Item 1. Business.
Lightning Poker, Inc. (“Lightning Poker”) was incorporated in Pennsylvania in 2005 under the name Pokermatic, Inc. and succeeded to the business of Pokermatic, LLC, a Pennsylvania limited liability company formed in 2004. Lightning Gaming, Inc. (the “Company”) was incorporated on March 1, 2007 and on January 29, 2008, completed a merger with Lightning Poker (the “Merger”) which became a wholly owned subsidiary of the Company. Lightning Slot Machines, LLC (“Lightning Slots”) was formed in 2008 to leverage the Company’s existing gaming licenses. The Company, through Lightning Slots, manufactures and markets slot machines and related parts to casinos, cruise ships, and lottery venues. Its executive offices are located at 23 Creek Circle, Boothwyn, Pennsylvania, 19061.
Products
In 2009, the Company 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 with secondary bonus games. Our games combine advanced graphics and digital music to create an engaging player experience. We seek to develop games and gaming machines that offer high entertainment value to casino patrons and generate greater revenues for casinos than the machines offered by our competitors. Our current slot machine products are:
· Around the World in 80 Days · Just Jackpots
· Beauty and the Beast · Lava Queen - Quick Link
· Bierfeier - Screaming Links · Lightning Lotto
· Candy Cash · Luck of the Irish - Screaming Links
· Cash Flow · Penny Palooza
· Cinderella · Pixiu - Quick Link
· Crazy 8’s Link Deluxe - Jackpot Link Deluxe · Prosperous Buddha - Persistent Link
· Drachma - Quick Link · Scarabs of Egypt - Screaming Links
· Duck Dynamite · Si Shou
· Electric Sevens - Quick Link · Si Xiang - Screaming Links
· Eye of RA - Persistent Link · Slotto
· Fins N Wins · Snow White
· Fruit Jackpots · Snow White - Screaming Links
· Fruit Treasure · Swamp Fever
· Golden Egg · Swamp Fever - Persistent Link
· Goyaate · Swamp Frenzy
· Great Balls of Fire - Screaming Links · Thunder Spirit - Quick Link
· Hao Yun · Vampires Fortune
· Hua Mulan - Screaming Links · Xingyun Gou - Quick Link
· Jackpot Link Deluxe - Jackpot Link Deluxe · Year of the Horse
· Jumbo Fish Stacks · Ye Xian
· Jungle Book · Zhang Jiao - Screaming Links
· Jungle Jackpots - Screaming Links · Zuo Ci - Screaming Links
When we expanded our products to include slot machines, we embarked on an initiative to market to additional Native American jurisdictions as well as the commercial casino marketplace and cruise lines. Prior to our state mandated closure in March 2020, we had 370 slot machines out on lease or revenue share in 57 different casinos. We currently have 272 video slot machines placed in 44 casinos in 66 jurisdictions. We are working to secure licensing to place our slot machines in a number of new jurisdictions across North America. The licensing process includes specific jurisdictional approvals from the appropriate testing laboratory and regulatory agency.
To date, we have secured 66 regulatory gaming licenses, including 45 from Native American tribes. We offer our video slot machine products in 18 state jurisdictions. We expect to be licensed in several additional jurisdictions during 2021 and over the next several years.
Our first product was The Lightning Poker Table ("Poker Table"), a fully automated electronic poker table that enabled up to ten players to make their wagers and game decisions via individual touch-screen betting stations. Our Poker Table received Gaming Laboratories Incorporated ("GLI") certification for a casino version of Texas Hold'em, Omaha, Omaha High/Low, and Tournament poker. In 2008, we developed a newer version of the Poker Table, which eliminated the need for a separate, stand-alone cash station and allowed for cash management at the table.
We ceased production of the Poker Table in 2010 and were able to utilize tables in stock that had previously been out on lease, to fulfill sales and lease orders obtained after then. As of December 31, 2019, all Poker Table leases were terminated and there were no remaining tables in stock.
Distribution
All sales are handled through the Company’s seasoned and experienced in-house sales team and outside account managers who are located in those areas in which we are strategically seeking market share. The Company believes it is very important for its salespeople to have regular contact with the casino decision makers. As our footprint in the market expands, additions to sales staff will be necessary to maximize customer interaction.
Revenue Models
We have three different revenue models for the products that we offer to our customers:
● Lease model
● Sale model
● Revenue sharing model
The majority of our customers utilize a lease program whereby we receive a fixed daily rate per slot machine. Typical lease agreements involve a month-to-month term and are cancellable upon thirty days written notice.
In an outright sale of our gaming machines, we receive cash for the entire purchase price. We will typically use this model in situations where there is a strong customer preference for an outright purchase or in situations where leasing to a customer may be impractical due to geographic or financial reasons. All expenses pertaining to the sale are recorded as they are incurred.
Our third model is a revenue sharing model, where we place our gaming machines on the floor of the casino and participate in a portion of the revenue generated. Typical revenue sharing agreements involve a month-to-month term and certain agreements provide for a minimum and maximum monthly payment.
There are also instances in which a lease may be offered to a customer with the option to convert to a sale upon the completion of certain obligations such as a pre-determined paid or reduced-rate lease term and/or a free-trial period. In addition, circumstances may arise in which a customer wishes to purchase machines after being on lease at their facility. In all of these situations, the initial revenue is recorded as lease revenue and the agreed upon sales price is shown as sales revenue when the lease is converted to a sale.
Manufacture of Products
Cabinets for our slot machines are produced by a third-party manufacturer. The gaming software and artwork is created in our Boothwyn facility. The software, motherboard, player tracking panel, bill validators and ticket printers are loaded into the cabinets. The games are then tested and shipped from our Boothwyn, Pennsylvania facility.
Competition
The gaming machine market is highly competitive and is characterized by the continual introduction of new games and new technologies. Our ability to compete successfully in this market is dependent, in large part, upon our ability to:
●
develop and offer games with higher earnings performance than the games and gaming machines from our competitors;
●
create an expanding and constantly refreshed portfolio of games;
●
identify and develop or obtain rights to commercially marketable intellectual properties;
●
adapt our products for use with new technologies;
●
implement product innovation and reliability;
●
offer mechanical and electronic reliability;
●
generate brand recognition;
●
implement effective marketing and customer support; and
●
offer competitive prices and lease terms.
There are many companies in the world that manufacture slot machines for legalized gaming markets. Of these companies, we believe that Aristocrat, International Gaming Technology PLC (“IGT”), Konami Co. Ltd., Evri Holdings, Inc., Aruze Gaming, Novomatic Group of Companies, and Scientific Games Corporation have a majority of this worldwide market.
Our competitors vary in size from small companies with limited resources to large multi-national corporations with greater financial, marketing and product development resources than we have. The larger competitors have an advantage in being able to spend greater amounts to develop new technologies, games, and products, however we have the advantage of being able to react to market conditions more rapidly and bring new games to market much quicker than our larger competitors.
Intellectual Property
Our trademark for “Lightning Poker” is registered with the U.S. Patent and Trademark Office. We have registered the www.LightningPoker.net, www.LTGaming.com, and www.LightningGaming.com Internet domain names.
From time to time, we enter into license agreements for the use of intellectual properties and technologies in our products. These agreements generally provide for license fee payments when the agreements are signed and minimum commitments, which are cancellable in certain circumstances. Each license typically provides that the licensor retains the right to exploit the licensed property for all other purposes, including the right to license the property for use with any products not related to gaming machines.
Gaming Regulations and Licensing
Regulatory Overview
Generally, the manufacture, sale and use of gambling devices are subject to extensive federal, state, local and, in some jurisdictions, tribal regulation. In order to sell and distribute our products to our target markets we, along with our customers, must comply with the applicable regulations of each jurisdiction in which we operate, including certain foreign jurisdictions. We expect it to take up to 12 months or longer from the date of the submission of our application to obtain regulatory approval in some jurisdictions. As of March 30, 2021, we have a total of 66 regulatory gaming licenses for our products, including regulatory gaming licenses in Native American jurisdictions, and we are preparing to file applications for several additional licenses in North America.
It is possible that the approval of our gaming products will take much longer than we expect or that our gaming products will not be approved in the jurisdictions where we intend to operate, in which case we will be unable to generate revenues in such jurisdictions. The laws and regulations of the jurisdictions in which we intend to operate are subject to amendment and reinterpretation from time to time, and therefore it is possible that even if our gaming products are approved at one time, their use may be restricted, conditioned or prohibited in the future.
A total of 40 states and provinces in Canada allow casino-type gambling. We will not sell or distribute our gaming products in states or provinces that prohibit casino gambling.
The following is a brief description of the material regulations that may apply to us in some of the jurisdictions in which we intend to market and sell our products.
If a state requires that the Company, as well as our products, obtain regulatory approval, we will be required to submit detailed financial and operating reports and furnish any other information the state may require. Our officers, directors, certain key employees and any person having a material relationship with us may also have to qualify with the state and obtain a finding of suitability. Our beneficial owners, especially beneficial owners of more than 5% of our outstanding Common Stock, may also be required to obtain a finding of suitability.
If a gaming authority in any jurisdiction fails to find any of our officers, directors or significant shareholders suitable, we may be prohibited from leasing, licensing or selling our products in that jurisdiction.
A finding of suitability is generally determined based upon a myriad of facts and circumstances surrounding the entity or individual in question and many gaming authorities have broad discretion in determining whether a particular entity or individual is suitable. We are unaware of circumstances that would prevent a gaming authority from finding any of our officers, directors or significant shareholders suitable.
If any of our officers, directors or significant shareholders is not found suitable in a jurisdiction requiring a finding of suitability, we would be prevented from leasing, licensing or selling our products in that jurisdiction as long as the person in question remained an officer, director, or a significant shareholder. Such an occurrence would likely delay introduction of our products into such jurisdiction or prevent us from introducing our products in such jurisdiction altogether. Depending on how material any such jurisdictions are to our plan of operations, failure to obtain such findings of suitability could have a material adverse effect on our results of operations. In addition, a finding that one of our officers, directors or significant shareholders is not suitable in any jurisdiction may hinder our ability to obtain necessary regulatory approvals in other jurisdictions. Conversely, however, a finding of suitability by one or more gaming authorities does not ensure that similar suitability determinations will be obtained from any other gaming authorities.
A state regulator may have the authority to disapprove a change in our officers, directors and key employees. Some corporate transactions, including those that may be advantageous to our shareholders, may require prior approval of various state regulators. These states may also require our products to undergo rigorous testing, a field trial and a determination as to whether our products meet strict technical standards set forth in the applicable state regulations.
The failure to comply with any requirements imposed by state regulators or required by state law could prevent us from selling our products in such state, subject us to criminal and civil penalties, substantial fines, and adversely affect our business.
Tribal Casinos
Numerous Native American tribes have become engaged in or have licensed gaming activities on Native American tribal lands as a means of generating revenue for tribal governments. Gaming on Native American tribal lands, including the terms and conditions under which gaming equipment can be sold or leased to Native American tribes, is or may be subject to regulation under the laws of the tribes, the laws of the host state, and the Indian Gaming Regulatory Act of 1988 (“IGRA”), which includes regulation and oversight by the National Indian Gaming Commission (“NIGC”) and the Secretary of the United States Department of the Interior (“Interior Secretary”). Furthermore, gaming on Native American lands may also be subject to the provisions of statutes relating to contracts with Native American tribes, which are also administered by the Interior Secretary.
The IGRA requires that the tribe and the host state enter into a written agreement called a tribal-state compact, that specifically authorizes Class III gaming. The compact must be approved by the Interior Secretary, with the notice of approval published in the Federal Register. Tribal-state compacts vary from state to state. Many require that equipment suppliers meet ongoing registration and licensing requirements of the state and/or the tribe and some impose background check requirements on the officers, directors, principals and shareholders of gaming equipment suppliers. Under the IGRA, tribes are required to regulate gaming on their tribal lands under ordinances approved by the NIGC. These ordinances may impose standards and technical requirements on hardware and software and may impose registration, licensing and background check requirements on gaming equipment suppliers and their officers, directors, principals and shareholders.
We have the required licenses to manufacture and distribute our products in the Native American jurisdictions in which we do business.
The United States Department of Justice ("DOJ"), the primary law enforcement entity responsible for enforcing the federal law that restricts or prohibits certain gaming devices and activities, namely the Federal Gambling Devices Act of 1962, which is commonly known as the Johnson Act, has traditionally taken a broad view as to what constitutes a gambling device prohibited by the Johnson Act. We believe the Johnson Act is inapplicable to the use of our gaming products, but it is possible that the DOJ would disagree with our position. In that event, the DOJ might institute criminal and civil proceedings against us, and a court might rule that the Johnson Act prohibits the use of our gaming products by tribal casinos unless the tribe and state have entered into an appropriate tribal-state compact. Any such proceedings could interfere with our ability to obtain regulatory approvals in other jurisdictions.
Additionally, certain tribes require gaming lab certification for devices such as our gaming products before the casino will agree to purchase or lease the devices. Gaming lab certification requires meeting certain technical specifications and standards and can be difficult and time consuming. It is possible this process will take longer than we anticipate for a particular jurisdiction, or we may never obtain gaming lab certification for a particular jurisdiction.
Federal Regulation
We are required to register annually with the Criminal Division of the DOJ in connection with the sale, distribution or operation of gaming equipment. The Johnson Act makes it unlawful, in general, for a person to manufacture, transport or receive gaming machines or components across state lines unless that person has first registered with the U.S. Attorney General. We also have various record-keeping and equipment-identification requirements imposed by this act. Violation of the Johnson Act may result in seizure and forfeiture of the equipment, as well as other penalties.
We believe the Johnson Act is inapplicable to the use of our gaming products. However, the DOJ has traditionally taken a broad view as to what constitutes a gambling device prohibited by the Johnson Act, and may disagree with our position on the Johnson Act.
