Company Quick10K Filing
Lightning Gaming
Price-0.00 EPS0
Shares5 P/E-0
MCap-0 P/FCF-0
Net Debt-1 EBIT0
TEV-1 TEV/EBIT-2
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-14
10-Q 2020-03-31 Filed 2020-05-14
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-12
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-03-28
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-03-28
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-11
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-28
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-12
10-K 2015-12-31 Filed 2016-03-25
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-12
10-Q 2015-03-31 Filed 2015-05-12
10-K 2014-12-31 Filed 2015-03-27
10-Q 2014-09-30 Filed 2014-11-12
10-Q 2014-06-30 Filed 2014-08-12
10-Q 2014-03-31 Filed 2014-05-12
10-K 2013-12-31 Filed 2014-03-28
10-Q 2013-09-30 Filed 2013-11-04
10-Q 2013-06-30 Filed 2013-07-31
10-Q 2013-03-31 Filed 2013-05-13
10-K 2012-12-31 Filed 2013-03-29
10-Q 2012-09-30 Filed 2012-11-15
10-Q 2012-06-30 Filed 2012-08-15
10-Q 2012-03-31 Filed 2012-05-31
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-12
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-04-07
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-13
10-Q 2010-03-31 Filed 2010-05-17
10-K 2009-12-31 Filed 2010-03-31
8-K 2020-03-31
8-K 2019-11-27
8-K 2018-07-17

LGTG 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 1. Financial Statements.	
Note 1. Nature of Business and Summary of Significant Accounting Policies
Note 2. Inventory
Note 3. Property and Equipment
Note 4. License Fees
Note 5. Notes Payable
Note 6. Deferred Income
Note 7. Leases
Note 8. Commitments
Note 9. Stockholders' Equity
Note 10. Revenue
Note 11. Income Taxes	
Note 12. Concentration of Risk - Major Customers
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 s22-21573_311.htm
EX-31.2 s22-21573_312.htm
EX-32.1 s22-21573_321.htm

Lightning Gaming Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
10.03.0-4.0-11.0-18.0-25.02012201420172020
Assets, Equity
2.92.01.10.1-0.8-1.72012201420172020
Rev, G Profit, Net Income
1.10.70.2-0.2-0.7-1.12012201420172020
Ops, Inv, Fin

10-Q 1 s22-21573_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
  For the quarterly period ended June 30, 2020  
   
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
  For the transition period __________  to __________  

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes ¨ No  x

 

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

 

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

 

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,649,383 shares of (voting) Common Stock as of August 14, 2020; 33,300,000 shares of Nonvoting Common Stock as of August 14, 2020; and -0- shares of Series A Nonvoting Capital Stock as of August 14, 2020

 

 1 

 

 

 

  TABLE OF CONTENTS
     Page
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 33
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings 34
Item 1A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Mine Safety Disclosures 34
Item 5. Other Information 34
Item 6. Exhibits 35

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

 1 Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 (audited);  
 2 Unaudited Consolidated Statements of Operations for the three months ended June 30, 2020 and 2019;  
 3 Unaudited Consolidated Statements of Operations for the six months ended June 30, 2020 and 2019;  
 4 Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019;  
 5 Notes to Unaudited Consolidated Financial Statements.  

 

 2 

 

 

Item 1. Financial Statements.

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

  

June 30,

 2020

 

December 31,

2019

   (unaudited)  (audited)
Assets          
Current Assets          
       Cash  $1,500,325   $1,598,749 
Accounts receivable, net   592,686    747,704 
Inventory   1,566,464    1,468,210 
Prepaid expenses   260,002    234,994 
       Deposits with vendors   —      1,529 
       Deferred debt commitment fee   46,423    204,260 
Total Current Assets   3,965,900    4,255,446 
           
Property and Equipment, net   4,008,179    4,277,223 
           
Right-of-use asset - building   58,530    100,070 
Other assets   8,193    8,193 
License fees, net of accumulated amortization   24,589    36,005 
           
Total Assets  $8,065,391   $8,676,937 
           
See Notes to Unaudited Consolidated Financial Statements          

 

 3 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

 

 

  

June 30,

 2020

 

December 31,

2019

   (unaudited)  (audited)
Liabilities and Stockholders’ Equity          
Current Liabilities          
       Accounts payable  $172,304   $557,199 
       Accrued expenses   77,526    382,806 
       Deferred income   9,824    —   
       Current portion of lease liability   69,931    101,083 
       Current portion of notes payable, net   602,240    439,594 
Total Current Liabilities   931,825    1,480,682 
           
Long-Term Debt and Other Liabilities          
       Long-term notes payable, net   4,890,814    4,397,410 
       Warrant liability   294,667    779,901 
       Long-term lease liability   —      17,944 
Total Long-Term Debt and Other Liabilities   5,185,481    5,195,255 
           
Total Liabilities   6,117,306    6,675,937 
           
Commitments (Note 8)          
           
Stockholders' Equity          
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares designated, -0- shares issued and outstanding   —      —   
           
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,916,285 shares issued and 4,649,383 outstanding   4,917    4,917 
           
Nonvoting common stock: $0.001 par value; authorized 50,000,000 shares; 33,300,000 issued and outstanding   33,300    33,300 
           
Additional paid in capital   30,564,008    30,532,427 
       Accumulated deficit   (28,633,329)   (28,548,833)
Treasury stock, 266,902 shares, at cost   (20,811)   (20,811)
Total Stockholders’ Equity   1,948,085    2,001,000 
           
Total Liabilities and Stockholders’ Equity  $8,065,391   $8,676,937 
           
See Notes to Unaudited Consolidated Financial Statements          

 

 

 4 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended June 30, 2020 and 2019

(Unaudited)

 

 

  

June 30,

 2020

 

June 30,

2019

Revenues          
       Lease and license fees  $193,572   $1,054,989 
       Sales of gaming products and parts   378,110    1,463,480 
Total revenues   571,682    2,518,469 
Costs of Revenue          
       Cost of products sold   300,103    1,230,415 
Gross Profit  $271,579   $1,288,054 
           
Operating expenses          
       Operating expenses   16,853    173,830 
       Research and development   54,141    101,836 
       Selling, general and administrative expenses   260,772    501,851 
       Depreciation and amortization   258,606    142,600 
Total operating expenses   590,372    920,117 
           
Operating (loss) income  $(318,793)  $367,937 
           
Non-operating income (expense)          
       Interest expense   (231,642)   (138,776)
       Interest income   2,157    —   
       Gain on change in fair value of warrant liability   59,759    —   
Total non-operating income (expense)   (169,726)   (138,776)
Net (loss) income before income taxes   (488,519)   229,161 
       Income tax expense   —      4,700 
Net (loss) income  $(488,519)  $224,461 
Net (loss) income per common share - basic  $(0.01)  $0.01 
Net (loss) income per common share - diluted  $(0.01)  $0.01 
Weighted average Common shares outstanding – basic   4,649,383    4,649,383 
Weighted average Common shares outstanding - diluted   4,649,383    4,915,702 
Weighted average Nonvoting Common shares outstanding - basic   33,300,000    33,300,000 
Weighted average Nonvoting Common shares outstanding - diluted   33,300,000    37,340,000 
           
See Notes to Unaudited Consolidated Financial Statements          

 

 

 

 5 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Six Months Ended June 30, 2020 and 2019

(Unaudited)

 

 

  

June 30,

 2020

 

June 30,

2019

Revenues          
       Lease and license fees  $1,284,049   $1,920,488 
       Sales of gaming products and parts   514,972    2,190,618 
Total revenues   1,799,021    4,111,106 
Costs of Revenue          
       Cost of products sold   385,110    1,644,218 
Gross Profit  $1,413,911   $2,466,888 
           
Operating expenses          
       Operating expenses   51,618    292,138 
       Research and development   166,988    209,947 
       Selling, general and administrative expenses   788,866    1,043,660 
       Depreciation and amortization   513,197    247,846 
Total operating expenses   1,520,669    1,793,591 
           
