UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2018
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period __________  to __________

 

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

 

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

 

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

 

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

 

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

 

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

 

Large accelerated filer  ¨

Accelerated filer  ¨

Non-accelerated filer  ¨(Do not check if a smaller reporting company)

Smaller reporting company  x

Emerging Growth Company ¨

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,649,383 shares of (voting) Common Stock as of November 14, 2018; 33,300,000 shares of Nonvoting Common Stock as of November 14, 2018; and -0- shares of Series A Nonvoting Capital Stock as of November 14, 2018

 

 

 

 

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	22
Item 3.	Quantitative and Qualitative  Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

1	Consolidated Condensed Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017 (audited);
2	Unaudited Consolidated Condensed Statements of Operations for the three months ended September 30, 2018 and 2017;
3	Unaudited Consolidated Condensed Statements of Operations for the nine months ended September 30, 2018 and 2017;
4	Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2018 and 2017;
5	Notes to Consolidated Condensed Financial Statements.

 

 

 

 

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

		September 30,  2018				December 31, 2017
		(unaudited)				(audited)
Assets
Current Assets
Cash		$	761,496			$	276,111
Restricted Cash			221,859				—
Accounts Receivable, net			884,649				293,761
Inventory			730,161				121,962
Deposits with Vendors			399,706				—
Prepaid Expenses and Other Current Assets			126,934				108,593
Total Current Assets			3,124,805				800,427
Property and Equipment, net			49,463				109,486
Other Assets			8,193				8,193
License Fees, net of accumulated amortization			10,172				6,283
Total Assets		$	3,192,633			$	924,389

See Notes to Consolidated Condensed Financial Statements

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

 

		September 30,  2018				December 31, 2017
		(unaudited)				(audited)
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable		$	96,910			$	122,008
Accrued Expenses			55,879				85,104
Current Portion of Long-Term Notes Payable			363,374				—
Interest Payable			4,759				—
Notes Payable – Related Party			—				125,000
Total Current Liabilities			520,922				332,112
Long-Term Debt and Other Liabilities
Long-Term Notes Payable			827,189				—
Other Long Term Liabilities			35,475				43,185
Total Long-Term Debt and Other Liabilities			862,664				43,185
Commitments (Note 8)
Stockholders' Equity
Preferred Stock: $0.001 par value; authorized 10,000,000 shares; Series A Nonvoting Capital Stock 6,000,000 shares authorized, -0- shares issued and outstanding			—				—
Common Stock: $0.001 par value; authorized 90,000,000 shares; 4,916,285 shares issued; 4,649,383 and 4,688,474 shares outstanding at September 30, 2018 and December 31, 2017, respectively			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			30,417,830				30,384,996
Accumulated Deficit			(28,626,189	)			(29,854,310	)
Treasury Stock, 266,902 and 261,902 shares, at cost, as of September 30, 2018 and December 31, 2017, respectively			(20,811	)			(19,811	)
Total Stockholders’ Equity			1,809,047				549,092
Total Liabilities and Stockholders’ Equity		$	3,192,633			$	924,389
See Notes to Consolidated Condensed Financial Statements

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2018 and 2017

 

 

		September 30,  2018				September 30, 2017
		(unaudited)				(unaudited)
Revenues
Lease and license fees		$	540,708			$	532,378
Sales of gaming products and parts			980,059				307,065
Total revenues			1,520,767				839,443
Costs and operating expenses
Cost of products sold			294,928				17,963
Operating expenses			115,079				108,672
Research and development			99,234				96,203
Selling, general and administrative expenses			494,158				556,171
Depreciation and amortization			11,324				21,846
Total costs and operating expenses			1,014,723				800,855
Operating income		$	506,044			$	38,588
Non-operating expense
Interest expense			(13,934	)			(329	)
Net income		$	492,110			$	38,259
Net income per common share – basic and diluted		$	0.01			$	0.00
Weighted average Series A Nonvoting shares outstanding-basic and diluted			—				—
Weighted average Common shares outstanding - basic			4,649,655				4,688,474
Weighted average Common shares outstanding - diluted			5,024,655				5,063,474
Weighted average Nonvoting Common shares outstanding - basic			33,300,000				33,300,000
Weighted average Nonvoting Common shares outstanding - diluted			37,240,000				37,240,000
See Notes to Consolidated Condensed Financial Statements

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2018 and 2017

 

 

