UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: | June 30, 2009 |
OR |
o | TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from: | to |
Commission file number: | 000-30375 |
Las Vegas Gaming, Inc. | |||
(Exact name of registrant as specified in its charter) | |||
Nevada | 88-0392994 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
3980 Howard Hughes Pkwy., Suite 450, Las Vegas, Nevada 89169 | |||
(Address of principal executive offices) | |||
(702) 871-7111 | |||
(Issuer’s telephone number) | |||
(Former name, former address and former fiscal year, if changed since last report) | |||
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o | |||
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o | |||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer o (do not check if smaller reporting company) Smaller reporting company x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x | |||
APPLICABLE ONLY TO CORPORATE ISSUERS | |||
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest | |||
practicable date: | 15,081,846 shares of Common Stock Series A, $.001 par value, as of June 30, 2009 |
LAS VEGAS GAMING, INC.
FORM 10-Q
Page | ||
PART I – FINANCIAL INFORMATION | ||
Item 1. | 2 | |
2 | ||
3 | ||
5 | ||
7 | ||
8 | ||
Item 2. | 19 | |
Item 3. | 25 | |
Item 4T. | 25 | |
PART II – OTHER INFORMATION | ||
Item 1. | 26 | |
Item 1A. | 26 | |
Item 2. | 26 | |
Item 3. | 26 | |
Item 4. | 26 | |
Item 5. | 27 | |
Item 6. | 27 |
______________
PlayerVision, RoutePromo, NumberVision, WagerVision, AdVision, Nevada Numbers, The Million Dollar Ticket, and Nevada Keno are our trademarks. This report may contain trademarks and trade names of other parties, corporations, and organizations.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
December 31, 2008 | June 30, 2009 | |||||||
ASSETS | (unaudited) | |||||||
Current assets | ||||||||
Cash | $ | 497,529 | ||||||
Investment in marketable securities | 5,068 | |||||||
Accounts receivable, net of allowance of $578 and $31,560 | 576,847 | $ | 273,173 | |||||
Inventories | 454,026 | 493,571 | ||||||
Prepaid expenses, deposits and other | 79,881 | 159,765 | ||||||
Jackpot reserve deposits | 1,230,761 | 201,541 | ||||||
2,844,112 | 1,128,050 | |||||||
Equipment, net of accumulated depreciation of $1,238,739 and $1,336,364 | 924,256 | 756,732 | ||||||
Other assets | ||||||||
Goodwill | 2,371,178 | 2,371,178 | ||||||
Trademarks, copyrights, patents, software, and other identifiable intangibles, net of accumulated amortization of $1,165,742 and $1,296,843 | 278,330 | 781,067 | ||||||
Other long term assets | 56,451 | 70,151 | ||||||
$ | 6,474,327 | $ | 5,107,178 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) | ||||||||
Current liabilities | ||||||||
Advances from stockholders | $ | 600,000 | $ | 1,710,000 | ||||
Accounts payable and accrued expenses | 1,624,740 | 2,524,024 | ||||||
Current portion of long-term debt | 11,957 | 10,914 | ||||||
Current portion of progressive jackpot liability | 1,555,360 | 1,495,665 | ||||||
3,792,057 | 5,740,603 | |||||||
Long-term debt | 23,119 | 18,795 | ||||||
Conditionally redeemable equity | ||||||||
Series B convertible preferred stock, $.001 par, 50,000 shares issued and outstanding | 250,000 | 250,000 | ||||||
Stockholders' equity (deficiency) | ||||||||
Convertible preferred stock, $.001 par, 10,000,000 shares authorized: | ||||||||
Series E: 810,800 shares authorized, 810,800 shares issued and outstanding | 811 | 811 | ||||||
Series F: 200,000 shares authorized, 200,000 and 0 shares issued and outstanding, respectively | 200 | - | ||||||
Series G: 150,000 shares authorized, 150,000 shares issued and outstanding | 150 | 150 | ||||||
Series H: 98,500 shares authorized, 98,500 shares issued and outstanding | 99 | 99 | ||||||
