Company Quick10K Filing
Quick10K
Lightning Gaming
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-07-17 Enter Agreement, Off-BS Arrangement
NYRT New York REIT 302
CBKM Consumers Bancorp 48
SPDL Spindle 15
PAYD Paid 5
OZSC Ozop Surgical 1
CXKJ CX Network 1
MOG Moog 0
HCMC Healthier Choices Management 0
BYIN Baying Ecological Holding Group 0
VIST Vist Financial 0
LGTG 2019-09-30
Part I - Financial Information
Item 1. Financial Statements
Item 1. Financial Statements.
Note 1. Nature of Business and Summary of Significant Accounting Policies
Note 2. Inventory
Note 3. Property and Equipment
Note 4. License Fees
Note 5. Notes Payable
Note 6. Leases
Note 7. Commitments
Note 8. Stockholders' Equity
Note 9. Revenue
Note 10. Income Taxes	
Note 11. Concentration of Risk - Major Customers
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 s22-21117_ex311.htm
EX-31.2 s22-21117_ex312.htm
EX-32.1 s22-21117_ex321.htm

Lightning Gaming Earnings 2019-09-30

LGTG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 s22-21117_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 September 30, 2019  
   
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
  For the transition period __________  to __________  

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,649,383 shares of (voting) Common Stock as of November 14, 2019; 33,300,000 shares of Nonvoting Common Stock as of November 14, 2019; and -0- shares of Series A Nonvoting Capital Stock as of November 14, 2019

 

1 

 

 

 

  TABLE OF CONTENTS
     Page
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative  Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Mine Safety Disclosures 26
Item 5. Other Information 26
Item 6. Exhibits 26

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

 1 Consolidated Condensed Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (audited);
 2 Unaudited Consolidated Condensed Statements of Operations for the three months ended September 30, 2019 and 2018;
 3 Unaudited Consolidated Condensed Statements of Operations for the nine months ended September 30, 2019 and 2018;
 4 Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018;
 5 Notes to Consolidated Condensed Financial Statements.

 

 

 

2 

 

 

 

 

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

  

September 30,

 2019

 

December 31,

2018

   (unaudited)  (audited)
Assets          
Current Assets          
       Cash  $764,773   $565,461 
Accounts receivable, net   549,057    415,466 
Inventory   1,399,006    584,221 
Prepaid expenses   203,667    124,887 
       Deposits with vendors   277,571    553,760 
Total Current Assets   3,194,074    2,243,795 
           
Property and Equipment, net   3,573,988    1,497,373 
           
Right-of-use asset - building   120,116    —   
Other assets   8,193    8,193 
License fees, net of accumulated amortization   6,839    9,339 
           
Total Assets  $6,903,210   $3,758,700 
           
See Notes to Consolidated Condensed Financial Statements          

 

 

3 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)

 

 

  

September 30,

 2019

 

December 31,

2018

   (unaudited)  (audited)
Liabilities and Stockholders’ Equity          
Current Liabilities          
       Accounts payable  $151,788   $191,751 
       Accrued expenses   251,553    98,241 
       Income tax payable   2,693    23,000 
       Current portion of lease liability   98,434    —   
       Current portion of long-term debt   976,668    572,298 
       Accrued interest   38,342    12,891 
Total Current Liabilities   1,519,478    898,181 
           
Long-Term Debt and Other Liabilities          
       Long-term notes payable   2,907,285    1,178,113 
       Long-term lease liability   44,417    —   
       Other long term liabilities   —      32,344 
Total Long-Term Debt and Other Liabilities   2,951,702    1,210,457 
           
Total Liabilities   4,471,180    2,108,638 
           
Commitments (Note 7)          
           
Stockholders' Equity          
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares authorized, -0- shares issued and outstanding   —      —   
           
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,916,285 shares issued and 4,649,383 outstanding   4,917    4,917 
           
Nonvoting common stock: $0.001 par value; authorized 50,000,000 shares; 33,300,000 issued and outstanding   33,300    33,300 
           
Additional paid in capital   30,516,388    30,467,906 
       Accumulated deficit   (28,101,764)   (28,835,250)
Treasury stock, 266,902 shares, at cost   (20,811)   (20,811)
Total Stockholders’ Equity   2,432,030    1,650,062 
           
Total Liabilities and Stockholders’ Equity  $6,903,210   $3,758,700 
           
See Notes to Consolidated Condensed Financial Statements          

 

4 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2019 and 2018

 

 

  

September 30,

 2019

 