		September 30,  2018				September 30, 2017
		(unaudited)				(unaudited)
Revenues
Lease and license fees		$	1,661,201			$	1,656,284
Sales of gaming products and parts			3,265,352				540,181
Total revenues			4,926,553				2,196,465
Costs and operating expenses
Cost of products sold			1,579,318				34,743
Operating expenses			399,682				346,083
Research and development			283,062				275,807
Selling, general and administrative expenses			1,373,979				1,485,926
Depreciation and amortization			43,614				92,708
Total costs and operating expenses			3,679,655				2,235,267
Operating income (loss)		$	1,246,898			$	(38,802	)
Non-operating expense
Interest expense			(18,777	)			(329	)
Net income (loss)		$	1,228,121			$	(39,131	)
Net income (loss) per common share – basic and diluted		$	0.03			$	(0.00	)
Weighted average Series A Nonvoting shares outstanding-basic and diluted			—				—
Weighted average Common shares outstanding - basic			4,652,790				4,688,474
Weighted average Common shares outstanding - diluted			5,027,790				5,063,474
Weighted average Nonvoting Common shares outstanding - basic			33,300,000				33,300,000
Weighted average Nonvoting Common shares outstanding - diluted			37,240,000				36,287,473
See Notes to Consolidated Condensed Financial Statements

 

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2018 and 2017

 

 

		September 30,  2018				September 30,  2017
		(unaudited)				(unaudited)
Net Cash Used In Operating Activities		$	(307,413	)		$	(2,748	)
Cash Flows From Investing Activities
Purchase of equipment			(39,906	)			(27,237	)
(Increase) decrease in license fees			(10,000	)			18,750
Net Cash Used in Investing Activities			(49,906	)			(8,487	)
Cash Flows From Financing Activities
Purchase of treasury stock			(1,000	)
Proceeds from notes payable			1,213,553				125,000
Repayment of notes payable			(147,990	)			—
Net Cash Provided by Financing Activities			1,064,563				125,000
Net Increase in Cash and Restricted Cash			707,244				113,765
Cash and Restricted Cash - Beginning of period			276,111				252,306
Cash and Restricted Cash - End of period		$	983,355			$	366,071
Supplemental Disclosure of Non-Cash Financing Activities:
Transfers of inventory and equipment, net		$	62,425			$	18,304
Supplemental Information:
Cash paid for interest		$	14,018			$	—
See Notes to Consolidated Condensed Financial Statements

 

 

 

 

 

 

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

September 30, 2018

 

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 (the “Merger”) with Lightning Poker, Inc. (“Lightning Poker”) which became a wholly-owned subsidiary of the Company.

 

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

 

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

 

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

 

Our 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.

 

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, 2018 (“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

 

 

 

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

 

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

 

Basis of Presentation (Continued)

 

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, 2017 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 nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the entire year.

 

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

 

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

 

The Company has a reserve for uncollectible accounts of $6,593 and $11,639 as of September 30, 2018 and December 31, 2017, respectively. Except for this reserve, the Company believes its receivables are collectible. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change. Recoveries of receivables previously written off are recorded as revenue when recovered. Delinquency of accounts receivable is determined based on contractual terms. The Company does not charge interest on its past due receivables. During the nine months ended September 30, 2018, the Company did not consider any of its accounts receivable to be uncollectible.

 

Reclassifications: Certain amounts in the 2017 comparative financial information have been reclassified to conform with the 2018 presentation. These reclassifications had no effect on net income.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued converged guidance on recognizing revenue from contracts with customers, referred to as ASC 606. The new guidance removes inconsistencies in current revenue recognition requirements, provides a framework for addressing revenue issues, improves comparability of revenue recognition across industries, entities and jurisdictions, and provides more useful information to users of financial statements through improved disclosure requirements. In general, the update requires that a five-step principles based revenue recognition model be applied in recognizing revenue from contracts with customers:

 

 

 

 

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)

 

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

 

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

 

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

 

The guidance became effective for annual and interim reporting periods beginning after December 15, 2017. The Company completed its review and assessment of the impact that this guidance has on our financial statements, made enhancements to the risk assessment process to take into account risks associated with the new standard, and modified the controls to address this risk. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective application transition method for any contracts that were not complete as of that date. Although this update required enhancements to the processes related to this guidance and the control activities within them, the updates in this guidance had an immaterial impact on operations and revenue. There were no uncompleted contracts as of January 1, 2018.

 

See Note 10, Revenue, for additional disclosures required under this guidance.

 

In February 2016, the FASB finalized the accounting standard and issued an update under the Leases topic. The update provides for major changes by lessees in that a lessee must recognize on its statement of financial position both an asset (“right-of-use”), representing its right to 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

 

 

 

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)

 

3. Classify in the statement of cash flows repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities.

 

For operating leases, lessees are required to:

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

 

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

 

The amendments in this update as well as the targeted and codification improvements issued in July 2018, are effective for fiscal and interim periods beginning after December 15, 2018. The Company has gathered the information and is performing the analyses required before the standard’s effective date to determine the impact this guidance will have on our consolidated financial statements.