Operating (loss) income  $(106,758)  $673,297 
           
Non-operating income (expense)          
       Interest expense   (465,129)   (233,583)
       Interest income   2,157    —   
       Gain on change in fair value of warrant liability   485,234    —   
Total non-operating income (expense)   22,262    (233,583)
Net (loss) income before income taxes   (84,496)   439,714 
       Income tax expense   —      11,000 
Net (loss) income  $(84,496)  $428,714 
Net (loss) income per common share - basic  $(0.00)  $0.01 
Net (loss) income per common share - diluted  $(0.00)  $0.01 
Weighted average Common shares outstanding – basic   4,649,383    4,649,383 
Weighted average Common shares outstanding - diluted   4,649,383    4,920,018 
Weighted average Nonvoting Common shares outstanding - basic   33,300,000    33,300,000 
Weighted average Nonvoting Common shares outstanding - diluted   33,300,000    37,304,641 
           
See Notes to Unaudited Consolidated Financial Statements          

 

 

 

 

 6 

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2020 and 2019

(Unaudited)

 

 

  

June 30,

 2020

 

June 30,

 2019

Cash Flows from Operating Activities          
Net (loss) income  $(84,496)  $428,714 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:          
     Depreciation and amortization   513,197    247,846 
     Stock based compensation   31,581    32,353 
     Amortization of debt discount and deferred debt commitment fee   89,751    —   
     Gain on change in fair value of warrant liability   (485,234)   —   
Changes in Assets and Liabilities          
     Decrease (increase) in accounts receivable   155,019    (68,446)
     Increase in inventory   (98,254)   (166,683)
     Increase in prepaid expenses   (25,008)   (35,698)
     Decrease in deposits with vendors   1,529    1,063 
     (Increase) decrease in right-of-use asset and lease liability   (7,555)   26,082 
     Decrease in accounts payable   (384,896)   (46,176)
     Increase (decrease) in accrued expenses   (305,281)   125,954 
     Increase in deferred revenue   —      48,000 
     Increase in deferred income   9,824    —   
     Decrease in income tax payable   —      (22,738)
     Increase in accrued interest   —      16,460 
     Decrease in other long-term liabilities   —      (32,344)
Net Cash (Used in) Provided by Operating Activities   (589,823)   554,387 
           
Cash Flows from Investing Activities          
       Purchase of equipment   (212,487)   (1,925,577)
       Purchase of licenses   (20,250)   —   
           
Net Cash Used in Investing Activities   (232,737)   (1,925,577)
           
Cash Flows from Financing Activities          
       Proceeds from notes payable, net of loan fee   990,000    2,079,131 
       Repayment of notes payable   (265,864)   (416,028)
           
Net Cash Provided by Financing Activities   724,136    1,663,103 
           
Net (Decrease) Increase in Cash   (98,424)   291,913 
           
Cash - Beginning of period   1,598,749    565,461 
           
Cash - End of period  $1,500,325   $857,374 
           
See Notes to Unaudited Consolidated Financial Statements          

 

 

 7 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2020 and 2019 (Continued)

(Unaudited)

 

 

 

  

June 31,

 2020

 

June 30,

 2019

Supplemental Disclosure of Non-Cash Financing Activities:          
       Transfers among inventory, equipment and licenses, net  $30,000   $125,005 
           
Supplemental Information:          
Cash paid for:          
     Interest  $375,377   $217,123 
     Income taxes  $5,422   $33,738 
     Operating building lease  $53,046   $51,752 
           
See Notes to Unaudited Consolidated Financial Statements          

 

 8 

 

 

 

 

 LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

June 30, 2020

 

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 was 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. Our gaming products feature advanced graphics and engaging games based on proprietary themes.

 

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

 

Basis of Presentation

 

The unaudited interim financial statements contained herein should be read in conjunction with the Company’s annual report on Form 10-K filed on March 30, 2020 (“Form 10-K”). The accompanying interim financial statements are presented in accordance with the requirements of Article 8.03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, accordingly, do not include all the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) with respect to annual financial statements. The interim consolidated condensed financial statements have been prepared in accordance with the Company’s accounting practices described in the Form 10-K but have not been audited. In management’s opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods presented. The consolidated balance sheet data as of December 31, 2019 was derived from the Company’s consolidated audited financial statements. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the entire year.

 

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. The Company recognized net losses for the three and six months ended June 30, 2020 and used approximately $590,000 in cash from operations for the six months ended June 30, 2020, however it has maintained and sustained a working capital surplus. Due to the outbreak of the novel coronavirus disease (COVID-19), the Company, as well as all other non-life-sustaining businesses within the state of Pennsylvania, was ordered by governor’s mandate to close physical operations on March 19, 2020. Due to COVID-19, all of our customers were mandated to close by March 31, 2020 and remained closed throughout the entire month of April 2020 which reduced our revenues to $-0- during that time period. Certain customers were able to start reopening their facilities in May 2020 and the Company was able to reopen its facility and operations on May 22, 2020, however operations are open with limitations and through strict adherence to guidelines established by the Centers for Disease Control and Prevention (“CDC”) and each facility’s respective state or tribal government. The ability to measure the degree to which COVID-19 will impact the Company’s performance in its aftermath will depend on the duration and

 

 9 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

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

 

Basis of Presentation (Continued)

 

spread of COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended.

 

On May 7, 2020, we received $246,200 in funding under the federal loan program known as the Paycheck Protection Program (“PPP”) through the Small Business Association (“SBA”) which has helped to lessen the impact of COVID-19 for the expenses covered under the program.

 

In addition, aggressive expense management has been employed to mitigate the adverse impact that COVID-19 has had on our operations and performance. We anticipate that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations, however the Company’s future performance will depend on the duration of COVID-19 and the Company’s ability to distribute its products and successfully market them to more casinos and gaming venues. Although we realized a net loss and used cash from operations for the six months ended June 30, 2020 due to COVID-19, based on our working capital surplus, financial condition, cash flow projections, anticipated revenues and financing agreements, we believe we have sufficient cash flows to support our operations for the next twelve months, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects for expansion. The Company’s continuance as a going concern is dependent upon these factors, among others. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Accounts Receivable 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, 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 maintained a reserve of $6,593 as of June 30, 2020 and December 31, 2019. 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, customer payment history, and current creditworthiness. The Company does not charge interest on its past due receivables. During each of the six months ended June 30, 2020 and 2019, respectively, the Company wrote off $-0- of accounts receivable considered to be uncollectible.

 

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.

 

Accounting Standards Codification (“ASC”) 820 – Fair Value Measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 further establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques into the following three levels, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs:

 

 

 10 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

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

 

Fair Value Measurements (Continued)

 

 

·Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity can access at the measurement date;

 

·Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities that are observable, either directly or indirectly;

 

·Level 3: Unobservable inputs for the asset or liability, including significant assumptions of the reporting entity and other market participants.

 

 

The fair value of and the methodology used by the Company for the warrant liability is discussed in Note 9.

 

Earnings per share: The Company computes earnings 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 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 and warrants.

 

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:

 

   June 30, 2020  June 30, 2019
Stock options   3,930,000    4,055,000 
Warrant   7,000,000    —   
    10,930,000    4,055,000 
           

 

Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued the update Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the estimation of credit losses from an “incurred loss” methodology to one that reflects “expected credit losses” (the Current Expected Credit Loss model, or “CECL”) which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Measurement under CECL is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability of reported amounts. The amendment became effective for the annual and interim periods ending after December 15, 2019 and did not have a material impact on our financial statements.

 

 11 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

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

 

Recent Accounting Pronouncements (Continued)

 

In December 2019, the FASB issued an update within the scope of Topic 740, Income Taxes. The update simplifies the accounting for income taxes by removing certain exceptions to the general principles within the Topic and improves consistent application of and simplifies generally accepted accounting principles (“GAAP”) for other areas by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is gathering the information and performing the analyses required before the standard’s effective date to determine the impact this guidance will have on our financial statements.

 

Note 2.  Inventory

 

Inventory consists of the following:

  

June 30,

2020

 

December 31,

2019

Finished products  $1,222,654   $1,046,629 
Raw materials and work in process   343,810    421,581 
Inventory  $1,566,464   $1,468,210 

 

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

 

Slot machine cabinets, which are manufactured by a third-party, include monitors, toppers, stands and certain electronic components, are shown as finished products. Raw materials primarily consist of the flash drives, motherboards, spare parts and interchangeable electronic components for the slot machines.