September 30,

2018

   (unaudited)  (unaudited)
Revenues          
       Lease and license fees  $1,229,975   $540,708 
       Sales of gaming products and parts   199,965    980,059 
Total revenues   1,429,940    1,520,767 
           
Costs and operating expenses          
       Cost of products sold   42,223    294,928 
       Operating expenses   121,589    115,079 
       Research and development   100,405    99,234 
       Selling, general and administrative expenses   494,173    494,158 
       Depreciation and amortization   190,964    11,324 
Total costs and operating expenses   949,354    1,014,723 
           
Operating income  $480,586   $506,044 
           
Non-operating expense          
       Interest expense   (167,883)   (13,934)
Net income before income taxes   312,703    492,110 
       Income tax expense   7,931    —   
Net income  $304,772   $492,110 
Net income per common share - basic  $0.01   $0.01 
Net income per common share - diluted  $0.01   $0.01 
Weighted average Series A Nonvoting shares outstanding-basic and diluted   —      —   
Weighted average Common shares outstanding - basic   4,649,383    4,649,655 
Weighted average Common shares outstanding - diluted   4,663,731    5,024,655 
Weighted average Nonvoting Common shares outstanding - basic   33,300,000    33,300,000 
Weighted average Nonvoting Common shares outstanding - diluted   37,340,000    37,240,000 
           
See Notes to Consolidated Condensed Financial Statements          

 

 

5 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2019 and 2018

 

 

  

September 30,

 2019

 

September 30,

2018

   (unaudited)  (unaudited)
Revenues          
       Lease and license fees  $3,150,463   $1,661,201 
       Sales of gaming products and parts   2,390,583    3,265,352 
Total revenues   5,541,046    4,926,553 
           
Costs and operating expenses          
       Cost of products sold   1,686,441    1,579,318 
       Operating expenses   413,727    399,682 
       Research and development   310,352    283,062 
       Selling, general and administrative expenses   1,537,833    1,373,979 
       Depreciation and amortization   438,810    43,614 
Total costs and operating expenses   4,387,163    3,679,655 
           
Operating income  $1,153,883   $1,246,898 
           
Non-operating expense          
       Interest expense   (401,466)   (18,777)
Net income before income taxes   752,417    1,228,121 
       Income tax expense   18,931    —   
Net income  $733,486   $1,228,121 
Net income per common share - basic  $0.02   $0.03 
Net income per common share - diluted  $0.02   $0.03 
Weighted average Series A Nonvoting shares outstanding-basic and diluted   —      —   
Weighted average Common shares outstanding - basic   4,649,383    4,652,790 
Weighted average Common shares outstanding - diluted   4,833,650    5,027,790 
Weighted average Nonvoting Common shares outstanding - basic   33,300,000    33,300,000 
Weighted average Nonvoting Common shares outstanding - diluted   37,316,557    37,240,000 
           
See Notes to Consolidated Condensed Financial Statements          

 

6 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2019 and 2018

 

 

  

September 30,

 2019

 

September 30,

 2018

   (unaudited)  (unaudited)
       
Net Cash Provided by (Used in) Operating Activities  $630,008   $(307,413)
           
Cash Flows From Investing Activities          
       Purchase of equipment   (2,564,238)   (39,906)
       Increase in license fees   —      (10,000)
           
Net Cash Used in Investing Activities   (2,564,238)   (49,906)
           
Cash Flows From Financing Activities          
       Purchase of treasury stock   —      (1,000)
       Proceeds from notes payable   2,729,131    1,213,553 
       Repayment of notes payable   (595,589)   (147,990)
           
Net Cash Provided by Financing Activities   2,133,542    1,064,563 
           
Net Increase in Cash   199,312    707,244 
           
Cash - Beginning of period   565,461    276,111 
           
Cash - End of period  $764,773   $983,355 
           
Supplemental Disclosure of Non-Cash Financing Activities:          
Transfers of inventory and equipment, net  $51,313   $62,425 
           
Supplemental Information:          
Cash paid for:          
     Interest  $376,015   $14,018 
     Income taxes  $39,238   $—   
     Operating leases  $77,843   $75,945 
           
See Notes to Consolidated Condensed Financial Statements          

 

7 

 

 

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

September 30, 2019

 

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

 

Nature of Business:

 

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

 

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

 

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

 

·           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   ·           Scarabs of Egypt – Screaming Links
·           Drachma – Quick Link   ·           Si Shou
·           Duck Dynamite   ·           Si Xiang – Screaming Links
·           Electric Sevens – Quick Link   ·           Slotto
·           Fins N Wins   ·           Snow White – Screaming Links
·           Golden Egg   ·           Swamp Fever
·           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

 

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 28, 2019 (“Form 10-K”). The accompanying interim financial statements are presented in accordance with the requirements of Article 8.03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, accordingly, do not include all the disclosures required by accounting principles generally accepted in the

 

8 

 

 

 

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

 

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

 

Basis of Presentation (Continued)

 

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, 2018 was derived from the Company’s consolidated audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the entire year.

