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, 2015
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period __________  to __________

 

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

 

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

 

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

 

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

 

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

 

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

 

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

(Do not check if a smaller reporting company) 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,607,474 Voting Common Stock shares as of July 31, 2015; 0 Nonvoting Common Stock shares as of July 31, 2015; 4,500,000 Series A Nonvoting Capital Stock shares as of July 31, 2015

 

 

 

 

 

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	18
Item 3.	Quantitative and Qualitative  Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

1	Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014 (audited);
2	Unaudited Consolidated Statements of Operations for the three months ended June 30, 2015 and 2014;
3	Unaudited Consolidated Statements of Operations for the six months ended June 30, 2015 and 2014;
4	Unaudited Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2015 and 2014;
5	Notes to Consolidated Financial Statements.

 

 

 

 

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		June 30, 2015				December 31, 2014
		(unaudited)				(audited)
Assets
Current Assets
Cash		$	423,739			$	274,547
Accounts receivable, net			337,836				359,486
Inventory			199,194				132,561
Prepaid expenses			195,125				202,503
Total Current Assets			1,155,894				969,097
Property and Equipment, net			640,301				819,489
Other Assets			8,193				8,193
License fees, net of accumulated amortization			39,826				95,058
Total Assets		$	1,844,214			$	1,891,837
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable		$	180,604			$	158,665
Accrued expenses			109,068				213,959
Total Current Liabilities			289,672				372,624
Long Term Debt and Other Liabilities
Long term notes payable			14,750,000				14,750,000
Interest payable and other liabilities			7,972,483				7,677,826
Other long term liabilities			62,955				46,313
Fair value of warrants and convertible feature of long term debt			20,521				26,945
Total Long Term Debt and Other Liabilities			22,805,959				22,501,084
Commitments (Note 6)
Stockholders' Deficit
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares authorized, 4,500,000 shares issued and outstanding			4,500				4,500
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,735,285 and 4,660,285 shares issued and 4,607,474 and 4,532,474 shares outstanding as of June 30, 2015 and December 31, 2014, respectively			4,736				4,661
Additional paid in capital			7,634,437				7,633,255
Accumulated deficit			(28,881,279	)			(28,610,476	)
Treasury stock, 127,811 shares, at cost			(13,811	)			(13,811	)
Total Stockholders’ Deficit			(21,251,417	)			(20,981,871	)
Total Liabilities and Stockholders’ Deficit		$	1,844,214			$	1,891,837
See Notes to Consolidated Financial Statements

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended June 30, 2015 and 2014

 

 

		June 30, 2015				June 30, 2014
		(unaudited)				(unaudited)
Revenues
Lease and license fees		$	896,674			$	914,813
Sales of gaming products and parts			52,940				56,800
Total revenues			949,614				971,613
Costs and operating expenses
Cost of products sold			1,485				24,333
Operating expenses			200,127				206,232
Research and development			130,380				120,800
Selling, general and administrative expenses			471,761				428,333
Depreciation and amortization			138,800				190,128
Total costs and operating expenses			942,553				969,826
Operating income			7,061				1,787
Non-operating expense
Net interest expense			—				(289,945	)
Change in value of warrants			6,424				—
Net income (loss)		$	13,485			$	(288,158	)
Net income (loss) per common share including Series A Nonvoting shares-basic and diluted		$	0.00			$	(0.03	)
Weighted average Series A Nonvoting shares outstanding-basic and diluted			4,500,000				4,500,000
Weighted average common shares outstanding-basic and diluted			4,607,474				4,652,474
See Notes to Consolidated Financial Statements

 

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Six Months Ended June 30, 2015 and 2014

 

 

		June 30, 2015				June 30, 2014
		(unaudited)				(unaudited)
Revenues
Lease and license fees		$	1,870,073			$	1,811,807
Sales of gaming products and parts			58,286				83,951
Total revenues			1,928,359				1,895,758
Costs and operating expenses
Cost of products sold			1,485				24,333
Operating expenses			398,764				395,454
Research and development			249,924				239,709
Selling, general and administrative expenses			977,644				959,762
Depreciation and amortization			283,111				387,858
Total costs and operating expenses			1,910,928				2,007,116
Operating income (loss)			17,431				(111,358	)
Non-operating expense
Net interest expense			(294,658	)			(579,671	)
Change in value of warrants			6,424				—
Net loss		$	(270,803	)		$	(691,029	)
Net loss per common share including Series A Nonvoting shares-basic and diluted		$	(0.03	)		$	(0.08	)
Weighted average Series A Nonvoting shares outstanding-basic and diluted			4,500,000				4,500,000
Weighted average common shares outstanding-basic and diluted			4,570,576				4,652,474
See Notes to Consolidated Financial Statements