 

Note 3.  Property and Equipment

 

Property and equipment consist of the following:

  

June 30,

2020

 

December 31,

2019

Equipment, principally gaming equipment under lease  $6,520,790   $6,281,476 
Delivery truck   28,140    28,140 
Furniture and fixtures   90,206    87,033 
Leasehold improvements   91,794    91,794 
Property and equipment   6,730,930    6,488,443 
Less accumulated depreciation   (2,722,751)   (2,211,220)
Property and equipment, net  $4,008,179   $4,277,223 

 

Depreciation expense related to the property and equipment included in the consolidated Statements of Operations was $257,773 and $141,766 for the three months ended June 30, 2020 and 2019, respectively. Depreciation expense related to the property and equipment included in the consolidated Statements of Operations was $511,531 and $246,179 for the six months ended June 30, 2020 and 2019, respectively.

 

 

 12 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 4.  License Fees

 

License fees consist of the following:

  

June 30,

2020

 

December 31,

2019

Purchased licenses  $367,410   $377,160 
Less accumulated amortization   (342,821)   (341,155)
License fees, net  $24,589   $36,005 

 

Through May 31, 2020, licenses for gaming machine patents and technology had been added to the cost of slot machines built for sale or lease using a capitalization rate per machine. The capitalization rate was based on expected annual machine production and adjusted accordingly based on actual versus projected units produced. As of May 31, 2020, machine production for the remainder of the 2020 calendar year was projected to be nominal due to COVID-19. Therefore, the cost of licenses for gaming technology as of that date of $27,000 are being expensed as license fees on a straight-line basis at $6,750 per month over the remaining initial term of the license period ending September 30, 2020.

 

The weighted average useful life of purchased source code licenses is 3 years. Amortization expense included in the consolidated Statements of Operations relating to the source code licenses was $833 and $834 for the three months ended June 30, 2020 and 2019, respectively. Amortization expense included in the consolidated Statements of Operations relating to the purchased licenses was $1,666 for the six months ended June 30, 2020 and 2019, respectively.

 

Estimated future capitalizable costs, amortization and expense related to recorded license fees is as follows:

 

Year Ending
December 31,
  Amount
 2020   $22,366 
 2021    2,223 
     $24,589 

 

Note 5.  Notes Payable

 

On July 17, 2018, the Company entered into a Master Loan Agreement (the “Prior Loan”) with PDS Gaming LLC (“PDS” or the “Lender”) to make a series of advances under the Prior Loan in the principal amount of up to $2,500,000 for the purposes of financing the purchase or manufacturing of equipment. The Loan was evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and secured by a Security Agreement dated of even date with the Loan, between the Company and the Lender 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 was advanced, in parts, pursuant to the Prior Loan and in the amounts of each Note during the advance period which originally expired on July 17, 2019. Each subsequent advance being made at the Lender’s sole and absolute discretion.

 

Under the original terms, the Notes bore 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 were due and payable monthly. Each Note matured in 36 months and CIP obligations matured 48 months after the respective closing of each Note.

 

 13 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 5. Notes Payable (Continued)

 

On March 29, 2019, the Lender agreed to increase the total principal amount that may be borrowed under the Loan from $2,500,000 to $5,500,000. On April 15, 2019, the Lender agreed to additional amendments, extending the advance period to 24 months beyond the Prior Loan date expiring July 17, 2020, and defining the CIP in each Note. In addition, the original Notes on Advances 1 through 5 were amended (the “Amendment” or the “Amended Note[s]”), extending the maturity dates, reducing the base monthly payments of principal and interest, reducing the CIP to $3.00 per day for each on-line day, extending the CIP obligation maturity date to 60 months, and defining the remaining CIP days under each Amended Note. All other terms of the Notes and Prior Loan remained unchanged and in full force, including the interest rate which remained at 11% on each Note.

 

On November 27, 2019 (the “Closing Date”), the Company entered into a new Master Loan Agreement (the “Loan”) with PDS Gaming – Nevada, LLC (“PDS Gaming” or the “Lender”) to make a series of advances under the Loan in the principal amount of up to $7,000,000 in order to (i) re-finance the existing outstanding indebtedness of the Company under the Prior Loan and Amendment for Advances 1 through 8 which totaled $3,765,792, (ii) finance the Company’s purchase or manufacturing of equipment and (iii) to be used for general working capital. The Loan is and will be evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and is secured by a Security Agreement dated of even date with the Loan, between the Company and the Lender 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 runs until November 30, 2020.

 

The Notes will bear interest on the outstanding principal amount at a rate per annum equal to an annual rate of 13%. Payments consisting of principal and interest for each advance financed under the Note are due and payable monthly based on an 84-month amortization and mature in 60 months, at which time the entire principal balance plus all accrued and unpaid interest under the Notes are due and payable in full. Each Note is prepayable subject to a sliding scale prepayment fee, declining 1% from 4% in the first twelve months to 0% after the 48th month, based on then-outstanding principal amount of the Note.

 

The initial advance dated November 27, 2019 is evidenced by a Note in the principal amount of $5,000,000 (“Advance 9”). Monthly payments of $91,616 on Advance 9 commenced on January 1, 2020 and will mature on December 1, 2024. On January 29, 2020, the Company closed on Advance 10 under the Loan with PDS Gaming. The advance is evidenced by a Note in the principal amount of $1,000,000 and bears interest at an annual rate of 13%. Monthly payments of $18,309 commenced on March 1, 2020, and the Note matures on February 1, 2025.

 

As inducement to the Lender to make the Loan, the Company issued to the Lender a warrant (“Warrant”) entitling the Lender to purchase up to 7,000,000 shares of common stock of the Company which was equal to 15.6% of the outstanding common stock on the Closing Date. The Warrant is detachable with an exercise price of $0.05 per share and expires ten years from the Closing Date. The Warrant cannot be exercised until PDS Gaming is fully licensed in all of the Company’s gaming jurisdictions. The Company calculated the fair value of the Warrant to be $779,901 at the time of issuance using the Black-Scholes pricing model, and under ASC 480, recorded the Warrant as a liability. See Note 9 for further details regarding the Warrant.

 

The Company incurred a closing fee of 1% on the principal amount of the Note, excluding the portion of the principal amount of the first Note that is attributable to the refinancing of the Prior Loan as of the closing date, of $12,342. In addition, the Company paid $1,879 for out of pocket expenses and the total fees of $14,221 were recorded as expense on the Closing Date.

 

 14 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 5. Notes Payable (Continued)

 

On November 27, 2019, the Company recorded the percentage of the Loan remaining for advance in proportion to the total Loan, i.e. 2/7 ($2,000,000/$7,000,000) or 28.6% or $229,829, as a deferred debt commitment fee which is being amortized on a straight-line basis until the earlier of the end of the advance period or until the remaining advances under the Loan are made. In January 2020, a $10,000 loan fee was paid to the Lender and the fee as well as the proportionate amount of the unamortized deferred fee attributable to the $1,000,000 advance of $92,845 were reclassified as debt discount and are being amortized over the life of the advance using the interest method. When the remaining advances under the Loan are made, the proportionate amount of the unamortized deferred fee remaining will be reclassified as debt discount and amortized over the life of the advance using the interest method. The balance of the debt discount attributable to the advance taken in January 2020 was $93,393 as of June 30, 2020.

 

ASC Topic 470 – Debt, requires an analysis to determine if the debt instruments under a refinancing transaction are substantially different by testing the present value (“PV”) of the cash flows under the terms of the new debt instrument versus the PV of the remaining cash flows under the terms of the original instrument. In cases where the transactions are deemed to be significantly different, an extinguishment has occurred, the old debt is derecognized and the new debt is recorded at fair value and fees paid to the lender on the old debt are expensed. The difference between the net carrying value of the original debt and the fair value of the new debt is recorded as a gain or a loss and interest expense is recorded based on the effective rate of interest on the new debt. The Company prepared the analysis and determined that the change in PV of cash flows is greater than 10%, the threshold established in ASC 470, and considered the transaction an extinguishment. The total cost of the debt of $557,072 was calculated as the difference between the fair value of the Warrant and the deferred debt commitment fee and the portion of the cost of debt reacquired associated with the carrying value of the old debt of $419,563 (75.3% x $557,072) was recognized as a loss on extinguishment of debt on the Closing Date, November 27, 2019. Debt discount of $137,509 was calculated as the cost associated with the new debt in proportion to the total cost of the debt refinanced or reacquired and is presented as a direct reduction to the value of the debt and is being amortized over the life of the advance using the interest method. The balance of the debt discount attributable to the advance taken on November 27, 2019 was $119,267 and $134,574 as of June 30, 2020 and December 31, 2019, respectively.