 

Note 2.  Cash and Restricted Cash

 

The amount included in restricted cash represents funds set aside for equipment purchases from loan proceeds and notes payable advances. See Note 6, Notes Payable, for more information on notes payable transactions.

 

The following table provides a reconciliation of cash and restricted cash reported within the consolidated condensed Balance Sheets that sum to the total of the same such amounts shown in the consolidated condensed Statements of Cash Flows:

 

		September 30, 2018				December 31, 2017
Cash		$	761,496			$	276,111
Restricted Cash			221,859				—
Cash and Restricted Cash		$	983,355			$	276,111

 

Note 3.  Inventory

 

Inventory consists of the following:

		September 30, 2018				December 31, 2017
Finished products		$	453,083			$	56,100
Raw materials and work in process			277,088				65,862
Inventory		$	730,161			$	121,962

 

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

 

 

 

 

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

 

Note 4.  Property and Equipment

 

Property and equipment consist of the following:

		September 30, 2018				December 31, 2017
Equipment, principally gaming equipment		$	1,820,561			$	3,789,081
Delivery truck			28,140				28,140
Furniture and fixtures			104,313				100,041
Leasehold improvements			91,794				91,794
Property and equipment			2,044,808				4,009,056
Less accumulated depreciation			(1,995,345	)			(3,899,570	)
Property and equipment, net		$	49,463			$	109,486

 

Depreciation expense related to the property and equipment included in the consolidated condensed Statements of Operations was $10,213 and $19,346 for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense for the nine months ended September 30, 2018 and 2017 was $37,503 and $85,208, respectively.

 

Note 5.  License Fees

 

License fees consist of the following:

		September 30, 2018				December 31, 2017
Purchased licenses		$	351,605			$	341,605
Less accumulated amortization			(341,433	)			(335,322	)
License fees, net		$	10,172			$	6,283

 

The weighted average useful life of purchased licenses is 3 years. Amortization expense included in the consolidated condensed Statements of Operations relating to the purchased licenses was $1,111 and $2,500 for three months ended September 30, 2018 and 2017, respectively. Amortization expense for the nine months ended September 30, 2018 and 2017 was $6,111 and $7,500, respectively.

 

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

 

Year Ending December 31,				Amount
	2018			$	834
	2019				3,783
	2020				3,333
	2021				2,222
				$	10,172

 

Note 6.  Notes Payable

 

On July 17, 2018, the Company entered into a Master Loan Agreement (the “Loan”) with PDS Gaming LLC (“PDS” or the “Lender”) to make a series of advances under the Loan in the principal amount of up to $2,500,000 for the purposes of financing the purchase or manufacturing of equipment. The Loan will be evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and secured by a Security Agreement dated of even date with the Loan, between the Company and the Lender (the “Security Agreement”) granting a security interest to the Lender in all of the Company’s right,

 

 

 

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

 

Note 6.  Notes Payable (Continued)

 

title and interest in and to personal property, tangible and intangible, wherever located or situated and whether now owned or acquired or created. The Loan will be advanced, in parts, pursuant to the Loan and in the amounts of each Note during the advance period which expires on July 17, 2019. Each subsequent advance will be made at the Lender’s sole and absolute discretion.

 

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

 

Monthly payments on the initial advance (“Advance 1”), evidenced by a Note in the principal amount of $489,989, commenced on August 17, 2018. Monthly payments on the second advance (“Advance 2”), evidenced by a Note in the principal amount of $723,565, will commence on October 18, 2018.

 

Notes payable consist of the following:

 

		Advance Date		Maturity Date		Interest Rate				September 30, 2018				December 31, 2017
Advance 1		7/17/2018		7/17/2021			11	%		$	466,998			$	—
Advance 2		9/18/2018		9/18/2021			11	%			723,565				—
Total Notes Payable											1,190,563				—
Less: amounts classified as current											(363,374	)			—
Long-Term Notes Payable										$	827,189			$	—

 

Interest expense relating to these Notes for the three and nine months ended September 30, 2018 was $13,934. There were no CIP payments for the three and nine months ended September 30, 2018.

 

Principal repayments on the Notes are as follows:

 

Year Ending December 31,				Amount
	2018			$	87,170
	2019				373,572
	2020				417,212
	2021				312,609
				$	1,190,563

 

 

Note 7.  Notes Payable – Related Party

 

Notes payable – related party consist of the following:

		September 30, 2018				December 31, 2017
The Co-Investment Fund II, L.P. (“CI II”)		$	—			$	100,000
Brian Haveson (“BH”)			—				25,000
		$	—			$	125,000

 

 

 

 

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

 

Note 7. Notes Payable – Related Party (Continued)

 

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

 

The Company repaid the loans along with interest due on June 26, 2018.