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2015 and 2014

 

 

		June 30, 2015				June 30, 2014
		(unaudited)				(unaudited)
Net Cash Provided by (Used in) Operating Activities		$	146,352			$	(103,878	)
Cash Flows From Investing Activities
Purchase of equipment			(57,692	)			(246,301	)
Proceeds from sale of equipment			52,267				83,000
Decrease in license fees			7,515				1,610
Net Cash Provided by (Used in) Investing Activities			2,090				(161,691	)
Cash Flows From Financing Activities
Issuance of common stock			750				—
Net Cash Provided by Financing Activities			750				—
Net Increase (Decrease) in Cash			149,192				(265,569	)
Cash - Beginning of period			274,547				462,200
Cash - End of period		$	423,739			$	196,631
Supplemental Disclosure of Non-Cash Financing Activities:
Inventory transferred to fixed assets		$	—			$	15,370
See Notes to Consolidated Financial Statements

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2015

 

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

 

Nature of Business:

 

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

 

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

 

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

 

·	Popeye	·	Garfield
·	Popeye’s Bonus Voyage	·	Jungle Book
·	Popeye’s Seven Seas	·	Golden Egg
·	Blondie’s Penny Bonanza	·	Just Jackpots
·	Hagar the Horrible	·	Duck Dynamite
·	Beetle Bailey	·	Candy Cash
·	Pink Panther	·	Olive Oyl’s Jumbo Stacks
·	Swamp Fever	·	Jumbo Fish Stacks
·	Vampires Fortune	·	Lightning Lotto
·	Penny Palooza	·	Slotto
·	Snow White	·	Year of the Horse

 

 

 

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

 

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

 

Basis of Presentation:

 

The unaudited interim financial statements contained herein should be read in conjunction with the Company’s annual report on Form 10-K filed on March 27, 2015 (“Form 10-K”). The accompanying interim financial statements are presented in accordance with the requirements of Article 8.03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, accordingly, do not include all the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) with respect to annual financial statements. The interim consolidated condensed financial statements have been prepared in accordance with the Company’s accounting practices described in the Form 10-K but have not been audited. In management’s opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods presented. The balance sheet data as of December 31, 2014 were derived from the Company’s audited financial statements, but do not include all disclosures required by GAAP. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the entire year.

 

 

 

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

 

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

 

Basis of Presentation (Continued)

 

The accompanying financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. The Company has limited capital resources however conditions have been improving and the Company expects these conditions will continue to improve. The Company has been generating operating income and cash from operations, however the generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to obtain the regulatory approvals required to distribute its products and successfully market them to more casinos. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flows to support our operations during 2015 and 2016, 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.

 

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.

 

There were no material changes during the most recent fiscal quarter in the Company’s significant accounting policies described in the Form 10-K.

 

The allowance for doubtful accounts at June 30, 2015 and December 31, 2014 was $10,000 and $4,000, respectively.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board issued converged guidance on recognizing revenue from contracts with customers. The new guidance removes inconsistencies in current revenue recognition requirements, provides a framework for addressing revenue issues, improves comparability of revenue recognition across industries, entities and jurisdictions, and provides more useful information to users of financial statements through improved disclosure requirements. This guidance replaces the numerous GAAP revenue recognition requirements that are industry specific and establishes the principles to report about the nature, timing, and uncertainty of revenue from contracts with customers to users of financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the Company is assessing the impact it will have on our financial statements.

 

In August 2014, the FASB issued guidance regarding disclosures in the presentation of financial statements when the uncertainty exists about an entity’s ability to continue as a going concern. The update provides guidance in GAAP about management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Along with requiring management’s assessment of the entity’s ability to continue as a going concern, the guidance provides:

 

·         a definition for the term “substantial doubt”;

·         requires an evaluation every reporting period including interim periods;

·         provides principles for considering the mitigating effect of management’s plans;

·         requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans;

 

 

 

 

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

 

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

 

Recent Accounting Pronouncements (Continued)

 

·         requires an express statement and other disclosures when substantial doubt is not alleviated; and

·         requires an assessment for a period of one year after the date that the financial statements are issued.

 

The amendment is effective for the annual and interim periods ending after December 15, 2016. The Company is assessing the impact this guidance may have on our financial statements.