Research and Development
We currently conduct research and development activities primarily to develop new gaming platforms and content and to add enhancements to our existing product lines. We believe our ability to deliver differentiated, appealing products to the marketplace is based on our research and development investments and we expect to continue to make such investments in the future. These research and development costs consist primarily of salaries and benefits and consulting fees.
Our research and development expenses were $378,168 and $427,095 during the fiscal years ended December 31, 2020 and 2019, respectively.
Significant Customers, Foreign Revenues and Foreign Assets
For the years 2020 and 2019, there was no revenue from customers outside the United States. For the years 2020 and 2019, two and three casino customers accounted for 29% and 30%, respectively, of our revenues. One customer which was a group of casinos under common control represented approximately 8% and 9% of our 2020 and 2019, revenues, respectively. As of December 31, 2020 and 2019, we had no long-lived assets outside the United States. As of December 31, 2020, four casino customers accounted for 32% of our net accounts receivable and as of December 31, 2019, two casino customers accounted for 44% of our net accounts receivable.
Employees
As of March 30, 2021, we had 13 full-time employees as well as one consultant that provides engineering and game design services on a part-time basis. We consider our relationships with our employees to be satisfactory. None of our employees is covered by a collective bargaining agreement.
Item 1A.
Item 1A. Risk Factors.
Our business is subject to a variety of risks. The following risk factors could result in a material adverse effect upon our business, financial condition, results of operations, and ability to implement our business plan. Many of these events are outside of our control.
Risks Relating to our Business
We have a limited operating history on which to evaluate our business.
We are a company that has generated operating revenue lower than operating costs since inception, except for two years, and are in the relatively early stages of switching our business focus from the manufacture of Poker Tables to slot machines. We are continually developing and testing new game software and new slot machine themes which may not appeal to customers and are in the early stage of a new cabinet design deployment. Our business model is unproven and the lack of meaningful historical financial data makes it difficult to evaluate our prospects. To the extent that we are able to implement our business plan, our business will be subject to all of the problems that typically affect a business with a limited operating history, such as unanticipated expenses, capital shortfalls, delays in program development, delays in product availability and possible cost overruns.
We have a history of losses. We may be unable to generate sufficient net revenue in the future to achieve or sustain profitability.
We recognized a net loss of $445,739 for the year and have an accumulated deficit of $28,994,572 as of December 31, 2020. To implement our business plan and generate the increased revenues necessary to achieve profitability, we must gain broad market acceptance of our products. The market for our products is heavily regulated. We must obtain regulatory approvals for our Company and our products in many additional jurisdictions, including some jurisdictions where we have not yet filed applications. In addition to the usual risks associated with the introduction of a new product, the timing of our revenue generation will be driven, in part, by our ability to gain broad market acceptance of our products in those jurisdictions where we are able to distribute our products, our receipt of regulatory approvals in additional jurisdictions, and our entry into definitive agreements with customers in those jurisdictions. For the reasons discussed in this Risk Factors section and elsewhere in this report, we might not generate significant revenues to achieve profitability in the foreseeable future or at all. Even if we achieve profitability, we might not be able to sustain or increase it on a quarterly or annual basis. Our failure to do so would adversely affect our business and may require us to raise additional capital or incur additional debt, which may be very difficult given the current state of the gaming industry, capital markets and the overall economy due to the current Coronavirus pandemic COVID-19.
Our success in the gaming industry depends in large part on our ability to expand further into the slot machine market and new geographical markets. Our further expansion into these markets will present new challenges and risks that could adversely affect our business and results of operations.
As we seek to expand further into the slot machine market and new geographical markets, we expect to encounter business, legal, operational, and regulatory uncertainties, many of which are similar to those we faced in our Poker Table deployment. As a result, we may encounter legal and regulatory challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact on planned revenues or costs associated with this expansion. If we are unable to effectively develop and operate within these new markets, then our business, operating results and financial condition would be impaired.
Successful growth in new markets may require us to make changes to our products to ensure that they comply with applicable regulatory requirements and will require us to obtain additional licenses. Our ability to affect these changes and obtain the required licenses is subject to a great degree of uncertainty and may never be achieved.
Generally, our ability to further expand into the slot machine market and enter new geographical markets involves a number of business uncertainties, including:
●
whether our resources and expertise will enable us to effectively operate and grow in such new markets;
●
whether our internal processes and controls will continue to function effectively;
●
whether we have enough experience to accurately predict revenues and expenses in these new markets;
●
whether we will be able to successfully compete against larger companies who dominate the markets that we are trying to enter; and
●
whether we can timely perform under our agreements in these new markets because of other unforeseen obstacles.
If we are unable to keep pace with rapid innovations in new technologies or product design and deployment, or if we are unable to quickly adapt our development and manufacturing processes to compete, our business and results of operations could be negatively impacted.
Our success is dependent on our ability to develop and sell our products that are attractive not only to our customers, but also to their customers, the end players. If our slot machines do not appeal to customers, or do not meet or sustain revenue and profitability expectations, our slot machines may be replaced by our competitors’ machines. Additionally, we may be unable to enhance existing slot machines in a timely manner in response to changing regulatory, legal or market conditions or customer requirements, or new products or new versions of our existing products may not achieve acceptance in new or existing markets. Therefore, our future success depends upon our ability to design and market technologically sophisticated products that meet our customers’ needs regarding, among other things, ease of use and adaptability, and are unique and entertaining such that they achieve high levels of player appeal and sustainability. If we fail to keep pace with our competitors, our business could be adversely affected and a decrease in demand for our products could also result in inventory obsolescence charges.
The demands of our customers and the preferences of the end players are continually changing. As a result, there is constant pressure to develop and market new game content and technologically innovative products. As our revenues are heavily dependent on the earning power and life span of our games, we face increased pressure to design and deploy new and successful game themes to maintain our revenue stream and remain competitive. Our ability to develop new and innovative products could be adversely affected by:
●
the failure of our new gaming products to become popular with end players;
●
a decision by our customers in particular or the gaming industry in general to decline to purchase our new slot machines or to cancel or return previous orders in anticipation of newer technologies;
●
an inability to roll out new games on schedule as a result of delays in regulatory approval in the applicable jurisdictions, or otherwise; and
●
an increase in the popularity of competitors' games.
If we cannot adapt our manufacturing to meet the needs of our product innovations, or if we are unable to increase our production capacity in a timely manner, our business could be negatively impacted.
If we fail to obtain or maintain gaming licenses and regulatory approvals, we will be unable to operate our business and license or sell our products.
The manufacture and distribution of gaming machines are subject to extensive federal, state, local and tribal regulation. Some jurisdictions require licenses, permits and other forms of approval for gaming devices. Most, if not all, jurisdictions also require licenses, permits and documentation of suitability, including evidence of financial stability, for the manufacturers and distributors of such gaming devices and for their officers, directors, significant shareholders and key personnel. Our failure to obtain regulatory approval in any jurisdiction will prevent us from distributing our products and generating revenue in that jurisdiction. Obtaining such approval is a time-consuming and costly process and cannot be assured. Although a manufacturer of gaming devices may pursue entity regulatory approval with regulators of tribal casinos at the same time that it pursues regulatory approval for its gaming devices, states that license commercial casinos require that a manufacturer obtain entity regulatory approval before seeking approval for gaming devices. This might result in additional time and expense associated with obtaining regulatory approvals. Even after incurring significant time and expense seeking such regulatory approvals, we may not be able to obtain them.
If we fail to obtain a necessary registration, license, approval or finding of suitability in a given jurisdiction, we would likely be prohibited from distributing our products in that jurisdiction. In addition, some jurisdictions require license holders to obtain government approval before engaging in some transactions, such as business combinations, reorganizations, stock offerings and repurchases. We may not be able to obtain all necessary registrations, licenses, permits, approvals or findings of suitability in a timely manner, or at all. Our failure to obtain regulatory approvals in a timely manner in jurisdictions that are material to us, whether individually or in the aggregate, would have a material adverse effect on our net revenue and delay or prevent market acceptance of our products.
If we fail to obtain or maintain gaming licenses and regulatory approvals for our officers, directors and significant shareholders, we might be unable to operate our business and license or sell our products.
Gaming authorities in some jurisdictions may investigate any individual who has a material relationship with us, and any of our shareholders, to determine whether the individual or shareholder is suitable to those gaming authorities. If a gaming authority in any jurisdiction fails to find any of our officers, directors or significant shareholders suitable, we may be prohibited from leasing, licensing or selling our products in that jurisdiction and it could adversely affect our regulatory approvals in other jurisdictions.
A finding of suitability is generally determined based upon a myriad of facts and circumstances involving the entity or individual in question, and many gaming authorities have broad discretion in determining suitability. If any of our officers, directors or significant shareholders are not found suitable in a jurisdiction requiring a finding of suitability, we would be prevented from leasing, licensing or selling our products in that jurisdiction as long as the individual or entity in question remained an officer, director, or significant shareholder. Such an occurrence would likely delay or prevent our introduction of our products into such jurisdiction.
Depending on how material such jurisdiction is to our plan of operations, failure to obtain findings of suitability could have a material adverse effect on us. In addition, a finding that one of our officers, directors or significant shareholders is not suitable in any jurisdiction may hinder our ability to obtain or retain regulatory approvals in other jurisdictions. Conversely, however, a finding of suitability by one or more gaming authorities does not ensure that similar suitability determinations will be obtained from any other gaming authorities.
Although we can terminate the employment of an officer or remove a director who is not found suitable, such action could disrupt the management of our Company and adversely affect our business and the results of our operations. In addition, the removal of a director may be delayed if such removal requires action on the part of our shareholders.
Most of our competitors have greater resources and other advantages, and our failure to remain competitive could adversely affect our ability to retain existing customers and obtain future business.
There are a number of companies that offer, manufacture and distribute slot machines. Most of these companies have greater financial resources than we have.
The primary challenges to entering a market are the need to establish relationships with the owners and operators of casinos, the requirements for regulatory approvals, and the development of the necessary technology for our products. Our competitors include manufacturers of gaming devices that have already established such relationships and that have received some, if not all, of the regulatory approvals needed to market and sell slot machines in our target markets, and we anticipate that the number of such competitors will increase in the future. Most of our competitors have greater financial resources than we have. Therefore, we anticipate that the challenges to enter into our markets would not pose a significant obstacle for such manufacturers if they sought to compete with us.
Competition in the gaming industry is intense due to the number of providers, as well as the limited number of facilities and jurisdictions in which they operate. There are many companies that could introduce directly competitive products in the short term that also have established relationships and have the potential to develop technology quickly with greater resources than we have.
Additionally, our customers compete with other providers of entertainment for their end users’ entertainment budget. Consequently, our customers might not be able to spend new capital on acquiring gaming equipment. Moreover, our customers might reduce their utilization of revenue sharing agreements.
We operate in a very competitive business environment and if we do not adapt our approach and our products to meet this competitive environment, our business, results of operations, and/or financial condition could be adversely impacted.
There is intense competition in the gaming products industry, which is characterized by dynamic customer demand and rapid technological advances. We must continually adapt our approach and our products to meet this demand and match these technological advances and if we cannot do so, our business, results of operations, and/or financial condition may be adversely impacted. Conversely, the development of new competitive products or the enhancement of existing competitive products in any market in which we operate could have an adverse impact on our business, results of operations, and/or financial condition. If we are unable to remain dynamic in the face of changes in the market, it could have a material adverse effect on our business, results of operations and financial condition.
In general, we compete with other gaming and entertainment products for space on the casino customers’ floor, as well as for our customers' capital and operational spending. Some of the larger gaming supply companies with whom we compete are IGT, Scientific Games and Aristocrat. New competitors may also enter our key markets.
Adverse general economic conditions that affect the gaming industry or a reduction in demand for gaming in any of our significant markets may adversely affect our results of operations.
Our business operations are affected by national and local economic conditions. The current level of activity in the general economy, or in a region constituting a significant source of our customers, or a reduction in demand for gaming, may harm the health of casino operators and our other customers and result in fewer customers leasing or purchasing our products, which would adversely affect our results.
Our growth and ability to access capital markets are subject to a number of economic risks.
In the wake of the global health crisis caused by the novel coronavirus pandemic known as COVID-19, financial markets in the United States and abroad have suffered significant losses. It is possible that unfavorable financial market conditions will continue for a long time or that there will be an even further deterioration in financial markets and confidence in major economies even after the crisis of COVID-19 has passed.
These financial market conditions affect our business in a number of ways. The diminished availability of credit in financial markets adversely affects the ability of our customers to obtain financing for purchases and operations and could result in a decrease in or cancellation of orders for our products. Financial market conditions could also affect our ability to raise funds in the capital and bank lending markets.
Risks that impact our customers may impact us.
If fewer players visit our customers' facilities, if such players have less disposable income to spend at our customers' facilities, if our customers are unable to devote resources to purchasing and leasing our products, or if our customers are in an area that is experiencing a health crisis, such as COVID-19, that causes them to shut down either voluntarily or involuntarily, there could be an adverse effect on our business. Such risks that affect our customers include, but are not limited to:
·adverse economic conditions in gaming markets including recession, economic slowdown, higher airfares and higher energy and gasoline prices;
·global geopolitical events such as terrorist attacks, other acts of war or hostility, and popular uprisings and violence such as those that have been occurring in the Middle East;
·natural disasters such as major fires, floods, hurricanes, tornadoes, earthquakes, snowstorms and tsunamis and their aftermath;
·health crises, such as those caused by the spread of virus, epidemics and pandemics.
Political, legal and other risks associated with sales in Native American jurisdictions could adversely affect our operating results.
Agreements with casinos in Native American jurisdictions may subject us to sovereign immunity risks and could subject us to additional compliance costs.
We compete in a single industry and our business may suffer if our products become obsolete or demand for them decreases, including downturns in the gaming industry.