 

The accompanying consolidated condensed financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. The Company had net income for the three and nine months ended September 30, 2019, realized a significant increase in revenue and cash flow from operations for the nine months ending September 30, 2019 versus September 30, 2018, and has maintained and sustained working capital surpluses. The generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to distribute its products and successfully market them to more casinos and gaming venues. The Company has increased the number of lease contracts during 2019, and based on our current performance, financial condition, cash flow projections, anticipated revenues and financing agreements, we believe we have sufficient cash flows to support our operations for the next twelve months, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects for expansion. The Company’s continuance as a going concern is dependent upon these factors, among others. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company has a reserve for uncollectible accounts of $6,593 as of September 30, 2019 and December 31, 2018. Except for this reserve, the Company believes its receivables are collectible. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change. Recoveries of receivables previously written off are recorded as revenue when recovered. Delinquency of accounts receivable is determined based on contractual terms. The Company does not charge interest on its past due receivables. During each the nine months ended September 30, 2019 and 2018, the Company did not consider any of its receivables to be uncollectible.

 

Recent Accounting Pronouncements

 

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

 

9 

 

 

 

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

 

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

 

Recent Accounting Pronouncements (Continued) 

 

For finance leases, lessees are required to:

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

 

For operating leases, lessees are required to:

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

 

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

 

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

 

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

 

Note 2.  Inventory

 

Inventory consists of the following:

  

September 30,

2019

 

December 31,

2018

Finished products  $1,088,002   $403,080 
Raw materials and work in process   311,004    181,141 
Inventory  $1,399,006   $584,221 

 

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

 

10 

 

 

 

 

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

 

Note 2.  Inventory (Continued)

 

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

 

 

Note 3.  Property and Equipment

 

Property and equipment consist of the following:

  

September 30,

2019

 

December 31,

2018

Equipment, principally gaming equipment under lease  $5,452,981   $3,208,481 
Delivery truck   28,140    28,140 
Furniture and fixtures   83,943    104,314 
Leasehold improvements   91,794    91,794 
Property and equipment   5,656,858    3,432,729 
Less accumulated depreciation   (2,082,870)   (1,935,356)
Property and equipment, net  $3,573,988   $1,497,373 

 

Depreciation expense related to the property and equipment included in the consolidated condensed Statements of Operations was $190,131 and $10,213 for the three months ended September 30, 2019 and 2018, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $436,310 and $37,503, respectively.

 

 

Note 4.  License Fees

 

License fees consist of the following:

  

September 30,

2019

 

December 31,

2018

Purchased licenses  $347,160   $351,605 
Less accumulated amortization   (340,321)   (342,266)
License fees, net  $6,839   $9,339 

 

The weighted average useful life of purchased licenses is 3 years. Amortization expense included in the consolidated condensed Statements of Operations relating to the purchased licenses was $833 and $1,111 for the three months ended September 30, 2019 and 2018, respectively. Amortization expense included in the consolidated condensed Statements of Operations relating to the purchased licenses was $2,500 and $6,111 for the nine months ended September 30, 2019 and 2018, respectively.

 

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

 

Year Ending
December 31,
  Amount
 2019   $1,283 
 2020    3,333 
 2021    2,223 
     $6,839 

 

 

11 

 

 

 

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

 

Note 5.  Notes Payable

 

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

 

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

 

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 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 Loan remain unchanged and in full force, including the interest rate which remains at 11% on each Note.

 

Accounting Standards Codification (“ASC”) Topic 470 – Debt, requires an analysis to determine if the debt instruments 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. The Company prepared the analysis and since the change in PV of cash flows is less than 10%, the threshold established in ASC 470, the change in the Amendment is considered a modification and therefore no gain or loss was incurred or recorded.