 

In November 2014, the FASB issued an amendment under the derivatives and hedging topic. The amendment clarifies how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. In evaluating the nature of a host contract, the amendment states that an entity should assess the substance of the relevant terms and features when considering how to weight those terms and features. Specifically, the assessment of the substance should include consideration of the characteristics of the terms and features themselves, the circumstances under which the hybrid financial instrument was issued, and the potential outcomes of the hybrid financial instrument. The amendment is effective for the fiscal years and interim periods beginning after December 15, 2015. The Company is assessing the impact this guidance may have on our financial statements.

 

In January 2015, the FASB issued an update under the income statement topic, eliminating from GAAP the concept of an extraordinary item which required an entity to separately classify, present and disclose extraordinary events and transactions. Although the separate classification has been eliminated, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendment is effective for the fiscal years and interim periods beginning after December 15, 2015. The guidance will be applied prospectively to transactions and events meeting the criteria.

 

In April 2015, the FASB issued an update under the interest topic, requiring the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by this update. The amendment is effective for the fiscal years and interim periods beginning after December 15, 2015. The Company is assessing the impact this guidance may have on our financial statements.

 

In April 2015, the FASB added guidance to the Intangibles – Goodwill and Other – Internal-Use Software subtopic in order to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The update states that when a cloud computing arrangement includes a software license, the customer should account for a software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendment is effective for the fiscal years and interim periods beginning after December 15, 2015. The Company is assessing the impact this guidance may have on our financial statements.

 

In July 2015, the FASB issued an update under the inventory topic which more clearly articulates the requirements for the measurement and disclosure of inventory, stating that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in this update do not apply to inventory that is measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendment is effective for the fiscal years beginning after December 15, 2016 and interim periods beginning after December 15, 2017. The Company is assessing the impact this guidance may have on our financial statements.

 

 

 

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

 

Note 2.  Inventory

 

Inventory consists of the following:

		June 30, 2015				December 31, 2014
Finished products		$	1,685			$	1,685
Raw materials and work in process			197,509				130,876
Inventory		$	199,194			$	132,561

 

 

Note 3.  Property and Equipment

 

Property and equipment consist of the following:

		June 30, 2015				December 31, 2014
Equipment, principally gaming equipment under lease		$	4,189,943			$	4,213,187
Delivery truck			28,140				28,140
Furniture and fixtures			90,524				75,177
Leasehold improvements			91,794				91,794
Property and equipment			4,400,401				4,408,298
Less accumulated depreciation			(3,760,100	)			(3,588,809	)
Property and equipment, net		$	640,301			$	819,489

 

 

Note 4.  License Fees

 

License fees consist of the following:

		June 30, 2015				December 31, 2014
Purchased licenses		$	334,990			$	342,505
Less accumulated amortization			(295,164	)			(247,447	)
License fees, net		$	39,826			$	95,058

 

Purchased licenses are amortized over 3 years.

  

Note 5.  Debt

 

Notes payable, long term consists of the following:

		Warrants				June 30, 2015				December 31, 2014
The Co-Investment Fund II, L.P. (“CI II”)			12,151,385			$	14,750,000			$	14,750,000

 

Substantially all of the Company’s assets are pledged as collateral on debt and all of the notes are due on June 30, 2017 with interest at 8% on each note payable at maturity. In May 2015, the lender agreed to suspend the accrual of interest on all of the notes outstanding, effective April 1, 2015, in anticipation of converting its debt to equity in the Company as discussed further in Note 11, Subsequent Events.

 

 

 

 

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

 

Note 5.  Debt (Continued)

 

In accordance with various loans obtained by the Company, CI II holds warrants to purchase the following maximum number of shares of common stock as of June 30, 2015:

 

Maximum Number of Shares				Price per Share				Expiration Date
	8,901,385			$	1.00			April 12, 2016
	1,000,000			$	1.00			January 17, 2017
	1,000,000			$	1.00			July 6, 2017
	500,000			$	1.00			January 30, 2018
	500,000			$	1.00			May 6, 2018
	250,000			$	1.00			October 8, 2019
	12,151,385

 

The purchase price of the common stock is subject to adjustment from time to time pursuant to the anti-dilution provisions of the respective warrant agreements. Also, certain notes in the amount of $8,750,000 and related accrued interest of $4,121,195 at June 30, 2015 contain a right to convert the principal amount of the note and accrued interest into shares of common stock at the discretion of the note holder on the same terms and conditions of the next equity offering.

