interim periods beginning after December 15, 2018. The Company completed its review and assessment of the impact that this guidance will have on our financial statements and has determined that one lease agreement for the Company’s corporate offices, as described in more detail in Note 6. Commitments, 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 will be made and there is no effect to prior periods.

 

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.

     

 

 

 

 

 

24
 

 

Twelve Months Ended December 31, 2018 Compared to Twelve Months Ended December 31, 2017

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

 

Revenue

 

The Company’s revenues for the year ended December 31, 2018 were $5,680,000 compared to $2,788,000 for the prior year, an increase of $2,892,000. This increase was attributable to the popularity of our latest game titles under the Screaming Links line of games. Sales of slot machines and parts increased by $2,822,000 to $3,420,000 for the year ended December 31, 2018 from $598,000 for the year ended December 31, 2017. In addition, the Company had a large parts sale to one customer, which generated $1,525,000 in revenues.

 

The increase in lease revenues was attributable to the increase in the average number of slot machines installed during the year offset by the decrease in recurring Poker Table leases. Lease revenues increased by $69,000 to $2,259,000 for the year ended December 31, 2018 from $2,190,000 for the year ended December 31, 2017.

 

Cost of Products Sold

 

For the year ended December 31, 2018, cost of products sold increased $1,539,000 to $1,586,000 from $47,000 for the year ended December 31, 2017. This increase was due to the increase in parts and slot machines sales in 2018 versus 2017.

 

Operating Expenses

 

Operating expenses increased by $66,000 to $593,000 for the year ended December 31, 2018, from $527,000 for the year ended December 31, 2017. This increase was the result of the reversal of license fees accrued in 2016 which were reduced by agreement with the licensor in 2017, the increase in payroll and related benefit costs associated with the addition of an assembly technician in 2018, as well as the increase in slot machine freight costs during the year. In addition, parts that were no longer being used in production or were deemed to be unsalvageable totaling approximately $41,000 were written off in 2018.

 

Research and Development Expenses

 

Research and development expenses increased by $16,000 to $383,000 for the year ended December 31, 2018, from $367,000 for the year ended December 31, 2017. Research and development expenses are related to the development of gaming equipment and consist mainly of payroll and related expenses for programmers and graphic artists and the costs to acquire new brands. 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 were $1,925,000 for the year ended December 31, 2018, a decrease of $34,000 from $1,959,000 for the year ended December 31, 2017. This decrease was due to the decrease in payroll and related commission and travel expenses associated with the elimination of a regional salesperson in September of 2017, and the write-off of an uncollectible accounts receivable account for $42,000 during 2017. These decreases were offset in part by the increases in payroll and payroll related expenses, mainly benefits, for compliance, finance and administrative personnel.

 

Depreciation and Amortization

 

Depreciation and amortization decreased by $30,000 to $83,000 for the year ended December 31, 2018 from $113,000 for the year ended December 31, 2017. This decrease was from assets built and placed in gaming venues in prior years that were sold or are now fully depreciated.

 

 

 

25
 

 

Net Interest Expense

 

Net interest expense increased $64,000 from $3,000 for the year ended December 31, 2017 to $67,000 for the year ended December 31, 2018. This increase was as a result of the increase in loans taken in 2018 versus 2017.

 

Income Tax Expense

 

Income tax expense increased $23,000 from $-0- for the year ended December 31, 2017 to $23,000 for the year ended December 31, 2018, and is from estimated tax due at the state level on income generated in 2018. 

     

 

Liquidity and Capital Resources

 

Although we have historically incurred net losses, 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 and proceeds from the sales of our gaming products, we recognized net income of $1,019,000 and generated cash flows from operations in 2018. These transactions that occurred in 2018 and 2017 are described in more detail following the discussion of cash flows below:

 

Discussion of Statement of Cash Flows

    2018     2017     Change
Net cash provided by (used in) operating activities   $ 201,000     $ (66,000 ) $ 267,000  
Net cash used in investing activities     (1,536,000 )     (35,000 )     (1,501,000 )
Net cash provided by financing activities     1,624,000       124,000     1,500,000  
Net increase in cash     289,000       23,000   $     266,000  
Cash, beginning of year     276,000       253,000        
Cash, end of period   $ 565,000     $ 276,000        

 

For the twelve months ended December 31, 2018, net cash provided by operating activities increased $267,000 to $201,000 as compared to $66,000 cash used in operations for the twelve months ended December 31, 2017. The positive swing in cash provided by operating activities was primarily due to the net income experienced for the year in addition to the timing of receipts from customers, and the timing of payments to creditors, suppliers and vendors.

 

Net cash used in investing activities increased by $1,501,000 to $1,536,000 for the twelve months ended December 31, 2018, from $35,000 for the twelve months ended December 31, 2017. Cash is used in investing activities to produce slot machines and acquire brand and software licenses for our slot products. This increase in cash used was due to the increase in slot machines and purchased licenses.

 

Net cash provided by financing activities was $1,624,000 for the twelve months ended December 31, 2018, an increase of $1,500,000 from $124,000 for the twelve months ended December 31, 2017. This is the net result of the notes payable taken for the purchase of slot machine cabinet inventory of $1,876,000, less the principal repayments on these notes of $126,000 and the notes payable from related parties of $125,000 as well as the purchase of shares for the treasury of $1,000.

 

 

 

 

 

26
 

 

Operations and Liquidity Management

 

For the year ended December 31, 2018, we had net income of $1,019,000, a positive swing in income of $1,247,000 from the $228,000 net loss for the year ended December 31, 2017. For the twelve months ended December 31, 2018, we generated $201,000 in cash from operating activities versus $66,000 cash used in operating activities for the twelve months ended December 31, 2017, an increase of $267,000. At December 31, 2018, our cash balance was $565,000.

 

The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to develop slot machines that are appealing to the marketplace, and continue to obtain the regulatory approvals required to distribute our products. In order to boost our recurring revenue install base, we have secured financing to fund the costs and deployment of a new slot machine cabinet, the installations of which commenced in October 2018, and we continue to develop new slot machine themes.

 

Our current operating cash requirements are 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 during 2019.

 

Our ability to sell or license our products on a large scale in the future may require additional financing for working capital. There is no assurance that such additional financing would be available to us, if at all, on reasonable terms, particularly for the reasons discussed above in the “RISK FACTORS” item. Our inability to obtain such financing on terms that allow us to lease our products profitably would hamper our ability to distribute our products on a large scale.

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of December 31, 2018:

 

    Total    

Less than

1 year

    1 - 3 years     3 - 5 years    

More than

5 years

 
                               
Operating lease obligations (1)   229,465     $ 104,366     125,099     $ -     $ -  
Debt obligations (2)     1,750,411       572,298       1,178,113       -       -  
            Total   $ 1,979,876     $ 676,664     $ 1,303,212     $ -     $ -  

 

 

(1) Represents operating lease agreements for office and warehouse facility.

 

(2) Represents principal payments on notes payable.

   

     

 

Off-Balance Sheet Arrangements

 

As of December 31, 2018, there were no off-balance sheet arrangements.

     

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Not Applicable.

     

  

 

27
 

Item 8. Financial Statements and Supplementary Data.

 

Report of Independent Registered Public Accounting Firm

The following is a list of financial statements filed herewith:

Consolidated Balance Sheets as of December 31, 2018 and 2017

Consolidated Statements of Operations for the years ended December 31, 2018 and 2017

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018 and 2017

Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017

     

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28
 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the stockholders and the board of directors of Lightning Gaming, Inc. and subsidiaries:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Lightning Gaming, Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended and the related notes and financial statement schedule listed in item 15(a)2 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards general accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Baker Tilly Virchow Krause, LLP

 

We have served as the Company's auditor since 2015.