 

The Loan is subject to covenant clauses whereby the Company is required to meet certain key financial ratios. The Company did not meet the maximum debt to EBITDA, defined as Earnings Before Interest Taxes, Depreciation and Amortization, ratio as required in the Loan for the quarter ended June 30, 2020, a direct effect from COVID-19 casino closures and slot machine social distancing requirements. Due to the material effect that COVID-19 has on the Company’s revenues and prior to June 30, 2020, the Lender has agreed to provide a grace period for compliance of financial ratio covenants until September 30, 2020.

 

As of June 30, 2020 and December 31, 2019, Notes payable, net of debt discount, consist of the following:

 

   Advance Date  Maturity Date  Note Amount  Monthly Payment  Interest Rate 

June 30,

2020

 

December 31,

2019

                      
PDS Gaming Advance 9  11/27/2019  12/1/2024  $5,000,000   $91,616    13%  $4,623,162   $4,837,004 
PDS Gaming Advance 10  1/29/2020  2/1/2025  $1,000,000   $18,309    13%   869,892    —   
                                
Total Notes Payable                        5,493,054    4,837,004 
Less: amounts classified as current                        (602,240)   (439,594)
Long-Term Notes Payable                       $4,890,814   $4,397,410 
                                

 

 15 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 5. Notes Payable (Continued)

 

The following table lists the future principal payments due on the Notes as of June 30, 2020:

 

Year Ending
December 31,
  Amount
 Remaining 2020   $261,553 
 2021    591,118 
 2022    683,484 
 2023    790,371 
 2024    2,768,025 
 2025    398,503 
     $5,493,054 

 

The following table provides a breakdown of the interest expense in the consolidated Statements of Operations for the three months ended June 30, 2020 and 2019:

 

  

June 30,

2020

 

June 30,

2019

       
Interest on Notes payable  $190,557   $84,843 
Contingent interest obligations   —      53,933 
Amortization of deferred debt commitment fee   27,854    —   
Amortization of debt discount   13,231    —   
   $231,642   $138,776 

 

The following table provides a breakdown of the interest expense in the consolidated Statements of Operations for the six months ended June 30, 2020 and 2019:

 

  

June 30,

2020

 

June 30,

2019

       
Interest on Notes payable  $375,377   $143,163 
Contingent interest obligations   —      90,420 
Amortization of deferred debt commitment fee   64,992    —   
Amortization of debt discount   24,760    —   
   $465,129   $233,583 

 

Note 6. Deferred Income

 

In March 2020, Congress established the Paycheck Protection Program (“PPP”) to provide relief to small businesses during the coronavirus pandemic (“COVID-19”) as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The legislation authorized Treasury to use the Small Business Association’s (“SBA’s”) 7(a) small business lending program to fund forgivable loans that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities during the “Covered Period” defined as the 8-week period starting on the date the PPP loan proceeds are received. Upon meeting certain criteria as specified in the PPP program, the loans are eligible for partial or total forgiveness.

 

On June 5, 2020, the PPP Flexibility Act of 2020 (the “Act”) was signed into law, giving borrowers flexibility with certain criteria under the PPP program including extension of the Covered Period to 24 weeks from 8 weeks, reduction to 60% of the payroll costs requirement (previously 75%), extension of the payment deferral period, extension of the full-time equivalent (“FTE”) restoration deadline to December 31, 2020, and safe harbor provisions to remove the FTE reduction in forgiveness under limited circumstances.

 16 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 6. Deferred Income (Continued)

 

In June 2020, the AICPA issued Technical Question and Answer (“TQA”) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. The TQA addresses accounting for nongovernmental entities that are not Not-For-Profits, i.e. business entities, that believe the PPP loan represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a deferred income liability. The TQA further states that if such an entity expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standard (“IAS”) 20 to account for the PPP loan.

 

IAS 20 provides a model for the accounting of different forms of government assistance, which includes forgivable loans. Under this model, government assistance is not recognized until there is reasonable assurance (similar to the probable threshold in U.S. GAAP) that any conditions attached to the assistance will be met and the assistance will be received.

 

Once there is reasonable assurance that the conditions will be met, the earnings impact of the grant is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Hence, a business entity would record the cash inflow from the PPP loan as a deferred income liability and subsequently reduce the liability, with the offset through earnings as either a credit in the income statement or a reduction of the related expenses, as it recognizes the related cost to which the loan relates, for example, payroll expense.

 

The Company applied for and received proceeds of $246,200 through the PPP program on May 7, 2020, prior to the enactment of the Act. Based on the flexibility provided under the Act, the Company has elected to extend its Covered Period to 24 weeks. The Company has determined both through internal calculations and those provided by the AICPA’s forgiveness model, that all criteria for forgiveness based on both the CARES Act and the Act have been met as of July 15, 2020 and that the PPP loan will be 100% forgiven. In analogizing to IAS 20, the Company considers the PPP loan a grant that is expected to be forgiven and as such, has recorded the proceeds as a deferred income liability and will recognize the PPP grant as a reduction of the related expenses to which the loan is intended to compensate.

 

For the period May 7, 2020 through June 30, 2020, the Company incurred the following costs related to and compensated through the PPP proceeds and which are expected to be forgiven in their entirety:

 

Salaries and wages  $156,224 
Group health insurance   32,758 
401K match   4,157 
Subtotal payroll expenses   193,139 
Rent   40,925 
Utilities   2,312 
Total eligible and forgivable expense under PPP program  $236,376 
      

 

On June 30, 2020, in accordance with methods acceptable under IAS 20, the Company reduced the PPP deferred income liability and offset the expenses listed above by their respective amounts, leaving a balance remaining of $9,824 as of that date.

 

 

 17 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 7. Leases

 

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

 

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

 

The following table summarizes the right-of-use asset and lease liability as of June 30, 2020:

 

Right-of-use Asset  $58,530 
      
Lease Liability     
     Current  $69,931 
      

 

Net of the PPP forgivable amount as listed in Note 6, lease expense for the three months ended June 30, 2020 and 2019 was $208 and $35,930, respectively, and lease expense for the six months ended June 30, 2020 and 2019 was $37,356 and $71,860, respectively.

 

The following table summarizes the Company’s scheduled future minimum lease payments as of June 30, 2020:

 

Year Ended December 31:   
2020  $53,930 
2021   18,124 
Minimum lease payments    72,054 
Less: imputed interest   (2,123)
Present value of minimum lease payments   69,931 
Less: current maturities of lease liability   69,931 
Long-term lease liability  $—   

 

Note 8. Commitments

 

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

 

 18 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 8. Commitments (Continued)

 

On March 10, 2020, the Company and a licensor amended the terms under a patent cross license agreement dated February 28, 2017, which required the Company to pay an upfront per unit license fee on games (slot machines) placed in service after the agreement date and for a period of five years, and settled on the amount due upon audit conducted by the licensor for the period March 1, 2017 through September 30, 2019. Upon the payment of the $158,250 audit settlement amount, the Company was released from all claims under the agreement. The amendment removed the upfront per unit license fee and replaced it with a quarterly un-recoupable fee of $45,000 payable within fifteen days after the end of each calendar quarter and removed all audit provisions. The amendment terminates after five years from October 1, 2019, or September 30, 2024. The $66,000 difference between the $203,250 combined amount paid by the Company for the audit settlement and the quarterly license fee, and the $269,250 balance in the estimated liability for the license fee, was reversed in March 2020 and is included as a reduction to the operating expenses in the consolidated Statements of Operations for the six months ended June 30, 2020.

 

Note 9. Stockholders’ Equity

 

Stock Option Plans: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "2007 Plan") having substantially the same terms. The options were granted at the discretion of the Board of Directors and the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each option was determined by the Board of Directors at the time the option was granted, but in no event less than 100% of the fair market value of the common stock at the time of grant. Options previously granted will not be exercisable after 10 years from the grant date and under the terms of the plan, no awards may be granted after October 16, 2017. Options generally vested at 20% per year starting from the grant date and are fully vested after five years. The options can be exercised in partial or full amounts upon a change in control and at such other times as specified in the award agreements.