 

The original Notes and their terms and the Amended Notes and terms consist of the following:

 

   Advance Date  Note Amount  Original Maturity Date  Amended Maturity Date  Interest Rate  Original Monthly Payment  Amended Monthly Payment  Amended Remaining CIP Days*
                         
 Advance 1   7/17/2018  $489,989   7/17/2021  7/17/2022   11%  $16,083   $11,737    723 
 Advance 2   9/18/2018  $723,565   9/18/2021  9/18/2022   11%  $23,741   $17,699    754 
 Advance 3   11/15/2018  $662,686   11/15/2021  11/15/2022   11%  $21,743   $16,163    781 
 Advance 4   1/21/2019  $581,700   1/21/2022  1/21/2023   11%  $19,085   $14,746    831 
 Advance 5   3/29/2019  $343,732   3/29/2022  3/29/2023   11%  $11,284   $8,852    852 

 

*Represents the remaining on-line days as of May 1, 2019 and excludes all on-line days prior to April 1, 2019 and on-line days reported in May 2019 that were earned for April 2019.

 

12 

 

 

 

 

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

 

Note 5. Notes Payable (Continued)

 

As of September 30, 2019 and December 31, 2018, Notes payable consist of the following:

 

   Advance Date  Maturity Date  Note Amount  Monthly Payment  Interest Rate 

September 30,

2019

 

December 31,

2018

                      
Advance 1  7/17/2018  7/17/2022  $489,989   $11,737    11%  $340,772   $431,407 
Advance 2  9/18/2018  9/18/2022  $723,565   $17,699    11%   539,346    671,986 
Advance 3  11/15/2018  11/15/2022  $662,686   $16,163    11%   492,389    647,018 
Advance 4  1/21/2019  1/21/2023  $581,700   $14,746    11%   467,033    —   
Advance 5  3/29/2019  3/29/2023  $343,732   $8,852    11%   240,713    —   
Advance 6  5/10/2019  6/10/2023  $581,700   $15,879    11%   581,700    —   
Advance 7  6/17/2019  7/17/2023  $572,000   $15,616    11%   572,000    —   
Advance 8  9/9/2019  10/9/2023  $650,000   $17,742    11%   650,000    —   
                                
Total Notes Payable                     3,883,953    1,750,411 
Less: amounts classified as current                  (976,668)   (572,298)
Long-Term Notes Payable                 $2,907,285   $1,178,113 
                                

 

The following table lists the future principal payments due on the Notes as of September 30, 2019:

 

Year Ending
December 31,
  Amount
 2019   $203,555 
 2020    1,050,123 
 2021    1,187,414 
 2022    1,076,542 
 2023    366,319 
     $3,883,953 

 

Interest expense and CIP obligations relating to these Notes were $100,896 and $66,987, respectively, for the three months ended September 30, 2019. Interest expense and CIP obligations relating to these Notes were $244,059 and $157,407, respectively, for the nine months ended September 30, 2019. Interest expense relating to these Notes for the three and nine months ended September 30, 2018 was $13,934. There were no CIP payments for the three and nine months ended September 30, 2018.

 

 

Note 6. Leases

 

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

 

Since the original lease inception, rental expense had been recognized on a straight-line basis over the life of the lease and was recorded as a deferred rent obligation during the abatement period. The deferred rent was reduced by the difference between the rent due and the straight-line expense upon commencement of the rental payments, which was identical to the lease expense that would have been recognized applying the principals under ASC 842. Since there was no difference in the lease versus rent expense calculation, there was no effect to prior periods and the balance sheet adjustment to record the

 

13 

 

 

 

 

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

 

Note 6. Leases (Continued)

 

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 September 30, 2019:

 

Right-of-use Asset  $120,116 
      
Lease Liability     
     Current  $98,434 
     Long-term   44,417 
   $142,851 

 

Lease expense for each of the three months ended September 30, 2019 and 2018 was $35,930. Lease expense for the nine months ended September 30, 2019 and 2018 was $107,790 and $105,671, respectively.

 

The following table summarizes the Company’s scheduled future minimum lease payments as of September 30, 2019:

 

Year Ended December 31:   
2019  $26,522 
2020   106,976 
2021   18,124 
Minimum lease payments    151,622 
Less: imputed interest   (8,771)
Present value of minimum lease payments   142,851 
Less: current maturities of lease liability   98,434 
Long-term lease liability  $44,417 

 

 

Note 7. Commitments

 

The Company routinely enters into license agreements for the use of intellectual properties and technologies. These agreements generally provide for royalty advances and license fee payments when the agreements are signed and minimum commitments which are cancelable in certain circumstances. As of September 30, 2019, there are no royalty agreements in place and the Company estimates that there will be no future royalty payments.