 

Wyomissing, Pennsylvania

March 28, 2019

 

 

 

     

 

 

 

 

29
 

 

Lightning Gaming, Inc. and Subsidiaries

Consolidated Balance Sheets

 

  

December 31,

 2018

 

December 31,

2017

Assets          
Current Assets          
       Cash  $565,461   $276,111 
Accounts receivable, net   415,466    293,761 
Inventory   584,221    121,962 
Prepaid expenses   124,887    108,593 
       Deposits with vendors   553,760    —   
Total Current Assets   2,243,795    800,427 
           
Property and Equipment, net   1,497,373    109,486 
           
Other assets   8,193    8,193 
License fees, net of accumulated amortization   9,339    6,283 
           
Total Assets  $3,758,700   $924,389 
           
See Notes to Consolidated Financial Statements          

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30
 

 

Lightning Gaming, Inc. and Subsidiaries

Consolidated Balance Sheets (Continued)

 

 

  

December 31,

 2018

 

December 31,

2017

Liabilities and Stockholders’ Equity          
Current Liabilities          
       Accounts payable  $191,751   $122,008 
       Accrued expenses   98,241    85,104 
       Income tax payable   23,000    —   
       Current portion of long-term debt   572,298    —   
       Notes payable – related party   —      125,000 
       Accrued interest   12,891    —   
Total Current Liabilities   898,181    332,112 
           
Long-Term Debt and Other Liabilities          
       Long-Term Notes Payable   1,178,113    —   
       Other Long Term Liabilities   32,344    43,185 
Total Long-Term Debt and Other Liabilities   1,210,457    43,185 
           
Total Liabilities   2,108,638    375,297 
           
Commitments (Note 6)          
           
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 as of December 31, 2018 and 2017   —      —   
           
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,916,285 shares issued at December 31, 2018 and 2017, 4,649,383 and 4,654,383 shares outstanding at December 31, 2018 and 2017, respectively   4,917    4,917 
           
Nonvoting common stock: $0.001 par value; authorized 50,000,000 shares; 33,300,000 issued and outstanding at December 31, 2018 and 2017   33,300    33,300 
           
Additional paid in capital   30,467,906    30,384,996 
       Accumulated deficit   (28,835,250)   (29,854,310)
Treasury stock, 266,902 and 261,902 shares, at cost, as of December 31, 2018 and 2017, respectively   (20,811)   (19,811)
Total Stockholders’ Equity   1,650,062    549,092 
           
Total Liabilities and Stockholders’ Equity  $3,758,700   $924,389 
           
See Notes to Consolidated Financial Statements          

     

 

 

 

 

31
 

 

Lightning Gaming, Inc. and Subsidiaries

Consolidated Statements of Operations

   Year Ended
  

December 31,

 2018

 

December 31,

2017

Revenues      
       Lease, license and service fees  $2,259,216   $2,189,981 
       Sales of gaming products and parts   3,420,434    597,913 
Total revenues   5,679,650    2,787,894 
           
Costs and operating expenses          
       Cost of products sold   1,585,589    46,597 
       Operating expenses   593,400    527,013 
       Research and development   383,494    367,348 
       Selling, general and administrative expenses   1,925,053    1,959,479 
       Depreciation and amortization   83,110    112,564 
Total costs and operating expenses   4,570,646    3,013,001 
           
Operating income (loss)   1,109,004    (225,107)
           
Non-operating expense          
  Interest expense   (66,944)   (2,849)
Net income (loss) before income taxes   1,042,060    (227,956)
  Income tax expense   (23,000)   —   
Net income (loss)  $1,019,060   $(227,956)
Net income (loss) per common share - basic  $0.03   $(0.01)
           
Net income (loss) per common share – diluted  $0.02   $(0.01)
Weighted average Series A Nonvoting shares outstanding-basic and diluted   —      —   
Weighted average Common shares outstanding - basic   4,651,931    4,680,815 
Weighted average Common shares outstanding - diluted   5,024,739    5,055,815 
Weighted average Nonvoting Common shares outstanding - basic   33,300,000    33,300,000 
Weighted average Nonvoting Common shares outstanding - diluted   37,240,000    36,527,562 
           
See Notes to Consolidated Financial Statements          

     

 

 

32
 

 

Lightning Gaming, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2018 and 2017

 

 

 

   Common Stock  Nonvoting Common Stock  Additional Paid in  Accumulated  Treasury Stock   
   Shares  Amount  Shares  Amount  Capital  Deficit  Shares  Amount  Total
Balance January 1, 2017   4,916,285   $4,917    33,300,000   $33,300   $30,348,856   $(29,626,354)   227,811   $(18,811)  $741,908 
                                              
Net Loss   —      —      —      —      —      (227,956)   —      —      (227,956)
                                              
Purchase of stock for the treasury   —      —      —      —      —      —      34,091    (1,000)   (1,000)
                                              
Stock based compensation   —      —      —      —      36,140    —      —      —      36,140 
                                              
Balance December 31, 2017   4,916,285    4,917    33,300,000   $33,300    30,384,996    (29,854,310)   261,902    (19,811)   549,092 
                                              
Net income   —      —      —      —      —      1,019,060    —      —      1,019,060 
                                              
Purchase of stock for the treasury   —      —      —      —      —      —      5,000    (1,000)   (1,000)
                                              
Stock based compensation   —      —      —      —      82,910    —      —      —      82,910 
                                              
Balance December 31, 2018   4,916,285   $4,917    33,300,000   $33,300   $30,467,906   $(28,835,250)   266,902   $(20,811)  $1,650,062 

 

 

See Notes to Consolidated Financial Statements

 

 

     

 

 

 

 

 

 

33
 

 

Lightning Gaming, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

   Year Ended
   December 31,  December 31,
   2018  2017
Cash Flows from Operating Activities          
Net income (loss)  $1,019,060   $(227,956)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization   83,110    112,564 
Stock based compensation   82,910    36,140 
Changes in Assets and Liabilities          
(Increase) decrease in accounts receivable   (121,705)   158,430 
Increase in inventory   (399,833)   (1,716)
Increase in prepaid expenses   (16,294)   (13,013)
Increase in deposits with vendors   (553,760)   —   
Increase (decrease) in accounts payable   69,743    (72,931)
Increase (decrease) in accrued expenses   13,136    (48,903)
Increase in income tax payable   23,000    —   
Increase in accrued interest   12,891    —   
Decrease in other long-term liabilities   (10,841)   (8,358)

 

Net cash provided by (used in) operating activities

   201,417    (65,743)
           
Cash flows from investing activities          
Purchase of equipment   (1,526,478)   (56,075)
(Increase) decrease in license fees   (10,000)   21,623 
           
Net cash used in investing activities   (1,536,478)   (34,452)
           
Cash flows from financing activities          
Proceeds from notes payable   1,876,241    —   
Repayment on notes payable   (125,830)   —   
Proceeds and repayment of notes payable – related party   (125,000)   125,000 
Purchase of treasury stock   (1,000)   (1,000)

 

Net cash provided by financing activities

   1,624,411    124,000 
           
Net increase in cash and restricted cash   289,350    23,805 

 

Cash and restricted cash beginning

   276,111    252,306 

 

Cash and restricted cash ending

  $565,461   $276,111 
                 
Supplemental Disclosure of Non-Cash Financing Activities:                
                 
Transfers of inventory and equipment, net   $ 62,425     $ 18,304  

 

Supplemental Information:                
                 
Cash paid for interest   $ 54,053     $ 2,849  

 

See Notes to Consolidated Financial Statements

     

 

34
 

 

Lightning Gaming, Inc. and Subsidiaries Notes to Consolidated Financial Statement

 

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

 

The accompanying consolidated 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. For the year ended December 31, 2018, the Company had net income and cash flows from operations, recognized a significant increase in revenue during the year, has obtained financing to fund inventory purchases, 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. Based on our current financial condition, cash flow projections and anticipated revenues, 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.