 

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

 

 

 19 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 9.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

A summary of option transactions in 2020 under the 2007 Plan is as follows:

  

Shares

 

 

Weighted

Average

Exercise Price

Outstanding at December 31, 2019   5,000   $2.00 
Options granted   —      —   
Options exercised   —      —   
Options cancelled   —      —   
Options outstanding at June 30, 2020   5,000   $2.00 

 

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

 

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

 

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

 

A summary of option transactions in 2020 under the 2016 Plan is as follows:

  

Shares

 

 

Weighted

Average

Exercise Price

Outstanding at December 31, 2019   3,925,000   $0.13 
Options granted   —      —   
Options exercised   —      —   
Options cancelled   —      —   
Options outstanding at June 30, 2020   3,925,000   $0.13 
Options available for grant under the 2016 Plan at June 30, 2020   1,775,000      

 

Stock-based compensation expense is recognized in the consolidated Statements of Operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures. Additional compensation expense arising from the modification of the exercise price is being recognized over the vesting period. Compensation expense related to stock options for the three months ended June 30, 2020 and 2019 was $15,726 and $16,128, respectively. Compensation expense related to stock options for the six months ended June 30, 2020 and 2019 was $31,581 and $32,354, respectively.

 

 

 20 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 9.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

The following table summarizes information with respect to stock options outstanding at June 30, 2020:

 

    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             5,000 0.1 $2.00 -            5,000  0.1 $2.00 -
2016 Plan   3,925,000 6.7 $0.13 -   2,325,000  6.7 $0.13 -

 

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

 

    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          5,000 0.6 $2.00 -          5,000 0.6 $2.00 -
2016 Plan   3,925,000 7.2 $0.13 -   1,540,000 7.2 $0.13 -

 

As of June 30, 2020, all compensation costs related to share-based compensation arrangements granted under the 2007 Plan had been fully recognized. As of June 30, 2020, there was approximately $105,983 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2016 Plan. The cost is expected to be recognized over a weighted-average period of 1.7 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.

 

Warrants: On November 27, 2019 in connection with the Loan obtained by the Company, the Company issued to PDS Gaming a Warrant entitling the Lender to purchase up to 7,000,000 shares of (voting) common stock of the Company at an exercise price of $.05 per share, expiring 120 months* after the issue date. The Warrant cannot be exercised until PDS Gaming is licensed in all of the Company’s gaming jurisdictions and cannot be exercised in a cashless exercise within the first six months following issuance.

 

*The “Expiration Date” was initially defined under the Warrant as 36 months. The Warrant was revoked, amended and resissued on December 27, 2019 and defined the Expiration Date as 119 months from date of issuance of the amended Warrant, which was the original intent between the Company and the Lender.

 

The Warrant contains a put feature providing the right to the holder, i.e. the Lender, for a net cash settlement in the event of a fundamental transaction which is defined under the Warrant as a sale of all of the stock, voting stock, or all, or substantially all, of the assets of the Company. Under such a transaction, the holder can require the Company to purchase any unexercised shares under the Warrant at the pro-rata share of the sales price or calculated value less the exercise price of the Warrant share.

 

 21 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 9.  Stockholders’ Equity (Continued)

 

Warrants (Continued)

 

The fair value of the warrant is estimated using the Black-Scholes pricing model and is recognized as a liability in the accompanying consolidated condensed Balance Sheets. The following assumptions were used to determine the fair value of the Warrant at June 30, 2020 and December 31, 2019:

 

  

June 30,

2020

  December 31,
2019
Stock price  $0.06   $0.14 
Exercise price  $0.05   $0.05 
Weighted average volatility   65.2%   44.8%
Expected dividend yield   —      —   
Expected term (in years)   9.4    10.0 
Weighted average risk free interest rate   0.7%   1.8%

 

There currently is no public market for the Company’s stock price. Historically, the valuation of the Company was determined by utilizing a formula of six (6) times the Company’s Earnings Before Interest Taxes, Depreciation and Amortization (“EBITDA”) for the prior twelve (12) month period minus all outstanding debt of the Company plus all cash and cash equivalents owned by the Company which is defined in the Warrant agreement as the Calculated Value (“CV”) of the Company. Volatility is based on the average stock price of comparable public companies in the industry.

 

It was determined that the CV formula needed to be modified at the June 30, 2020 measurement date taking into consideration the effect that the pandemic COVID-19 has had on the Company and in order to determine a more realistic and reasonable fair value of the Warrant as of that date. The percentage decrease in the stock prices in the comparable public companies used as the basis for volatility was approximately 41% for the six months ending June 30, 2020. Based on the reductions in stock price of the comparable public companies and the projected significant impact to the Company’s revenues, the CV was discounted by 37% and the resulting price per share of $.06 was used in the Black Scholes model to determine fair value of the Warrant at June 30, 2020.

 

The following table reconciles the change in the fair value of the warrant liability classified as Level 3 in the fair value hierarchy:

 

   Warrant Liability
Balance at December 31, 2019  $779,901 
Net change in fair value   (425,475)
Balance at March 31, 2020   354,426 
    Net change in fair value   (59,759)
Balance at June 30, 2020  $294,667 

 

 

 22 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 9.  Stockholders’ Equity (Continued)

 

Warrants (Continued)

 

The following table is a summary of the Warrant activity for the six months ended June 30, 2020:

 

  Shares 

Weighted

Average

Exercise Price

Warrants at December 31, 2019   7,000,000   $0.05 
Warrants granted   —      —   
Warrants exercised   —      —   
Warrants cancelled   —      —   
Warrants at June 30, 2020   7,000,000   $0.05 
Warrants exercisable at June 30, 2020   7,000,000      
           

 

The following table summarizes information with respect to the Warrant outstanding at June 30, 2020:

 

Warrant Outstanding  
  Weighted      
  Average Weighted    
  Remaining Average Aggregate  
  Contractual Exercise Intrinsic  
Shares Life (Years) Price Value  
7,000,000 9.4 $0.05 -  

 

The following table summarizes information with respect to the Warrant outstanding at December 31, 2019:

Warrant Outstanding  
  Weighted      
  Average Weighted    
  Remaining Average Aggregate  
  Contractual Exercise Intrinsic  
Shares Life (Years) Price Value  
7,000,000 9.9 $0.05 -  

 

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

 

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

 

   June 30,
2020
  June 30,
2019
Common Stock   7,005,000    15,000 
Nonvoting Common Stock   3,925,000    4,040,000 
           

 

 

 23 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 9.  Stockholders’ Equity (Continued)

 

The following table reconciles the changes in stockholder’s equity for the six months ended June 30, 2020:

 

   Common Stock  Nonvoting Common Stock  Additional Paid In   Accumulated   Treasury Stock 
   Shares  Amount  Shares  Amount  Capital  Deficit  Shares  Amount  Total
Balances at December 31, 2019   4,916,285   $4,917    33,300,000   $33,300   $30,532,427   $(28,548,833)   266,902   $(20,811)  $2,001,000 
Net income   —      —      —      —      —      404,023    —      —      404,023 
Stock based compensation   —      —      —      —      15,855    —      —      —      15,855 
Balances at March 31, 2020   4,916,285    4,917    33,300,000    33,300   $30,548,282    (28,144,810)   266,902    (20,811)   2,420,878 
Net loss   —      —      —      —      —      (488,519)   —      —      (488,519)
Stock based compensation   —      —      —      —      15,726    —      —      —      15,726 
Balances at June 30, 2020   4,916,285   $4,917    33,300,000   $33,300   $30,564,008   $(28,633,329)   266,902   $(20,811)  $1,948,085 

 

The following table reconciles the changes in stockholder’s equity for the six months ended June 30, 2019:

 

   Common Stock  Nonvoting Common Stock  Additional Paid In   Accumulated   Treasury Stock 
   Shares  Amount  Shares  Amount  Capital  Deficit  Shares  Amount  Total
Balances at 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 
Net income   —      —      —      —      —      204,253    —      —      204,253 
Stock based compensation   —      —      —      —      16,226    —      —      —      16,226 
Balances at March 31, 2019   4,916,285    4,917    33,300,000    33,300    30,484,132   $(28,630,997)   266,902    (20,811)   1,870,541 
Net income   —      —      —      —      —      224,461    —      —      224,461 
Stock based compensation   —      —      —      —      16,128    —      —      —      16,128 
Balances at June 30, 2019   4,916,285   $4,917    33,300,000   $33,300   $30,500,260   $(28,406,536)   266,902   $(20,811)  $2,111,130 

 

 

Note 10.  Revenue

 

The Company applies the guidance under ASC 606 in recognizing revenue, which is generated from leasing and selling slot machines and from sales of parts and certain services relating to the slot machines. Revenue is recognized on sales of products, net of rebates, discounts and allowances, when an agreement exists, typically an approved sales proposal or contract, or upon receipt of customer’s purchase order, in which the sales price is fixed or determinable, and when the performance obligations under that agreement have been completed. This typically occurs when products are delivered and/or installed and upon receipt of regulatory approval, if required. If multiple units of the products are included in any one sale or lease agreement or ancillary services are provided such as delivery or installation, revenue is allocated to each unit or service based upon its respective fair value against the total contract value, or itemized price within the contract, and revenue recognition is deferred on those units or services until all of the performance obligation requirements under the applicable section(s) of that agreement have been completed.