 

Note 8. Stockholders’ Equity

Stock Option Plans: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "2007 Plan") having substantially the same terms. The options were granted at the discretion of the Board of Directors and the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each

 

 

14 

 

 

 

 

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

 

Note 8.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

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.

 

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

  

Shares

 

 

Weighted

Average

Exercise Price

Outstanding at December 31, 2018   275,000   $0.37 
Options granted   —      —   
Options exercised   —      —   
Options cancelled   (270,000)   0.34 
Options outstanding at September 30, 2019   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

 

15 

 

 

 

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

 

Note 8.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

(e.g., volatility, expected term, etc.) reflecting the current facts and circumstances on the modification date and therefore, differs from the fair value calculated on the grant date.

 

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

  

Shares

 

 

Weighted

Average

Exercise Price

Outstanding at December 31, 2018   3,940,000   $0.13 
Options granted   100,000    0.13 
Options exercised   —      —   
Options cancelled   —      —   
Options outstanding at September 30, 2019   4,040,000   $0.13 
Options available for grant under the 2016 Plan at September 30, 2019   1,660,000      

 

Stock-based compensation expense is recognized in the consolidated condensed Statements of Operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures. Additional compensation expense arising from the modification of the exercise price is being recognized over the vesting period. Compensation expense related to stock options for the three months ended September 30, 2019 and 2018 was $16,128 and $10,894, respectively. Compensation expense related to stock options for the nine months ended September 30, 2019 and 2018 was $48,481 and $32,834, respectively.

 

The following table summarizes information with respect to stock options outstanding at September 30, 2019:

  Options Outstanding   Vested Options
 
 
 
 
 
Number Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
 
 
 
Number Weighted
Average
Contractual
Term (Years)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
2007 Plan    5,000 0.9 $2.00 -   5,000 0.9 $2.00 -
2016 Plan 4,040,000 7.5 $0.13 -   1,576,000 7.4 $0.13 -
                   
The following table summarizes information with respect to stock options outstanding at December 31, 2018:
  Options Outstanding   Vested Options
 
 
 
 
 
Number Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
 
 

Number Weighted
Average
Contractual
Term (Years)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
2007 Plan    275,000 0.5 $0.37 -   275,000 0.5 $0.37 -
2016 Plan 3,940,000 8.2 $0.13 -   788,000 8.2 $0.13 -

 

 

As of September 30, 2019, all compensation costs related to share-based compensation arrangements granted under the 2007 Plan had been fully recognized. As of September 30, 2019, there was approximately $155,296 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 2.4 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.

 

16 

 

 

 

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

 

Note 8.  Stockholders’ Equity (Continued)

 

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

 

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

 

   September 30, 2019  September 30, 2018
Common Stock   5,000    375,000 
Nonvoting Common Stock   4,040,000    3,940,000 
           

 

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

 

   Common Stock  Nonvoting Common Stock  Additional Paid In Capital  Accumulated Deficit  Treasury Stock  Total
Balances at December 31, 2018  $4,917   $33,300   $30,467,906   $(28,835,250)  $(20,811)  $1,650,062 
     Net income   —      —      —      204,253    —      204,253 
     Stock based compensation   —      —      16,226    —      —      16,226 
Balance at March 31, 2019   4,917    33,300    30,484,132    (28,630,997)   (20,811)   1,870,541 
     Net income   —      —      —      224,461    —      224,461 
     Stock based compensation   —      —      16,128    —      —      16,128 
Balances at June 30, 2019   4,917    33,300    30,500,260    (28,406,536)   (20,811)   2,111,130 
     Net income   —      —      —      304,772    —      304,772 
     Stock based compensation   —      —      16,128    —      —      16,128 
Balances at September 30, 2019  $4,917   $33,300   $30,516,388   $(28,101,764)  $(20,811)  $2,432,030 

 

The following table reconciles the changes in stockholder’s equity for the nine months ended September 30, 2018:

 

   Common Stock  Nonvoting Common Stock  Additional Paid In Capital  Accumulated Deficit  Treasury Stock  Total
Balances at December 31, 2017  $4,917   $33,300   $30,384,996   $(29,854,310)  $(19,811)  $549,092 
     Net income   —      —      —      311,171    —      311,171 
     Stock based compensation   —      —      11,047    —      —      11,047 
Balances at March 31, 2018   4,917    33,300    30,396,043    (29,543,139)   (19,811)   871,310 
     Net income   —      —      —      424,840    —      424,840 
     Stock based compensation   —      —      10,893    —      —      10,893 
Balances at June 30, 2018   4,917    33,300    30,406,936    (29,118,299)   (19,811)   1,307,043 
     Net income   —      —      —      492,110    —      492,110 
     Acquisition of treasury stock   —      —      —      —      (1,000)   (1,000)
     Stock based compensation   —      —      10,894    —      —      10,894 
Balances at September 30, 2018  $4,917   $33,300   $30,417,830   $(28,626,189)  $(20,811)  $1,809,047 

 

 

17 

 

 

 

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

 

Note 9.  Revenue

 

The Company generates revenue 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 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.