We derive substantially all of our revenues from leasing and selling slot machines for the gaming industry. If the gaming industry suffers a significant downturn, our business may materially suffer if our products become obsolete or if use of our products decreases. Our licensing agreements with our customers are typically month-to-month and provide for termination upon 30 days' prior notice by either party. Accordingly, consistent demand for and satisfaction with our products by our customers is critical to our financial condition and future success. Problems, defects or dissatisfaction with our products could cause us to lose customers or revenues from leases with minimal notice. Additionally, our success depends on our ability to keep pace with technological advances in our industry and to adapt and improve our products in response to evolving customer needs and industry trends. If demand for our products weakens due to lack of market acceptance, technological change, competition, regulatory changes, or other factors, it could have a material adverse effect on our business, results of operations and financial condition.
Defects in, and fraudulent manipulation of, our products could reduce our revenue, increase our costs, burden our engineering and marketing resources, involve us in litigation and adversely affect our gaming licenses.
Our success will depend, in part, on our ability to avoid, detect and correct software and hardware defects and prevent fraudulent manipulation of our products. Our products are subject to rigorous internal testing and will be subject to additional testing by regulators in certain gaming jurisdictions. We may not be able to build and maintain products that are free from defects or manipulations and that satisfy these tests. Although we have taken steps to prevent defects and manipulations, our products could suffer such defects and manipulation after they have been widely distributed.
Although we do not believe it is likely, it is possible that an individual could breach the security of a casino and fraudulently manipulate its operations. Any such fraudulent manipulation, defects or malfunctions, or any such problems with our slot machines, could result in financial losses for our customers and, in turn, termination of leases, cancellation of orders, product returns and diversion of our resources. Even if our customers do not suffer financial losses, casinos may replace our machines if they do not perform according to expectations. Any of these occurrences could also result in the loss of, or delay in, market acceptance of our products and loss of licenses, leases and sales.
In addition, the occurrence of defects in, or fraudulent manipulation of, our products may give rise to claims for lost revenues and related litigation by our customers and may subject us to investigation or other disciplinary action by regulatory authorities that could include suspension or revocation of our regulatory approvals.
Our failure to obtain any necessary additional financing would have a material adverse effect on our business.
Most of our revenue is derived from leasing our products to customers under operating leases. Our ability to lease our products to customers on a large scale will require us to obtain additional financing necessary for the manufacture of our products. Our inability to obtain financing on terms that would allow us to license our products profitably would hamper our ability to distribute the products on a large scale and may therefore, delay our ability to obtain significant market presence as well as market acceptance of our products.
In addition, if our revenues are not sufficient, or if we incur more than anticipated expenses, we may need to seek additional equity or debt financing. It is uncertain whether we could obtain such financing. Even if such financing is available, it may not be on terms that are favorable to us or in sufficient amounts to satisfy our requirements. If we need, but are unable to obtain, additional financing we may be unable to develop our products, meet customer demand for our products, withstand adverse operating results, or otherwise accomplish our business objectives. More importantly, if we are unable to obtain further financing when needed, our continued operations may have to be scaled down or even ceased and our ability to generate revenues would be negatively affected.
We are dependent on intellectual property rights. Therefore, infringement claims against us, patents issued to our competitors, or misappropriation of our trade secrets or other proprietary information may adversely affect us.
Our competitors have patents covering, among other things, gaming machine features, bonusing techniques and related technologies. If our products use processes or other subject matter that is claimed under our competitors’ patents, or if other companies obtain patents claiming subject matter that we use, those companies may bring infringement actions against us.
Whether a product infringes a patent involves complex legal and factual issues, which can be time-consuming and expensive to resolve. In addition, because patent applications can take many years to be approved, there may be applications now pending of which we are unaware, which may later result in the issuance of patents that our products may infringe upon or that may lead to infringement claims against us. If our product infringes a patent, we could be prevented from distributing the product unless and until we obtain a license or redesign the product to avoid infringement. A license may not be available or may require us to pay substantial royalties. We also may not be successful in redesigning a product to avoid infringement.
Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and we may not have the resources to defend against infringement suits brought against us. Furthermore, if we are found to have willfully infringed on another party’s patent, we might be liable for treble damages.
We also rely on trade secrets and other proprietary information. We enter into confidentiality agreements with our employees and independent contractors regarding our trade secrets and proprietary information, but we cannot be assured that the obligation to maintain the confidentiality of our trade secrets or proprietary information will be honored. Despite various confidentiality agreements and other trade secret protections, our trade secrets and proprietary know-how could become known to, or independently developed by, competitors.
The use of our products could result in product liability claims that could be expensive and that could damage our reputation and harm our business.
Our business exposes us to the risk of product liability claims. Subject to contractual limitations, we will face financial exposure to product liability claims if our products fail to work properly and cause monetary damage to patrons, casinos or card clubs. In addition, defects in the design or manufacture of our products might require us to recall each product that has been leased. Although we maintain product liability insurance, the coverage limits of policies available to us may not be adequate to cover future claims. If a successful claim is brought against us in excess or outside of our insurance coverage, we may be forced to divert resources from the development of our products, the pursuit of regulatory approvals and other working capital needs in order to satisfy such claims.
We are dependent on the success of our customers and are subject to industry fluctuations.
Our success depends on our customers licensing or buying our products to expand their existing operations, replace existing gaming products or equip a new casino. Any slowdown in the replacement cycle may negatively impact our operations. Additionally, to the extent existing or potential customers choose to allocate capital to expenditures other than gaming products, such as real estate acquisitions, hotel furnishings, restaurants and other improvements, or generally to reduce expenditures, particularly in response to current conditions in the global economy and especially in the gaming industry and due to COVID-19, we may suffer a material adverse effect on our business, results of operations and financial condition.
Certain market risks may affect our business, results of operations and prospects.
In the normal course of our business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements, fluctuating commodities markets, higher labor costs, increased fuel prices and collectability of receivables. Further, some of our customers may experience financial difficulties, possibly as a result of conditions in the gaming industry, or may otherwise not pay accounts receivable when due, resulting in increased write-offs. We may incur material losses in these areas in the future, particularly in the aftermath of COVID-19.
The loss of the services of our Chief Executive Officer (“CEO”) and our President or other key employees, or the failure to attract additional key individuals, could materially and adversely affect our business.
Our success will depend on retention of key executives who have been instrumental in our development thus far, and on our ability to attract and retain employees to complete the development or enhancements of our products and to market them widely. We seek to compensate and incentivize our executives and other key employees through competitive salaries and equity incentive compensation, but such compensation may not be sufficient to enable us to retain them or hire new personnel.
Our success will depend on the reliability and performance of third-party manufacturers and suppliers.
We currently obtain slot machine cabinets from third party manufacturers. If those manufacturers are unable to meet our requirements, we would be significantly hampered in serving our customers and may miss revenue-generating opportunities. Our inability to contract with third-party manufacturers and suppliers to provide a sufficient supply of our products on acceptable terms and on a timely basis could negatively impact our relationships with existing customers and cause us to lose revenue-generating opportunities with potential customers. We may experience shortages in materials used in the manufacture of our slot machines as well as additional lead times in receiving those supplies which could delay filling customer orders in the aftermath of COVID-19. In addition, manufacturing costs may increase significantly, and we may not be able to successfully recover these cost increases with increased pricing to our customers. Either situation could have an adverse impact on our business, results of operations and financial condition.
Attitudes and public policies regarding gaming might change, to our detriment.
Gaming has historically experienced backlash from various constituencies and communities. Public tastes are unpredictable and subject to change, and they may be affected by changes in the country’s economic, political and social climate. A change in public tastes or a backlash among certain constituencies or in certain communities could result in reduced popularity of gaming in general, or increased regulation of the gaming industry, either of which could significantly reduce demand.
The current novel coronavirus pandemic outbreak COVID-19 could continue to spread rapidly and affect our suppliers, customers and employees, and cause disruptions in current and future plans for operations and expansion.
Our performance will depend on the duration and spread of the outbreak of the novel coronavirus disease COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended. On March 19, 2020, we, as well as all other non-life-sustaining businesses, were ordered by governor’s mandate to close physical operations within the state of Pennsylvania. Due to COVID-19, all of our customers were mandated to close by March 31, 2020 and remained closed throughout the entire month of April 2020 which reduced our revenues to zero during that time period. Certain customers were able to start reopening their facilities in May 2020 and the Company was able to reopen its facility and operations on May 22, 2020, however operations are open with limitations and through strict adherence to guidelines established by the Centers for Disease Control and Prevention (“CDC”) and each facility’s respective state or tribal government.
Although we had implemented methods to mitigate exposure to COVID-19 for our employees and we continue to use these methods, such as the ability to work remotely with access to our IT systems, the mandate to close our physical location from March 19 until May 22, 2020, impeded our ability to assemble the slot machine units to fulfill existing and new orders.
In the aftermath of COVID-19, customers may continue to lose patrons due to fears about being in public and potential exposure to COVID-19 or future pandemics. Customers may experience significant losses due to the COVID-19 outbreak and may terminate their existing contracts or postpone or ultimately cancel future planned orders and contracts due to those losses. Travel may be restricted to certain areas which may limit our ability to obtain new customers or jurisdictions, or to provide services in those areas in which our customers are currently located. We may experience a shortage of labor due to quarantine or prolonged illness within our own organization or at supplier or customer locations.
The full impact of COVID-19 cannot be measured at this time and might not become apparent until sometime in the next few months and beyond.
We have been incurring significant additional costs since we became a publicly reporting company in 2008, and we expect this to continue.
Our public company compliance costs before we acquired Lightning Poker in January 2008 in the Merger were not substantial, due to our minimal operations before the Merger. Lightning Poker did not operate as a public company before the Merger. As a publicly reporting company with operations since January 2008, we have been incurring, and will continue to incur, significant legal, auditing and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the United States Securities and Exchange Commission (“SEC”), have imposed various requirements on public companies. Our management and other personnel need to devote a substantial amount of time to these matters.
Our business is subject to quarterly fluctuation.
Our quarterly operating results may vary based on the timing of the opening of new gaming jurisdictions, the opening or closing of casinos, the expansion or contraction of existing casinos, approval or denial of our products and corporate licenses under gaming regulations, the introduction of new products, the mix of lease versus sales revenue, and the closure of ours and our customers’ physical locations due to COVID-19. As a result, our operating results could be volatile, particularly on a quarterly basis.
Risks Relating to our Common Stock
There is no trading market for our common stock, and liquidity of shares of our common stock is limited.
There is no public trading market for our common stock, and we do not expect a public trading market to develop in the foreseeable future. Trading in our stock has been minimal, the number of shareholders is relatively small, and there are currently no market makers for our stock. Consequently, holders of our stock may find it difficult to liquidate their investments.
Our common stock might never be listed on any stock exchange.
We might not attempt to meet, or we might be unable to meet, the initial listing standards of NASDAQ or any other stock exchange. Even if we obtain a listing of our common stock, we might be unable to maintain that listing. Before our stock is so listed, we might seek to have our stock quoted on the OTCQB or OTC Pink marketplaces of OTC Link, where our stockholders may find it more difficult than on a stock exchange to dispose of shares or obtain accurate quotations as to trading price and trading activity. In addition, if we failed to meet criteria set forth in a trading rule issued by the SEC, that rule would impose various practice requirements on broker-dealers who sell our stock to persons other than established customers and accredited investors. This may deter broker-dealers from recommending or selling our stock, which may further reduce its liquidity. This would also make it more difficult for us to raise additional capital.
We have never paid dividends on our common stock.
We have never paid dividends on our common stock and do not intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of dividends will instead be re-invested into the Company to further our business strategy.
Our authorized Preferred Stock could be issued under circumstances that would adversely affect holders of our common stock.
Our Articles of Incorporation authorize the issuance of up to 10,000,000 shares of Preferred Stock with designations, rights and preferences determined from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue those shares with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of holders of our common stock. For example, those shares could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company. Although no shares of Preferred Stock are currently outstanding and we have no present intention to issue any shares of Preferred Stock, there is no assurance that we will not do so in the future.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties.
We lease office and warehouse space of 11,566 square feet located at 23 Creek Circle, Boothwyn, PA 19061 at a current average rental of $108,271 per year. The lease was renewed in 2020 and expires in August 2026. This is the location of our principal offices and substantially all of our operations. The premises are in good condition and adequate for our foreseeable needs. We believe our property is adequately insured.
Item 3.
Item 3. Legal Proceedings.
None.
Item 4.
Item 4. Mine Safety Disclosures.
None
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market information. There is currently no established public trading market for our common stock, and we do not expect such a market to develop in the foreseeable future. Trading in our stock to date has been minimal and we have no reliable basis for reporting trading prices or bid prices.
Holders of record. On March 30, 2021, there were 73 shareholders of record of our common stock and one shareholder of record of our Nonvoting Common Stock. We have no information that indicates the number of beneficial owners is materially higher.
Dividend policy. We have never declared or paid cash dividends on our stock. We intend to retain any future earnings to finance the growth and development of our business and do not intend to pay any cash dividends on our stock in the foreseeable future. Payment of dividends in the future, if any, will be made at the discretion of our Board of Directors. Such decisions will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors as our Board of Directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2020, with respect to the equity compensation plan approved by security holders, the 2016 Stock Option Plan (the “2016 Plan”) under which we have authorized 5,700,000 shares of our Non-voting common stock for issuance.
(1) Stock options were granted on March 8, 2017 and on March 5, 2019 to employees with greater than one year of service as of those dates. All options were granted using a five-year vesting schedule and as of March 30, 2021, no options have been exercised.
(2) On November 30, 2018, the Board of Directors determined that it was in the best interests of the Company to approve the reduction in the exercise price of the options granted under the 2016 Plan before that date based on current valuation information available. The market price of the Company’s stock was determined to be $.13 per share and the Board authorized the reduction of the option exercise price to that amount from the original $.28 per share.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT
Throughout this report we make “forward-looking statements,” as that term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), 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” or “anticipate” or the negative of such terms and similar words and include all discussions about our ongoing or future plans, objectives or expectations.