 

Revenue generated under the leasing model is recognized when the ability to collect is reasonably assured. Lease agreements are based on either a fixed daily or a pre-determined percentage of the monthly net “participation” revenue collected, i.e. revenue share, for each slot machine, subject to monthly minimums

 

 24 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 10.  Revenue (Continued)

 

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 revenue share agreements are invoiced when participation reports are remitted to us detailing the monthly per unit 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 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 is recorded when the performance obligations of the Company have been met and the customer has not been billed. A contract liability is recorded when the Company has an obligation to transfer products or services to a customer for which consideration has been received. As of June 30, 2020 and December 31, 2019, respectively, there were no performance obligations outstanding and there was no revenue expected to be recognized in future periods related to performance obligations. As such, there were no contract liabilities recorded as of June 30, 2020 or December 31, 2019, respectively.

 

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

 

   Three months ended
June  30,
  Six months ended
 June  30,
   2020  2019  2020  2019
Lease and license fees:                    
Flat daily rate lease  $94,440   $795,360   $937,078   $1,436,574 
Participation lease   99,132    259,629    346,971    483,914 
   $193,572   $1,054,989   $1,284,049   $1,920,488 
Sales of gaming products and parts:                    
Slot machine sales  $372,000   $324,662   $462,000   $1,051,800 
Parts and ancillary items sales   6,110    1,138,818    52,972    1,138,818 
   $378,110   $1,463,480   $514,972   $2,190,618 

 

 

 25 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

June 30, 2020

 

Note 10.  Revenue (Continued)

 

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

 

   Three months ended
June  30,
  Six months ended
June  30,
   2020  2019  2020  2019
Lease and license fees by product:                    
Slot machines  $193,572   $1,054,989   $1,284,049   $1,920,264 
Poker Tables   —          —      224 
   $193,572   $1,054,989   $1,284,049   $1,920,488 
                     

 

Note 11.  Income Taxes

 

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

 

As of June 30, 2020, the Company has available, for federal and state income tax purposes, NOL carryforwards of approximately $13,481,000, which expire at various times through 2037. The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods. The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the financial statements.

 

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

 

Note 12. Concentration of Risk – Major Customers

 

The Company generated approximately 31% and 47% of its revenue from its top three customers for each of the six months ended June 30, 2020 and 2019, respectively.

 

At June 30, 2020, accounts receivable from one casino customer represented 62% of total accounts receivable. At December 31, 2019, accounts receivable from two casino customers represented 44% of total accounts receivable. One customer represented 32% of the accounts receivable balance as of December 31, 2019.

 

 26 

 

 

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

 

Forward-Looking Statements

 

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

 

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

 

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section or elsewhere in this report. In light of these and other risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. Factors that might cause our actual results to differ from our expectations, might cause us to modify our plans or objectives, or might affect our ability to meet our expectations include, but are not limited to: the duration and spread of the recent outbreak of the novel coronavirus disease COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak; the economic downturn in the financial markets and the dramatic decline in national and global economic conditions, especially in the gaming industry and in the wake of COVID-19; the tightening of credit in financial markets generally and the particularly severe tightening of them for the gaming industry, which may adversely affect our ability to raise funds through debt or equity financing, and may also adversely affect the ability of our customers to purchase our product and services; our ability to obtain additional gaming licenses; fuel price increases; legislative/regulatory changes; competition; changes in generally accepted accounting principles; and fluctuations in foreign currency exchange rates.

 

The most significant factors affecting our suppliers, customers and employees, and causing disruptions in current and future plans for operations and expansion, revolve around the impact of COVID-19. The mandate to close our physical location as of March 19, 2020 impeded our ability to assemble the slot machine units to fulfill existing and new orders. Due to COVID-19, all of our customers were mandated to close by March 31, 2020 and remained closed throughout the entire month of April 2020 which reduced our revenues to $-0- during that time period. Although certain customers were able to start reopening their facilities in May 2020 and the Company was able to reopen its facility and operations on May 22, 2020, operations are open with limitations and through strict adherence to guidelines established by the CDC and each facility’s respective state or tribal government. As of June 30, 2020, several of our customers remain closed due to COVID-19 and have no scheduled reopening date. In the aftermath of COVID-19, customers may continue to lose patrons due to fears about being in public and potential exposure to COVID-19 or future pandemics. Customers may experience significant losses due to the COVID-19 outbreak and may terminate their existing contracts or postpone or ultimately cancel future planned orders and contracts due to those losses. Travel may be restricted to certain areas which may limit our ability to obtain new customers or jurisdictions, or to provide services in those areas in which our customers are currently located. We may experience a shortage of labor due to quarantine or prolonged illness within our own organization or at supplier or customer locations.

 

We received funding under the federal PPP loan program through the SBA that has helped to lessen the impact of COVID-19 for eligible expenses under the program. In addition, aggressive expense management has been employed to mitigate the adverse impact that COVID-19 has had and continues to have on our operations and performance. We anticipate that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations, however the Company’s future performance will depend on the duration of COVID-19 and the severity of its effects on us, our customers and our suppliers. As this is a constantly changing and fluid situation, the full impact of COVID-19 cannot be measured at this time and might not become apparent until sometime in the next few months and beyond.

 

Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the Securities and Exchange Commission (“SEC”).

 

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

 27 

 

 

 

Overview

 

We were formed to develop and market our Poker Table, which is an electronic poker table that provides a fully automated table gaming experience without a dealer in casinos and card rooms in regulated jurisdictions worldwide.

 

In 2009, we commenced the design, manufacture, marketing, sale and operation of video slot machines to customers in various gaming jurisdictions. Our video slot machines contain games where the casino patron wagers on multiple pay lines and contain secondary bonus games. The current slot machine products are:

 

·           Around the World in 80 Days   ·           Lava Queen – Quick Link
·           Beauty and the Beast   ·           Lightning Lotto
·           Bierfeier – Screaming Links   ·           Luck of the Irish – Screaming Links
·           Candy Cash   ·           Penny Palooza
·           Cash Flow   ·           Pixiu – Quick Link
·           Cinderella   ·           Prosperous Buddha – Persistent Link
·           Drachma – Quick Link   ·           Scarabs of Egypt – Screaming Links
·           Duck Dynamite   ·           Si Shou
·           Electric Sevens – Quick Link   ·           Si Xiang – Screaming Links
·           Eye of RA – Persistent Link   ·           Slotto
·           Fins N Wins   ·           Snow White
·           Fruit Jackpots   ·           Snow White – Screaming Links
·           Fruit Treasure   ·           Swamp Fever
·           Golden Egg   ·           Swamp Fever – Persistent Link
·           Goyaate   ·           Swamp Frenzy
·           Great Balls of Fire – Screaming Links   ·           Thunder Spirit – Quick Link
·           Hao Yun   ·           Vampires Fortune
·           Hua Mulan – Screaming Links   ·           Xingyun Gou – Quick Link
·           Jumbo Fish Stacks   ·           Year of the Horse
·           Jungle Book   ·           Ye Xian
·           Jungle Jackpots – Screaming Links   ·           Zhang Jiao – Screaming Links
·           Just Jackpots   ·           Zuo Ci – Screaming Links

 

When we expanded our products to include slot machines, we embarked on an initiative to market our slot machines to Native American jurisdictions as well as the commercial casino marketplace and cruise lines.