 

 

18 

 

 

 

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

 

Note 9.  Revenue (Continued)

 

For the three months ended September 30, 2019, contract liabilities decreased by $48,000 and revenue recognized related to performance obligations outstanding as of June 30, 2019 was $48,000. For the nine months ended September 30, 2019, the Company recorded no revenues related to performance obligations from prior periods. There were no contract liabilities outstanding as of September 30, 2019 and December 31, 2018.

 

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

 

   Nine months ended
September 30,
  Three months ended
September 30,
   2019  2018  2019  2018
Lease and license fees:                    
Flat daily rate lease  $2,305,812   $1,176,210   $878,238   $393,424 
Participation lease   835,651    473,591    351,737    144,884 
Placement fees   9,000    11,400    —      2,400 
   $3,150,463   $1,661,201   $1,229,975   $540,708 
Sales of gaming products and parts:                    
Slot machine sales  $1,243,300   $1,712,332   $191,500   $743,200 
Parts and ancillary items sales   1,147,283    1,553,020    8,465    236,859 
   $2,390,583   $3,265,352   $199,965   $980,059 
                     

 

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

 

   Nine months ended
September 30,
  Three months ended
September 30,
   2019  2018  2019  2018
Lease and license fees by product:                    
Slot machines  $3,150,239   $1,647,449   $1,229,975   $534,934 
Poker Tables   224    13,752    —      5,774 
   $3,150,463   $1,661,201   $1,229,975   $540,708 
                     

 

Note 10.  Income Taxes

 

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

 

As of September 30, 2019, the Company has available, for federal and state income tax purposes, carryforwards of approximately $12,666,000, which expire at various times through 2037. The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods. The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the financial statements.

 

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

 

Note 11. Concentration of Risk – Major Customers

 

The Company generated approximately 36% and 56% of its revenue from its top three customers for each of the nine months ended September 30, 2019 and 2018, respectively.

 

At September 30, 2019, accounts receivable from four casino customers represented 32% of total accounts receivable. At December 31, 2018, accounts receivable from four casino customers represented 52% of total accounts receivable. One customer represented 17% of the total accounts receivable balance as of September 30, 2019 and one customer represented 21% of the accounts receivable balance as of December 31, 2018.

 

19 

 

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

 

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 ·          Scarabs of Egypt – Screaming Links
·          Drachma – Quick Link ·          Si Shou
·          Duck Dynamite ·          Si Xiang – Screaming Links
·          Electric Sevens – Quick Link ·          Slotto
·          Fins N Wins ·          Snow White – Screaming Links
·          Golden Egg ·          Swamp Fever
·          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 have 366 slot machines out on lease or revenue share in 54 different casinos. We are registered as an approved vendor to distribute products to gaming venues located in 17 state jurisdictions.

 

We recognized net income of $733,486 and generated $630,008 of cash from operations in the nine months ended September 30, 2019.

 

 

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 Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

 

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

 

Revenues

 

The Company’s revenues for the three months ended September 30, 2019 were $1,430,000 compared to $1,521,000 for the comparable prior year period, a decrease of $91,000. This decrease was attributable to the decrease in slot machine unit and parts sales. While total revenues decreased, lease and license fees increased by a net of $689,000 to $1,230,000 for the three months ended September 30, 2019 as compared to $541,000 for the three months ended September 30, 2018. The increase in lease revenues was attributable to the popularity of our latest game titles under the Screaming Links line of games, resulting in an increase in the average number of slot machines installed since the previous quarter as well as an increase in the average daily rate of those machines, offset by the decrease in recurring Poker Table leases.

 

Sales of slot machines and related parts decreased by $780,000 to $200,000 for the three months ended September 30, 2019 as compared to $980,000 for the three months ended September 30, 2018, which included a large parts sale to one customer of $223,000.

 

Cost of Products Sold

 

Cost of products sold for the three months ended September 30, 2019 were $42,000 as compared to $295,000 for the three months ended September 30, 2018, a reflection of the decrease in slot machine sales during the quarter.