 

See Note 12, Related Party Transactions, for more information on notes payable transactions.

 

Note 8. 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 September 30, 2018 and 2017 was $35,930. Rental expense under this lease for each of the nine months ended September 30, 2018 and 2017 was $105,671 and $104,906, respectively.

 

Future minimum lease payments are as follows:

 

Year Ending December 31,				Amount
	2018			$	25,876
	2019				104,366
	2020				106,975
	2021				18,124
				$	255,341

 

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. 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 which was payable and paid on or before December 31, 2017 and $25,000 payable on or before December 31, 2018.

 

 

 

 

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

 

Note 8. 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 ran from December 1, 2014 to November 30, 2017 and was 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 were recoupable out of royalties earned on the license. The license period expired in November 2017 and the Company opted not to extend the agreement. All royalty obligations have been paid in full.

 

In November 2014, the Company entered into a license agreement with Hearst Holdings, Inc. for the worldwide distribution of gaming devices using Flash Gordon and associated family of characters. The initial term of the agreement ran from November 1, 2014 to October 31, 2017 with royalties based on a percentage of revenues earned on the license, payable on a quarterly basis which commenced on January 31, 2016. The license period expired in October 2017 and the Company opted not to extend the agreement. All royalty obligations have been paid in full.

 

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

 

At September 30, 2018, the Company had total license fee commitments and advances made as follows:

 

		Minimum Commitments
Total royalty and license fee commitments		$	50,000
Advances made			(38,846	)
Potential future payments		$	11,154

 

As of September 30, 2018, the Company estimates that potential future royalty payments will be $11,154 for the year ending December 31, 2018.

 

Note 9. Stockholders’ Equity

Stock Option Plans: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger as described in Note 1, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "2007 Plan") having substantially the same terms. The options were granted at the discretion of the Board of Directors and the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each option was determined by the Board of Directors at the time the option was granted, but in no event less than 100% of the fair market value of the common stock at the time of grant. Options previously granted will not be exercisable after 10 years from the grant date under the terms of the plan, and no awards may be granted after October 16, 2017.

 

 

 

 

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

 

Note 9.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

Options generally vested at 20% per year starting from the grant date and are fully vested after five years. The options can be exercised in partial or full amounts upon a change in control and at such other times as specified in the award agreements.

 

In order to provide an incentive to designated employees, officers, directors, consultants, independent contractors and other service providers who perform services contributing to the growth of the Company, and by aligning the interests of participants with the interests of stockholders, the Board declared it advisable and in the Company’s best interest and on May 25, 2016, approved the 2016 Stock Option Plan (the “2016 Plan”). The 2016 Plan permits the granting of nonqualified stock options. The shares underlying the options will be shares of the Company’s nonvoting common stock, par value $0.001 per share, and the total aggregate number of shares that may be issued under the 2016 Plan is 5,700,000 shares. The purchase price of each option will be determined by the Board at the time the option is granted, but in no event will be less than 100% of the fair market value of the common stock at the time of grant. Options granted will not be exercisable after 10 years from the grant date.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based upon publicly traded companies with characteristics similar to those of the Company. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

A summary of option transactions in 2018 under the 2007 Plan is as follows:

		Shares				Weighted Average Exercise Price
Outstanding at December 31, 2017			375,000			$	0.81
Options granted			—				—
Options exercised			—				—
Options cancelled			—				—
Options outstanding at September 30, 2018			375,000			$	0.81

 

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

 

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

 

 

 

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

 

Note 9.  Stockholders’ Equity (Continued)

 

Stock Option Plans (Continued)

 

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

		Shares				Weighted Average Exercise Price
Outstanding at December 31, 2017			3,940,000			$	0.28
Options granted			—				—
Options exercised			—				—
Options cancelled			—				—
Options outstanding at September 30, 2018			3,940,000			$	0.28
Options available for grant under the 2016 Plan at September 30, 2018			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 September 30, 2018 and 2017 was $10,894 and $11,097, respectively. Compensation expense related to these stock options for the nine months ended September 30, 2018 and 2017 was $32,834 and $25,043, respectively.

 

The following table summarizes information with respect to stock options outstanding at September 30, 2018:

 

		Options Outstanding					Vested Options
		Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value		Number	Weighted Average Contractual Term (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value
	2007 Plan	375,000	0.6	$0.81	-		375,000	.06	$0.81	-
	2016 Plan	3,940,000	8.4	$0.28	-		788,000	8.4	$0.28	-

 

The following table summarizes information with respect to stock options outstanding at December 31, 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	375,000	1.4	$0.81	-		375,000	1.4	$0.81	-
	2016 Plan	3,940,000	9.2	$0.28	-		-	-	-	-

 

 

As of September 30, 2018, all compensation costs related to share-based compensation arrangements granted under the 2007 Plan had been fully recognized. As of September 30, 2018, there was approximately $150,050 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 3.4 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.