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 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. Specific 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 those identified in Item 1A. “RISK FACTORS”. The historical financial 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. 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.
We are registered as an approved vendor to distribute our gaming products in 66 jurisdictions. We must obtain regulatory approvals in many additional jurisdictions in order to fully effectuate our business plan. We may not receive any such regulatory approvals. Due to these and a variety of other factors, including those described under “RISK FACTORS” in Item 1A. of this report, we may be unable to generate significant revenues or margins, control operating expenses or achieve or sustain profitability in future years.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to the valuation of equity awards issued. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 1 to our financial statements appearing elsewhere in this report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We generate revenue from leasing and selling our slot machines and from sales of parts and certain services relating to our slot machines. We recognize revenue on sales of our 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 win or “participation” revenue collected for each slot machine, subject to monthly minimums and maximums. Customers under fixed daily rate agreements are invoiced on the first day of the month at the agreed upon daily rate per unit for the number of days the unit is leased during the month, typically the total number of days in the month. Customers under revenue agreements are invoiced when participation reports are remitted to us detailing the monthly per unit and 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 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 is borne by the Company. Historically, these costs have been immaterial and are expensed at time of issuance, however the Company has and will continue to assess these post-sales costs to determine whether they constitute performance obligations and should be recorded at time of sale. A contract asset is recorded when the performance obligations of the Company have been met and the customer has not been billed. A contract liability is recorded when the Company has an obligation to transfer products or services to a customer for which consideration has been received.
Research and Development
We expense internally developed software costs in accordance with guidance by the Financial Accounting Standards Board (“FASB”) with respect to research and development costs. All employee and product costs associated with the development of our products are expensed until technological feasibility is reached. Technological feasibility is established when a product design and a working model of the software product have been completed and the completeness of the working model and its consistency with the product design have been confirmed by testing.
Equity-based Compensation and Warrants
We account for our stock-based employee compensation awards in accordance with FASB issued guidance on transactions in which an entity exchanges its equity instruments for goods or services. The FASB guidance also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments. We value stock options issued based upon the Black-Scholes option-pricing model and recognize this value as an expense over the period in which the options vest.
We estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. Expected volatility is based upon publicly traded companies with similar characteristics as us. We use 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. Non-qualified stock options to purchase 100,000 shares of nonvoting common stock were granted during 2019.
In connection with loans obtained by the Company, the lender holds a warrant to purchase 7,000,000 shares of the Company’s common stock at a price of $.05 per share, expiring November 2029. The warrant is detachable, may be exercised via cashless exercise however may not be exercised until or unless the lender is fully licensed in the Company’s gaming jurisdictions. The Company classified its warrant as a liability in accordance with the applicable guidance and was initially, and will subsequently be, measured at its estimated fair value using the Black-Scholes pricing model. The warrant will continue to be classified as a liability until such time it is exercised, expires or is amended in a manner that would no longer require classification as a liability.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The accounting for income taxes involves significant judgments and estimates and deals with complex tax regulations. When recognizable, the recoverability of certain deferred tax assets is based in part on estimates of future income and the timing of temporary differences, and the failure to fully realize such deferred tax assets could result in a higher tax provision in future periods. If, based on available data, future estimated tax liabilities differ materially from our estimates, the resulting difference will be recorded in the period in which they become known.
Impairment of Long-lived Assets
The Company reviews its long-lived assets, including property and equipment and license fees, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, including definite lived license fees, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets or for identifiable intangibles with finite useful lives. In addition, the Company considers changes in our business strategy and the industry as a whole in assessing recoverability of its long-lived assets. Any resulting impairment loss will be measured and recognized in the period in which the impairment becomes known. Based on the Company’s evaluation, there were no impairments for 2020 and 2019.
Assessment of Going Concern
The Company is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern for a period of one year after the date that the financial statements are issued, taking into consideration the Company’s current financial condition, conditional and unconditional obligations due within one year and the funds and cash flow necessary to maintain operations. It is management’s responsibility to perform an evaluation for every reporting period presented. The financial statements contained herein were prepared on a going concern basis. The going concern basis assumes that the company will continue in operation for at least the next twelve months from the date our financial statements are issued and based on management’s evaluation, will be able to realize its assets, discharge its liabilities and commitments, and maintain positive working capital in the normal course of business.
Recent Accounting Pronouncements
In December 2019, the FASB issued an update within the scope of Topic 740, Income Taxes. The update simplifies the accounting for income taxes by removing certain exceptions to the general principles within the Topic and improves consistent application of and simplifies GAAP for other areas by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is gathering the information and performing the analyses required before the standard’s effective date to determine the impact this guidance will have on our financial statements.
In June 2016, the FASB issued the update Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the estimation of credit losses from an “incurred loss” methodology to one that reflects “expected credit losses” (the Current Expected Credit Loss model, or CECL) which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Measurement under CECL is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability of reported amounts. The amendment is effective for the annual and interim periods ending after December 15, 2021 and we will assess the impact, if any, this update will have on our consolidated financial statements.
Twelve Months Ended December 31, 2020 Compared to Twelve Months Ended December 31, 2019
(All amounts are rounded to the nearest $1,000)
Revenue
The Company’s revenues for the year ended December 31, 2020 were $3,989,000 compared to $7,013,000 for the prior year, a decrease of $3,024,000. This decrease was directly attributable to the mandated closure of our customers’ facilities starting in March 2020 due to the outbreak of COVID-19, as well as the decrease in slot machine unit and parts sales. Although some our customers commenced the reopening of their locations in May 2020, a majority of the reopenings occurred in June 2020, all with restrictions on the number of slot machines available for play on the casino floor due to safety and social distancing requirements.
The decrease in lease revenues was attributable to the decrease in the average number of slot machines installed during the year as well as a decrease in the average daily rate generated from those leases, both due to COVID-19 closures and restrictions due to social distancing. Lease revenues decreased by $1,517,000 to $2,878,000 for the year ended December 31, 2020 from $4,395,000 for the year ended December 31, 2019. Temporary casino closures were mandated again in December 2020 due to COVID-19 in the state of Pennsylvania, which attributed to the decrease in the number of installed games as of December 31, 2020 by 27 slot machines and further attributed to the reduction in lease revenues.
Sales of slot machines and parts decreased by $1,507,000 to $1,111,000 for the year ended December 31, 2020 from $2,618,000 for the year ended December 31, 2019. The decrease is attributable to larger parts sales to individual customers that occurred in the year ended December 31, 2019 as well as the casino closures in March and December 2020 due to COVID-19. Larger volume parts sales decreased by $1,292,000, from $1,321,000 for the year ended December 31, 2019 to $29,000 for the year ended December 31, 2020. Other parts sales increased slightly by $1,000 to $55,000 for the year ended December 31, 2020 from $54,000 for the year ended December 31, 2019. Revenue from slot machine unit sales decreased by $216,000, from $1,243,000 for the year ended December 31, 2019 to $1,027,000 for the year ended December 31, 2020.
Cost of Products Sold
For the year ended December 31, 2020, cost of products sold decreased $1,216,000 to $683,000 from $1,899,000 for the year ended December 31, 2019, a direct result of the decrease in sales of slot machines and parts as described above.
Operating Expenses
Operating expenses decreased by $100,000 to $475,000 for the year ended December 31, 2020, from $575,000 for the year ended December 31, 2019. This decrease was the result of the offset of payroll and related expenses from the Paycheck Protection Program (“PPP”) loan as well as the reductions in freight, installation, repair and maintenance costs, and hardware and supplies due to the lower number of installs during the year due to the casino closures and restrictions from COVID-19. This decrease was partially offset by inventory write offs of approximately $94,000 that occurred in 2020.
Research and Development Expenses
Research and development expenses decreased by $49,000 to $378,000 for the year ended December 31, 2020, from $427,000 for the year ended December 31, 2019. Research and development expenses are related to the development of gaming equipment and consist mainly of payroll and related expenses for programmers and graphic artists and the costs to acquire new brands. This decrease is directly attributable to the offset of payroll and related expenses from the PPP loan.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,663,000 for the year ended December 31, 2020, a decrease of $456,000 from $2,119,000 for the year ended December 31, 2019. This decrease was due to the temporary furlough and reduction in salaries and commissions of personnel due to the state mandated office closure due to COVID-19 in March 2020, as well as the offset of payroll and related, rent and utility expenses from the PPP loan. In addition, the suspension of all travel, meals, and entertainment commencing in March 2020, due to travel restrictions and casino closures as a result of COVID-19, attributed to the decrease.
Depreciation and Amortization
Depreciation and amortization increased by $370,000 to $1,045,000 for the year ended December 31, 2020 from $675,000 for the year ended December 31, 2019. This increase was from the increase in fixed assets built and placed in gaming venues during 2019.	
Change in Value of Warrant Liability
The change in fair value of the warrant liability of $695,000 was due to the decline in the estimated fair market value of our common stock, a direct result of the impact on performance due to COVID-19.
Net Interest Expense
Net interest expense increased $310,000 from $600,000 for the year ended December 31, 2019 to $910,000 for the year ended December 31, 2020, as a result of the loan agreement and promissory note advances made in November 2019 and January 2020, and the amortization of the deferred commitment fee and debt discounts associated with the loan agreement and advances.
Loss on Extinguishment of Debt
A loss on extinguishment of debt of $420,000 was recognized in November 2019 as a result of the difference in the carrying value of the original loan and the fair value of the loan that was refinanced.
Interest Income
Interest income increased to $4,000 for the year ended December 31, 2020, from $-0- for the year ended December 31, 2019, as a result of funds deposited into an interest-bearing account that was opened in April 2020.
Other Income
Other income increased $20,000 for the year ended December 31, 2020, from $-0- for the year ended December 31, 2019 as a result of the receipt of the DelCo Strong 2 grant of $20,000 received in September 2020. Grants under the program were intended to provide economic support in the form of working capital for businesses suffering economic loss from the coronavirus COVID-19 public health emergency that were located in Delaware County, Pennsylvania.
Income Tax Expense
Income tax expense decreased to $-0- for the year ended December 31, 2020 from $13,000 for the year ended December 31, 2019 due to the loss incurred for 2020.
Liquidity and Capital Resources
We realized a net loss of $446,000 and funded our working capital investments and capital expenditures associated with our growth strategy with proceeds from loans and the revenue generated from leases and proceeds from the sales of our gaming products. These transactions that occurred in 2020 and 2019 are described in more detail following the discussion of cash flows below:
Discussion of Statement of Cash Flows
For the twelve months ended December 31, 2020, net cash provided by operating activities decreased $1,111,000 to $634,000 as compared to $1,745,000 for the twelve months ended December 31, 2019. The decrease in cash from operating activities was due to the loss incurred, the result of the casino closures and restrictions from COVID-19, as well as timing of receipts from customers and payments to creditors, suppliers and vendors.
Net cash used in investing activities decreased by $3,121,000 to $811,000 for the twelve months ended December 31, 2020, from $3,932,000 for the twelve months ended December 31, 2019. Cash used in investing activities is primarily the function of the net investment in property and equipment, principally slot machines used in our operations. This decrease in cash used was due to the decrease in slot machines built and placed in service during the period, a result of the casino closures and restrictions placed on those casinos due to COVID-19.
Net cash provided by financing activities was $990,000 for the twelve months ended December 31, 2020, the result of the note payable advance taken in January 2020 versus $7,729,000 for those taken during the twelve months ended December 31, 2019, a decrease of $6,739,000. The decrease in note payable advances offset by the decrease in principal payments on the notes of $3,954,000 resulted in the net decrease in cash provided by financing activities of $2,785,000.
Operations and Liquidity Management
For the year ended December 31, 2020, we sustained a net loss of $446,000 however we generated $634,000 in cash from operating activities and maintained and sustained a working capital surplus.
Due to the outbreak of the novel coronavirus disease (COVID-19), the Company, as well as all other non-life-sustaining businesses within the state of Pennsylvania, was ordered by governor’s mandate to close physical operations on March 19, 2020 which impeded our ability to assemble the slot machine units to fulfill existing and new orders. Due to COVID-19, all of our customers were mandated to close by March 31, 2020 and remained closed throughout the entire month of April 2020 which reduced our revenues to zero during that time period. Although certain customers were able to start reopening their facilities in May 2020 and the Company was able to reopen its facility and operations on May 22, 2020, operations are open with limitations and through strict adherence to guidelines established by the CDC and each facility’s respective state or tribal government. Temporary casino closures were mandated again in December 2020 due to COVID-19 in the state of Pennsylvania, which attributed to the decrease in the number of installed games as of December 31, 2020 by 27 slot machines and further attributed to the reduction in revenues. Although a majority of our customers were reopened as of December 31, 2020, only 76% of our slot machines installed at our customers’ locations were generating revenues and the remaining 24% of the slot machines were taped off or off the casino floor in order to adhere to social distancing guidelines. The situation surrounding COVID-19 is fluid and the ability to measure the degree to which COVID-19 will impact the Company’s performance in its aftermath will depend on the duration and spread of COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended.
Prior to the outbreak of COVID-19, we made improvements in performance and experienced an increase in the average number of signed recurring lease agreements for our slot machines with our latest theme offerings utilizing our new slot machine cabinet design. In addition, we continue to develop new proprietary game themes and plan to enter into new markets. The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to continue to obtain the regulatory approvals required to distribute our products and successfully market them to casinos, the development of new slot machine themes and new cabinets that are appealing to our customers and their patrons, and, most recently, the effects of COVID-19 on us, our customers, and suppliers.
Before the outbreak of COVID-19, our operating cash requirements were approximately $260,000 to $300,000 per month, principally for salaries, professional services, licenses, marketing, and office expenses, approximately $500,000 for the purchase of the hardware components for our products, and $110,000 for debt service. The full effects of COVID-19 on our revenues cannot be projected at this time, however, we have employed aggressive expense management measures and received funding through participation in the federal PPP and County DelCo Strong 2 programs that have enabled us to mitigate the adverse impact COVID-19 has had and will have on our projected performance.