 

Operating Expenses

 

Operating expenses increased $7,000 to $122,000 for the three months ended September 30, 2019, from $115,000 for the three months ended September 30, 2018. This increase was the result of an increase in repair and maintenance costs, due to the increase in the slot machine installation base during the period, as well as an increase in personnel costs, offset by the elimination of royalty fees for the period.

 

Research and Development Expenses

 

Research and development expenses increased by $1,000 to $100,000 for the three months ended September 30, 2019, from $99,000 for the three months ended September 30, 2018. Research and development expenses are primarily related to the development of new gaming equipment themes and technology and consist mainly of payroll and related expenses for programmers and graphic artists, software, and consulting fees. This increase is attributable to the increase in payroll and benefit costs associated with the research and development personnel.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $494,000 for each of the three months ended September 30, 2019 and 2018. Salary increases and the related increases in payroll costs plus an increase in travel, meals and entertainment costs for sales personnel were offset by the decreases in lab fees associated with the new cabinet design launched in 2018 as well as license fees relating to initial applications submitted in September 2018.

 

Depreciation and Amortization

 

Depreciation and amortization increased by $180,000 to $191,000 for the three months ended September 30, 2019 from $11,000 for the three months ended September 30, 2018. This increase was the result of the increase in fixed assets built and placed in service during the quarter.

 

Interest Expense

 

Interest expense increased $154,000 for the three months ended September 30, 2019, from $14,000 for the three months ended September 30, 2018, to $168,000 as a result of the loan agreement and promissory note advances made during the latter part of 2018 through September 2019.

 

 

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Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

 

Revenue

 

The Company’s revenues for the nine months ended September 30, 2019 were $5,541,000 compared to $4,927,000 for the comparable prior year period, an increase of $614,000. Lease and license fees increased by $1,489,000 to $3,150,000 for the nine months ended September 30, 2019 as compared to $1,661,000 for the nine months ended September 30, 2018. The increase in lease revenues was attributable to the increase in the number of slot machines installed on recurring leases as well as the average daily rate of those lease installs.

 

Sales of slot machines and related parts, however decreased by $874,000 to $2,391,000 for the nine months ended September 30, 2019 from $3,265,000 for the nine months ended September 30, 2018. This decrease was mainly attributable to the $422,000 decrease in the large parts sales to single customers in each of the nine months ending September 30, 2019 and 2018, of $1,103,000 and 1,525,000, respectively. Other parts sales increased by $17,000 to $44,000 for the nine months ended September 30, 2019, from $27,000 for the nine months ended September 30, 2018. Revenue from slot machine unit sales decreased by $470,000, from $1,713,000 for the nine months ended September 30, 2018 to $1,243,000 for the nine months ended September 30, 2019.

 

Cost of Products Sold

 

For the nine months ended September 30, 2019, cost of products sold increased $107,000 to $1,686,000 from $1,579,000 for the nine months ended September 30, 2018. This increase was due to the increase in the average cost per unit sold in 2019 versus 2018. While the sales of slot machines decreased, the average cost per unit of the products sold is significantly higher for the newer slot machine cabinet design, which averaged $8,500 per machine for 73 units sold in the nine months ended September 30, 2019 versus $900 per machine for 150 units sold in the nine months ended September 30, 2018.

 

Operating Expenses

 

Operating expenses increased $14,000 to $414,000 for the nine months ended September 30, 2019, from $400,000 for the nine months ended September 30, 2018. This increase was primarily the result of the increase in installation and freight costs, due to the increase in the slot machines installed during the period, as well as an increase in personnel costs, offset by the decrease in game conversion costs and the elimination of royalty fees for the period.

 

Research and Development Expenses

 

Research and development expenses increased by $27,000 to $310,000 for the nine months ended September 30, 2019, from $283,000 for the nine months ended September 30, 2018. Research and development expenses are related to the development of gaming equipment and consist mainly of payroll and related expenses for programmers and graphic artists and the costs to acquire new brands. This increase is attributable to the increase in payroll and benefit costs associated with the research and development personnel.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $164,000 to $1,538,000 for the nine months ended September 30, 2019, from $1,374,000 for the nine months ended September 30, 2018. This increase was due to several factors: 1) an increase in regulatory and license fees; 2) salary increases and the related increases in payroll costs; 3) an increase in travel, meals and entertainment costs for sales personnel; and 4) an increase in lab fees associated with the latest themes on the new cabinet design.