 

On August 6, 2015, the Company entered into an agreement with CI II in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including warrants for stock, as well as the 4,500,000 shares of Preferred Series A Nonvoting Capital Stock, were converted into 181,000 shares of Voting Common Stock and 33,300,000 shares of the newly issued Nonvoting Common Stock of the Company. Upon the conversion, all notes, loans, accrued interest, and warrants due to CI II were terminated in their entirety and all obligations were extinguished.

 

See Note 7, Stockholders’ Deficit, Note 9, Related Party Transactions, and Note 11, Subsequent Events for more information on debt and warrant transactions.

 

Note 6. Commitments

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

 

Rental expense is recognized on a straight-line basis over the life of the lease and is recorded as a deferred rent obligation during the abatement period. The deferred rent is reduced by the difference between the rent due and the straight-line expense upon commencement of the rental payments. Rental expense under this lease for the three months ended June 30, 2015 and 2014 was $34,751 and $34,330, respectively. Rental expense under this lease for the six months ended June 30, 2015 and 2014 was $70,681 and $65,102, respectively.

 

 

 

 

 

 

 

 

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

 

Note 6. Commitments (Continued)

 

Future minimum lease payments are as follows:

 

Year Ending December 31,				Amount
	2015			$	50,968
	2016				96,914
	2017				99,337
	2018				101,821
	2019				104,366
	2020 and thereafter				125,099
				$	578,505

 

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

 

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

 

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

 

In June 2011, the Company entered into a license agreement with Hearst Holdings, Inc. to use the brand Blondie and related family of characters in gaming devices distributed worldwide. The initial term of the agreement was for two years with the Company’s right to extend the agreement for eight additional one-year terms upon payment of minimum royalties. The Company and Hearst Holdings entered into a renewal agreement extending the renewal term from June 1, 2013 to December 31, 2015.

 

In November 2011, the Company entered into a license agreement with Hearst Holdings, Inc. to use the brand Beetle Bailey and related family of characters in gaming devices distributed worldwide. The initial term of the agreement was for two years with the Company’s right to extend the agreement for eight additional one-year terms upon payment of minimum royalties. The Company and Hearst Holdings entered into a renewal agreement extending the renewal term from January 1, 2014 to December 31, 2015.

 

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

 

 

 

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

 

Note 6. Commitments (Continued)

 

In October 2014, the Company entered into a license agreement with Paws, Inc. to use the brand Garfield and associated family of characters in gaming devices distributed worldwide, except in the embargo countries of Cuba, Iran and Sudan. The initial term of the agreement runs from December 1, 2014 to November 30, 2017 and is subject to a guaranteed minimum royalty of $75,000. In December 2014, the Company paid $25,000 as a non-refundable advance against the guaranteed royalty with an additional $25,000 payable before November 1, 2015 and another $25,000 payable before November 1, 2016. The guaranteed advanced payments are recoupable out of royalties earned on the license.

 

In November 2014, the Company entered into a license agreement with Hearst Holdings, Inc. for the worldwide distribution of gaming devices using Flash Gordon and associated family of characters. The initial term of the agreement runs from November 1, 2014 to October 31, 2017 with royalties based on a percentage of revenues earned on the license, payable on a quarterly basis commencing January 31, 2016.

 

At June 30, 2015, the Company had total license fee commitments and advances made as follows:

 

			Minimum Commitments
Total royalty and license fee commitments		$	81,250
Advances made			(31,250	)
Potential future payments		$	50,000

 

As of June 30, 2015, the Company estimates that potential future royalty payments will be as follows:

 

Year ending December 31,				Minimum Commitments
	2015			$	25,000
	2016				25,000
	Potential future payments			$	50,000

 

Note 7.  Stockholders’ Deficit

 

Stock Option Plan: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants, and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "Stock Plan") having substantially the same terms. The options are granted at the discretion of the Board of Directors and, at December 31, 2014, the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each option will be determined by the Board of Directors at the time the option is granted, but in no event will be less than 100% of the fair market value of the common stock at the time of grant. Options granted will not be exercisable after 10 years from the grant date. Options generally vest at 20% per year starting from the grant date and are fully vested after five years. The options can be exercised in partial or full amounts upon a change in control and at such other times as specified in the award agreements.