 

 

35
 

 

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

 

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

 

A summary of the Company’s significant accounting policies is as follows:

 

Revenue Recognition: 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. If multiple units of the products are included in any one sale or lease agreement or ancillary services are provided such as delivery, installation, or placement of the product on the gaming floor (“placement fees”), revenue is allocated to each unit or service based upon its respective fair value against the total contract value, and revenue recognition is deferred on those units or services until each of the performance obligation requirements under the applicable section(s) of that agreement have been completed.

 

Revenue generated under operating leases is recognized when the performance obligation is satisfied. 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.

 

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.

 

For the years 2018 and 2017, there was no revenue generated from customers outside the United States. Four and three casino customers accounted for 56% and 18% of our revenues for the years ended December 31, 2018 and 2017, respectively. One casino group represented 7% and 12% of total revenues for each of the years ended December 31, 2018 and 2017, respectively. For the year ended December 31, 2018, the Company recorded no revenues related to performance obligations from prior periods.

 

Effective January 1, 2018, the Company adopted Accounting Standard Codification 606 (“ASC 606”) with regards to revenue recognition as described more fully in Note 8 below.

 

 

 

 

36
 

 

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

 

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

 

Use of Estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include the recoverable value of long-lived assets and projected cash flows. Actual results could differ from those estimates.

 

Cash: For the purposes of reporting the statement of cash flows, the Company considers all cash accounts and highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintained and will maintain cash balances with highly reputable financial institutions, which at times throughout the year exceeded the federally-insured amount. The Company has not experienced any losses from deposits above the federally-insured amount.

 

Concentrations of Credit Risk: Financial instruments that subject us to credit risk primarily consist of cash and trade receivables. The Company’s credit risk is managed by investing cash primarily in high-quality financial institutions. Accounts receivable include amounts owed by various customers and groups of customers. No collateral is required. Accounts receivable are not sold or factored. The Company regularly reviews its trade receivables in determining its allowance for doubtful accounts and believes its credit and collection polices mitigate its credit risk relative to accounts receivable.

 

Receivables and Allowance for Doubtful Accounts: The Company regularly evaluates the collectability of its trade receivable balances based on a combination of factors. When a customer’s account becomes past due, dialogue is initiated with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, a specific reserve is recorded for bad debts to reduce the related receivable to the amount expected to be recovered, given all information presently available. The Company has a reserve of $6,593 and $11,639 as of December 31, 2018 and 2017, 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 years ended December 31, 2018 and 2017, respectively, the Company wrote off $715 and $42,692 of accounts receivable considered to be uncollectible.

 

At December 31, 2018 and 2017, accounts receivable from four casino customers represented 52% and 43%, respectively, of total accounts receivable. One customer represented 21% and 18% of the total accounts receivable balance as of December 31, 2018 and 2017, respectively.

 

License Fees: Licensee fees are amortized on a straight-line basis over the life of the respective license, which ranges from one to three years.

 

Patents: The Company expenses legal fees and application costs related to its patent application process. There is a high degree of uncertainty in the outcome of approval for any of our patents. Once the patents are approved, any costs incurred to defend and register these patents will be capitalized.

 

Research and Development: Research and development costs are charged to expense when incurred and are included in the Statement of Operations until technological feasibility is reached. Technological feasibility is established when a product design and a working model of the software product have been completed and the completeness of the working model and its consistency with the product design have been confirmed by testing. These expenses include internally-developed software costs as well as employee and product costs associated

 

 

37
 

 

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

 

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

 

with the development of our products. As of December 31, 2018 and 2017, no amounts had been capitalized.

 

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

 

Fair Value Measurements: Given their short-term nature and expected maturity, the carrying amounts reported in these financial statements for cash, prepaid and other current assets, accounts payable, and accrued expenses approximate fair value.

 

Property and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the life of the lease or the useful life of the improvement if less.

 

Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

The Company has assessed its tax position and does not believe there are any uncertain tax positions. Our policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the Statement of Operations. The Company has determined that there are no unrecognized tax benefits, and accordingly, has not recognized any interest or penalties during 2018 and 2017 related to unrecognized tax benefits. There is no accrual for interest or penalties as of December 31, 2018 and 2017. The Company files U.S. income tax returns and multiple state and foreign income tax returns. With few exceptions, the U.S. and state income tax returns filed for the tax years ending on December 31, 2015 and thereafter are subject to examination by the relevant taxing authorities.

 

Advertising: The Company expenses advertising costs as incurred. There was no advertising expense in 2018 or 2017.

 

Impairment of Long-Lived Assets: The Company reviews its long-lived assets, including property and equipment and license fees, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, including definite lived license fees, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets or for identifiable intangibles with finite useful lives. The evaluation performed for 2018 and 2017 did not result in an impairment.

 

Going Concern: The Company evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern for a period of one year after the date that the financial statements are issued, taking into consideration the quantitative and qualitative information regarding the Company’s current financial condition, conditional and unconditional obligations due and the funds and cash flow necessary to maintain operations within that time period. Based on management’s evaluation, the Company will be able to continue in operation on a going concern basis for at least the next twelve months from the date these financial statements are issued.

 

Stock Option Plans: The Company has equity-based compensation plans which are more fully described in Note 7. Compensation expense is recognized over the required service period. All options have been granted with an exercise price equal to the fair value of the Company’s common stock on the date of grant.

 

38
 

 

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

 

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

 

Earnings (loss) per share: The Company computes earnings (loss) per share in accordance with generally accepted accounting principles which require presentation of both basic and diluted earnings per share ("EPS") on the face of the Statement of Operations. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted to common stock. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS for loss periods excludes all potential dilutive shares due to their anti-dilutive effect.

 

The Company uses the two-class method in computing earnings per share. Under the two-class method, undistributed earnings are allocated among common and participating shares to the extent each security may share in such earnings.

 

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, which may dilute future earnings per share, outstanding for each of the periods presented:

 

   December 31,
2018
  December 31,
2017
Stock options   4,215,000    4,315,000 
           

 

 

Note 2. Inventory

 

Inventory consisted of the following:

 

   December 31,
2018
 

December 31,

2017

Finished products  $403,080   $56,100 
Raw materials   181,141    65,862 
Inventory  $584,221   $121,962 

 

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.

 

 

 

 

 

 

 

 

39
 

 

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

 

 

Note 3. Property and Equipment

 

Property and equipment consisted of the following:

 

  

December 31,

2018

 

December 31,

2017

Equipment, principally gaming equipment  $3,208,481   $3,789,081 
Delivery truck   28,140    28,140 
Furniture and fixtures   104,314    100,041 
Leasehold improvements   91,794    91,794 
Property and equipment   3,432,729    4,009,056 
Less accumulated depreciation   (1,935,356)   (3,899,570)
Property and equipment, net  $1,497,373   $109,486 

 

During the year ended December 31, 2018, the Company determined that the Poker Tables that had previously been out on lease and returned from customers had no further use to the Company and no resale or scrap value. The Company wrote off the cost and corresponding accumulated depreciation of these Poker Tables of $1,276,039, with a $-0- net book value.

 

Depreciation expense related to the property and equipment included in the consolidated Statements of Operations was $76,166 and $102,564 for the years ended December 31, 2018 and 2017, respectively.

 

 

Note 4. License Fees

 

License fees consist of the following:

 

  

December 31,

2018

  December 31,
2017
Purchased licenses  $351,605   $341,605 
Less accumulated amortization   (342,266)   (335,322)
License fees, net  $9,339   $6,283 

 

The weighted average useful life of purchased licenses is 3 years. Amortization expense included in the consolidated Statements of Operations and relating to the purchased licenses was $6,944 and $10,000 for the years ended December 31, 2018 and 2017, respectively.

 

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

 

  Year Ending December 31,   Amount    
  2019   $ 3,783    
  2020     3,333    
  2021     2,223    
      $ 9,339    

 

 

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

 

40
 

 

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

 

Note 5.  Notes Payable (Continued)

 

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.

