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, 2017
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: 4,688,474 shares of (voting) Common Stock as of August 11, 2017; 33,300,000 shares of Nonvoting Common Stock as of August 11, 2017; and -0- shares of Series A Nonvoting Capital Stock as of August 11, 2017.

 

 

 

 

 

	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	15
	Item 3.	Quantitative and Qualitative  Disclosures About Market Risk	20
	Item 4.	Controls and Procedures	20
	PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	21
	Item 1A.	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3.	Defaults Upon Senior Securities	21
	Item 4.	Mine Safety Disclosures	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	21

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

1	Consolidated  Balance Sheets as of  June 30, 2017 (unaudited) and December 31, 2016 (audited);
2	Unaudited Consolidated Statements of Operations for the three months ended June 30, 2017 and 2016;
3	Unaudited Consolidated Statements of Operations for the six months ended June 30, 2017 and 2016;
4	Unaudited Consolidated  Statements of Cash Flows for the six months ended June 30, 2017 and 2016;
5	Notes to Consolidated Condensed Financial Statements.

 

 

 

 

 

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

		June 30,  2017				December 31, 2016
		(unaudited)				(audited)
Assets
Current Assets
Cash		$	254,218			$	252,306
Accounts receivable, net			298,577				452,190
Inventory			97,790				127,753
Prepaid expenses			135,625				95,581
Total Current Assets			786,210				927,830
Property and Equipment, net			107,174				148,467
Other Assets			8,193				8,193
License fees, net of accumulated amortization			20,407				37,907
Total Assets		$	921,984			$	1,122,397
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	124,266			$	194,939
Accrued expenses			71,479				134,007
Total Current Liabilities			195,745				328,946
Long-Term Liabilities			47,774				51,543
Commitments (Note 5)
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 4,688,474 shares outstanding			4,917				4,917
Nonvoting common stock: $0.001 par value; authorized 50,000,000 shares; 33,300,000 shares issued and outstanding			33,300				33,300
Additional paid in capital			30,362,803				30,348,856
Accumulated deficit			(29,703,744	)			(29,626,354	)
Treasury stock, 227,811 shares, at cost			(18,811	)			(18,811	)
Total Stockholders’ Equity			678,465				741,908
Total Liabilities and Stockholders’ Equity		$	921,984			$	1,122,397
See Notes to Consolidated Condensed Financial Statements

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Three Months Ended June 30, 2017 and 2016

 

 

		June 30,  2017				June 30, 2016
		(unaudited)				(unaudited)
Revenues
Lease and license fees		$	539,363			$	581,841
Sales of gaming products and parts			32,903				125,870
Total revenues			572,266				707,711
Costs and operating expenses
Cost of products sold			8,713				33,133
Operating expenses			117,176				127,698
Research and development			89,071				102,294
Selling, general and administrative expenses			499,607				482,128
Depreciation and amortization			30,129				77,417
Total costs and operating expenses			744,696				822,670
Net loss		$	(172,430	)		$	(114,959	)
Net loss per share including Nonvoting Common and Series A Nonvoting shares-basic and diluted		$	(0.00	)		$	(0.00	)
Weighted average Series A Nonvoting shares outstanding-basic and diluted			—				—
Weighted average Common shares outstanding-basic and diluted			4,688,474				4,688,474
Weighted average Nonvoting Common shares outstanding-basic and diluted			33,300,000				33,300,000
See Notes to Consolidated Condensed Financial Statements

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Six Months Ended June 30, 2017 and 2016

 

 

		June 30,  2017				June 30, 2016
		(unaudited)				(unaudited)
Revenues
Lease and license fees		$	1,123,905			$	1,254,646
Sales of gaming products and parts			233,116				126,938
Total revenues			1,357,021				1,381,584
Costs and operating expenses
Cost of products sold			16,779				87,616
Operating expenses			237,411				255,581
Research and development			179,604				219,959
Selling, general and administrative expenses			929,754				1,049,779
Depreciation and amortization			70,863				167,949
Total costs and operating expenses			1,434,411				1,780,884
Net loss		$	(77,390	)		$	(399,300	)
Net loss per share including Nonvoting Common and Series A Nonvoting shares-basic and diluted		$	(0.00	)		$	(0.01	)
Weighted average Series A Nonvoting shares outstanding-basic and diluted			—				—
Weighted average Common shares outstanding-basic and diluted			4,688,474				4,688,474
Weighted average Nonvoting Common shares outstanding-basic and diluted			33,300,000				33,300,000
See Notes to Consolidated Condensed Financial Statements