Series I: 4,693,878 shares authorized, 4,693,878 shares issued and outstanding | 4,694 | 4,694 | ||||||
Common stock (including Series A): $.001 par, 90,000,000 shares authorized, 14,849,690 and 15,081,846 shares issued and outstanding | 14,850 | 15,082 | ||||||
Additional paid-in capital | 44,160,702 | 44,119,795 | ||||||
Less stock subscriptions due from officers and principal stockholders | (188,245 | ) | (182,245 | ) | ||||
Deficit | (41,584,110 | ) | (44,860,606 | ) | ||||
2,409,151 | (902,220 | ) | ||||||
$ | 6,474,327 | $ | 5,107,178 | |||||
The accompanying notes are an integral part of these consolidated financial statements. |
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, 2008 AND 2009 (UNAUDITED)
2008 | 2009 | |||||||
Revenues | ||||||||
Casino games | $ | 616,412 | $ | 426,658 | ||||
Product sales | 349,356 | 251,475 | ||||||
Other | 205,870 | 301,518 | ||||||
1,171,638 | 979,651 | |||||||
Costs and expenses | ||||||||
Casino games | 551,810 | 404,184 | ||||||
Product costs | 165,577 | 133,885 | ||||||
Other | 241,518 | 211,990 | ||||||
958,905 | 750,059 | |||||||
Gross operating income | 212,733 | 229,592 | ||||||
Other operating expenses | ||||||||
Selling, general, and administrative | 1,767,938 | 1,282,587 | ||||||
Research and development | 397,321 | 162,725 | ||||||
Depreciation and amortization | 211,313 | 134,387 | ||||||
2,376,572 | 1,579,699 | |||||||
Operating loss | (2,163,839 | ) | (1,350,107 | ) | ||||
Other income (expense) | ||||||||
Finance costs | (580,391 | ) | (2,794 | ) | ||||
Interest income and other | (71,318 | ) | (25,287 | ) | ||||
Net loss | (2,815,548 | ) | (1,378,188 | ) | ||||
Preferred stock dividends | - | (214,062 | ) | |||||
Net loss attributed to common stockholders | $ | (2,815,548 | ) | $ | (1,592,250 | ) | ||
Net loss per share attributed to common stockholders | $ | (0.21 | ) | $ | (0.11 | ) | ||
Weighted average shares outstanding | 13,363,193 | 15,095,057 | ||||||
The accompanying notes are an integral part of these consolidated financial statements. |
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2008 AND 2009 (UNAUDITED)
2008 | 2009 | |||||||
Revenues | ||||||||
Casino games | $ | 1,159,507 | $ | 984,565 | ||||
Product sales | 673,369 | 531,349 | ||||||
Other | 477,890 | 588,050 | ||||||
2,310,766 | 2,103,964 | |||||||
Costs and expenses | ||||||||
Casino games | 1,320,829 | 911,901 | ||||||
Product costs | 318,198 | 271,050 | ||||||
Other | 583,726 | 492,040 | ||||||
2,222,753 | 1,674,991 | |||||||
Gross operating income | 88,013 | 428,973 | ||||||
Other operating expenses | ||||||||
Selling, general, and administrative | 3,362,027 | 2,771,726 | ||||||
Research and development | 698,540 | 183,183 | ||||||
Depreciation and amortization | 428,709 | 270,330 | ||||||
4,489,276 | 3,225,239 | |||||||
Operating loss | (4,401,263 | ) | (2,796,266 | ) | ||||
Other income (expense) | ||||||||
Finance costs | (1,122,462 | ) | (14,335 | ) | ||||
Interest income and other | (91,389 | ) | (27,902 | ) | ||||
Net loss | (5,615,114 | ) | (2,838,503 | ) | ||||
Preferred stock dividends | - | (437,993 | ) | |||||
Net loss attributed to common stockholders | $ | (5,615,114 | ) | $ | (3,276,496 | ) | ||
Net loss per share attributed to common stockholders | $ | (0.43 | ) | $ | (0.22 | ) | ||
Weighted average shares outstanding | 13,045,254 | 15,054,185 | ||||||
The accompanying notes are an integral part of these consolidated financial statements. |
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
SIX MONTHS ENDED JUNE 30, 2008 AND 2009 (UNAUDITED)
Series A Convertible Preferred Stock | Series C Convertible Preferred Stock | Series D Convertible Preferred Stock | Series E Convertible Preferred Stock | Series F Convertible Preferred Stock | Series G Convertible Preferred Stock | Series H Convertible Preferred Stock | Series I Convertible Preferred Stock | Common Stock (Including Series A) | Additional Paid-In Capital | Less Due From Officers and Stockholders | Deficit | |||||||||||||||||||||||||||||||||||||