As of December 31, 2020, our cash balance was $1,858,000 and our current gross cash requirements are approximately $220,000 to $240,000 per month, principally for salaries, professional services, licenses, and office expenses and $110,000 for debt service. We currently have adequate inventory to meet existing orders awaiting shipment and expected future orders and believe that the purchase of hardware components for our products will not be necessary for several months.
Anticipating that the effects from COVID-19 will continue through mid-year, gradual improvement in performance is projected for 2021 with slot machine installs projected to increase to pre-COVID levels by year’s end. Beyond 2021, the Company is anticipating growth in the install base and additional unit sales, penetration into markets in newly licensed jurisdictions, as well as the continued deployment of the current and additional new cabinet designs with new themes meant to maximize the player’s gaming experience. We expect that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flow to support our operations for the next twelve months.
Our ability to sell or license our products on a large scale in the future may require additional financing for working capital. There is no assurance that such additional financing would be available to us, if at all, on reasonable terms, particularly for the reasons discussed above in the “RISK FACTORS” item. Our inability to obtain such financing on terms that allow us to lease our products profitably would hamper our ability to distribute our products on a large scale.
Contractual Obligations
The table below sets forth our known contractual obligations as of December 31, 2020:
(1) Represents operating lease agreement for office and warehouse facility.
(2) Represents amounts due per license agreement.
(3) Represents outstanding amounts on notes payable.
Off-Balance Sheet Arrangements
As of December 31, 2020, there were no off-balance sheet arrangements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firms
The following is a list of financial statements filed herewith:
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lightning Gaming, Inc. and Subsidiaries.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Lightning Gaming Inc. and Subsidiaries (the Company) as of December 31, 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the year ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Going Concern:
Description of the Matter
The Company’s operations were significantly affected by the impact of COVID-19 due to the fact that the Company’s customers were mandated to close their casinos for several months, and once reopened, capacities were limited to comply with social distancing requirements. Operations have begun again but as the pandemic continues, operations may still be affected. In addition, and due to the impact of COVID-19 on operations, the Company was unable to meet the PDS Gaming, LLC covenant requirements under the original loan agreement during fiscal year 2020, for which they received a waiver. These conditions raised concerns about Company’s ability to continue as a going concern for a period of one year from the date of this audit report.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter include the following: (i) verifying the cash balance of approximately $1.9 million at December 31, 2020, (ii) obtaining management’s detailed projections and analysis to support the entity’s cash flow position and assessment of going concern, (iii) substantiating the projections with evidence of new contracts in 2021, (iv) reviewing performance of the Company to date as compared to projections and current cash balance, and (v) review of the second amendment to the loan agreement with PDS Gaming, LLC, in which the covenant requirements were removed through December 31, 2021 and were reduced from the original covenant value between December 31, 2021 to June 30, 2022, at which point the Company is expected to be in compliance based on their projections. Based on these procedures and evidence obtained, our concerns were alleviated and we concluded that the Company has the ability to continue as a going concern.
/s/ Assurance Dimensions, Inc.
We have served as the Company’s auditor since 2020.
Margate, Florida
ASSURANCE DIMENSIONS CERTIFIED PUBLIC ACCOUNTANTS & ASSOCIATES
also d/b/a McNAMARA and ASSOCIATES, PLLC
TAMPA BAY: 4920 W Cypress Street, Suite 102 | Tampa, FL 33607 | Office: 813.443.5048 | Fax: 813.443.5053
JACKSONVILLE: 4720 Salisbury Road, Suite 223 | Jacksonville, FL 32256 | Office: 888.410.2323 | Fax: 813.443.5053
ORLANDO: 1800 Pembrook Drive, Suite 300 | Orlando, FL 32810 | Office: 888.410.2323 | Fax: 813.443.5053
SOUTH FLORIDA: 2000 Banks Road, Suite 218 | Margate, FL 33063 | Office: 754.800.3400 | Fax: 813.443.5053
www.assurancedimensions.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the board of directors of Lightning Gaming, Inc. and subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Lightning Gaming, Inc. and subsidiaries (the "Company") as of December 31, 2019, the related consolidated statement of operations, stockholders’ equity, and cash flows for the year then ended and the related notes and financial statement schedule listed in item 15(a)2 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Baker Tilly US, LLP
We served as the Company's auditor from 2015 to 2020.
Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)
Lancaster, Pennsylvania
March 30, 2020
Lightning Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets
Lightning Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Lightning Gaming, Inc. and Subsidiaries
Consolidated Statements of Operations
Lightning Gaming, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2020 and 2019
See Notes to Consolidated Financial Statements
Lightning Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
See Notes to Consolidated Financial Statements
Lightning Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
See Notes to Consolidated Financial Statements
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business: Lightning Gaming, Inc. (the “Company”) was incorporated on March 1, 2007 and on January 29, 2008, completed a merger with Lightning Poker, Inc. (“Lightning Poker”) which became a wholly owned subsidiary of the Company.
Lightning Poker was formed to manufacture and market a fully automated, proprietary electronic poker table (the “Poker Table”) to commercial and tribal casinos, card clubs, and other gaming and lottery venues. Lightning Poker’s Poker Table was designed to improve economics for casino operators while improving overall player experience.
In 2008, the Company, as the sole member, established Lightning Slot Machines, LLC (“Lightning Slots”) through which it commenced the design, manufacture, marketing, sale, and operation of video slot machines to customers in various gaming jurisdictions.
Our consolidated financial statements include the accounts of the Company, including Lightning Poker and Lightning Slots. All inter-company accounts and transactions have been eliminated.
For the year ended December 31, 2020, the Company recognized a net loss however it generated cash flows from operations, has sufficient inventory to fill outstanding lease and sales orders, and has maintained and sustained working capital surpluses. Due to the outbreak of the novel coronavirus disease (COVID-19), the Company, as well as all other non-life-sustaining businesses within the state of Pennsylvania, was ordered by governor’s mandate to close physical operations on March 19, 2020. Due to COVID-19, all of our customers were mandated to close by March 31, 2020 and remained closed throughout the entire month of April 2020 which reduced our revenues to zero during that time period. Certain customers were able to start reopening their facilities in May 2020 and the Company was able to reopen its facility and operations on May 22, 2020, however operations are open with limitations and through strict adherence to guidelines established by the Centers for Disease Control and Prevention (“CDC”) and each facility’s respective state or tribal government. The ability to measure the degree to which COVID-19 will impact the Company’s performance in its aftermath will depend on the duration and spread of COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended.
On May 7, 2020, we received $246,200 in funding under the federal loan program known as the Paycheck Protection Program (“PPP”) through the Small Business Association (“SBA”) which has helped to lessen the impact of COVID-19 for the expenses covered under the program. In addition, we received a $20,000 grant in September 2020 through our county government meant to provide economic support in the form of working capital for businesses suffering from the coronavirus COVID-19 public health emergency.
In addition, aggressive expense management has been employed to mitigate the adverse impact that COVID-19 has had on our operations and performance. We anticipate that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations, however the Company’s future performance will depend on the duration of COVID-19 and the Company’s ability to distribute its products and successfully market them to more casinos and gaming venues. Although we realized a net loss for the year ended December 31, 2020 due to the COVID-19, based on our working capital surplus, financial condition, cash flow projections, anticipated revenues and financing agreements, we believe we have sufficient cash flows to support our operations for the next twelve months, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects for expansion. The Company’s continuance as a going concern is dependent upon these factors, among others. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
A summary of the Company’s significant accounting policies is as follows:
Revenue Recognition: The Company generates revenue from leasing and selling slot machines and from sales of parts and certain services relating to the slot machines. Revenue is recognized on sales of products, net of rebates, discounts and allowances, when an agreement exists, typically an approved sales proposal or contract, or upon receipt of customer’s purchase order, in which the sales price is fixed or determinable and when the performance obligations under that agreement have been completed. 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 win or “participation” revenue collected for each slot machine, subject to monthly minimums and maximums. Customers under fixed daily rate agreements are invoiced on the first day of the month at the agreed upon daily rate per unit for the number of days the unit is leased during the month, typically the total number of days in the month. Customers under revenue 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 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.
For the years 2020 and 2019, there was no revenue generated from customers outside the United States. Two and three casino customers accounted for 29% and 30% of our revenues for the years ended December 31, 2020 and 2019, respectively. One casino group represented 8% and 9% of total revenues for each of the years ended December 31, 2020 and 2019, respectively. For each of the years ended December 31, 2020 and 2019, the Company recorded no revenues related to performance obligations from prior periods.
Use of Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Significant estimates include the recoverable value of long-lived assets and projected cash flows. Actual results could differ from those estimates.
Cash: For the purposes of reporting the statement of cash flows, the Company considers all cash accounts and highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintained and will maintain cash balances with highly reputable financial institutions, which at times throughout the year exceeded the federally insured amount of $250,000. The Company has not experienced any losses from deposits above the federally insured amount and the amount of funds in excess of the federally insured amount was $1,434,119 as of December 31, 2020.
Concentrations of Credit Risk: Financial instruments that subject us to credit risk primarily consist of cash and trade receivables. The Company’s credit risk is managed by investing cash primarily in high-quality financial institutions. Accounts receivable include amounts owed by various customers and groups of customers. No collateral is required. Accounts receivable are not sold or factored. The Company regularly reviews its trade receivables’ current expected credit losses in determining its allowance for doubtful accounts and believes its credit and collection polices mitigate its credit risk relative to accounts receivable.
Receivables and Allowance for Doubtful Accounts: The Company regularly evaluates the collectability of its trade receivable balances based on a combination of factors. Delinquency of accounts receivable is determined based on contractual terms, customer payment history, and relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability of reported amounts. When a customer’s account becomes past due or is determined to be delinquent, dialogue is initiated with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results, financial position, or other material events impacting its business, an allowance is recorded as a reserve for bad debts to reduce the related receivable to the amount expected to be recovered, given all information presently available. The Company maintained an allowance of $6,593 as of December 31, 2020 and 2019. Except for this allowance, 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. The Company does not charge interest on its past due receivables. During each of the years ended December 31, 2020 and 2019, respectively, the Company wrote off $-0- of accounts receivable considered to be uncollectible.
At December 31, 2020, accounts receivable from four casino customers represented 32% of total accounts receivable. At December 31, 2019, two casino customers represented 44% of total accounts receivable. One customer represented 14% and 32% of the total accounts receivable balance as of December 31, 2020 and 2019, respectively.
License Fees: Licensee fees are amortized on a straight-line basis over the life of the respective license, which ranges from one to three years.
Patents: The Company expenses legal fees and application costs related to its patent application process. There is a high degree of uncertainty in the outcome of approval for any of our patents. Once the patents are approved, any costs incurred to defend and register these patents will be capitalized.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Research and Development: Research and development costs are charged to expense when incurred and are included in the Statement of Operations until technological feasibility is reached. Technological feasibility is established when a product design and a working model of the software product have been completed and the completeness of the working model and its consistency with the product design have been confirmed by testing. These expenses include internally developed software costs as well as employee and product costs associated with the development of our products. As of December 31, 2020 and 2019, no amounts had been capitalized.
Inventory: Inventory is stated at the lower of cost using the first-in, first-out method, net realizable value.
Fair Value Measurements: Given their short-term nature and expected maturity, the carrying amounts
reported in these financial statements for cash, prepaid and other current assets, accounts payable, and accrued expenses approximate fair value.
Accounting Standards Codification (“ASC”) 820 - Fair Value Measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 further establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques into the following three levels, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs:
·Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity can access at the measurement date;
·Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities that are observable, either directly or indirectly;
·Level 3: Unobservable inputs for the asset or liability, including significant assumptions of the reporting entity and other market participants.
The fair value of and the methodology used by the Company for the warrant liability is discussed in Note 9.
Property and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the life of the lease or the useful life of the improvement if less.
Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company has assessed its tax position and does not believe there are any uncertain tax positions. Our policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the Statement of Operations. The Company has determined that there are no unrecognized tax benefits, and accordingly, has not recognized any interest or penalties during 2020 and 2019 related to unrecognized tax benefits. There is no accrual for interest or penalties as of December 31, 2020 and 2019. The Company files U.S. income tax returns and multiple state income tax returns. With few exceptions, the U.S. and state income tax returns filed for the tax years ending on December 31, 2017 and thereafter are subject to examination by the relevant taxing authorities.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Advertising: The Company expenses advertising costs as incurred. There was no advertising expense in 2020 or 2019.
Impairment of Long-Lived Assets: The Company reviews its long-lived assets, including property and equipment and license fees, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, including definite lived license fees, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets or for identifiable intangibles with finite useful lives. The evaluation performed for 2020 and 2019 did not result in an impairment.
Going Concern: The Company evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern for a period of one year after the date that the financial statements are issued, taking into consideration the quantitative and qualitative information regarding the Company’s current financial condition, conditional and unconditional obligations due and the funds and cash flow necessary to maintain operations within that time period.
Based on management’s evaluation, the Company will be able to continue in operation on a going concern basis for at least the next twelve months from the date these financial statements are issued.
Stock Option Plans: The Company has equity-based compensation plans which are more fully described in Note 9. Compensation expense is recognized over the required service period. All options have been granted with an exercise price equal to the fair value of the Company’s common stock on the date of grant.
Warrants: As explained in further detail in Notes 5 and 9, in connection with loans obtained by the Company, the lender holds a warrant to purchase shares of common stock. The Company accounts for the value and classification of the warrant in accordance with ASC 480 - Distinguishing Liabilities from Equity, and classified the warrant as a liability and was initially, and will subsequently be, measured at its estimated fair value using the Black-Scholes pricing model. The warrant will continue to be classified as a liability until such time it is exercised, expires or is amended in a manner that would no longer require classification as a liability.