 

 

 

 

 

 

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

 

Note 7.  Stockholders’ Deficit (Continued)

 

Stock Option Plan (Continued)

 

A summary of option transactions in 2015 is as follows:

		Shares				Weighted Average Exercise Price
Outstanding at December 31, 2014			1,198,000			$	1.64
Options granted			—				—
Options exercised			—				—
Options cancelled			—				—
Options outstanding at June 30, 2015			1,198,000			$	1.64
Options available for grant under the Stock Plan at June 30, 2015			1,302,000

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based upon publicly traded companies with characteristics similar to those of the Company. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted during the six months ended June 30, 2015.

 

Stock-based compensation expense is recognized in the statement of operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures. Compensation expense related to stock options for the three months ended June 30, 2015 and 2014 was $253 and $1,974, respectively. For the six months ended June 30, 2015 and 2014, compensation expense related to stock options was $506 and $5,194, respectively.

 

The following table summarizes information with respect to stock options outstanding at June 30, 2015:

 

Options Outstanding					Vested Options
Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Contractual Term (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value
1,198,000	2.5	$1.64	-		1,192,000	2.5	$1.63	-

 

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

 

Options Outstanding					Vested Options
Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Contractual Term (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value
1,198,000	3.0	$1.64	-		1,192,000	3.0	$1.63	-

 

 

 

As of June 30, 2015, there was approximately $84 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan. The cost is expected to be recognized over a weighted-average period of .1 years.

 

 

 

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

 

Note 7.  Stockholders’ Deficit (Continued)

 

Warrants:  In accordance with the loans obtained by the Company, the lender holds warrants to purchase 12,151,385 shares of the Company’s common stock at a price of $1.00 per share, expiring at various times from April 2016 through October 2019. The purchase price shall be subject to adjustment from time to time pursuant to the respective provisions of the warrant agreements. The Company calculates the value of these warrants at the time of issuance using a Binomial Pricing Model. On August 6, 2015, the Company entered into an agreement with CI II in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including the warrants listed above, as well as the 4,500,000 shares of Preferred Series A Nonvoting Capital Stock, were converted into shares of the Company’s Common Stock. See Note 11, Subsequent Events, for further details on the conversion.

 

The following table is a summary of the Company’s warrant activity for the six months ended June 30, 2015:

 

		Warrants Outstanding				Weighted Average Exercise Price
Outstanding at December 31, 2014			12,151,385			$	1.00
Warrants granted			—				—
Warrants exercised			—				—
Warrants cancelled			—				—
Warrants outstanding at June 30, 2015			12,151,385			$	1.00

 

 

The following table summarizes information with respect to warrants outstanding at June 30, 2015:

  

Warrants Outstanding					Vested Warrants
Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Exercise Price	Aggregate Intrinsic Value
12,151,385	1.2	$1.00	-		12,151,385	$1.00	-

 

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

 

Warrants Outstanding					Vested Warrants
Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Exercise Price	Aggregate Intrinsic Value
12,151,385	1.7	$1.00	-		12,151,385	$1.00	-

  

For the six months ended June 30, 2015, the weighted average fair value per share of each warrant was $.01.

 

 

 

 

 

 

 

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

 

Note 7.  Stockholders’ Deficit (Continued)

 

Warrants (Continued) 

 

The fair value of each warrant is estimated using the Binomial pricing model, with the following assumptions for the six months ended June 30, 2015:

		2015
Weighted average volatility			40.7	%
Expected dividend yield			—
Expected term (in years)			1.1
Weighted average risk free interest rate			.4	%

 

The changes in Level 3 liabilities measured at fair value on a recurring basis are summarized as follows:

 

		Fair Value of Debt Conversion Feature				Fair Value of Warrants
Balance December 31, 2014		$	—			$	26,945
Net change in fair value			—				(6,424	)
Balance June 30, 2015		$	—			$	20,521

 

 

Note 8.  Income Taxes

 

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

 

As of June 30, 2015, the Company has available, for federal and state income tax purposes, net operating loss (“NOL”) carryforwards of approximately $18,836,000, which expire at various times through 2034. The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods. The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the financial statements.

 

 

Note 9.  Related Party Transactions

 

In October 2014, the Company borrowed $250,000 from The Co-Investment Fund II, L.P. (“CI II”) to fund the purchase of twenty-five slot machine cabinets and component parts. The note is due on June 30, 2017 together with interest at the rate of 8% per annum. The note may be converted to Nonvoting Stock at $1.00 per share at the discretion of the lender. A warrant to purchase 250,000 shares of common stock was issued concurrently with the note.