Balances, January 1, 2008 | $ | - | $ | 35 | $ | 125 | $ | 744 | - | - | - | - | $ | 12,563 | $ | 26,497,097 | $ | (235,414 | ) | $ | (28,562,419 | ) | ||||||||||||||||||||||||||
Net loss | (5,615,114 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants and options | 93 | 108,706 | (8,412 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of warrants | 238,682 | |||||||||||||||||||||||||||||||||||||||||||||||
Other Stock based compensation | 238 | 476,096 | 52,000 | |||||||||||||||||||||||||||||||||||||||||||||
Cash received from employees and stockholders | 6,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Series B Convertible Preferred Stock to Common Stock Series A | 131 | 130,370 | ||||||||||||||||||||||||||||||||||||||||||||||
Sale of Series E Convertible Preferred Stock | 67 | 334,933 | ||||||||||||||||||||||||||||||||||||||||||||||
Sale of Series F Convertible Preferred Stock | 200 | 639,872 | ||||||||||||||||||||||||||||||||||||||||||||||
Sale of Series G Convertible Preferred Stock | 150 | 479,904 | ||||||||||||||||||||||||||||||||||||||||||||||
Sale of Series H Convertible Preferred Stock | 99 | 492,402 | ||||||||||||||||||||||||||||||||||||||||||||||
Sale of Common Stock Series A to Employees | 55 | 110,667 | ||||||||||||||||||||||||||||||||||||||||||||||
Sale of Common Stock Series A | 500 | 629,374 | ||||||||||||||||||||||||||||||||||||||||||||||
Balances, June 30, 2008 | $ | - | $ | 35 | $ | 125 | $ | 811 | $ | 200 | $ | 150 | $ | 99 | $ | - | $ | 13,580 | $ | 30,138,101 | $ | (185,826 | ) | $ | (34,177,533 | ) |
The accompanying notes are an integral part of these financial statements.
Series A Convertible Preferred Stock | Series C Convertible Preferred Stock | Series D Convertible Preferred Stock | Series E Convertible Preferred Stock | Series F Convertible Preferred Stock | Series G Convertible Preferred Stock | Series H Convertible Preferred Stock | Series I Convertible Preferred Stock | Common Stock (Including Series A) | Additional Paid-In Capital | Less Due From Officers and Stockholders | Deficit | |||||||||||||||||||||||||||||||||||||
Balances, January 1, 2009 | $ | - | $ | - | $ | - | $ | 811 | $ | 200 | $ | 150 | $ | 99 | 4,694 | $ | 14,850 | $ | 44,160,702 | $ | (188,245 | ) | $ | (41,584,110 | ) | |||||||||||||||||||||||
Net loss | (2,838,503 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends payable Preferred Stock Series F, G and I | (437,993 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of warrants for services | 378,735 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to reimburse legal expenses | 27 | 17,863 | ||||||||||||||||||||||||||||||||||||||||||||||
Cancellation of common stock | (20 | ) | 20 | |||||||||||||||||||||||||||||||||||||||||||||
Cancellation of Series F Preferred Stock | (400 | ) | (1,999,600 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Re-issuance of Series F Preferred Stock | 200 | 999,800 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash received from employees and stockholders | 6,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Sale of Common Stock Series A | 225 | 562,275 | ||||||||||||||||||||||||||||||||||||||||||||||
Balances, June 30, 2009 | $ | - | $ | - | $ | - | $ | 811 | $ | - | $ | 150 | $ | 99 | $ | 4,694 | $ | 15,082 | $ | 44,119,795 | $ | (182,245 | ) | $ | (44,860,606 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30, 2008 AND 2009 (UNAUDITED)
2008 | 2009 | |||||||
Operating activities | ||||||||
Net loss | $ | (5,615,114 | ) | $ | (2,838,503 | ) | ||
Marketable security received for licensing fee | 36,001 | 5,068 | ||||||