 

In computing earnings per share, the Company's Nonvoting Stock is considered a participating security. Each share of Nonvoting Stock has identical rights, powers, limitations and restrictions in all respects as each share of common stock of the Company including

 

 

 

 

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

 

Note 9. Stockholder’s Equity (Continued)

 

the right to receive the same consideration per share payable in respect of each share of common stock, except that holders of Nonvoting Stock shall have no voting rights or powers whatsoever.

 

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

 

		September 30, 2018				September 30, 2017
Common Stock			375,000				375,000
Nonvoting Common Stock			3,940,000				3,940,000

 

 

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

 

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

 

 

 

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

 

Note 9. Stockholder’s Equity (Continued)

 

The following table reconciles the changes in stockholder’s equity for the nine months ended September 30, 2017:

 

		Common Stock				Nonvoting Common Stock				Additional Paid In Capital				Accumulated Deficit				Treasury Stock				Total
Balances at December 31, 2016		$	4,917			$	33,300			$	30,348,856			$	(29,626,354	)		$	(18,811	)		$	741,908
Net income			—				—				—				95,040				—				95,040
Stock based compensation			—				—				2,275				—				—				2,275
Balances at March 31, 2017			4,917				33,300				30,351,131				(29,531,314	)			(18,811	)			839,223
Net loss			—				—				—				(172,430	)			—				(172,430	)
Stock based compensation			—				—				11,672				—				—				11,672
Balances at June 30, 2017			4,917				33,300				30,362,803				(29,703,744	)			(18,811	)			678,465
Net income			—				—				—				38,259				—				38,259
Stock based compensation			—				—				11,097				—				—				11,097
Balances at September 30, 2017		$	4,917			$	33,300			$	30,373,900			$	(29,665,485	)		$	(18,811	)		$	727,821

 

 

Note 10.  Revenue

 

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

 

Revenue generated under operating leases is recognized when the performance obligation is satisfied. Lease agreements are based on either a fixed daily or monthly rate, or a pre-determined percentage of the monthly net “rake” or “participation” revenue collected for each Poker Table and slot machine, subject to monthly minimums and maximums. Customers under fixed daily rate agreements are invoiced on the first day of the month at the agreed upon daily rate per unit for the number of days the unit is leased during the month, typically the total number of days in the month. Customers under rake revenue agreements are invoiced when participation reports are remitted to us detailing the monthly per unit per theme information including coin-in, net win, and days on the floor data. Revenue under both of these bases is recorded as lease revenue and recognized in the month to which the lease data pertains.

 

There may be instances in which a lease is offered to a customer with the option to convert to a sale upon the completion of certain obligations such as a pre-determined paid or reduced-rate lease term and/or a free-trial period. In addition, circumstances may

 

 

 

 

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

 

Note 10.  Revenue (Continued)

 

arise in which a customer wishes to purchase machines after being on lease at their facility. In all of these situations, the initial revenue is recorded as lease revenue as described above, and the agreed upon sales price is shown as sales revenue when the lease is converted to a sale and all performance obligations of the sale have been met.

 

For sales of slot machines, a warranty on parts is typically offered which expires after a defined period of time, usually 90 days after delivery or installation date. One slot machine theme conversion per unit sold is also typically offered during the one year period beginning upon the delivery and/or installation of the slot machine, and only if the slot game fails to earn at least eighty percent of the rolling monthly slot machine gaming floor area average for the customer. The game theme must be of the same category approved in the customer's gaming jurisdiction for use in the slot machine and the customer must provide written notice requesting the conversion, including certification of the average that serves as the basis for any such game theme conversion. In addition, the customer must return the original game theme components to the Company upon conversion of the slot game theme.

 

The cost of the warrantied and theme conversion items are borne by the Company. Historically, these costs have been immaterial and are expensed at time of issuance, however the Company has and will continue to assess these post-sales costs to determine whether they constitute performance obligations and should be recorded at time of sale. A contract asset will be recorded when the Company has a right to consideration in exchange for products or services that have been transferred to a customer. A contract liability will be recorded when the Company has an obligation to transfer products or services to a customer for which consideration has been received.

 

For the three months ended September 30, 2018, contract liabilities decreased by $241,350 and revenue recognized related to performance obligations outstanding as of June 30, 2018 was $241,350. For the nine months ended September 30, 2018, the Company recorded no revenues related to performance obligations from prior periods.