 

Monthly payments of $16,083 on the initial advance (“Advance 1”), evidenced by a Note in the principal amount of $489,989, commenced on August 17, 2018. Monthly payments of $23,741 on the second advance (“Advance 2”), under a Note in the principal amount of $723,565, commenced on October 18, 2018. Monthly payments of $21,743 under the next advance (“Advance 3”), evidenced by a Note in the principal amount of $662,686, commenced on December 15, 2018.

 

Notes payable consist of the following:

 

   Advance Date  Maturity Date  Interest Rate 

December 31,

2018

 

December 31,

2017

                
Advance 1  7/17/2018  7/17/2021   11%  $431,407   $—   
Advance 2  9/18/2018  9/18/2021   11%   671,986    —   
Advance 3  11/15/2018  11/15/2021   11%   647,018    —   
Total Notes Payable              1,750,411    —   
Less: amounts classified as current              (572,298)   —   
Long-Term Notes Payable             $1,178,113   $—   
                      

 

Interest expense and CIP obligations relating to these Notes were $54,939 and $7,161, respectively, for the year ended December 31, 2018.

 

The following table lists the principal payments due on the Notes as of December 31, 2018:

 

  Year Ending December 31,   Amount    
  2019   $ 572,298    
  2020     639,133    
  2021     538,980    
      $ 1,750,411    

 

On January 21, 2019, the Company closed on its next advance (“Advance 4”) under the Loan. See Note 12, Subsequent Event, for more information on the Advance 4 transaction.

 

 

 

 

 

 

 

41
 

 

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

 

Note 6.  Notes Payable – Related Party

 

Notes payable to related party consist of the following:

   

December 31,

2018

   

December 31,

2017

 
             
The Co-Investment Fund II, L.P. (“CI II”)   $     $ 100,000  
Brian Haveson (“BH”)           25,000  
    $     $ 125,000  

 

In September 2017, the Company entered into a Loan Agreement (“Loan”) with The Co-Investment Fund II, L.P. (“CI II”) and Brian Haveson (“BH”), collectively the lenders, for the principal amount of $125,000 for working capital purposes. The Loan was secured by a Security Agreement among the Company and its subsidiaries in which substantially all of the Company’s assets were pledged as collateral. The Loan was evidenced by promissory notes that were due on September 1, 2018, together with interest at the rate of 8% per annum, and with the provision that they may be prepaid at any time with written consent of the lender(s). The Company repaid the loans along with interest due on June 26, 2018.

 

See Note 10, Related Party Transactions, for more information on notes payable transactions.

 

 

Note 6. Commitments

 

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.

 

Rental expense is recognized on a straight-line basis over the life of the lease and is recorded as a deferred rent obligation during the abatement period. The deferred rent is reduced by the difference between the rent due and the straight-line expense upon commencement of the rental payments. Rental expense under this lease for the years ended December 31, 2018 and 2017 was $141,601 and $140,836, respectively.

 

Future minimum lease payments are as follows:

 

  Year Ending December 31,   Amount  
  2019   $ 104,366  
  2020     106,975  
  2021     18,124  
      $ 229,465  

 

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.

 

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

 

42
 

 

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

 

Note 6. Commitments (Continued)

 

Spain for the remainder of the renewal term. In December 2013, the Company and Hearst Holdings executed a second renewal agreement which extended the license and sublicense renewal term for the period January 1, 2014 to December 31, 2016. A third renewal agreement was executed in January 2017, extending the license and sublicense renewal term for the period January 1, 2017 to December 31, 2018. The third renewal agreement was subject to a guaranteed minimum royalty of $50,000, $25,000 payable on or before December 31, 2017 and $25,000 payable on or before December 31, 2018. The license period has expired and the Company opted not to extend the agreement.

 

In October 2014, the Company entered into a license agreement with Paws, Inc. to use the brand Garfield and associated family of characters in gaming devices distributed worldwide. The initial term of the agreement ran from December 1, 2014 to November 30, 2017 and was subject to a guaranteed minimum royalty of $75,000. The Company paid $75,000 as non-refundable advances against the guaranteed royalty which were recoupable out of royalties earned on the license. The license period expired and the Company opted not to extend the agreement. All royalty obligations have been paid in full.

 

In November 2014, the Company entered into a license agreement with Hearst Holdings, Inc. for the worldwide distribution of gaming devices using Flash Gordon and associated family of characters. The initial term of the agreement ran from November 1, 2014 to October 31, 2017 with royalties based on a percentage of revenues earned on the license, payable on a quarterly basis. The license period has expired and the Company opted not to extend the agreement. All royalty obligations have been paid in full.

 

In July 2016, the Company entered into a license agreement with Ainsworth Game Technology Ltd for the intellectual property rights to use certain game technology in slot machines titled as Flash Gordon, Ye Xian and Cash Flow. The term of the agreement ran from July 1, 2016 to March 30, 2018 with royalties based on a percentage of revenues earned on the slot machines running the aforementioned titles, payable on a quarterly basis. The license period has expired and all royalty obligations have been paid in full.

 

As of December 31, 2018, the Company estimates that there will be no future royalty payments.

 

 

Note 7. 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 are granted at the discretion of the Board of Directors and, at December 31, 2018, 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 and no awards may be granted after October 16, 2017, the expiration date of the 2007 Plan.

 

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.

 

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

 

43
 

 

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

 

Note 7. Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

(the “2016 Plan”). The 2016 Plan will permit 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 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 2018 and 2017 under the 2007 Plan is as follows:

  

Shares

 

 

Weighted

Average

Exercise Price

Options outstanding at January 1, 2017   885,000   $1.80 
Options granted   —      —   
Options exercised   —      —   
Options cancelled   (510,000)   2.53 
Options outstanding at December 31, 2017   375,000   $.81 
Options granted   —      —   
Options exercised   —      —   
Options cancelled   (100,000)   2.00 
Options outstanding at December 31, 2018   275,000   $0.37 
Options available for grant under the 2007 Plan at December 31, 2018   2,225,000      

 

There were no options granted during the year ended December 31, 2017 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 4,015,000 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.

 

 

 

 

 

 

44
 

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

 

Note 7. Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

A summary of option transactions in 2018 and 2017 under the 2016 Plan is as follows:

  

Shares

 

 

Weighted

Average

Exercise Price

Options outstanding at January 1, 2017   —     $—   
Options granted   4,015,000    0.13 
Options exercised   —      —   
Options cancelled   (75,000)   0.13 
Options outstanding at December 31, 2017   3,940,000   $0.13 
Options granted   —      —   
Options exercised   —      —   
Options cancelled   —      —   
Options outstanding at December 31, 2018   3,940,000   $0.13 
Options available for grant under the 2016 Plan at December 31, 2018   1,760,000      

 

Stock-based compensation expense is recognized in the Statements of Operations based on awards ultimately expected to vest and is adjusted for estimated forfeitures. The additional compensation expense arising from the modification of the exercise price amounted to $105,767 and is being recognized over the vesting period. Expense relating to the stock option plans was $82,910, which included $39,182 of cumulative incremental expense due to the option repricing, and $36,140 for the years ended December 31, 2018, and 2017, respectively.

 

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

 

    Options Outstanding   Vested Options
    Weighted              
    Average Weighted       Weighted Weighted  
    Remaining Average Aggregate     Average Average Aggregate
    Contractual Exercise Intrinsic     Contractual Exercise Intrinsic
  Number Life (Years) Price Value   Number Term (Years) Price Value
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

 

The following table summarizes information with respect to stock options outstanding at December 31, 2017:

 

    Options Outstanding   Vested Options
    Weighted              
    Average Weighted       Weighted Weighted  
    Remaining Average Aggregate     Average Average Aggregate
    Contractual Exercise Intrinsic     Contractual Exercise Intrinsic
  Number Life (Years) Price Value   Number Term (Years) Price Value
2007 Plan      375,000 1.4 $0.81   375,000  1.4 $0.81
2016 Plan   3,940,000 9.2 $0.13  

 

As of December 31, 2018, all compensation costs related to share-based compensation arrangements granted under the 2007 Plan had been fully recognized. As of December 31, 2018, there was approximately $202,110 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2016 Plan, including $66,585 of incremental compensation expense

 

45
 

 

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

 

Note 7. Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

stemming from the option repricing. The cost is expected to be recognized over a weighted-average period of 3.2 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.