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2017 and 2016

 

 

		June 30,  2017				June 30, 2016
		(unaudited)				(unaudited)
Net Cash Provided by (Used in) Operating Activities		$	3,744			$	(81,059	)
Cash Flows From Investing Activities
Purchase of equipment			(14,332	)			(39,670	)
Proceeds from sale of equipment			—				18
Decrease in license fees			12,500				13,200
Net Cash Used in Investing Activities			(1,832	)			(26,452	)
Net Increase (Decrease) in Cash			1,912				(107,511	)
Cash - Beginning of period			252,306				357,477
Cash - End of period		$	254,218			$	249,966
Supplemental Disclosure of Non-Cash Financing Activities:
Inventory transferred to equipment		$	18,304			$	—
See Notes to Consolidated Condensed Financial Statements

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

June 30, 2017

 

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

  

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.

 

 

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:

 

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, 2017 (“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, 2016 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, 2017 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. Historically, the Company has had net operating losses and negative cash flows from operations however it has a significantly lower net loss in the current six month period ending June 30, 2017 than the six month period ending June 30, 2016, realized positive cash flows from operations for the period ending June 30, 2017, 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 card clubs. Based on our current financial condition, cash flow projections and anticipated revenues, we believe we have sufficient cash flows to support our operations for the next twelve months, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects for expansion. The Company’s continuance as a going concern is dependent upon these factors, among others. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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, 2017 and December 31, 2016 was $21,121 and $12,331, respectively.

 

Recent Accounting Pronouncements

 

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

 

 

 

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)

 

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

 

The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company has read through the guidance and subsequent updates, attended seminars on the topic, and has continued to review and assess the impact it will 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 became effective for the fiscal year beginning after December 15, 2016 and did not have a material impact on our financial statements.

 

In November 2015, the FASB issued an update under the income taxes topic, simplifying the presentation of deferred income taxes, requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This update aligns the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (“IFRS”). The amendments in this update became effective for interim and annual periods beginning after December 15, 2016, and did not have a material impact on our financial statements.

 

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.

 

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.

 

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 operating leases, lessees are required to:

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

 

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

 

The amendments in this update are effective for fiscal and interim periods beginning after December 15, 2018 and the Company is assessing the impact this guidance will have on our financial statements.

 

In March 2016, the FASB issued an update on the stock compensation topic, simplifying several aspects of the accounting for share-based payment transactions, including income tax consequences, balance sheet classification of awards as either equity or liabilities, and statement of cash flows classification. The amendments in the update became effective for annual and interim periods beginning after December 15, 2016 and did not have a material impact on our financial statements.

 

Note 2.  Inventory

 

Inventory consists of the following:

		June 30, 2017				December 31, 2016
Finished products		$	1,685			$	19,989
Raw materials and work in process			96,105				107,764
Inventory		$	97,790			$	127,753

 

 

Note 3.  Property and Equipment

 

Property and equipment consist of the following:

		June 30, 2017				December 31, 2016
Equipment, principally gaming equipment under lease		$	3,879,846			$	3,956,072
Delivery truck			28,140				28,140
Furniture and fixtures			95,316				92,237
Leasehold improvements			91,794				91,794
Property and equipment			4,095,096				4,168,243
Less accumulated depreciation			(3,987,922	)			(4,019,776	)
Property and equipment, net		$	107,174			$	148,467

 

 

 

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

 

Note 4.  License Fees

 

License fees consist of the following:

		June 30, 2017				December 31, 2016
Purchased licenses		$	350,729			$	363,229
Less accumulated amortization			(330,322	)			(325,322	)
License fees, net		$	20,407			$	37,907

 

Purchased licenses are amortized over 3 years.

 

Note 5.  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 each of the three months ended June 30, 2017 and 2016 was $33,045 and $43,347, respectively. Rental expense under this lease for each of the six months ended June 30, 2017 and 2016 was $68,976 and $79,710, respectively.

 

Future minimum lease payments are as follows:

 

Year Ending December 31,				Amount
	2017			$	50,079
	2018				101,821
	2019				104,366
	2020				106,976
	2021				18,124
				$	381,366

 

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.