 

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

 

		Nine months ended September  30,								Three months ended September  30,
		2018				2017				2018				2017
Lease and license fees:
Flat daily rate lease		$	1,176,210			$	1,110,313			$	393,424			$	347,534
Participation lease			473,591				543,571				144,884				184,844
Placement fees			11,400				2,400				2,400				—
		$	1,661,201			$	1,656,284			$	540,708			$	532,378
Sales of gaming products and parts:
Slot machine sales		$	1,712,332			$	533,680			$	743,200			$	306,440
Installation fees			940				1,688				—				—
Parts and ancillary items sales			1,552,080				4,813				236,859				625
		$	3,265,352			$	540,181			$	980,059			$	307,065

 

 

 

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

 

Note 10.  Revenue (Continued)

 

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

 

		Nine months ended September  30,								Three months ended September  30,
		2018				2017				2018				2017
Lease and license fees by product:
Slot machines		$	1,647,449			$	1,572,389			$	534,934			$	506,434
Poker Tables			13,752				83,895				5,774				25,944
		$	1,661,201			$	1,656,284			$	540,708			$	532,378

 

 

Note 11.  Income Taxes

 

The Company recognizes and measures deferred income tax assets 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.

 

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

 

As of September 30, 2018, the Company has available, for federal and state income tax purposes, carryforwards of approximately $12,668,000, 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 12.  Related Party Transactions

 

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

 

On March 1, 2018, the Co-Investment Fund II, L.P and Brian Haveson agreed to extend the maturity date on each of the promissory notes held to September 1, 2018. All other provisions of the notes remained unchanged and in full force. On June 26, 2018, the Company repaid the notes in full along with all interest due.

 

As of September 30, 2018, CI II owns 3.89% of the (voting) Common Stock and 100% of the Nonvoting Common Stock of the Company. CI II is managed by Cross Atlantic Capital Partners, wholly owned by Donald Caldwell, who is a Director and Shareholder of the Company. Frederick Tecce is also a Director and Shareholder of the Company and is a Managing Director of Cross Atlantic Capital Partners.

 

During the three months ended September 30, 2018 and 2017, respectively, interest expense on the notes from CI II and BH amounted to $0 and $329. During the nine months ended September 30, 2018 and 2017, respectively, interest expense on the notes from CI II and BH amounted to $4,844 and $329.

 

 

 

 

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

 

Note 13. Concentration of Risk – Major Customers

 

The Company generated approximately 56% and 20% of its revenue from its top three customers for each of the nine months ended September 30, 2018 and 2017, respectively.

 

At September 30, 2018, accounts receivable from three casino customers represented 71% of total accounts receivable. At December 31, 2017, accounts receivable from four casino customers represented 43% of total accounts receivable. One customer represented 31% of the total accounts receivable balance as of September 30, 2018 and one customer represented 18% of the accounts receivable balance as of December 31, 2017.

 

 

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. Our video slot machines contain games where the casino patron wagers on multiple pay lines and contain secondary bonus games. The current slot machine products are:

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

 

When we expanded our products to include slot machines, we embarked on an initiative to market our slot machines to Native American jurisdictions as well as the commercial casino marketplace and cruise lines. 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. We ceased production of the Poker Table in 2010 and have been able to utilize the tables in stock since then to fulfill sales and lease orders.

 

Our slot machines are placed into the market using a daily lease model or a revenue sharing model. We have 172 slot machines out on lease or revenue share in 28 different casinos and cruise ships. We are registered as an approved vendor to distribute products to gaming venues located in 14 state jurisdictions.

 

We recognized net income of $1,228,121 in the nine months ended September 30, 2018.

 

 

 

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

 

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

 

Revenues

 

The Company’s revenues for the three months ended September 30, 2018 were $1,521,000 compared to $839,000 for the comparable prior year period, an increase of $682,000. This increase was attributable to the sales of slot machines and related parts, which increased by $673,000 to $980,000 for the three months ended September 30, 2018 as compared to $307,000 for the three months ended September 30, 2017. Lease and license fees increased by $9,000 to $541,000 for the three months ended September 30, 2018 as compared to $532,000 for the three months ended September 30, 2017.

 

The increase in sales of slot machines is attributable to the success of our latest game titles under the Screaming Links line of games. A majority of the units sold were initially under lease agreements so while the for-sale market of our slot machines is successfully generating revenue and cash flow, it has and will continue to reduce the recurring revenue install base. The for-sale market reduced recurring revenue machines by 14 in 2017 and 74 in 2018. In addition, the Company had a large parts sale to one customer, generating $232,000 in revenues.