 

 

Note 8. Revenue

 

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

 

   Year ended December 31,
   2018  2017
Lease, license and service fees:          
Flat daily rate lease  $1,615,266   $1,508,802 
Participation lease   613,197    677,029 
Placement and license fees   30,753    4,150 
   $2,259,216   $2,189,981 
           
Sales of gaming products and parts:          
Slot machine sales  $1,863,932   $588,680 
Installation fees   940    2,581 
Parts and ancillary items sales   1,555,562    6,652 
   $3,420,434   $597,913 
           

 

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

   Year ended December 31,
   2018  2017
Lease, license and service fees by product:          
Slot machines  $2,242,250   $2,086,055 
Poker Tables   16,966    103,926 
   $2,259,216   $2,189,981 
           

 

 

Note 9. Income Taxes

 

The components of the income tax provision (benefit) for the years ended December 31, 2018 and 2017 are as follows:

   2018  2017
Current tax expense:          
Federal  $—     $—   
State   23,000    —   
   $23,000   $—   
           
Deferred tax benefit (expense):          
Federal  $(199,000)  $37,000 
State   (106,000)   19,000 
Valuation reserve   305,000    (56,000)
   $—     $—   

 

 

 

 

46
 

 

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

 

Note 9. Income Taxes (Continued)

 

Net deferred tax assets consist of the following components as of December 31, 2018 and 2017:

 

   2018  2017
Deferred tax asset:          
Net operating loss carryforward  $3,777,000   $3,993,000 
Accounts receivable reserves   2,000    3,000 
Property and equipment   (211,000)   (117,000)
Accrued expenses   61,000    61,000 
Impairment charge   211,000    211,000 
Start-up costs   10,000    14,000 
Stock based compensation   78,000    55,000 
Inventory reserves   3,000    4,000 
Other   8,000    20,000 
    3,939,000    4,244,000 
Less valuation allowance   (3,939,000)   (4,244,000)
Net deferred taxes  $—     $—   

 

Due to the change in the corporate tax rate under the Tax Cuts and Jobs Act (“Tax Cuts”) signed into law in December 2017, a cumulative adjustment of $1,703,000 was made to the deferred tax asset and valuation allowance to account for the corporate tax rate reduction to 21% from 34%.

 

A reconciliation of income tax expense at statutory rates to the income tax expense reported in the Statements of Operations is as follows for the years ended December 31, 2018 and 2017.

 

   Year ended December 31,
   2018  2017
Federal tax benefit at statutory rate  $214,000   $(48,000)
State tax benefit net of federal taxes   104,000    (18,000)
Other   10,000    10,000 
Increase (decrease) in valuation allowance   (305,000)   56,000 
Income tax expense  $23,000   $—   

 

As of December 31, 2018, the Company has available, for federal and state income tax purposes, net operating loss (“NOL”) carryforwards of approximately $13,110,000, which expire at various times through 2038. 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 current financial statements.

 

Note 10. Related Party Transactions

 

In September 2017, the Company borrowed $100,000 from The Co-Investment Fund II, L.P. (“CI II”) and $25,000 from its CEO/CFO and Director, Brian Haveson (“BH”). The notes were due on March 1, 2018 and included interest at the rate of 8% per annum, payable on a monthly basis. The proceeds of the loans were used for working capital purposes. On March 1, 2018, CI II and BH agreed to extend the maturity date on each of the promissory notes held to September 1, 2018. All other provisions of the notes remained unchanged and in full force.

 

 

47
 

 

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

 

Note 10. Related Party Transactions (Continued)

 

As of December 31, 2018, CI II owns 3.89% of the (voting) Common Stock and 100% of the Nonvoting Common Stock of the Company. CI II is managed by Cross Atlantic Capital Partners, wholly owned by Donald Caldwell, who is a Director and Shareholder of the Company. Frederick Tecce is also a Director and Shareholder of the Company and is a Managing Director of Cross Atlantic Capital Partners.

 

During the years ended December 31, 2018 and 2017, respectively, interest expense on the notes from CI II and BH amounted to $4,844 and $2,849. The Company repaid the loans along with interest due on June 26, 2018.

 

Note 11. Recently Issued Pronouncements

 

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued converged guidance on recognizing revenue from contracts with customers. The new guidance removes inconsistencies in current revenue recognition requirements, provides a framework for addressing revenue issues, improves comparability of revenue recognition across industries, entities and jurisdictions, and provides more useful information to users of financial statements through improved disclosure requirements. In general, the update requires that a five-step principles based revenue recognition model be applied in recognizing revenue from contracts with customers:

 

1.Identify the contract(s) with a customer
2.Identify the performance obligations in the contract
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations in the contract
5.Recognize revenue when (or as) the entity satisfies a performance obligation.

 

This guidance replaces the numerous GAAP revenue recognition requirements that are industry specific and establishes the principles to report about the nature, timing, and uncertainty of revenue from contracts with customers to users of financial statements.

 

Additions to this update were issued by the FASB and IASB in March 2016, clarifying the operability and understandability on principal versus agent considerations. In April 2016, further clarifications were issued on two aspects: identifying performance obligations and clarifying the licensing implementation guidance. An additional update was issued in May 2016, which included a technical correction, clarifying the objective of assessing the collectability criterion, the presentation of sales and other similar taxes collected from customers, specifying that the measurement date for noncash consideration is at contract inception, and practical guidance for applying contract modifications and completed contracts at the transition date. Additional technical corrections and improvements to clarify and correct unintended application of the guidance were issued in December 2016. These updates do not change the core principles of this guidance but rather provide clarification and implementation within the scope of this topic.

 

The guidance became effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective application transition method for any contracts that were not complete as of that date. Although this update required enhancements to the processes related to this guidance and the control activities within them, the updates in this guidance had an immaterial impact on operations and revenue. There were no uncompleted contracts as of January 1, 2018.

 

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

 

48
 

 

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

 

Note 11. Recently Issued Pronouncements (Continued)

 

(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.

 

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, are effective for fiscal and interim periods beginning after December 15, 2018. The Company completed its review and assessment of the impact that this guidance will have on our financial statements and has determined that one lease agreement for the Company’s corporate offices, as described in more detail in Note 6. Commitments, 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 will be made and there is no effect to prior periods.

 

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.

 

 

Note 12. Subsequent Event

 

On January 21, 2019, the Company closed on Advance 4 under the Loan with PDS. 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 $19,085 commence on February 21, 2019, and the Note matures on January 21, 2022.

     

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

We have no disagreements, transactions or events to report under this item.

     

 

49
 

 

 

Item 9A. Controls and Procedures.

 

Disclosure 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 CEO, as appropriate, to allow timely decisions regarding required disclosure.

 

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As of December 31, 2018, 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 December 31, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Internal Control Over Financial Reporting

 

Internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) refers to the process designed by, or under the supervision of, our CEO and Controller, or affected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Management is responsible for establishing and maintaining adequate internal control over our financial reporting.

 

All internal controls, no matter how well designed, have inherent limitations and may not prevent or detect all misstatements and fraud. Even those internal controls that are determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation. Additionally, judgments in decision-making can be faulty and breakdowns in internal control can occur because of simple errors or mistakes that are not detected on a timely basis. Furthermore, over time, controls that were previously determined to be effective may become inadequate due to changes in conditions or deterioration in the degree of compliance with internal policies and procedures.