 

Our slot machines are placed into the market using a daily lease model or a revenue sharing model. We are registered as an approved vendor to distribute products to gaming venues located in 19 state jurisdictions. Prior to our state mandated closure in March 2020, we had 370 slot machines out on lease or revenue share in 57 different casinos. As of June 30, 2020, 173 of those slot machines were up and running at 38 different casinos. The remainder of our slot machines remain at the casino facilities however they are off the floor or taped off to maintain social distancing requirements.

 

We realized a net loss of $84,496 and used $589,823 in cash from operations in the six months ended June 30, 2020.

 

 28 

 

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

 

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

 

Revenues

 

The Company’s revenues for the three months ended June 30, 2020 were $572,000 compared to $2,518,000 for the comparable prior year period, a decrease of $1,946,000. Lease and license fees decreased by a net of $861,000 to $194,000 for the three months ended June 30, 2020 as compared to $1,055,000 for the three months ended June 30, 2019. This decrease was directly attributable to the closure of our customers’ facilities due to the outbreak of COVID-19 as well as the decrease in slot machine unit and parts sales. Although some our customers commenced the reopening of their locations in May 2020, a majority of the reopenings occurred in June 2020, all with restrictions on the number of slot machines available for play on the casino floor due to safety and social distancing requirements. The average daily rate on our leased machines has decreased as well.

 

Sales of slot machines and related parts decreased by $1,085,000 to $378,000 for the three months ended June 30, 2020 as compared to $1,463,000 for the three months ended June 30, 2019. The Company had one 24-unit slot machine sale for $372,000 and miscellaneous parts sales of $6,000 during the quarter ending June 30, 2020 however the decrease in mainly attributable to a large parts sale to a single customer that occurred in the three months ending June 30, 2019, which generated $1,103,000 in revenues.

 

Cost of Products Sold

 

Cost of products sold, which consists of the cost of slot machines and parts inventory sold, for the three months ended June 30, 2020 were $300,000 as compared to $1,230,000 for the three months ended June 30, 2019, a decrease of $930,000 as a result of the large parts sale that occurred during the quarter ended June 30, 2019.

 

Operating Expenses

 

Operating expenses decreased $157,000 to $17,000 for the three months ended June 30, 2020, from $174,000 for the three months ended June 30, 2019. This decrease was the result of the offset of payroll and related expenses totaling $29,000 from the PPP loan as well as the reductions in freight ($42,000), installation ($18,000), repair and maintenance costs ($35,000), and hardware and supplies ($33,000) due to the lower number of installs during the quarter as a result of the casino closures from COVID-19.

 

Research and Development Expenses

 

Research and development expenses decreased by $48,000 to $54,000 for the three months ended June 30, 2020, from $102,000 for the three months ended June 30, 2019. Research and development expenses are primarily related to the development of new gaming equipment themes and technology and consist mainly of payroll and related expenses for programmers and graphic artists, software, and consulting fees. This decrease is attributable to the offset of payroll and related expenses from the PPP loan.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $261,000 for the three months ended June 30, 2020 versus $502,000 for the three months ended June 30, 2019, a decrease of $241,000. This decrease is the result of the temporary furlough and reduction in salaries of personnel due to the state mandated office closure due to COVID-19, as well as the offset of payroll and related, rent and utility expenses from the PPP loan. In addition, all travel, meals, and entertainment were suspended during the quarter ended June 30, 2020 due to travel restrictions and casino closures because of COVID-19.

 

Depreciation and Amortization

 

Depreciation and amortization increased by $116,000 to $259,000 for the three months ended June 30, 2020 from $143,000 for the three months ended June 30, 2019. This increase was the result of the increase in fixed assets built and placed in service during the previous three quarters.

 

Interest Expense

 

Interest expense increased $93,000 for the three months ended June 30, 2020, from $139,000 for the three months ended June 30, 2019, to $232,000 as a result of the loan agreement and promissory note advances made in November 2019 and January 2020, and the amortization of the deferred commitment fee and debt discounts associated with the loan agreement and advances.

 

Interest Income

 

Interest income increased to $2,000 for the three months ended June 30, 2020, from $-0- for the three months ended June 30, 2019 as a result of funds deposited into an interest-bearing account that was opened during the quarter.

 

Change in Value of Warrant

 

The change in fair value of the warrant of $60,000 was mainly due to the decline in the estimated fair market value of our common stock, a result of the impact on performance due to COVID-19.

 29 

 

 

 

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

 

Revenue

 

The Company’s revenues for the six months ended June 30, 2020 were $1,799,000 compared to $4,111,000 for the six months ended June 30, 2019, a decrease of $2,312,000. Lease and license fees decreased by $636,000 to $1,284,000 for the six months ended June 30, 2020 as compared to $1,920,000 for the six months ended June 30, 2019. This decrease was directly attributable to the closure of our customers’ facilities starting in March 2020 due to the outbreak of COVID-19, as well as the decrease in slot machine unit and parts sales. Although some our customers commenced the reopening of their locations in May 2020, a majority of the reopenings occurred in June 2020, all with restrictions on the number of slot machines available for play on the casino floor due to safety and social distancing requirements. The average daily rate on our leased machines has decreased as well.

 

Sales of slot machines and related parts decreased by $1,676,000 to $515,000 for the six months ended June 30, 2020 as compared to $2,191,000 for the six months ended June 30, 2019. The decrease is mainly attributable to a large parts sale to a single customer that occurred in the six months ending June 30, 2019, which generated $1,103,000 in revenues as well as the casino closures commencing in March 2020 due to COVID-19.

 

Cost of Products Sold

 

For the six months ended June 30, 2020, cost of products sold decreased $1,259,000 to $385,000 from $1,644,000 for the six months ended June 30, 2019, a direct result of the decrease in sales of slot machines and parts as described above.

 

Operating Expenses

 

Operating expenses decreased $240,000 to $52,000 for the six months ended June 30, 2020, from $292,000 for the six months ended June 30, 2019. This decrease was the result of the offset of payroll and related expenses from the PPP loan as well as the reductions in freight, installation, repair and maintenance costs, and hardware and supplies due to the lower number of installs during the year as a result of the casino closures from COVID-19. In addition, the reversal of $66,000 in license fees from the settlement and amendment of the patent cross license agreement that occurred in March 2020 added to the decrease.

 

Research and Development Expenses

 

Research and development expenses decreased by $43,000 to $167,000 for the six months ended June 30, 2020, from $210,000 for the six months ended June 30, 2019. 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 decrease is directly attributable to the offset of payroll and related expenses from the PPP loan.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $255,000 to $789,000 for the six months ended June 30, 2020, from $1,044,000 for the six months ended June 30, 2019. This decrease was due to the temporary furlough and reduction in salaries of personnel due to the state mandated office closure due to COVID-19 in March 2020, as well as the offset of payroll and related, rent and utility expenses from the PPP loan. In addition, the suspension of all travel, meals, and entertainment commencing in March 2020, due to travel restrictions and casino closures as a result of COVID-19, attributed to the decrease.

   

Depreciation and Amortization

 

Depreciation and amortization increased $265,000 from $248,000 for the six months ended June 30, 2019 to $513,000 for the six months ended June 30, 2019. This increase was the result of the increase in fixed assets built and placed in service during the previous four quarters.

 

Interest Expense

 

Interest expense increased $231,000 for the six months ended June 30, 2020, from $234,000 for the six months ended June 30, 2019, to $465,000 as a result of the loan agreement and promissory note advances made in November 2019 and January 2020, and the amortization of the deferred commitment fee and debt discounts associated with the loan agreement and advances.

 

Interest Income

 

Interest income increased to $2,000 for the six months ended June 30, 2020 as a result of funds deposited into an interest-bearing account that was opened in April 2020.

 

Change in Value of Warrant

 

The change in fair value of the warrant of $485,000 was due to the decline in the estimated fair market value of our common stock, a direct result of the impact on performance due to COVID-19.