Depreciation and amortization of equipment | 257,946 | 164,675 | ||||||
Amortization of debt issuance costs and intangibles | 1,178,205 | 131,100 | ||||||
Fair market value adjustment of debt derivative liability | (83,995 | ) | - | |||||
Stock-based compensation to employees and consultants | 557,319 | 386,625 | ||||||
Bad debts | 1,377 | 30,982 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 145,750 | 272,692 | ||||||
Inventories | 18,960 | 40,455 | ||||||
Prepaid expenses, deposits and other | 10,240 | (79,885 | ) | |||||
Other | (958 | ) | (13,701 | ) | ||||
Accounts payable and accrued expenses | 944,610 | 504,170 | ||||||
Progressive jackpot liability | 470,631 | (59,695 | ) | |||||
Net cash (used in) operating activities | (2,079,028 | ) | (1,456,017 | ) | ||||
Investing activities | ||||||||
Purchase of property, equipment, and software | (77,970 | ) | (85,239 | ) | ||||
Proceeds from sale of equipment | 55,250 | 6,150 | ||||||
Capitalize PlayerVision 3 engineering costs | - | (631,899 | ) | |||||
Jackpot reserve deposits | (1,001,072 | ) | 1,029,220 | |||||
Net cash provided by (used in) investing activities | (1,023,792 | ) | 318,232 | |||||
Financing activities | ||||||||
Dividend payments on Series F Preferred Stock | - | (32,877 | ) | |||||
Redemption of Series F Preferred Stock | - | (2,000,000 | ) | |||||
Re-issuance of Series F Preferred Stock | - | 1,000,000 | ||||||
Redemption of Series B Preferred Stock | (137,500 | ) | ||||||
Repayment of debt | (43,552 | ) | (5,367 | ) | ||||
Sale of Series E Convertible Preferred Stock | 335,000 | - | ||||||
Sale of Series F Convertible Preferred Stock | 640,072 | |||||||
Sale of Series G Convertible Preferred Stock | 480,054 | |||||||
Sale of Series H Convertible Preferred Stock | 492,501 | |||||||
Advances from principal stockholders | - | 1,720,000 | ||||||
Repayment of advances from principal stockholders | - | (610,000 | ) | |||||
Exercise of warrants and options for common stock | 100,387 | - | ||||||
Collection of stock subscription receivables | 6,000 | 6,000 | ||||||
Sale of common stock | 740,596 | 562,500 | ||||||
Net cash provided by financing activities | 2,613,558 | 640,256 | ||||||
Net decrease in cash | (489,262 | ) | (497,529 | ) | ||||
Cash, beginning of period | 489,262 | 497,529 | ||||||
Cash, end of period | $ | - | $ | - | ||||
Non-cash investing and financing activities | ||||||||
Conversion of Series B Convertible Preferred Stock to Common Stock Series A | $ | 130,500 | $ | - | ||||
Exercise of stock warrants and options increasing subscriptions receivable | 8,412 | - | ||||||
Equipment acquired directly with proceeds of new borrowing | 34,025 | - | ||||||
Debt retired through issuance of Common Stock Series A | 107,500 | - | ||||||
Prepayment of lease costs through issuance of Common Stock Series A | 106,000 | - | ||||||
Interest added to face amount of note due to debt modification | 801,250 | - | ||||||
Dividends declared, but unpaid on Series F, G and I Preferred Stock | - | 437,993 | ||||||
Dividend paid in Common Stock Series A on Series F Preferred Stock | (10,000 | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements. |
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
1. Nature of operations:
Our current principal business is the delivery of new, linked-progressive, mega jackpot games to the worldwide gaming industry. Our offering of these types of games has included Nevada Numbers, Super Bonanza Bingo, Million Dollar Ticket and Gamblers Bonus Million Dollar Ticket. During the second quarter of 2008, we launched Gamblers Bonus Million Dollar Ticket in cooperation with one of the larger slot route operators in Nevada. We subsequently shut this game down on January 31, 2009. On March 31, 2009, the Company shut down Nevada Numbers and Million Dollar Ticket.