 

We have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2018. This evaluation was performed using the criteria set forth in the Internal Control - Integrated Framework (the “Framework”) developed by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) updated in 2013. Based on such evaluation, our management has concluded that, as of such date, our internal control over financial reporting was effective as of December 31, 2018.

 

Due to the implementation of the new revenue guidance under ASC 606, enhancements were made to our internal controls over financial reporting during the year ended December 31, 2017 that were effective as of January 1, 2018. Although the new revenue standard had an immaterial impact on our operations and revenue, we did implement changes to our processes related to revenue recognition and the control activities within them. This includes the implementation of new policies based on the five-step model provided in the new revenue guidance, contract review procedures during the proposal stage, the implementation of standard warranty and theme conversion terms and conditions, and information gathered for the enhanced disclosures.

50
 

 

Further enhancements to our internal controls over financial reporting were made as a result of the implementation of ASC 842 effective as of January 1, 2019. This included updating our accounting procedures relating to accounting for leases, adding the consideration of the criteria for determining the existence of leases within a contract during contract reviews, and updating the required disclosures relating to leases.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Regulation S-K Item 308(b) that permits the Company to provide only management’s report in this annual report.

     

  

Item 9B. Other Information.

 

None.

     

 

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Below is certain information regarding our directors and executive officers. All of the Company’s directors took office on January 29, 2008, except Mr. Haveson, who became a director of the Company on September 6, 2007. Mr. Strano became president of the Company in December 2009.

 

Name   Age   Position Held with the Company
Brian Haveson   55   Chairman, CEO,  Director
Christopher Strano   46   President of Lightning Gaming, Inc.
Donald Caldwell   72   Director
Frederick Tecce   83   Director

 

Brian Haveson

 

Mr. Haveson has served as CEO of the Company since August 2007, CEO of Lightning Poker since October 1, 2006, President of the Company from August 2007 to December 2009, President of Lightning Poker from March 2008 to December 2009 and a director of Lightning Poker since June 2005. Since September 2018, Mr. Haveson has been serving as a member of the board of directors of CCA Industries, Inc. From 1994 through 2002, Mr. Haveson served as CFO and CEO of Nutri/System, Inc. Prior to that he was a manager for 4 years with Arthur Andersen in its Turnaround Group. Mr. Haveson received a Bachelor of Science degree in Aerospace Engineering from the University of Maryland and a Masters in Management from Purdue University. Mr. Haveson’s successful tenure as the CEO of Nutri/System and his consulting role at Arthur Andersen provide our Company with a seasoned and experienced CEO.

 

Christopher Strano

 

Mr. Strano was appointed President of the Company in December 2009, and previously served as Chief Marketing Officer from June 2009 to December 2009. Prior to joining Lightning Poker, Mr. Strano was Vice President of Sales and Marketing for AC Coin & Slot, from June 2004 to June 2009. Mr. Strano served as Director of Marketing for Franklin Electronic Publishers, Inc. from October 2000 to June 2004. Mr. Strano holds a Master of Business Administration degree from Drexel University's LeBow School of Business and a Bachelor of Science degree from Trenton State College.

 

51
 

 

Donald Caldwell

 

Mr. Caldwell has been a director of Lightning Gaming, Inc. (formerly Lightning Poker) since June 2005. He is the founder, Chairman and CEO of Cross Atlantic Capital Partners Inc. ("Cross Atlantic") and has oversight responsibility for its multiple funds.

 

Mr. Caldwell serves on the board of several publicly and privately held companies and civic organizations, including: Quaker Chemical Corporation (NYSE); Simplicity Esports and Gaming Company (OTC), f/k/a I-AM Capital Acquisition Company; InsPro Technologies Corporation (OTC); RootStock Software; Sagence Consulting; Voxware, Inc.; Haverford Trust Company; StoneRidge Investment Partners, LLC/Beltraith Capital, LLC; the South Australia Venture Capital Fund; the Pennsylvania Academy of the Fine Arts (Chairman Emeritus) and The Andalusia Foundation (Trustee). In addition to his role of director, Mr. Caldwell serves as Chairman of both Simplicity Esports and Gaming Company and InsPro Technologies Corporation, and is the Lead Director at Quaker Chemical Corporation.

 

Until March 1, 1999, he was President and Chief Operating Officer of Safeguard Scientifics, Inc., where he also previously served as Executive Vice President. Prior to joining Safeguard in 1993, Mr. Caldwell held a number of executive and financial positions, including Chief Administrative Officer of Cambridge Technology Partners, Inc. (Massachusetts), a provider of information technology consulting and software development; Executive Vice President and then President of Atlantic Financial; and as a partner in the national office of Arthur Young & Co., a predecessor to Ernst & Young, LLP. He holds a Bachelor of Science degree from Babson College and a Master of Business Administration from the Graduate School of Business at Harvard University.

 

Mr. Caldwell’s extensive experience in the financial markets, venture capital arena and service on corporate boards provide us with significant, well-respected financial and management leadership in addition to his strong corporate governance background.

 

Frederick Tecce

 

Mr. Tecce has been a director since June 2005. Mr. Tecce is a managing director and Of Counsel to Cross Atlantic. Mr. Tecce works closely with Mr. Caldwell on fundraising, as well as overseeing Cross Atlantic's legal issues, including contracts and intellectual property rights. Mr. Tecce is also Of Counsel to the law firm Buchanan, Ingersoll & Rooney PC.

 

Mr. Tecce has served on the board of the Pennsylvania Public School Employees' Retirement System Board, where he was appointed by Governor Tom Ridge in 1995, serving as chairman of the finance committee for five years. Mr. Tecce also serves on the board of another publicly-reporting company, InsPro Technologies Corp. In addition, he serves on the boards of Profectus BioSciences, Inc.and Nterra, Inc.

 

Most of Mr. Tecce's professional career has been spent as a principal in a company that pioneered and licensed new technology in the textile industry. This involved managing a long-term, complex, multi-party lawsuit directed to enforcing patent rights. His experience in managing complex litigation was also the basis for his engagement with two other significant businesses whose existence was threatened by lawsuit disputes. In addition, Mr. Tecce has launched several new businesses from the seed stage and has been an investor and active participant in several emerging growth companies.

 

Mr. Tecce holds a B.A. from the University of Pennsylvania and J.D. from the Dickinson School of Law of Pennsylvania State University. Mr. Tecce’s broad legal and business experience brings insight and a seasoned view to our board.

 

52
 

 

Director Independence

 

The NASDAQ listing standards define an "independent director" generally as a person, other than an executive officer or employee of the Company or an individual who has a relationship that, in the opinion of the Company's Board of Directors, would interfere with the director's exercise of independent judgment. Under NASDAQ Rule 4350(c), a Controlled Company is exempt from certain independent director requirements set forth in this rule. The Company is relying on the Controlled Company exemption under NASDAQ Rule 4350(c) with respect to Mr. Caldwell and Mr. Tecce and as such, the independent director requirements do not apply.

 

Mr. Caldwell and Mr. Tecce serve as the members of the audit committee of the Board of Directors.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, during the past ten years, none of the following occurred with respect to our directors or executive officers: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer at or within two years before the time of the filing; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, commodities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated; (5) being the subject of, or party to, a judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of law or regulation pertaining to securities or commodities, financial institution or insurance company regulation, or mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or party to any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization ( as defined in the Exchange Act), registered entity (as defined in the Commodities Exchange Act) or equivalent exchange, association, entity or organization.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of our common stock (“10% Shareholders”) to file with the SEC certain reports regarding their stock ownership and stock transactions (“Section 16(a) Reports”). Such persons are required to furnish us with copies of all Section 16(a) Reports they file. Based solely on our review of such reports (and amendments thereto) that were furnished to us and written representations made to us by reporting persons in connection with certain of these reporting requirements, we believe that all reporting persons met their Section 16(a) reporting obligations on a timely basis during our last fiscal year.