 

On December 19, 2014, Stewart J. Greenebaum, LLC (“Greenebaum”) sold all of its legal rights, title and interest in and to the stock, notes, including all accrued interest thereon, and warrants held with respect to the Company as of that date to CI II. Among the items transferred were 1,500,000 shares of Series A Nonvoting capital stock, notes of $1,000,000 in principal including accrued interest, convertible notes of $2,000,000 in principal including accrued interest, and warrants to purchase 2,500,000 shares of common stock at $1.00 per share.

 

 

 

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

 

Note 9. Related Party Transactions (Continued)

 

In May 2015, the lender agreed to suspend the accrual of interest on all of the notes outstanding, effective April 1, 2015, in anticipation of entering into an agreement with the Company to convert its debt outstanding into equity. On August 6, 2015, the Company entered into an agreement with CI II in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including the warrants listed above, as well as the 4,500,000 shares of Preferred Series A Nonvoting Capital Stock, were converted into shares of the Company’s Common Stock. See Note 11, Subsequent Events, for further details on the conversion.

 

During the three months ended June 30, 2015 and 2014 interest expense on all of the loans, including those transferred from Greenebaum to CI II as described above, amounted to $0 and $289,945, respectively. Interest on the loans from CI II was $294,658 and $579,671 for the six months ended June 30, 2015 and 2014, respectively. During 2015 and 2014, the Company made no principal or interest payments on those loans.

 

At June 30, 2015, included in the notes held by CI II and accrued interest thereon are notes in the principal amount of $8,750,000 and accrued interest of $4,121,195, which are convertible into shares of our common stock on the same terms and conditions of the next equity offering.

 

As of June 30, 2015, CI II holds warrants to purchase up to 12,151,385 shares of common stock at a weighted average exercise price of $1.00 per share.

 

 

Note 10. Concentration of Risk – Major Customers

 

The Company generated approximately 15% of its revenue from its top three customers for the six months ended June 30, 2015 and 13% of its revenue from its top three customers for the six months ended June 30, 2014.

 

 

Note 11. Subsequent Events

 

On July 27, 2015, the Company amended its Articles of Incorporation increasing the authorized number of shares of Common Stock to 150 million, creating a new class of stock called Nonvoting Common Stock, and authorizing the issuance of up to 50 million shares of Nonvoting Common Stock.

 

On August 6, 2015, the Company entered into an agreement with CI II in which the entire principal and accrued interest on promissory notes and other related loan agreements outstanding and due to CI II, including warrants for stock, as well as the 4,500,000 shares of Preferred Series A Nonvoting Capital Stock, were converted into 181,000 shares of Voting Common Stock and 33,300,000 shares of the newly issued Nonvoting Common Stock of the Company. Upon the conversion, all notes, loans, accrued interest, and warrants due to CI II were terminated in their entirety and all obligations were extinguished.

 

 

 

 

 

  

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

 

 

 

Overview

 

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

 

·	Popeye	·	Garfield
·	Popeye’s Bonus Voyage	·	Jungle Book
·	Popeye’s Seven Seas	·	Golden Egg
·	Blondie’s Penny Bonanza	·	Just Jackpots
·	Hagar the Horrible	·	Duck Dynamite
·	Beetle Bailey	·	Candy Cash
·	Pink Panther	·	Olive Oyl’s Jumbo Stacks
·	Swamp Fever	·	Jumbo Fish Stacks
·	Vampires Fortune	·	Lightning Lotto
·	Penny Palooza	·	Slotto
·	Snow White	·	Year of the Horse

 

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

 

Our Poker Table is designed to increase revenue and security while helping to reduce the labor costs associated with poker play. Our Poker Table achieves the goal of increasing revenue by allowing a larger number of hands to be played per hour, increasing the “rake” or per-hand fee collected by the operator commensurately. The elimination of a live dealer also reduces labor costs and permits more tables to be operational in jurisdictions where skilled poker dealers are in short supply. In 2008, we developed a newer version of the Poker Table, which eliminated the need for a separate, stand-alone cashless accounting system. The newer version allows for cash management at the Poker Table.

 

Our slot machines are placed into the market using a daily lease model or a revenue sharing model. We have 231 slot machines out on lease or revenue share in 57 different casinos and cruise ships. As of July 31, 2015, we have sold or leased 62 newer version Poker Tables to domestic and international casinos, card rooms, and cruise ships.

 

We are registered as an approved vendor to distribute products to gaming venues located in 16 state and Canadian province jurisdictions.

 

We have generated operating revenues and cash from operations, but we have a history of losses since our inception. We incurred a net loss of $270,803 in the six months ended June 30, 2015.