Earnings per share: The Company computes earnings per share in accordance with generally accepted accounting principles which require presentation of both basic and diluted earnings per share ("EPS") on the face of the Statement of Operations. Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted to common stock. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.
The Company uses the two-class method in computing earnings per share. Under the two-class method, undistributed earnings are allocated among common and participating shares to the extent each security may share in such earnings.
In computing earnings per share, the Company's Nonvoting Stock is considered a participating security. Each share of Nonvoting Stock has identical rights, powers, limitations and restrictions in all respects as each share of common stock of the Company including the right to receive the same consideration per share payable in respect of each share of common stock, except that holders of Nonvoting Stock shall have no voting rights or powers whatsoever.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
The following table summarizes the number of dilutive shares, which may dilute future earnings per share, outstanding for each of the periods presented:
Note 2. Inventory
Inventory consisted of the following:
Inventory is stated at the lower of cost using the first-in, first-out method, or net realizable value.
During 2018, the Company started using a new slot machine cabinet design for lease and sale. The cabinets, which are manufactured by a third-party and include monitors, toppers, stands and certain electronic components, are shown as finished products. Raw materials primarily consist of the flash drives, motherboards, spare parts and interchangeable electronic components for the slot machines.
In December 2020, parts and cabinets remaining in inventory that were associated with the former slot machine cabinet design in use prior to the implementation of the new design in 2018, were determined to be obsolete and were destroyed and discarded. The cost of the discarded inventory was $39,980. In addition, $54,415 in costs of slot machine cabinets in testing, that were subsequently not used for manufacture, were written off. These costs are included in the Statements of Operations under operating expenses.
Note 3. Property and Equipment
Property and equipment consisted of the following:
\
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 3. Property and Equipment (Continued)
In December 2020, the Company determined that the slot machines that were built using the former slot machine cabinet design and that had previously been out on lease and returned from customers, had no further use to the Company and no resale or scrap value and were destroyed and discarded. Ancillary items associated with these slot machines were also determined to have no resale or scrap value. The cost of the slot machines and associated items that were scrapped was $684,344 with a net book value of $-0-.
Cabinets used in 40 slot machines that were built in 2018 and were out on lease at customers’ facilities during 2019 were deemed to be defective due to numerous service and repair issues associated with the quality of those cabinets. During 2019, the Company requested, and was granted, warranty replacement from the manufacturer of those cabinets. In November 2019, the slot machines containing the defective cabinets were returned from the field so that the units could be disassembled, the defective cabinets returned to the cabinet manufacturer for warranty replacement, and the parts and licenses on those machines returned to inventory for use in other slot machines. The 40 slot machines that were disassembled had a cost of $536,956, a net book value of $429,565, and were removed from the books and the parts and license tags that were installed on those units were returned to inventory at their net realizable values. The cabinets, which had a net realizable value of $284,134, were replaced by the manufacturer with cabinets that had a cost of $321,868. The difference between the net value of the parts and licenses returned to inventory and the cabinets received under warranty of $29,532 was reflected as an inventory valuation adjustment and is included in the consolidated Statements of Operations under operating expenses.
Depreciation expense related to the property and equipment included in the consolidated Statements of Operations was $1,041,883 and $672,053, of which $1,031,632 and $665,744 relates to depreciation on leased slot machines, for the years ended December 31, 2020 and 2019, respectively.
Note 4. License Fees
License fees consist of the following:
Through May 31, 2020, licenses for gaming machine patents and technology had been added to the cost of slot machines built for sale or lease using a capitalization rate per machine. The capitalization rate was based on expected annual machine production and adjusted accordingly based on actual versus projected units produced. As of May 31, 2020, machine production for the remainder of the 2020 calendar year was projected to be nominal due to COVID-19 and the cost of licenses for gaming technology as of that date of $27,000 were expensed as license fees on a straight-line basis at $6,750 per month over the remaining initial term of the license period ending September 30, 2020. License fees incurred after September 30, 2020 are expensed on a straight-line basis over the term of the license agreement.
The weighted average useful life of purchased source code licenses is 3 years. Amortization expense included in the consolidated Statements of Operations and relating to the purchased licenses was $3,333 for each of the years ended December 31, 2020 and 2019, respectively.
Estimated amortization expense related to recorded license fees is $2,222 for the year ending December 31, 2021.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 5. Notes Payable
On July 17, 2018, the Company entered into a Master Loan Agreement (the “Prior Loan”) with PDS Gaming LLC (“PDS” or the “Lender”) to make a series of advances under the Prior Loan in the principal amount of up to $2,500,000 for the purposes of financing the purchase or manufacturing of equipment. The Loan was evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and secured by a Security Agreement dated of even date with the Loan, between the Company and the Lender granting a security interest to the Lender in all of the Company’s right, title and interest in and to personal property, tangible and intangible, wherever located or situated and whether now owned or acquired or created. The Loan was advanced, in parts, pursuant to the Prior Loan and in the amounts of each Note during the advance period which originally expired on July 17, 2019. Each subsequent advance being made at the Lender’s sole and absolute discretion.
Under the original terms, the Notes bore interest on the outstanding principal amount at the lesser of the maximum rate or interest rate specified on each note based on a 360-day year. Payments consisting of principal and interest, as well as “Contingent Interest Payments” (“CIP”) of $3.50 per day for each on-line day up to a maximum of 730 on-line days for each unit financed under the Note were due and payable monthly. Each Note matured in 36 months and CIP obligations matured 48 months after the respective closing of each Note.
On March 29, 2019, the Lender agreed to increase the total principal amount that may be borrowed under the Loan from $2,500,000 to $5,500,000. On April 15, 2019, the Lender agreed to additional amendments, extending the advance period to 24 months beyond the Prior Loan date expiring July 17, 2020, and defining the CIP in each Note. In addition, the original Notes on Advances 1 through 5 were amended (the “Amendment” or the “Amended Note[s]”), extending the maturity dates, reducing the base monthly payments of principal and interest, reducing the CIP to $3.00 per day for each on-line day, extending the CIP obligation maturity date to 60 months, and defining the remaining CIP days under each Amended Note. All other terms of the Notes and Prior Loan remained unchanged and in full force, including the interest rate which remained at 11% on each Note.
On November 27, 2019 (the “Closing Date”), the Company entered into a new Master Loan Agreement (the “Loan”) with PDS Gaming - Nevada, LLC (“PDS Gaming” or the “Lender”) to make a series of advances under the Loan in the principal amount of up to $7,000,000 in order to (i) re-finance the existing outstanding indebtedness of the Company under the Prior Loan and Amendment for Advances 1 through 8 which totaled $3,765,792, (ii) finance the Company’s purchase or manufacturing of equipment and (iii) to be used for general working capital. The Loan is and will be evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and is secured by a Security Agreement dated of even date with the Loan between the Company and the Lender granting a security interest to the Lender in all of the Company’s right, title and interest in and to personal property, tangible and intangible, wherever located or situated and whether now owned or acquired or created. The Loan was advanced, in parts, pursuant to the Loan and in the amounts of each Note during the advance period which ran until November 30, 2020.
The Notes bear interest on the outstanding principal amount at a rate per annum equal to an annual rate of 13%. Payments consisting of principal and interest for each advance financed under the Note are due and payable monthly based on an 84-month amortization and mature in 60 months. Each Note is prepayable subject to a sliding scale prepayment fee, declining 1% from 4% in the first twelve months to 0% after the 48th month, based on then-outstanding principal amount of the Note.
The initial advance dated November 27, 2019 is evidenced by a Note in the principal amount of $5,000,000 (“Advance 9”). Monthly payments of $91,616 on Advance 9 commenced on January 1, 2020 and will mature on December 1, 2024.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 5. Notes Payable (Continued)
On January 29, 2020, the Company closed on Advance 10 under the Loan with PDS Gaming. The advance is evidenced by a Note in the principal amount of $1,000,000 and bears interest at an annual rate of 13%. Monthly payments of $18,309 commenced on March 1, 2020, and the Note matures on February 1, 2025.
As inducement to the Lender to make the Loan, the Company issued to the Lender a warrant (“Warrant”) entitling the Lender to purchase up to 7,000,000 shares of common stock of the Company which is equal to 15.6% of the outstanding common stock on the Closing Date. The Warrant is detachable with an exercise price of $0.05 per share and expires ten years from the Closing Date. The Warrant cannot be exercised until PDS Gaming is fully licensed in all of the Company’s gaming jurisdictions. The Company calculated the fair value of the Warrant to be $779,901 at the time of issuance using the Black-Scholes pricing model, and under ASC 480, recorded the Warrant as a liability. See Note 9 for further details regarding the Warrant.
The Company incurred a closing fee of 1% on the principal amount of the Note, excluding the portion of the principal amount of the first Note that is attributable to the refinancing of the Prior Loan as of the closing date, of $12,342. In addition, the Company paid $1,879 for out of pocket expenses and the total fees of $14,221 were recorded as expense on the Closing Date.
On November 27, 2019, the Company recorded the percentage of the Loan remaining for advance in proportion to the total Loan, i.e. 2/7 ($2,000,000/$7,000,000) or 28.6% or $229,829, as a deferred debt commitment fee which was amortized on a straight-line basis until the earlier of the end of the advance period or until the remaining advances under the Loan were made. In January 2020, a $10,000 loan fee was paid to the Lender and the fee as well as the proportionate amount of the unamortized deferred debt fee attributable to the $1,000,000 advance of $92,845 were reclassified as debt discount and is being amortized over the life of the advance using the interest method. The balance of the debt discount attributable to the advance taken in January 2020 was $82,063 as of December 31, 2020. The balance of the deferred debt commitment fee was $-0- and $204,260 as of December 31, 2020 and 2019, respectively.
ASC Topic 470 - Debt, requires an analysis to determine if the debt instruments under a refinancing transaction are substantially different by testing the present value (“PV”) of the cash flows under the terms of the new debt instrument versus the PV of the remaining cash flows under the terms of the original instrument. In cases where the transactions are deemed to be significantly different, an extinguishment has occurred, the old debt is derecognized and the new debt is recorded at fair value and fees paid to the lender on the old debt are expensed. The difference between the net carrying value of the original debt and the fair value of the new debt is recorded as a gain or a loss and interest expense is recorded based on the effective rate of interest on the new debt. The Company prepared the analysis and determined that the change in PV of cash flows is greater than 10%, the threshold established in ASC 470, and considered the transaction an extinguishment. The total cost of the debt of $557,072 was calculated as the difference between the fair value of the Warrant and the deferred debt commitment fee and the portion of the cost of debt reacquired associated with the carrying value of the old debt of $419,563 (75.3% x $557,072) was recognized as a loss on extinguishment of debt on the Closing Date, November 27, 2019. Debt discount of $137,509 was calculated as the cost associated with the new debt in proportion to the total cost of the debt refinanced or reacquired and is presented as a direct reduction to the value of the debt and is being amortized over the life of the advance using the interest method. The balance of the debt discount attributable to the advance taken on November 27, 2019 was $103,874 and $134,574 as of December 31, 2020 and 2019, respectively.
The Loan is subject to covenant clauses whereby the Company is required to meet certain key financial ratios. The Company did not meet these ratio covenants as required in the Loan for the quarter ended September 30, 2020, a direct effect from COVID-19 casino closures and slot machine social distancing requirements. Due to the material effect that COVID-19 has on the Company’s revenues, the Lender amended the Loan in September 2020, providing a waiver of compliance with the financial ratio covenants and extending and resetting the compliance with the covenants until the quarter ending June 30, 2021.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 5. Notes Payable (Continued)
Due to the continued impact of COVID-19 on the Company’s operations, the Lender executed a second amendment to the Loan in March 2021. The second amendment waives compliance with the financial ratio covenants and extends and resets compliance with the covenants commencing with the quarter ending December 31, 2021.
As of December 31, 2020 and 2019, Notes payable, net of debt discount, consist of the following:
The following table lists the future principal payments due on the Notes as of December 31, 2020:
The following table provides a breakdown of the interest expense as included in the consolidated Statements of Operations:
Note 6. Deferred Income
In March 2020, Congress established the Paycheck Protection Program (“PPP”) to provide relief to small businesses during the coronavirus pandemic (“COVID-19”) as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The legislation authorized Treasury to use the Small Business Association’s (“SBA’s”) 7(a) small business lending program to fund forgivable loans that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities during the “Covered Period” defined as the 8-week period starting on the date the PPP loan proceeds are received. Upon meeting certain criteria as specified in the PPP program, the loans are eligible for partial or total forgiveness.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 6. Deferred Income (Continued)
On June 5, 2020, the PPP Flexibility Act of 2020 (the “Act”) was signed into law, giving borrowers flexibility with certain criteria under the PPP program including extension of the Covered Period to 24 weeks from 8 weeks, reduction to 60% of the payroll costs requirement (previously 75%), extension of the payment deferral period, extension of the full-time equivalent (“FTE”) restoration deadline to December 31, 2020, and safe harbor provisions to remove the FTE reduction in forgiveness under limited circumstances.
In June 2020, the AICPA issued Technical Question and Answer (“TQA”) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. The TQA addresses accounting for nongovernmental entities that are not Not-For-Profits, i.e. business entities, that believe the PPP loan represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a deferred income liability. The TQA further states that if such an entity expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standard (“IAS”) 20 to account for the PPP loan. IAS 20 provides a model for the accounting of different forms of government assistance, which includes forgivable loans. Under this model, government assistance is not recognized until there is reasonable assurance (similar to the probable threshold in U.S. GAAP) that any conditions attached to the assistance will be met and the assistance will be received.
Once there is reasonable assurance that the conditions will be met, the earnings impact of the grant is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Hence, a business entity would record the cash inflow from the PPP loan as a deferred income liability and subsequently reduce the liability, with the offset through earnings as either a credit in the income statement or a reduction of the related expenses, as it recognizes the related cost to which the loan relates, for example, payroll expense.