 

Code of Ethics

 

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We undertake to provide to any person without charge, upon request, a copy of our code of ethics. Such request should be directed to us in writing as follows: Mr. Brian Haveson, Chief Executive Officer, Lightning Gaming, Inc., 23 Creek Circle, Suite 400, Boothwyn, PA 19061.

 

Audit Committee

 

We have a separately-designated standing audit committee. Mr. Caldwell and Mr. Tecce are the audit committee members. The Board of Directors has determined that Mr. Caldwell is an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of SEC Regulation S-K.

     

 

53
 

 

Item 11. Executive Compensation.

 

The following Summary Compensation Table reports compensation we paid in 2018 and 2017 to Brian Haveson, our and Lightning Poker’s principal executive officer, and Christopher Strano, President of Lightning Gaming (collectively, our “named executive officers”).

 

SUMMARY COMPENSATION TABLE

 

Name & Principal Position  Year 

Salary

($)

 

Bonus

($) (1)

 

Stock Awards

($)

 

Option Awards

($)

 

Non-Equity Incentive Plan Compensation

($)

 

Nonqualified Deferred Compensation Earnings

($)

 

All Other Compensation

($) (2)

 

Total

($)

Brian Haveson,
Chairman and CEO
   

2018

2017

    

$252,141

$250,000

   $
$

  $
$

  $
$

   $
$

  $
$

  $
$
10,085

   

$262,226

$250,000

 
                                              
Christopher Strano, President of Lightning Gaming   

2018

2017

    

$232,940

$220,800

   $
$
5,000

 

$
$


  $
$

 

$
$


  $
$

  $
$
9,024

   

$246,964

$220,800

 
                                              
                                              

NOTES:

   
(1) Mr. Strano was awarded and paid a $5,000 performance bonus in 2018. There were no other bonuses awarded or accrued in 2018 and 2017.
(2) Includes employer contributions to 401K plan that is available to all employees. Does not include premiums for health insurance that is available on a non-discriminatory basis to all full-time employees.

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table contains information concerning all unexercised common stock options granted to our named executive officers, which were outstanding on December 31, 2017.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

    Option Awards
Name   Number of Securities Underlying Unexercised Options (#) Exercisable     Number of Securities Underlying Unexercised Options (#) Unexercisable    

Equity Incentive

Plan Awards:

Number of Securities Underlying Unexercised Unearned Options (#)

   

Option

Exercise Price ($)

 

Option Expiration Date

(mo/day/year)

Brian Haveson (1)     400,000       1,600,000           $ 0.13   3/8/2027
Christopher Strano (2)     250,000                 $ 0.28   6/29/2019
    200,000         800,000           $ 0.13   3/8/2027

 

NOTES:

(1) At December 31, 2018, Mr. Haveson held options to purchase an aggregate of 2,000,000 shares under the 2016 Plan which vest for 400,000 shares each March until 2022.
(2) At December 31, 2018, Mr. Strano held options to purchase 250,000 shares under the 2007 Plan which were fully vested as of June 2014. Mr. Strano also held options to purchase an aggregate of 1,000,000 shares under the 2016 Plan which vest for 200,000 shares each March until 2022.

 

All options granted prior to the Merger were granted under the 2006 Plan and were exchanged for options to purchase the Company’s common stock under the 2007 Plan after the Merger, on substantially the same terms and conditions. The exercise price was the price determined by the Board of Directors of the granting entity to be not less than 100% (110% for an owner of more than 10% of the outstanding stock) of the fair market value of the underlying shares at the time of the grant of the option. Options are not exercisable after ten years (five years for an owner of more than 10% of the outstanding stock) from the date of grant.

 

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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 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. 

     

 

Director Compensation

 

Our directors, excluding directors who are named executive officers, did not receive compensation during 2018.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table indicates how many shares of our (voting) Common Stock and Nonvoting Common Stock were beneficially owned as of March 28, 2019 by (1) each person known by us to be the beneficial owner of more than 5% of our common stock (“5% Shareholder”), (2) our directors, (3) our executive officers, and (4) all of our directors and executive officers as a group. In general, “beneficial ownership” includes those shares a person has sole or shared power to vote or transfer (whether or not owned directly) and rights to acquire such power, such as through the exercise of options, warrants, or convertible debt within 60 days. Except as indicated otherwise below, to our knowledge the persons named in the table below have sole voting power (for common stock) and investment power with respect to all shares shown as beneficially owned by them. To calculate the percentage of outstanding common stock owned by each named person or the group reported in the table below, we added shares of common stock that the named person or group (as the case may be) can acquire within 60 days to both (a) the number of shares of common stock actually outstanding (4,649,383) and (b) the number of other shares of common stock (if any) actually held by that named person or the group (as the case may be).

 

See Part II, Item 5 of this report for further information on securities authorized for issuance under our equity compensation plan.

 

The address of each of the directors and executive officers listed below is c/o Lightning Gaming, Inc., 23 Creek Circle, Suite 400, Boothwyn, Pennsylvania 19061.

 

 

 
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   Common Stock  Nonvoting Common Stock
Directors and Executive Officers:  Number of Shares Beneficially Owned 

Percent of

Class

  Number of Shares Beneficially Owned  Percent of Class
Donald Caldwell (1)     1,021,000(2)    17.9%   33,300,000    100.0%
Fredrick C. Tecce (1)    

611,000(2)

 (3)  10.7%   33,300,000    100.0%
Brian Haveson       1,138,409(4)    19.9%   —      —   
Christopher Strano          450,000(5)    7.9%   —      —   
All directors and executive officers as a group (4 persons)      3,039,409(7)    53.2%   33,300,000    100.0%
                     
5% Shareholder:                    
CI II and related parties (1) (2)      181,000(6)    3.2%   33,300,000    100.0%

 

(1)  

CI II is managed by Cross Atlantic of which Mr. Caldwell is Chairman and CEO and Mr. Tecce is a managing director and counsel. Consequently, Cross Atlantic, Mr. Caldwell, and Mr. Tecce may be deemed the beneficial owners of the shares that CI II beneficially owns.

 

(2)   Includes 181,000 shares owned by CI II.
(3)   Includes 50,000 shares beneficially owned by Mr. Tecce’s wife.
(4)   Includes options to purchase 400,000 shares under the 2016 Stock Option Plan.
(5)   Consists of 250,000 and 200,000 options to purchase shares under the 2007 Equity Incentive and the 2016 Stock Option Plans, respectively.
(6)   The address of CI II and its manager, Cross Atlantic, is 150 North Radnor-Chester Road, Suite A225, Radnor, PA 19087.
(7)   Includes an aggregate of 850,000 shares that can be acquired through the exercise of options.
     

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

We are reporting the transactions below based on the following relationships: (1) CI II is managed by Cross Atlantic and is a 5% Shareholder; and (2) Mr. Caldwell is the founder and CEO and Mr. Tecce is a managing director and counsel to Cross Atlantic.

 

Our Nonvoting Common Stock participates with, and is identical to, our common stock except for the lack of voting rights.

 

In September 2017, the Company borrowed $100,000 from The Co-Investment Fund II, L.P. (“CI II”) and $25,000 from its CEO/CFO and Director, Brian Haveson (“BH”). The notes were due on March 1, 2018 and included interest at the rate of 8% per annum, payable on a monthly basis. The proceeds of the loans were used for working capital purposes.

 

On March 1, 2018, CI II and BH agreed to extend the maturity date on each of the promissory notes held to September 1, 2018. All other provisions of the notes remained unchanged and in full force.

 

For 2017, interest on the notes held by CI II and BH amounted to $2,279 and $570, respectively. During 2017, the Company made monthly interest payments on the notes totaling $2,849. During 2018, interest expense on the notes from CI II and BH amounted to $3,879 and $964, respectively and the Company made monthly interest payments totaling $4,844. On June 26, 2018, the Company repaid the notes in full along with all interest due.