   

 

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Depreciation and Amortization

 

Depreciation and amortization increased $395,000 from $44,000 for the nine months ended September 30, 2018 to $439,000 for the nine months ended September 30, 2019. This increase was from the increase in fixed assets built and placed in gaming venues during the period.

 

Liquidity and Capital Resources

      

We recognized net income of $733,000 and generated cash flows from operations during the year 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 2019 and 2018 are described in more detail following the discussion of cash flows below:

 

Discussion of Statement of Cash Flows

  

Nine Months Ended

September 30,

   
   2019  2018  Change
Net cash provided by (used in) operating activities  $630,000   $(307,000)  $937,000 
Net cash used in investing activities   (2,564,000)   (50,000)   (2,514,000)
Net cash provided by financing activities   2,133,000    1,064,000    1,069,000 
Net increase in cash   199,000    707,000   $(508,000)
Cash, beginning of year   565,000    276,000      
Cash, end of period  $764,000   $983,000      

 

Discussion of Statement of Cash Flows

 

For the nine months ended September 30, 2019, cash provided by operating activities increased $937,000 to $630,000 as compared to $307,000 used in operating activities for the nine months ended September 30, 2018. The increase in cash provided by operating activities was due to the timing of receipts from customers and payments to creditors, suppliers and vendors.

 

Net cash used in investing activities increased by $2,514,000, from $50,000 used in investing activities for the nine months ended September 30, 2018 to $2,564,000 used in investing activities for the nine months ended September 30, 2019. Cash used in investing activities is primarily the function of the net investment in property and equipment, principally slot machines used in our operations. This increase in cash used was due to the increase in slot machines built and placed in service during the period.

 

Net cash provided by financing activities was $2,133,000 for the nine months ended September 30, 2019, the result of note payable advances taken in 2019 versus $1,064,000 for those taken during the nine months ended September 30, 2018, an increase of $1,069,000.

 

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Operations and Liquidity Management

 

For the nine months ended September 30, 2019, we recognized net income of $733,000 and we generated $630,000 in cash from operating activities.

 

We have made improvements in performance and experienced an increase in the number of signed recurring lease agreements for our slot machines with our latest theme offerings during the period, utilizing our new slot machine cabinet design. In addition, we continue to develop new proprietary game themes and we continue 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 and card clubs as well as the development of new slot machine themes and new cabinets.

 

As of September 30, 2019, our cash balance was $764,000 and our current gross cash requirements are approximately $260,000 to $300,000 per month, principally for salaries, professional services, licenses, marketing, and office expenses, and approximately $500,000 for the purchase of the hardware components for our products. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flow to support our operations for the next twelve months.

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of September 30, 2019:

 

   Total 

Less than

1 year

  1 - 3 years  3 - 5 years 

More than

5 years

                
Lease liability obligations (1)  $142,851   $98,434   $44,417   $—     $—   
Debt obligations (2)   3,883,953    976,668    2,889,705    17,580    —   
            Total  $4,026,804   $1,075,102   $2,934,122   $17,580   $—   

 

 

(1) Represents operating lease agreements for office and warehouse facilities.
   
(2) Represents outstanding amount of notes payable.

 

 

 

Off-Balance Sheet Arrangements

 

As of September 30, 2019, there were no off-balance sheet arrangements.

 

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Going Concern

 

The Company’s financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. During the three and nine months ended September 30, 2019, the Company had net income, cash flows from operations, increased revenues from the three and nine months ended September 30, 2018, and has maintained and sustained a working capital surplus. The generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to distribute its products and successfully market them to more casinos. Based on our current financial condition, cash flow projections, product development and anticipated revenues, we believe we have sufficient cash flows to support our operations for the next twelve months.

 

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

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable. 

 

 

Item 4. Controls and Procedures.

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer (“CEO”) and Controller as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of September 30, 2019, we conducted an evaluation, under the supervision and with the participation of our management including our CEO and Controller, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and Controller have concluded that as of September 30, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.

 

 

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PART II - OTHER INFORMATION

 

Item 1.   Legal Proceedings.

 

None

 

 

Item 1A. Risk Factors.

 

None

 

 

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

 

None.

 

 

Item 3.  Defaults Upon Senior Securities.

 

None

 

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

 

Item 5.   Other Information.

 

None

 

 

 

 

Item 6.   Exhibits.  

 

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

 

 

 

SIGNATURES

 

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

 

Date:  November 14, 2019 Lightning Gaming, Inc.
  By: 

/s/ Brian Haveson                                        

Brian Haveson

Chief Executive Officer and Director

 

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