The Company applied for and received proceeds of $246,200 through the PPP program on May 7, 2020, prior to the enactment of the Act. Based on the flexibility provided under the Act, the Company has elected to extend its Covered Period to 24 weeks. The Company determined both through internal calculations and those provided by the AICPA’s forgiveness model, that all criteria for forgiveness based on both the CARES Act and the Act have been met as of July 15, 2020 and that the PPP loan will be 100% forgiven. In analogizing to IAS 20, the Company considers the PPP loan a grant that is expected to be forgiven and as such, recorded the proceeds as a deferred income liability when received and recognized the PPP grant as a reduction of the related expenses to which the loan was intended to compensate.
For the period May 7, 2020 through October 21, 2020, the Covered Period, the Company incurred the following costs related to and compensated through the PPP proceeds and which are expected to be forgiven in their entirety:
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 6. Deferred Income (Continued)
As of December 31, 2020, in accordance with methods acceptable under IAS 20, the Company reduced the PPP deferred income liability and offset the expenses listed above by their respective amounts, leaving a balance remaining of $-0- as of that date.
In March 2021, the Company received notification from its bank that the application for forgiveness was approved by the SBA, confirming that the PPP loan has been forgiven in its entirety.
Note 7. Leases
In November 2009, the Company entered into a lease agreement for its corporate office and warehouse facility which became effective in January 2010 for a term of sixty-seven months. In September 2014, the lease was amended to include the following: 1) an extension of the lease term to February 28, 2021; 2) modification of the minimum annual and monthly rents for the extended lease term; 3) a rent abatement period of six months commencing October 1, 2014; and 4) an option to extend the term for a period of five years. In August 2020, a second amendment to the lease was executed to include: 1) an extension of the lease term to August 31, 2026; 2) modification of the minimum annual and monthly rents for the second extended lease term; 3) a rent abatement period of six months commencing October 1, 2020; and 4) removal of the option to extend the term beyond the amended expiration date.
In September 2020, the remaining balances in the right-of-use asset and lease liability associated with the first amendment to the lease of $37,016 and $44,417, respectively, were eliminated and the difference of $7,401 was adjusted as a credit to rent expense. On September 30, 2020, the right-of-use asset and corresponding lease liability of $462,858 were recorded to account for the second amendment to the lease.
The following table summarizes the right-of-use asset and lease liability as of December 31, 2020:
Net of the elimination of the remaining balances from the first amendment to the lease and the PPP forgivable amount as listed in Note 6, lease expense for the years ended December 31, 2020 and 2019 was $108,424 and $141,366, respectively.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 7. Leases (Continued)
The following table summarizes the Company’s scheduled future minimum lease payments as of December 31, 2020:
As of December 31, 2020 and 2019, the weighted-average remaining lease term for the building lease was 5.7 years and 1.2 years, respectively. Due to the fact that we do not have access to the rate implicit in the lease, we utilized our incremental borrowing rate as the discount rate. The weighted average discount rate associated with the lease as of December 31, 2020 and 2019 was 8%.
Note 8. Commitments and Contingencies
The Company routinely enters into license agreements for the use of intellectual properties and technologies. These agreements generally provide for license fee payments when the agreements are signed and minimum commitments, which are cancellable in certain circumstances. On March 10, 2020, the Company and a licensor amended the terms under a patent cross license agreement dated February 28, 2017, which required the Company to pay an upfront per unit license fee on games (slot machines) placed in service after the agreement date and for a period of five years, and settled on the amount due upon audit conducted by the licensor for the period March 1, 2017 through September 30, 2019. Upon the payment of the $158,250 audit settlement amount, the Company was released from all claims under the agreement. The amendment removed the upfront per unit license fee and replaced it with a quarterly un-recoupable fee of $45,000 payable within fifteen days after the end of each calendar quarter and removed all audit provisions. The amendment terminates after five years from October 1, 2019, or September 30, 2024. The $66,000 difference between the $203,250 combined amount paid by the Company for the audit settlement and the quarterly license fee, and the $269,250 balance in the estimated liability for the license fee, was reversed in March 2020 and is included as a reduction to the operating expenses. On October 13, 2020, the agreement was further amended allowing the Company to defer the payment of the quarterly fees according to the deferred payment schedule as delineated in the agreement, extended the termination of the agreement to December 31, 2024, increased the final four quarterly payments to $50,000 and extended the final four quarterly payments beyond the termination date to 2025. As described in Note 4, license fees under the agreement had originally been added to the cost of slot machines built for sale or lease through May 31, 2020, then subsequently expensed on a straight-line basis over the remaining term. License fees included as operating expenses in the consolidated Statements of Operations for the year ended December 31, 2020 was $96,000.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 9. Stockholders’ Equity
Stock Option Plans: On March 8, 2006, Lightning Poker adopted an equity incentive plan to enable Lightning Poker to offer key employees, consultants and directors equity interests in Lightning Poker, thereby helping to attract, retain and motivate such persons to exercise their best efforts on behalf of Lightning Poker. After the Merger, the options previously granted by Lightning Poker were exchanged for options to buy the Company's stock under the Company's 2007 Equity Incentive Plan (the "2007 Plan") having substantially the same terms. The options were granted at the discretion of the Board of Directors and the maximum aggregate number of shares issuable under the Stock Plan was 2,500,000. The purchase price of each option was determined by the Board of Directors at the time the option was granted, but in no event less than 100% of the fair market value of the common stock at the time of grant. Options previously granted will not be exercisable after 10 years from the grant date and under the terms of the plan, no awards may be granted after October 16, 2017. As of December 31, 2020, the 2007 Plan has expired and there are no options available for exercise.
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 2020 and 2019 under the 2007 Plan is as follows:
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 9. Stockholders’ Equity (Continued)
Stock Option Plans (Continued)
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.
On November 30, 2018, the Board of Directors, based on current valuation information available, authorized the reduction of the option exercise price to $.13 per share which was determined to be the market price of the Company’s stock on that date. The Company calculated the incremental fair value by calculating the fair value of the options immediately before and immediately after the modification. The fair value of the options immediately before the repricing is based on assumptions (e.g., volatility, expected term, etc.) reflecting the current facts and circumstances on the modification date and therefore, differs from the fair value calculated on the grant date.
A summary of option transactions in 2020 and 2019 under the 2016 Plan is as follows:
Stock-based compensation expense is recognized in the Statements of Operations based on awards ultimately expected to vest and is adjusted for estimated forfeitures. The additional compensation expense arising from the modification of the exercise price amounted to $105,767 and is being recognized over the vesting period. Expense relating to the stock option plans was $63,034 and $64,521 for the years ended December 31, 2020, and 2019, respectively.
The following table summarizes information with respect to stock options outstanding at December 31, 2020:
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 9. Stockholders’ Equity (Continued)
Stock Option Plans (Continued)
The following table summarizes information with respect to stock options outstanding at December 31, 2019:
As of December 31, 2020, all compensation costs related to share-based compensation arrangements granted under the 2007 Plan had been fully recognized. As of December 31, 2020, there was approximately $74,530 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2016 Plan. The cost is expected to be recognized over a weighted-average period of 1.2 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.
Warrant: On November 27, 2019 in connection with the Loan obtained by the Company, the Company issued to PDS Gaming a Warrant entitling the Lender to purchase up to 7,000,000 shares of (voting) common stock of the Company at an exercise price of $.05 per share, expiring 120 months* after the issue date. The Warrant cannot be exercised until PDS Gaming is licensed in all of the Company’s gaming jurisdictions and cannot be exercised in a cashless exercise within the first six months following issuance.
*The “Expiration Date” was initially defined under the Warrant as 36 months. The Warrant was revoked, amended and reissued on December 27, 2019 and defined the Expiration Date as 119 months from date of issuance of the amended Warrant, which was the original intent between the Company and the Lender.
The Warrant contains a put feature providing the right to the holder, i.e. the Lender, for a net cash settlement in the event of a fundamental transaction which is defined under the Warrant as a sale of all of the stock, voting stock, or all, or substantially all, of the assets of the Company. Under such a transaction, the holder can require the Company to purchase any unexercised shares under the Warrant at the pro-rata share of the sales price or calculated value less the exercise price of the Warrant share.
The fair value of the warrant is estimated using the Black-Scholes pricing model and is recognized as a liability in the accompanying consolidated condensed Balance Sheets. The following assumptions were used to determine the fair value of the Warrant at December 31, 2020 and 2019:
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 9. Stockholders’ Equity (Continued)
Warrant (Continued)
There currently is no public market for the Company’s stock price. The valuation of the Company was determined by utilizing a formula of six (6) times the Company’s Earnings Before Interest Taxes, Depreciation and Amortization (“EBITDA”) for the prior twelve (12) month period minus all outstanding debt of the Company plus all cash and cash equivalents owned by the Company which is defined in the Warrant agreement as the Calculated Value (“CV”) of the Company. Volatility is based on the average stock price of comparable public companies in the industry.
The pandemic COVID-19 has had a significant impact on the operating results of the Company and the stock prices of the comparable public companies, and the CV of the Company reflects that impact at the December 31, 2020 measurement date. Based on the volatility in stock price of the comparable public companies and the significant impact to the Company’s revenues and performance from COVID-19, the CV resulted in a $.02 price per share which was used in the Black Scholes model to determine fair value of the Warrant at December 31, 2020. The fair value assumptions used at December 31, 2019 remained unchanged from those used at the November 27, 2019 issuance date and therefore, the fair value remained at $779,901 at December 31, 2019 and no adjustment to fair value was necessary.
The following table reconciles the change in the fair value of the warrant liability classified as Level 3 in the fair value hierarchy:
The following table is a summary of the Warrant activity for the years ended December 31, 2020 and 2019:
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 9. Stockholders’ Equity (Continued)
Warrant (Continued)
The following table summarizes information with respect to the Warrant outstanding at December 31, 2020:
The following table summarizes information with respect to the Warrant outstanding at December 31, 2019:
Note 10. Revenue
The following table provides a breakdown of the revenue by category as included in the consolidated Statements of Operations:
The following table provides a breakdown of the sales of gaming products and parts as included in the
consolidated Statements of Operations:
The following table provides a breakdown of the lease revenue by product type:
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 11. Other Income
As a business headquartered in Delaware County (the “County”), Pennsylvania, with less than $9,000,000 in annual revenues and fewer than 100 employees, the Company was eligible to apply to the County’s Economic Oversight Development Board (“EDOB”) for a Business Assistance Grant Program funded by money received under the Federal CARES Act and known as “Delco Strong 2”, for a maximum grant amount of $20,000. Grants under the program were intended to provide economic support in the form of working capital for businesses suffering financial hardships from the coronavirus COVID-19 public health emergency. In July 2020, the Company submitted the application along with the required financial information and certification of losses caused by the COVID-19 pandemic. The County and the EDOB approved the Company’s application and awarded the grant to the Company for the maximum amount of $20,000 in September 2020.
Note 12. Income Taxes
The components of the income tax provision for the years ended December 31, 2020 and 2019 are as follows:
Net deferred tax assets consist of the following components as of December 31, 2020 and 2019:
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 12. Income Taxes (Continued)
A reconciliation of income tax expense at statutory rates to the income tax expense reported in the Statements of Operations is as follows for the years ended December 31, 2020 and 2019.
As of December 31, 2020, the Company has available, for federal and state income tax purposes, net operating loss (“NOL”) carryforwards of approximately $14,447,000. $12,773,000 of the NOL carryforwards expire at various times through 2038 and $1,674,000 of the NOLs can be carried forward indefinitely. 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 current financial statements.
Note 13. Recently Issued Pronouncements
In December 2019, the FASB issued an update within the scope of Topic 740, Income Taxes. The update simplifies the accounting for income taxes by removing certain exceptions to the general principles within the Topic and improves consistent application of and simplifies GAAP for other areas by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is gathering the information and performing the analyses required before the standard’s effective date to determine the impact this guidance will have on our financial statements.
In June 2016, the FASB issued the update Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the estimation of credit losses from an “incurred loss” methodology to one that reflects “expected credit losses” (the Current Expected Credit Loss model, or CECL) which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Measurement under CECL is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability of reported amounts. The amendments in the update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company is evaluating the impact, if any, the implementation of the CECL model will have on our financial statements.
Lightning Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Note 14. Subsequent Events
The SBA reopened the Paycheck Protection Program in January 2021, known as PPP2, which allows certain eligible borrowers that previously received a PPP loan to apply for a second PPP loan. Similar to the original PPP program, PPP2 loans can be used to help fund payroll costs, including benefits, and can also be used to pay for rent, utilities, worker protection costs related to COVID-19, and certain supplier costs and expenses for operations. The Company applied for and received proceeds of $237,030 through the PPP2 program on February 12, 2021.
Due to the continued impact of COVID-19 on the Company’s operations, the Lender executed the Second Amendment to Master Loan Agreement dated March 24, 2021, in which the covenant requirements were waived through December 31, 2021 and were reduced from the original covenant values between December 31, 2021 to June 30, 2022.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
We have no disagreements, transactions or events to report under this item.
Item 9A.
Item 9A. Controls and Procedures.
Disclosure 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 CEO, 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 necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2020, we conducted an evaluation, under the supervision and with the participation of our management including our CEO and Controller, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and Controller have concluded that as of December 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.
Internal Control Over Financial Reporting
Internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) refers to the process designed by, or under the supervision of, our CEO and Controller, or affected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Management is responsible for establishing and maintaining adequate internal control over our financial reporting.
All internal controls, no matter how well designed, have inherent limitations and may not prevent or detect all misstatements and fraud. Even those internal controls that are determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation. Additionally, judgments in decision-making can be faulty and breakdowns in internal control can occur because of simple errors or mistakes that are not detected on a timely basis. Furthermore, over time, controls that were previously determined to be effective may become inadequate due to changes in conditions or deterioration in the degree of compliance with internal policies and procedures.