 

 

 

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

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

 

Revenues

 

The Company’s revenues for the three months ended June 30, 2015 were $950,000 compared to $972,000 for the comparable prior year period. The decrease in revenues was due to the decrease in lease revenues received from our Poker Tables which was mitigated by the increase in slot machine lease and license fees.

 

Sales of gaming products, namely slot machines, decreased by $4,000 to $53,000 for the three months ended June 30, 2015 as compared to $57,000 for the three months ended June 30, 2014. This decrease was due to the decrease in the number of installed slot machines sold during the quarter.

 

Lease and license fees decreased by a net of $18,000 (2%) to $897,000 for the three months ended June 30, 2015 as compared to $915,000 for the three months ended June 30, 2014 as a result of the Poker Table sold in February of 2015 that was previously leased and the expiration of other Poker Table leases. This decrease of $29,000 was offset by the increase in slot machine lease and license fees of $11,000 due to the placement of 4 additional slot machines in casinos.

 

Cost of Products Sold

 

For the three months ended June 30, 2015, cost of products sold decreased by $23,000 (94%) as compared to the three months ended June 30, 2014 however gross margin on the slot machine sales was 97% for the three months ended June 30, 2015 versus 57% for the three months ended June 30, 2014.

 

Operating Expenses

 

Operating expenses decreased by $6,000 to $200,000 for the three months ended June 30, 2015, from $206,000 for the three months ended June 30, 2014 as a result of the elimination of the lease commissions on the sold and terminated Poker Table leases.

 

Research and Development Expenses

 

Research and development expenses increased by $9,000 to $130,000 for the three months ended June 30, 2015, from $121,000 for the three months ended June 30, 2014. 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 and the costs to acquire new brands. This increase was due to the increase in guaranteed royalties associated with new brands acquired in 2014.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $44,000 to $472,000 for the three months ended June 30, 2015, from $428,000 for the three months ended June 30, 2014. This increase was the net effect of the reversal of $111,000 in prior year’s compliance costs, the result of an agreement between the Company and a former service provider settling and releasing all claims regarding disputed work previously performed and discharging all invoices outstanding, offset by the decrease in the bonus accrual and decreased participation in regional trade shows and related costs.

 

Depreciation and Amortization

 

Depreciation and amortization decreased by $51,000 to $139,000 for the three months ended June 30, 2015 from $190,000 for the three months ended June 30, 2014. This decrease was the result of the reduction of depreciation for slot machines that were fully depreciated.

 

Net Interest Expense

 

Net interest expense decreased by $290,000 to $0 for the three months ended June 30, 2015 from $290,000 for the three months ended June 30, 2014. This decrease was as a result of the agreement by the lenders to discontinue the accrual of interest effective April 1, 2015, in anticipation of converting its debt into equity of the Company.

 

 

 

 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

Revenue

 

The Company’s revenues for the six months ended June 30, 2015 were $1,928,000 compared to $1,896,000 for the comparable prior year period, an increase of $32,000 or 2%. The increase in revenues was primarily due the increase in license fees earned attributable to the placement of our slot machines during the year.

   

Cost of Products Sold

 

For the six months ended June 30, 2015, cost of products sold decreased $23,000 to $1,000 from $24,000 for the six months ended June 30, 2014. This decrease was due to the decrease in the number of installed slot machines sold during the year.

 

Operating Expenses

 

Operating expenses increased $4,000 to $399,000 for the six months ended June 30, 2015, from $395,000 for the six months ended June 30, 2014. The increase is primarily the result of fees associated with the transfer of licensed slot machines from one casino to another.

 

Research and Development Expenses

 

Research and development expenses increased by $10,000 to $250,000 for the six months ended June 30, 2015, from $240,000 for the six months ended June 30, 2014. 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 was due to the increase in guaranteed royalties associated with new brands acquired in the second half of 2014.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $18,000 to $978,000 for the six months ended June 30, 2015, from $960,000 for the six months ended June 30, 2014. This increase was the net effect of the reversal of $111,000 in prior year’s compliance costs, as described above, offset by the decrease in the bonus accrual and decreased participation in regional trade shows and related costs.

   

Depreciation and Amortization

 

Depreciation and amortization decreased $105,000 from $388,000 for the six months ended June 30, 2014 to $283,000 for the six months ended June 30, 2015. This decrease was from assets built and placed in gaming venues in prior years that are now fully depreciated.