 

 

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 Liquidity and Capital Resources

      

We realized a net loss of $84,000 and funded our working capital investments and capital expenditures associated with our growth strategy with proceeds from loans and the revenue generated from leases and proceeds from the sales of our gaming products. These transactions that occurred in 2020 and 2019 are described in more detail following the discussion of cash flows below:

 

Discussion of Statement of Cash Flows

  

Six Months Ended

June 30,

   
   2020  2019  Change
Net cash (used in) provided by operating activities  $(590,000)  $554,000   $(1,144,000)
Net cash used in investing activities   (233,000)   (1,925,000)   1,692,000 
Net cash provided by financing activities   724,000    1,663,000    (939,000)
Net (decrease) increase in cash   (99,000)   292,000   $(391,000)
Cash, beginning of year   1,599,000    565,000      
Cash, end of period  $1,500,000   $857,000      

 

For the six months ended June 30, 2020, we experienced a negative swing of $1,144,000, from cash provided by operations for the six months ended June 30, 2019 of $544,000 to cash used in operations of $590,000. The decrease in cash from operating activities was due to the loss incurred as well as timing of receipts from customers and payments to creditors, suppliers and vendors.

 

Net cash used in investing activities decreased by $1,692,000, from $1,925,000 used in investing activities for the six months ended June 30, 2019 to $233,000 used in investing activities for the six months ended June 30, 2020. Cash used in investing activities is primarily the function of the net investment in property and equipment, principally slot machines used in our operations. This decrease in cash used was due to the decrease in slot machines built and placed in service during the period, a result of the casino closures due to COVID-19.

 

Net cash provided by financing activities was $990,000 for the six months ended June 30, 2020, the result of the note payable advance taken in January 2020 versus $2,079,000 for those taken during the six months ended June 30, 2019, a decrease of $1,089,000. The decrease in note payable advances offset by the decrease in principal payments on the notes of $150,000 resulted in the net decrease in cash provided by financing activities of $939,000.

 

Operations and Liquidity Management

 

For the six months ended June 30, 2020, we sustained a net loss of $84,000 and we used $590,000 in cash from operating activities, however we have maintained and sustained a working capital surplus.

 

Due to the outbreak of the novel coronavirus disease (COVID-19), the Company, as well as all other non-life-sustaining businesses within the state of Pennsylvania, was ordered by governor’s mandate to close physical operations on March 19, 2020 which impeded our ability to assemble the slot machine units to fulfill existing and new orders. Due to COVID-19, all of our customers were mandated to close by March 31, 2020 and remained closed throughout the entire month of April 2020 which reduced our revenues to $-0- during that time period. Although certain customers were able to start reopening their facilities in May 2020 and the Company was able to reopen its facility and operations on May 22, 2020, operations are open with limitations and through strict adherence to guidelines established by the CDC and each facility’s respective state or tribal government. As of June 30, 2020, several of our customers remain closed due to COVID-19 and have no scheduled reopening date. The situation surrounding COVID-19 is fluid and the ability to measure the degree to which COVID-19 will impact the Company’s performance in its aftermath will depend on the duration and spread of COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended. Prior to the outbreak of COVID-19, we made improvements in performance and experienced an increase in the average number of signed recurring lease agreements for our slot machines with our latest theme offerings utilizing our new slot machine cabinet design. In addition, we continue to develop new proprietary game themes and plan to enter into new markets. The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to continue to obtain the regulatory approvals required to distribute our products and successfully market them to casinos, the development of new slot machine themes and new cabinets that are appealing to our customers and their patrons, and, most recently, the effects of COVID-19 on us, our customers, and suppliers.

 

Prior to the outbreak of COVID-19, our operating cash requirements were 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. The full effects of COVID-19 on our revenues cannot be projected at this time, however, we have employed aggressive expense management measures and received funding through participation in the federal PPP program that has enabled us to mitigate the adverse impact COVID-19 has had and will have on our projected performance.

 

As of June 30, 2020, our cash balance was $1,500,000 and our current gross cash requirements are approximately $180,000 to $240,000 per month, principally for salaries, professional services, licenses, and office expenses. We currently have adequate inventory to meet existing orders awaiting shipment and expected future orders and believe that the purchase of hardware components for our products will not be necessary for several months. We expect that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flow to support our operations for the next twelve months.

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Contractual Obligations

 

The table below sets forth our known contractual obligations as of June 30, 2020:

 

   Total 

Less than

1 year

  1 - 3 years  3 - 5 years 

More than

5 years

                
Lease liability obligations (1)  $69,931   $69,931   $—     $—     $—   
Patent cross license fees (2)   810,000    135,000    360,000    315,000    —   
Debt obligations (3)   5,493,054    549,423    1,369,780    3,573,851    —   
            Total  $6,372,985   $734,354   $1,729,780   $3,888,851   $—   

 

 

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

 

(2) Represents amounts due per license agreement.

 

(3) Represents outstanding amounts of notes payable.

 

 

Off-Balance Sheet Arrangements

 

As of June 30, 2020, there were no off-balance sheet arrangements.

 

Going Concern

 

The Company’s financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. The Company sustained a net loss for the six months ended June 30, 2020 however it has maintained and sustained a working capital surplus. Due to the outbreak of the novel coronavirus disease (COVID-19), the Company, as well as all other non-life-sustaining businesses within the state of Pennsylvania, was ordered by governor’s mandate to close physical operations on March 19, 2020. Due to COVID-19, all of our customers were mandated to close by March 31, 2020 and remained closed throughout the entire month of April 2020 which reduced revenues to $-0- during that time frame. As of June 30, 2020, several of our customers remain closed due to COVID-19 and have no scheduled reopening date. As the situation surrounding COVID-19 is fluid, the ability to measure the degree to which COVID-19 will impact the Company’s performance in its aftermath will depend on the duration and spread of COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended.

 

We received funding under the federal PPP loan program that helped to lessen the impact of COVID-19 by covering costs incurred during the covered period for payroll and payroll related expenses, rent and utilities. In addition, aggressive expense management has been employed to mitigate the adverse impact that COVID-19 has on our operations and performance. We anticipate that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations, however the Company’s future performance will depend on the duration of COVID-19 and the Company’s ability to distribute its products and successfully market them to more casinos and gaming venues. Based on our current performance, financial condition, cash flow projections, anticipated revenues and financing agreements, we believe we have sufficient cash flows to support our operations for twelve months from the date of this report.

 

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

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

 

Item 4. Controls and Procedures.

 

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

 

As a result of the COVID-19 outbreak and the mandate to close our physical location as of March 19, 2020, we initiated changes to our systems of internal accounting controls, converting approval and workflow processes to a paperless environment in order to support a telework environment.

 

In order to address the control weakness relating to the warrant issued in November 2019, enhancements to our internal controls over financial reporting were made which included review of the applicable guidance relating to fair value measurements and accounting for warrants and reasonableness tests of the assumptions and inputs used in the fair value measurement and adjustments to the fair value of the warrant, including the effects of COVID-19 on that fair value measurement.

 

As of June 30, 2020, 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 June 30, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.

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PART II - OTHER INFORMATION

 

Item 1.   Legal Proceedings.

 

None

 

 

Item 1A. Risk Factors.

 

None

 

 

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

 

None.

 

 

Item 3.  Defaults Upon Senior Securities.

 

The Company is subject to covenant clauses under the Loan Agreement by and between the Company and PDS Gaming – Nevada, LLC, whereby the Company is required to meet certain key financial ratios. The Company did not meet the maximum debt to EBITDA, defined as Earnings Before Interest Taxes, Depreciation and Amortization, ratio as required in the Loan for the quarter ended June 30, 2020, a direct effect from COVID-19 casino closures and slot machine social distancing requirements. The maximum debt to EBITDA ratio as specified in the Loan is 3.0 to 1.0 and the actual debt to EBITDA ratio was calculated as 4.1 to 1.0.

 

As COVID-19 cases decline and states and tribal jurisdictions ease restrictions, it is expected that revenues will increase as casino customers reopen their facilities and are able to turn on more slot machines for play on the casino floor. In addition, expenses are being tightly monitored and managed in order to mitigate the impact on the Company’s revenue and EBITDA due to COVID-19.

 

In addition, due to the material effect that COVID-19 has on the Company’s revenues and prior to June 30, 2020, the Lender has agreed to provide a grace period for compliance of financial ratio covenants until September 30, 2020.

 

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

 

Item 5.   Other Information.

 

None

 

 

 

 

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Item 6.   Exhibits.  

 

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

 

 

 

SIGNATURES

 

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

 

Date:  August 14, 2020 Lightning Gaming, Inc.
  By: 

/s/ Brian Haveson                                        

Brian Haveson

Chief Executive Officer and Director

 

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