 

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

 

Note 5. Commitments (Continued)

 

 

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. 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, and a third renewal agreement extending the license and sublicense renewal term from January 1, 2017 to December 31, 2018. The third renewal agreement is subject to a guaranteed minimum royalty of $50,000, $25,000 payable on or before December 31, 2017 and $25,000 payable on or before December 31, 2018.

 

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, 2015, and 2016, the Company paid $25,000 as non-refundable advances against the guaranteed royalty. 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 which commenced on January 31, 2016.

 

In July 2016, the Company entered into a license agreement with Ainsworth Game Technology Ltd for the intellectual property rights to use certain game technology in slot machines titled as Flash Gordon, Ye Xian and Cash Flow. The term of the agreement runs from July 1, 2016 to May 30, 2018 with royalties based on a percentage of revenues earned on the slot machines running the aforementioned titles, payable on a quarterly basis with the first royalty payment due and paid for October 31, 2016.

 

At June 30, 2017, the Company had total license fee commitments and advances made as follows:

			Minimum Commitments
Total royalty and license fee commitments		$	125,000
Advances made			(84,749	)
Potential future payments		$	40,251

 

As of June 30, 2017, the Company estimates that potential future royalty payments will be as follows:

 

Year ending December 31,				Minimum Commitments
	2017			$	15,251
	2018				25,000
	Potential future payments			$	40,251

 

 

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

 

Note 6.  Stockholders’ Equity

  

 

Stock Option Plans: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "2007 Plan") having substantially the same terms. The options are granted at the discretion of the Board of Directors and, at June 30, 2017, 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.

 

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 2017 under the 2007 Plan is as follows:

		Shares				Weighted Average Exercise Price
Outstanding at December 31, 2016			885,000			$	1.80
Options granted			—				—
Options exercised			—				—
Options cancelled			(10,000	)			1.10
Options outstanding at June 30, 2017			875,000			$	1.81
Options available for grant under the 2007 Plan at June 30, 2017			1,625,000

 

There were no options granted during the six months ended June 30, 2017 under the 2007 Plan.

 

On March 8, 2017, the Board of Directors approved by unanimous written consent, the authorization to grant to employees with at least one year of service, non-qualified stock options to purchase 4,015,000 shares of nonvoting common stock of the Company under its 2016 Plan. The options were issued at an exercise price of $.28 per share and vest ratably over five years. The options are subject to the terms and conditions of the 2016 Plan and each individual’s stock option agreement.

 

 

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

 

Note 6.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

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

		Shares				Weighted Average Exercise Price
Outstanding at December 31, 2016			—			$	—
Options granted			4,015,000				.28
Options exercised			—				—
Options cancelled			(75,000	)			.28
Options outstanding at June 30, 2017			3,940,000			$	.28
Options available for grant under the 2016 Plan at June 30, 2017			1,760,000

 

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. Compensation expense related to stock options for the three months ended June 30, 2017 and 2016 was $2,274 and $-0-, respectively. Compensation expense related to these stock options for the six months ended June 30, 2017 and 2016 was $13,946 and $-0-, respectively. 

 

The following table summarizes information with respect to stock options outstanding at June 30, 2017:

		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	875,000	0.9	$1.81	-		875,000	0.9	$1.81	-
	2016 Plan	3,940,000	9.7	$0.28	-		-	-	-	-

 

The following table summarizes information with respect to stock options outstanding at December 31, 2016: 

 

		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	885,000	1.3	$1.80	-		885,000	1.3	$1.80	-
	2016 Plan	-	-	-	-		-	-	-	-

 

As of June 30, 2017, all compensation costs related to share-based compensation arrangements granted under the 2007 Plan had been fully recognized. As of June 30, 2017, there was approximately $201,446 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 4.7 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.

 

 

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

 

 

Note 7.  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, 2017, the Company has available, for federal and state income tax purposes, carryforwards of approximately $13,653,000, 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.

 

Note 8. Concentration of Risk – Major Customers

 

The Company generated approximately 27% and 15% of its revenue from its top three customers for each of the six months ended June 30, 2017 and 2016, respectively.