 

Net Interest Expense

 

Net interest expense decreased $285,000 from $580,000 for the six months ended June 30, 2014 to $295,000 for the six months ended June 30, 2015. This decrease was as a result of the agreement by the lenders to discontinue the accrual of interest effective April 1, 2015, in anticipation of converting its debt into equity of the Company.

 

Liquidity and Capital Resources

      

Although we have incurred net losses since inception and have historically funded our operating costs, research and development activities, working capital investments and capital expenditures associated with our growth strategy with proceeds from the issuances of our stock and loans in the past, we are currently generating positive cash flow from operations and anticipate that we will have sufficient resources to support our cash needs during the current year. Our cash flows are discussed in further detail below:

 

 

 

Discussion of Statement of Cash Flows

 

		Six Months Ended June 30,
		2015				2014				Change
Net cash provided by (used in) operating activities		$	146,352			$	(103,878	)		$	250,230
Net cash provided by (used in) investing activities			2,090				(161,691	)			163,781
Net cash provided by financing activities			750				—				750
Net increase (decrease) in cash			149,192				(265,569	)		$	414,761
Cash, beginning of year			274,547				462,200
Cash, end of period		$	423,739			$	196,631

 

For the six months ended June 30, 2015, cash provided by operating activities increased $250,000 (240%) to $146,000 as compared to cash used in operating activities of $104,000 for the six months ended June 30, 2014. The increase in cash from operating activities was due to the increase in slot machine revenues and gains on slot machines sold along with the decreases in the outlay of cash required for regulatory license applications and renewals and the timing of payments to creditors, suppliers and vendors.

 

Net cash provided by investing activities increased $164,000 (101%) to $2,000 for the six months ended June 30, 2015 from cash used of $162,000 for the six months ended June 30, 2014. Cash used in investing activities is primarily the function of the net investment in property and equipment, principally slot machines used in our operations, and brand licenses. This increase was the result of the $195,000 reduction in both slot machine purchases and investments in brand licenses offset by the reduction in proceeds from the sale of slot machines of $31,000.

 

Net cash provided by financing activities was $1,000 for the six months ended June 30, 2015, an increase of $1,000 from $0 for the six months ended June 30, 2014, which represented the net proceeds from the issuance of common stock to a non-related party during the year.

 

Operations and Liquidity Management

 

For the six months ended June 30, 2015, we incurred a net loss of $270,803 however we generated $146,352 in cash from operating activities. At June 30, 2015, our cash balance was $423,739. The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to obtain the regulatory approvals required to distribute our products and successfully market them to casinos and card clubs.

 

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

 

Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flow to support our operations during 2015 and 2016.

 

 

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of June 30, 2015:

 

		Total				Less than 1 year				1 - 3 years				3 - 5 years				More than 5 years
Debt obligations (1)		$	22,722,483			$	—			$	22,722,483			$	—			$	—
Operating lease obligations (2)			578,505				99,024				198,684				208,743				72,054
Royalty fee obligation (3)			50,000				25,000				25,000				—				—
Total		$	23,350,988			$	124,024			$	22,946,167			$	208,743			$	72,054

 

(1)	Represents the outstanding principal amount of notes and accrued interest at the rate of 8% annually.
(2)	Represents operating lease agreements for office and warehouse facilities.
(3)	Represents guaranteed royalty fee for brand license.

 

 

Off-Balance Sheet Arrangements

 

As of June 30, 2015, there were no off-balance sheet arrangements.

 

 

Going Concern

 

The Company’s financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. We have limited capital resources however conditions have been improving and the Company expects these conditions will continue to improve. We have been generating operating income and cash from operations, however the generation of cash flow sufficient to meet the Company’s cash needs in the future will depend on the Company’s ability to continue to obtain the regulatory approvals required to distribute its products and successfully market them to more casinos. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flows to support our operations during 2015 and 2016, 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.

 

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 June 30, 2015, 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, 2015, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There were no changes in our internal control over financial reporting during our quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 PART II - OTHER INFORMATION

 

Item 1.   Legal Proceedings.

 

None

 

 

Item 1A. Risk Factors.

 

None

 

 

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

 

None

 

 

Item 3.  Defaults Upon Senior Securities.

 

None

 

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

 

Item 5.   Other Information.

 

None

 

 

 

Item 6.   Exhibits.  

 

 

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

 

 

 

SIGNATURES

 

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

 

Date:  August 12, 2015	Lightning Gaming, Inc.
	By:	/s/ Brian Haveson                                         Brian Haveson President, Chief Executive Officer and Director

 

 

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