 

As of December 31, 2018, CI II owns 3.89% of the (voting) Common Stock and 100% of the Nonvoting Common Stock of the Company. CI II is managed by Cross Atlantic Capital Partners, wholly owned by Donald Caldwell, who is a Director and Shareholder of the Company. Frederick Tecce is also a Director and Shareholder of the Company and is a Managing Director of Cross Atlantic Capital Partners.

     

 

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Item 14. Principal Accountant Fees and Services.

 

Our audit committee selected and our Board of Directors approved the firm of Baker Tilly Virchow Krause, LLP (“Baker Tilly”) as our principal accountant and registered public accounting firm to audit our annual consolidated financial statements and perform quarterly financial statement review services for the fiscal year ended December 31, 2018.

 

Our policy is that before we engage our principal accountants annually to render audit or non-audit services, the engagement is reviewed and approved by our audit committee. All of our principal accountant’s services for our last two fiscal years, which consisted solely of audit services, were within the scope of the engagement that our audit committee approved before we entered into the engagement. The aggregate fees billed to us by Baker Tilly in 2018 and in 2017 were $102,703 and $93,161, respectively. All of Baker Tilly’s billings were for audit services, which consisted of the audits of our annual consolidated financial statements and review of our quarterly consolidated financial statements included in our Form 10-Q filings during 2018. 

     

 

Item 15. Exhibits and Financial Statement Schedules.

 

(a)(1) Financial Statements

Included in Part II of this report:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2018 and 2017

Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017

Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017

Notes to Consolidated Financial Statements

 

(a)(2) and (c) Financial Statement Schedules

II Valuation and Qualifying Accounts

All other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.  

     

 

Item 16. Form 10-K Summary

 

None

     

 

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(a)(3) and (b) Exhibits

 

EXHIBIT NUMBER   EXHIBIT DESCRIPTION
2.1*   Agreement and Plan of Merger by and among Lightning Gaming, Inc. (the “Company”), LPI Acquisition Corp. and Lightning Poker, Inc.(“Lightning Poker”) (see Exhibit 10.1 to Form 8-K filed October 4, 2007)
3.1*   Articles of Incorporation of the Company (see Exhibit 3.1 to Form 10-K filed March 31, 2010)
3.2*   Bylaws of the Company (see Exhibit 3.2 to Form 10-SB filed April 23, 2007)

3.3*

 

  Certificate of Amendment to Articles of Incorporation (See Exhibit 3.1 to Form 8-K filed on July 27, 2015)
10.1*   Distribution Agreement dated January 22, 2007, between Lightning Poker and Shuffle Master, Inc. (see Exhibit 10.1 to Form 8-K filed January 30, 2008) [Portions have been omitted pursuant to a request for confidential treatment.]

10.2*   Lease Agreement with Windsor at Namaan’s Creek LP for office and warehouse at 23 Creek Circle, Boothwyn, Pa 19061 (see Exhibit 10.2 to Form 10-K filed March 31, 2010)
10.3*(A)   2007 Equity Incentive Plan of the Company (see Exhibit A to Schedule 14C filed October 29, 2007)
10.4*   Lightning Poker Warrant for Stock issued to Lance Funston dated April 19, 2007 (see Exhibit 10.8 to Form 8-K filed January 30, 2008)
10.5*   Lightning Poker Warrant for Stock issued to Robert Paul dated April 19, 2007 (see Exhibit 10.9 to Form 8-K filed January 30, 2008)
10.6*   Lightning Poker Warrant for Stock (30,000 shares) issued to Frederick A. Tecce dated July 23, 2007 (see Exhibit 10.15 to Form 8-K filed January 30, 2008)

10.7*(A)

 

  The Company's 2007 Equity Incentive Plan form of Incentive Stock Option Agreement (see Exhibit 10.1 to Form 10-Q filed August 14, 2008)
10.8*(A)   The Company's 2007 Equity Incentive Plan form of Nonqualified Stock Option Agreement (see Exhibit 10.2 to Form 10-Q filed August 14, 2008)

10.9*(A)

 

  Lightning Poker employment agreement with Christopher Strano dated June 9 - June 15, 2009 (see Exhibit 10.31 to Form 10-K filed March 31, 2010)

10.10*

 

  Modification of Distribution Agreement, dated January 22, 2007, between Lightning Poker and Shuffle Master, Inc., referenced in Exhibit 10.1 to this Form 10-K (see Exhibit 10.54 to Form 10-K filed April 7, 2011) [Portions have been omitted pursuant to a request for confidential treatment.]
10.11*   Debt Conversion Agreement between the Company and CI II dated August 6, 2015 (see Exhibit 10.1 to Form 8-K filed August 6, 2015)
10.12*   Amended and Restated Voting Agreement between the Company and the Stock Holders dated August 6, 2015 (see Exhibit 10.2 to Form 8-K filed August 6, 2015)
10.13*   Cancellation of Amended and Restated Voting Agreement between the Company and the Stock Holders dated September 28, 2015 (see Exhibit 10.1 for Form 8-K filed September 28, 2015)
10.14*   Changes in Registrant’s Certifying Accountant, Dismissal of Previous Independent Registered Public Accounting Firm dated November 16, 2015 and Engagement of New Independent Registered Public Accounting Firm dated November 17, 2015 (see Exhibit 16.1 for form 8-K/A as amended filed November 23, 2015)
10.15*(A)   2016 Stock Option Plan of the Company (see Exhibit A to Schedule 14C filed August 9, 2016)
10.16*   Master Loan Agreement between the Company and PDS Gaming LLC dated July 17, 2018 (see Exhibit 99.1 to Form 8-K filed July 18, 2018)
10.17*   Security Agreement between the Company and PDS Gaming LLC dated July 17, 2018 (see Exhibit 99.2 to Form 8-K filed July 18, 2018)
10.18*   Promissory Note issued by the Company to PDS Gaming LLC dated July 17, 2018 (see Exhibit 99.3 to Form 8-K filed July 18, 2018)
21.1   List of subsidiaries
23.1   Consent of Baker Tilly Virchow Krause, LLP
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

 

101   The following materials from this Annual Report on Form 10-K for the year ended December 31, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders' Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements
(A) Management contract or compensatory plan or arrangement.

* These documents are incorporated herein by reference as exhibits hereto. Following the description of each such exhibit is a reference to the document as it appeared in a specified report previously filed with the SEC, to which there have been no amendments or changes unless otherwise indicated. The Commission File No. for all such filings is 000-52575.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

Lightning Gaming, Inc.

By: /s/ Brian Haveson

Brian Haveson, President and Chief Executive Officer

 

Dated: March 28, 2019

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Brian Haveson   Chief Executive Officer, Director   March 28, 2019
Brian Haveson   (Principal Executive Officer)    
         
/s/ Brian Haveson   Chief Financial Officer   March 28, 2019
Brian Haveson   (Principal Financial and Accounting Officer)    
         
/s/ Donald Caldwell   Director   March 28, 2019
Donald Caldwell        
         
/s/ Frederick C. Tecce   Director   March 28, 2019
Fredrick C. Tecce        
     

 

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Schedule II- Valuation and Qualifying Accounts

 

 

   Years ended December 31, 2018 and 2017
   Balance at Beginning of period  Additions/ Charges to Costs and Expenses  Deductions / Writeoffs  Balance at End of Period
Year ended December 31, 2017            
             
Allowance for deferred taxes  $5,891,000   $56,000    (1,703,000)  $4,244,000 
                     
Allowance for doubtful accounts  $12,331   $42,000    (42,692)  $11,639 
                     
Year ended December 31, 2018                    
                     
Allowance for deferred taxes  $4,244,000   $—      (305,000)  $3,939,000 
                     
Allowance for doubtful accounts  $11,639   $—      (5,046)  $6,593 
                     

     

 

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