 

 

 

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

  

 

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 in to the market using a daily lease model or a revenue sharing model. We have 198 slot machines out on lease or revenue share in 40 different casinos and cruise ships. As of August 11, 2017, 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 14 state 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 $77,390 in the six months ended June 30, 2017.

 

 

 

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

 

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

 

Revenues

 

The Company’s revenues for the three months ended June 30, 2017 were $572,000 compared to $708,000 for the comparable prior year period, a decrease of $136,000. This decrease was attributable to the sales of slot machines, which decreased by $93,000 to $33,000 for the three months ended June 30, 2017 as compared to $126,000 for the three months ended June 30, 2016. Lease and license fees decreased by a net of $42,000 to $539,000 for the three months ended June 30, 2017 as compared to $582,000 for the three months ended June 30, 2016. Although the leased slot machine base was higher as of June 30, 2017 than that as of June 30, 2016, the decrease in lease revenues was due to the lower leased slot machine base in April and May of 2017 versus April and May of 2016.

 

Pressure on casinos to reduce lease expense and cut costs, consolidations and mergers in the industry creating mega-corporations that undercut pricing to gain market share and eliminate competition, and casinos increasing hold percentages that reduce win percentages on which revenue-share fees are based were several of the reasons for the reduction in the lease revenue and the recurring leased revenue base. In order to diminish the effects of the decrease in lease revenues, an aggressive for-sale market of our slot machines was implemented and is successfully generating revenues and cash flow. Sales of slot machines reduced the recurring revenue leased install base by 30 machines in 2016 and an additional 14 in the first quarter of 2017.

 

Cost of Products Sold

 

Cost of products sold for the three months ended June 30, 2017 was $9,000 for 6 slot machines as compared to $33,000 for the three months ended June 30, 2016 for 16 slot machines.

 

Operating Expenses

 

Operating expenses decreased $11,000 to $117,000 for the three months ended June 30, 2017, from $128,000 for the three months ended June 30, 2016. This decrease was the result of the reversal of license fees accrued in 2016 which were reduced by agreement with the licensor, offset by the increase in materials, placement, conversion and absorption costs from the increase in the install base recognized during the quarter.

 

Research and Development Expenses

 

Research and development expenses decreased by $13,000 to $89,000 for the three months ended June 30, 2017, from $102,000 for the three months ended June 30, 2016. Research and development expenses are primarily related to the development of new gaming equipment themes and technology and consist mainly of payroll and related expenses for programmers and graphic artists, software, and consulting fees. This decrease is attributable to the payroll and benefit costs associated with the elimination of the director of technology position in 2016 and lower royalty expense from the decrease in installed licensed themes.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $18,000 to $500,000 for the three months ended June 30, 2017, from $482,000 for the three months ended June 30, 2016. This increase is primarily due to the payroll and related commission and travel expenses associated with the addition of a southeast regional sales person in March of 2017.

 

Depreciation and Amortization

 

Depreciation and amortization decreased by $48,000 to $30,000 for the three months ended June 30, 2017 from $78,000 for the three months ended June 30, 2016. This decrease was the result of the reduction of depreciation for slot machines that were fully depreciated and/or sold during the first half of 2017 and in 2016.

 

 

 

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

 

Revenue

 

The Company’s revenues for the six months ended June 30, 2017 were $1,357,000 compared to $1,382,000 for the comparable prior year period, a decrease of $25,000. The decrease in revenues was due to the lower installed slot machine base during the first five months of 2017 versus the same time frame in 2016. As explained above, pressure on casinos to reduce lease expense and cut costs, consolidations and mergers in the industry creating mega-corporations that undercut pricing to gain market share and eliminate competition, and casinos increasing hold percentages that reduce win percentages on which revenue-share fees are based were several of the reasons for the reduction in the revenue and the recurring revenue base. In addition, while the for-sale market of our slot machines is successfully generating revenue and cash flow, it is also reducing the recurring revenue install base. The for-sale market reduced recurring revenue machines by 14 in 2017 and an additional 18 in the first half of 2016.

 

Cost of Products Sold

 

For the six months ended June 30, 2017, cost of products sold decreased $70,000 to $17,000 from $87,000 for the six months ended June 30, 2016. This decrease was due to fewer machines sold in 2017 versus 2016 and the lower net cost of the slot machines sold.