We have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2020. This evaluation was performed using the criteria set forth in the Internal Control - Integrated Framework (the “Framework”) developed by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) updated in 2013. Based on such evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2020.
As a result of the COVID-19 outbreak and the mandate to close our physical location as of March 19, 2020, we initiated changes to our systems of internal accounting controls, converting approval and workflow processes to a paperless environment in order to support a telework environment.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Regulation S-K Item 308(b) that permits the Company to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Below is certain information regarding our directors and executive officers. All of the Company’s directors took office on January 29, 2008, except Mr. Haveson, who became a director of the Company on September 6, 2007. Mr. Strano became president of the Company in December 2009.
Name
Age
Position Held with the Company
Brian Haveson
Chairman, CEO, Director
Christopher Strano
President of Lightning Gaming, Inc.
Donald Caldwell
Director
Frederick Tecce
Director
Brian Haveson
Mr. Haveson has served as CEO of the Company since August 2007, CEO of Lightning Poker since October 1, 2006, President of the Company from August 2007 to December 2009, President of Lightning Poker from March 2008 to December 2009 and a director of Lightning Poker since June 2005. Since September 2018, Mr. Haveson has been serving as a member of the board of directors of CCA Industries, Inc. From 1994 through 2002, Mr. Haveson served as CFO and CEO of Nutri/System, Inc. Prior to that he was a manager for 4 years with Arthur Andersen in its Turnaround Group. Mr. Haveson received a bachelor of Science degree in Aerospace Engineering from the University of Maryland and a Masters in Management from Purdue University. Mr. Haveson’s successful tenure as the CEO of Nutri/System and his consulting role at Arthur Andersen provide our Company with a seasoned and experienced CEO.
Christopher Strano
Mr. Strano was appointed President of the Company in December 2009, and previously served as Chief Marketing Officer from June 2009 to December 2009. Prior to joining Lightning Poker, Mr. Strano was Vice President of Sales and Marketing for AC Coin & Slot from June 2004 to June 2009. Mr. Strano served as Director of Marketing for Franklin Electronic Publishers, Inc. from October 2000 to June 2004. Mr. Strano holds a Master of Business Administration degree from Drexel University's LeBow School of Business and a Bachelor of Science degree in Communications from The College of New Jersey.
Donald Caldwell
Mr. Caldwell has been a director of Lightning Gaming, Inc. (formerly Lightning Poker) since June 2005. He is the founder, Chairman and CEO of Cross Atlantic Capital Partners Inc. ("Cross Atlantic") and has oversight responsibility for its multiple funds.
Mr. Caldwell serves on the board of several publicly and privately held companies and civic organizations, including: Quaker Chemical Corporation (NYSE); Simplicity Esports and Gaming Company (OTC), f/k/a I-AM Capital Acquisition Company; RootStock Software; Sagence Consulting; Voxware, Inc.; Haverford Trust Company; StoneRidge Investment Partners, LLC/Beltraith Capital, LLC; the South Australia Venture Capital Fund; the Pennsylvania Academy of the Fine Arts (Chairman Emeritus) and The Andalusia Foundation (Trustee). In addition to his role of director, Mr. Caldwell serves as Chairman of Simplicity Esports and Gaming Company and is the Lead Director at Quaker Chemical Corporation.
Until March 1, 1999, he was President and Chief Operating Officer of Safeguard Scientifics, Inc., where he also previously served as Executive Vice President. Prior to joining Safeguard in 1993, Mr. Caldwell held a number of executive and financial positions, including Chief Administrative Officer of Cambridge Technology Partners, Inc. (Massachusetts), a provider of information technology consulting and software development; Executive Vice President and then President of Atlantic Financial; and as a partner in the national office of Arthur Young & Co., a predecessor to Ernst & Young, LLP. He holds a Bachelor of Science degree from Babson College and a Master of Business Administration from the Graduate School of Business at Harvard University. Mr. Caldwell is a retired New York state Certified Public Accountant.
Mr. Caldwell’s extensive experience in the financial markets, venture capital arena and service on corporate boards provide us with significant, well-respected financial and management leadership in addition to his strong corporate governance background.
Frederick Tecce
Mr. Tecce has been a director since June 2005. Prior to his retirement in 2020, Mr. Tecce had previously been managing director and Of Counsel to Cross Atlantic where he worked closely with Mr. Caldwell on fundraising, as well as overseeing Cross Atlantic's legal issues, including contracts and intellectual property rights. Mr. Tecce was also Of Counsel to the law firm Buchanan, Ingersoll & Rooney PC, retiring in 2020.
Mr. Tecce has served on the board of the Pennsylvania Public School Employees' Retirement System Board, where he was appointed by Governor Tom Ridge in 1995, serving as chairman of the finance committee for five years. Mr. Tecce also served on the board of another publicly-reporting company, InsPro Technologies Corp, until its sale in 2020. In addition, he previously served on the boards of Profectus BioSciences, Inc.and Nterra, Inc.
Most of Mr. Tecce's professional career has been spent as a principal in a company that pioneered and licensed new technology in the textile industry. This involved managing a long-term, complex, multi-party lawsuit directed to enforcing patent rights. His experience in managing complex litigation was also the basis for his engagement with two other significant businesses whose existence was threatened by lawsuit disputes. In addition, Mr. Tecce has launched several new businesses from the seed stage and has been an investor and active participant in several emerging growth companies.
Mr. Tecce holds a B.A. from the University of Pennsylvania and J.D. from the Dickinson School of Law of Pennsylvania State University. Mr. Tecce’s broad legal and business experience brings insight and a seasoned view to our board.
Director Independence
The NASDAQ listing standards define an "independent director" generally as a person, other than an executive officer or employee of the Company or an individual who has a relationship that, in the opinion of the Company's Board of Directors, would interfere with the director's exercise of independent judgment. Under NASDAQ Rule 4350(c), a Controlled Company is exempt from certain independent director requirements set forth in this rule. The Company is relying on the Controlled Company exemption under NASDAQ Rule 4350(c) with respect to Mr. Caldwell and Mr. Tecce and as such, the independent director requirements do not apply.
Mr. Caldwell and Mr. Tecce serve as the members of the audit committee of the Board of Directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of the following occurred with respect to our directors or executive officers: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer at or within two years before the time of the filing; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, commodities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated; (5) being the subject of, or party to, a judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of law or regulation pertaining to securities or commodities, financial institution or insurance company regulation, or mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or party to any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization ( as defined in the Exchange Act), registered entity (as defined in the Commodities Exchange Act) or equivalent exchange, association, entity or organization.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of our common stock (“10% Shareholders”) to file with the SEC certain reports regarding their stock ownership and stock transactions (“Section 16(a) Reports”). Such persons are required to furnish us with copies of all Section 16(a) Reports they file. Based solely on our review of such reports (and amendments thereto) that were furnished to us and written representations made to us by reporting persons in connection with certain of these reporting requirements, we believe that all reporting persons met their Section 16(a) reporting obligations on a timely basis during our last fiscal year.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We undertake to provide to any person without charge, upon request, a copy of our code of ethics. Such request should be directed to us in writing as follows: Mr. Brian Haveson, Chief Executive Officer, Lightning Gaming, Inc., 23 Creek Circle, Suite 400, Boothwyn, PA 19061.
Audit Committee
We have a separately designated standing audit committee. Mr. Caldwell and Mr. Tecce are the audit committee members. The Board of Directors has determined that Mr. Caldwell is an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of SEC Regulation S-K.
Item 11.
Item 11. Executive Compensation.
The following Summary Compensation Table reports compensation we paid in 2020 and 2019 to Brian Haveson, our and Lightning Poker’s principal executive officer, and Christopher Strano, President of Lightning Gaming (collectively, our “named executive officers”).
SUMMARY COMPENSATION TABLE
NOTES:
(1) Mr. Strano was awarded and paid a $10,000 bonus in 2019 as part of an overall bonus of $44,164 awarded to certain other non-executive employees. There were no bonuses awarded or paid in 2020.
(2) Includes employer contributions to 401K plan that is available to all employees. Does not include premiums for health insurance that is available on a non-discriminatory basis to all full-time employees.
Outstanding Equity Awards at Fiscal Year-End
The following table contains information concerning all unexercised common stock options granted to our named executive officers, which were outstanding on December 31, 2020.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Option Awards
NOTES:
(1) At December 31, 2020 Mr. Haveson held options to purchase an aggregate of 2,000,000 shares under the 2016 Plan which vest for 400,000 shares each March until 2022.
(2) At December 31, 2020, Mr. Strano held options to purchase an aggregate of 1,000,000 shares under the 2016 Plan which vest for 200,000 shares each March until 2022.
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.
Director Compensation
Our directors, excluding directors who are named executive officers, did not receive compensation during 2020.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The following table indicates how many shares of our (voting) Common Stock and Nonvoting Common Stock were beneficially owned as of March 30, 2021 by (1) each person known by us to be the beneficial owner of more than 5% of our common stock (“5% Shareholder”), (2) our directors, (3) our executive officers, and (4) all of our directors and executive officers as a group. In general, “beneficial ownership” includes those shares a person has sole or shared power to vote or transfer (whether or not owned directly) and rights to acquire such power, such as through the exercise of options, warrants, or convertible debt within 60 days. Except as indicated otherwise below, to our knowledge the persons named in the table below have sole voting power (for common stock) and investment power with respect to all shares shown as beneficially owned by them. To calculate the percentage of outstanding common stock owned by each named person or the group reported in the table below, we added shares of common stock that the named person or group (as the case may be) can acquire within 60 days to both (a) the number of shares of common stock actually outstanding (4,649,383) and (b) the number of other shares of common stock (if any) actually held by that named person or the group (as the case may be).
See Part II, Item 5 of this report for further information on securities authorized for issuance under our equity compensation plan.
The address of each of the directors and executive officers listed below is c/o Lightning Gaming, Inc., 23 Creek Circle, Suite 400, Boothwyn, Pennsylvania 19061.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
We are reporting the information below based on the following relationships: (1) CI II is managed by Cross Atlantic and is a 5% Shareholder; and (2) Mr. Caldwell is the founder and CEO and Mr. Tecce is a managing director and former counsel to Cross Atlantic.
As of December 31, 2020, 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. Our Nonvoting Common Stock participates with, and is identical to, our common stock except for the lack of voting rights.
For the years ended December 31, 2020 and 2019, the Company had no material related party transactions which were required to be disclosed in accordance with SEC rules.
Item 14.
Item 14. Principal Accountant Fees and Services.
On March 31, 2020, Baker Tilly Virchow Krause, LLP (“Baker Tilly”) notified the Audit Committee of Lightning Gaming, Inc. (the “Company”) that it declined to stand for reelection as the Company’s independent registered public accounting firm effective immediately.
The audit report of Baker Tilly on the consolidated financial statements of the Company and its subsidiaries as of and for the year ended December 31, 2019 did not contain any adverse opinion or disclaimer of opinion, however, the report as of and for the year ended December 31, 2019 was modified as it related to the adoption of the Financial Accounting Standards Board Accounting Standards Update 2016-02, Leases.
During the year ended December 31, 2019 and the subsequent interim period through March 31, 2020, there were no (1) disagreements between the Company and Baker Tilly on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to their satisfaction, would have caused them to make reference thereto in their reports on the consolidated financial statements for such year or (2) “reportable events” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K). Baker Tilly furnished the Company with a letter addressed to the Securities and Exchange Commission (the “SEC”) agreeing with statements made by us in response to Item 304(a) of Regulation S-K on April 9, 2020.
Our audit committee selected, and our Board of Directors approved, the firm of Assurance Dimensions, Inc. (“ADI”) as our principal accountant and registered public accounting firm to audit our annual consolidated financial statements and perform quarterly financial statement review services for the fiscal year ended December 31, 2020.
Our policy is that before we engage our principal accountants annually to render audit or non-audit services, the engagement is reviewed and approved by our audit committee. All of our principal accountant’s services for our last two fiscal years, which consisted solely of audit services, were within the scope of the engagement that our audit committee approved before we entered into the engagement.
The aggregate fees billed to us by Baker Tilly in 2020 and 2019 were $30,000 and $103,498, respectively. All of Baker Tilly’s billings were for audit services, which consisted of the audit of our annual consolidated financial statements and review of our quarterly consolidated financial statements included in our Form 10-Q filings during 2019.
The aggregate fees billed to us for the audit of our annual consolidated statements for the year ended December 31, 2020 by ADI in 2020 were $63,000. All of ADI’s billings were for audit services, which consisted of the audit of our annual consolidated financial statements and review of our quarterly consolidated financial statements included in our Form 10-Q filings during 2020
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements
Included in Part II of this report:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
(a)(2) and (c) Financial Statement Schedules
II Valuation and Qualifying Accounts
All other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
Item 16. Form 10-K Summary
None
(a)(3) and (b) Exhibits
(A) Management contract or compensatory plan or arrangement.
* These documents are incorporated herein by reference as exhibits hereto. Following the description of each such exhibit is a reference to the document as it appeared in a specified report previously filed with the SEC, to which there have been no amendments or changes unless otherwise indicated. The Commission File No. for all such filings is 000-52575.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Lightning Gaming, Inc.
By:/s/Brian Haveson
Brian Haveson, President and Chief Executive Officer
Dated: March 30, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/Brian Haveson
Chief Executive Officer, Director
March 30, 2021
Brian Haveson
(Principal Executive Officer)
/s/Brian Haveson
Chief Financial Officer
March 30, 2021
Brian Haveson
(Principal Financial and Accounting Officer)
/s/Donald Caldwell
Director
March 30, 2021
Donald Caldwell	
/s/Frederick C. Tecce
Director
March 30, 2021
Fredrick C. Tecce
Schedule II- Valuation and Qualifying Accounts