 

The increase in lease revenues of $9,000 was mainly attributable to the increase of approximately $4.60 in the average daily rate for slot machines installed during the quarter. This is net of a reduction in Poker Table lease revenue of $20,000 due to the decrease in the recurring Poker Tables out on lease.

 

Cost of Products Sold

 

Cost of products sold for the three months ended September 30, 2018 were $72,000 for 65 slot machines sold and $223,000 for parts sales as compared to $18,000 for the three months ended September 30, 2017 for 28 slot machines sold.

 

Operating Expenses

 

Operating expenses increased $6,000 to $115,000 for the three months ended September 30, 2018, from $109,000 for the three months ended September 30, 2017. This increase was primarily the result of the increased cost of freight for inventory shipments as well as the increase in payroll and related benefit costs associated with the addition of an assembly technician in 2018, offset by the decrease in conversion costs on slot machine installs.

 

Research and Development Expenses

 

Research and development expenses increased by $3,000 to $99,000 for the three months ended September 30, 2018, from $96,000 for the three months ended September 30, 2017. Research and development expenses are primarily related to the development of new gaming equipment themes and technology and consist mainly of payroll and related expenses for programmers and graphic artists, software, and consulting fees. This increase is attributable to the increase in payroll and benefit costs associated with the research and development personnel.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $62,000 to $494,000 for the three months ended September 30, 2018, from $556,000 for the three months ended September 30, 2017. This decrease was attributable to the reduction in payroll and benefit costs associated with the elimination of a salesperson and the uncollectible accounts receivable write-off that occurred in September 2017, as well as the decrease in lab fees associated with product testing.

 

 

Depreciation and Amortization

 

Depreciation and amortization decreased by $11,000 to $11,000 for the three months ended September 30, 2018 from $22,000 for the three months ended September 30, 2017. This decrease was the result of the reduction of depreciation for slot machines that were fully depreciated and/or sold during 2018 and 2017.

 

Interest Expense

 

Interest expense increased $14,000 for the three months ended September 30, 2018 from $300 for the three months ended September 30, 2017, the result of the advances taken on the notes payable in both July and September 2018.

 

 

 

 

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

 

Revenue

 

The Company’s revenues for the nine months ended September 30, 2018 were $4,927,000 compared to $2,196,000 for the comparable prior year period, an increase of $2,731,000. Sales of slot machines increased by $1,179,000 to $1,712,000 for the nine months ended September 30, 2018 from $534,000 for the nine months ended September 30, 2017. This increase was attributable to the popularity of our latest game titles under the Screaming Links line of games. In addition, the Company had a large parts sale to one customer, which generated $1,525,000 in revenues.

 

Lease and license fees increased by a net of $5,000 to $1,661,000 for the nine months ended September 30, 2018 as compared to $1,656,000 for the nine months ended September 30, 2017. The increase in lease revenues was attributable to the increase in the average number of slot machines installed during the year offset by the decrease in recurring Poker Table leases.

 

Cost of Products Sold

 

For the nine months ended September 30, 2018, cost of products sold increased $1,544,000 to $1,579,000 from $35,000 for the nine months ended September 30, 2017. This increase was due to the increase in parts and slot machines sales in 2018 versus 2017.

 

Operating Expenses

 

Operating expenses increased $54,000 to $400,000 for the nine months ended September 30, 2018, from $346,000 for the nine months ended September 30, 2017. This increase was the result of the reversal of license fees accrued in 2016 which were reduced by agreement with the licensor in 2017, the increase in payroll and related benefit costs associated with the addition of an assembly technician in 2018, as well as the increase in slot machine freight costs during the year.

 

Research and Development Expenses

 

Research and development expenses increased by $7,000 to $283,000 for the nine months ended September 30, 2018, from $276,000 for the nine months ended September 30, 2017. Research and development expenses are related to the development of gaming equipment and consist mainly of payroll and related expenses for programmers and graphic artists and the costs to acquire new brands. This increase is attributable to the increase in payroll and benefit costs associated with the research and development personnel.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $112,000 to $1,374,000 for the nine months ended September 30, 2018, from $1,486,000 for the nine months ended September 30, 2017. This decrease was due to the decreases in lab fees associated with product testing as well as payroll and related commission and travel expenses associated with the elimination of a regional salesperson in September of 2017. In addition, an uncollectible accounts receivable account for $42,000 was written off during the nine months ended September 30, 2017; there were no write-offs of uncollectible accounts during the nine months ended September 30, 2018.