 

Operating Expenses

 

Operating expenses decreased $19,000 to $237,000 for the six months ended June 30, 2017, from $256,000 for the six months ended June 30, 2016. This decrease was the result of the reversal of license fees accrued in 2016 which were reduced by agreement with the licensor, offset by higher costs directly associated with the slot machine activity during the year, i.e. materials, conversions, installation, and service relating to installations and removals.

 

Research and Development Expenses

 

Research and development expenses decreased by $40,000 to $180,000 for the six months ended June 30, 2017, from $220,000 for the six months ended June 30, 2016. Research and development expenses are related to the development of gaming equipment and consist mainly of payroll and related expenses for programmers and graphic artists and the costs to acquire new brands. This decrease is primarily attributable to the reduction in the number of programmers on staff during the year.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $120,000 to $930,000 for the six months ended June 30, 2017, from $1,050,000 for the six months ended June 30, 2016. This decrease was primarily due to the additional professional fees that were incurred in 2016 associated with the annual SEC audit requirements as a result of the change in the principal accountant that occurred in 2015 as well as a decrease in lab fees associated with new product testing. These decreases were offset in part by the increase in payroll and related commission and travel expenses associated with the addition of a regional sales person in March of 2017.

   

Depreciation and Amortization

 

Depreciation and amortization decreased $97,000 from $168,000 for the six months ended June 30, 2016 to $71,000 for the six months ended June 30, 2017. This decrease was from assets built and placed in gaming venues in prior years that were sold or are now fully depreciated.

 

Liquidity and Capital Resources

      

Prior to 2015, we had 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. Since then, we have been able to fund these costs with the proceeds from the sales of our gaming products as described in more detail in the discussion of cash flows below:

 

 

 

Discussion of Statement of Cash Flows

		Six Months Ended June 30,
		2017				2016				Change
Net cash provided by (used in) operating activities		$	3,744			$	(81,059	)		$	84,803
Net cash used in investing activities			(1,832	)			(26,452	)			24,620
Net cash provided by financing activities			—				—				—
Net increase (decrease) in cash			1,912				(107,511	)		$	109,423
Cash, beginning of year			252,306				357,477
Cash, end of period		$	254,218			$	249,966

 

For the six months ended June 30, 2017, cash provided by operating activities recognized a positive swing of $85,000 to $4,000 as compared to $81,000 of cash used operations for the six months ended June 30, 2016. The increase in cash from operating activities was due to the timing of receipts from customers and payments to creditors, suppliers and vendors offset by the decrease in the net loss for the year.

 

Net cash used in investing activities decreased by $24,000, from $26,000 used in investing activities for the six months ended June 30, 2016 to $2,000 for the six months ended June 30, 2017. 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 decrease in cash used was due to the reduction in slot machine and equipment purchases and investments in brand licenses.

 

Net cash provided by financing activities was $-0- for the six months ended June 30, 2017 and 2016.

 

Operations and Liquidity Management

 

For the six months ended June 30, 2017, we incurred a net loss of $77,390, however we generated $3,744 in cash from operating activities. At June 30, 2017, our cash balance was $254,218. 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 $250,000 to $280,000 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 for the next twelve months.

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of June 30, 2017:

 

		Total				Less than 1 year				1 - 3 years				3 - 5 years				More than 5 years
Operating lease obligations (1)		$	381,366			$	100,569			$	208,743			$	72,054			$	—
Royalty fee obligation (2)			40,251				15,251				25,000				—				—
Total		$	421,617			$	115,820			$	233,743			$	72,054			$	—

 

(1)	Represents operating lease agreements for office and warehouse facilities.
(2)	Represents guaranteed royalty fee for brand license.

 

 

 

Off-Balance Sheet Arrangements

 

As of June 30, 2017, 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. Historically, the Company has had net operating losses and negative cash flows from operations however it has a significantly lower net loss in the current six month period ending June 30, 2017 than the six month period ending June 30, 2016, realized positive cash flows from operations for the period ending June 30, 2017, 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 card clubs. Based on our current financial condition, cash flow projections and anticipated revenues, we believe we have sufficient cash flows to support our operations for the next twelve months.

 

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, 2017, 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, 2017, 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, 2017 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 11, 2017	Lightning Gaming, Inc.
	By:	/s/ Brian Haveson                                         Brian Haveson Chief Executive Officer and Director

 

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