   

Depreciation and Amortization

 

Depreciation and amortization decreased $49,000 from $93,000 for the nine months ended September 30, 2017 to $44,000 for the nine months ended September 30, 2018. 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

      

A discussion of our cash flows occurs below:

 

 

 

Discussion of Statement of Cash Flows

		Nine Months Ended September 30,
		2018				2017				Change
Net cash used in operating activities		$	(307,413	)		$	(2,748	)		$	(304,665	)
Net cash used in investing activities			(49,906	)			(8,487	)			(41,419	)
Net cash provided by financing activities			1,064,563				125,000				939,563
Net increase in cash			707,244				113,765			$	593,479
Cash and restricted cash, beginning of year			276,111				252,306
Cash and restricted cash, end of period		$	983,355			$	366,071

 

Discussion of Statement of Cash Flows

 

For the nine months ended September 30, 2018, cash used in operating activities increased $304,000 to $307,000 as compared to $3,000 for the nine months ended September 30, 2017. The increase in cash used in operating activities was due to the increase in deposits for and increases in inventory purchases for the period as well as the timing of receipts from customers and payments to creditors, suppliers and vendors.

 

Net cash used in investing activities increased by $42,000, from $8,000 for the nine months ended September 30, 2017 to $50,000 for the nine months ended September 30, 2018. 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 and purchased licenses. This increase in cash used was due to the increase in slot machines and purchased licenses.

 

Net cash provided by financing activities increased by $940,000 for the nine months ended September 30, 2017 to $1,065,000 for the nine months ended September 30, 2018. This is the net result of the notes payable taken for the purchase of slot machine cabinet inventory of $1,214,000, less the principal repayments on these notes and the notes payable from related parties of $148,000 as well as the purchase of shares for the treasury of $1,000.

 

Operations and Liquidity Management

 

For the nine months ended September 30, 2018, we had net income of $1,228,000, a positive swing in income of $1,267,000 from the $39,000 net loss for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, we used $307,000 in cash from operating activities versus $3,000 for the nine months ended September 30, 2017, an increase of $304,000.

 

We have made marked improvements in performance with the increase in sales of our slot machines with our latest theme offerings and continue to develop new proprietary and licensed game themes. In order to boost our recurring revenue install base, we have secured financing to fund the costs and deployment of a new slot machine cabinet design. Installations of the new cabinet commenced in October 2018 and we are expecting to install all cabinets in inventory with existing customers by the end of January 2019. In addition, cabinets on open purchase orders, i.e., cabinets ordered but not yet received, are being allocated to orders within jurisdictions awaiting gaming license approvals. The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to continue to obtain the regulatory approvals required to distribute our products and successfully market them to casinos and gaming venues as well as the development of new slot machine themes and new cabinets.

 

As of September 30, 2018, our cash and restricted cash balance was $983,000 and our current gross cash requirements are between approximately $740,000 to $790,000 per month, principally for salaries, professional services, licenses, marketing, and office expenses. The monthly cash requirements include approximately $460,000 to $500,000 for the purchase of cabinets and hardware components for our slot machines which is being funded through financing agreements.

 

Based on our cash flow projections, anticipated revenues from our lease and sales agreements, and financing agreements, we believe we have sufficient cash flow to support our operations for the next twelve months.

 

 

 

 

 

Contractual Obligations

 

The table below sets forth our known contractual obligations as of September 30, 2018:

 

		Total				Less than 1 year				1 - 3 years				3 - 5 years				More than 5 years
Operating lease obligations (1)		$	255,341			$	94,878			$	160,463			$	—			$	—
Notes payable (2)			1,190,563				363,374				827,189				—				—
Royalty fee obligation (3)			11,154				11,154				—				—				—
Total		$	1,457,058			$	469,406			$	987,652			$	—			$	—

 

 

(1)	Represents operating lease agreements for office and warehouse facilities.
(2)	Represents principal payments on notes payable.
(3)	Represents guaranteed royalty fee for brand license.

 

 

Off-Balance Sheet Arrangements

 

As of September 30, 2018, there were no off-balance sheet arrangements.

 

Going Concern

 

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

 

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

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

 

 

 

Item 4. Controls and Procedures.

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer (“CEO”) and Controller as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of September 30, 2018, we conducted an evaluation, under the supervision and with the participation of our management including our CEO and Controller, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and Controller have concluded that as of September 30, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.

 

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

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.   Legal Proceedings.

 

None

 

 

Item 1A. Risk Factors.

 

None

 

 

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

 

None.

 

Item 3.  Defaults Upon Senior Securities.

 

None

 

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

 

Item 5.   Other Information.

 

None

 

 

 

 

 

Item 6.   Exhibits.  

 

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

 

 

SIGNATURES

 

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

 

Date:  November 14, 2018	Lightning Gaming, Inc.
	By:	Brian Haveson Chief Executive Officer and Director

 

 

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