Although we have focused our business on the development of our proprietary multimedia delivery system, known as PlayerVision, PlayerVision has not had a significant revenue effect on our financial statements to date. We continue to provide equipment, supplies and casino games for use by our customers in the keno and bingo segments of the gaming industry. (See Note 8a).
2. Basis of Presentation and Accounting:
The accompanying consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, relating to interim financial statements. Accordingly, certain information normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. For further information, please refer to our annual financial statements and the related notes included within our Annual Report on Form 10-K for the year ended December 31, 2008, previously filed with the SEC, from which the information as of that date is derived.
The consolidated financial statements include the accounts of our wholly-owned subsidiaries and an inactive and immaterial 85%-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.
The unaudited interim consolidated financial statements included herein reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the interim periods presented. Events through the date the consolidated financial statements were issued, August 19, 2009, were evaluated by management to determine if adjustments to or disclosure in these interim consolidated financial statements were necessary. The results of operations for the three and six months ended June 30, 2009, are not necessarily indicative of results to be expected for the year.
3. Jackpot Reserve Deposits:
At December 31, 2008 and June 30, 2009, as required by gaming regulators, we had deposit cash amounts of $1,230,761 and $201,604, respectively, which are restricted for funding our various jackpot-oriented games.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Equipment:
Equipment (Note 8a) consists of the following:
December 31, 2008 | June 30, 2009 (Unaudited) | |||||||
Production equipment | $ | 1,561,513 | $ | 1,478,147 | ||||
Equipment, furniture, and fixtures | 557,855 | 571,322 | ||||||
Leasehold improvements | 43,627 | 43,627 | ||||||
2,162,995 | 2,093,096 | |||||||
Less accumulated depreciation and amortization | 1,238,739 | 1,336,364 | ||||||
$ | 924,256 | $ | 756,732 |
5. Other Intangible Assets:
Other intangible assets (Note 8a) consist of the following:
December 31, 2008 | June 30, 2009 (Unaudited) | |||||||
Capitalized PlayerVision engineering costs | $ | 651,899 | ||||||
PlayerVision technology patents | $ | 1,016,236 | 996,236 | |||||
Software | 427,836 | 429,775 | ||||||
1,444,072 | 2,077,910 | |||||||
Less accumulated amortization | 1,165,742 | 1,296,843 | ||||||
$ | 278,330 | $ | 781,067 |
The intangible assets are amortized over their estimated useful lives, which are currently 5 years with the exception of software which is amortized over three years. We have not begun amortizing PlayerVision costs as yet and will begin when we get our product to market. Total amortization for other intangible assets amounted to $266,944 and $131,100, respectively, for the six months ended June 30, 2008 and 2009. The estimated aggregate amortization for the remaining six months of calendar 2009 and the next five years is as follows (if we begin deployment of PlayerVision 3 as planned in November 2009):
2009 | $ 153,941 |
2010 | 236,925 |
2011 | 214,512 |
2012 | 175,689 |
2013 | - |
2014 | - |
$ 781,067 |
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Debt:
Long term debt is as follows:
December 31, 2008 | June 30, 2009 | |||||||
Other notes payable | $ | 35,076 | $ | 29,709 | ||||
Less amounts due within one year | 11,957 | 10,914 | ||||||
$ | 23,119 | $ | 18,795 |
The $600,000 advance from a stockholder at December 31, 2008 was paid back in January 2009. An additional $1,720,000 was advanced from three stockholders including $1.5 million from IGT (see below). Of this amount, $10,000 was paid back in June 2009.
On February 13, 2009, we signed a binding term sheet (“Term Sheet”) with IGT whereby IGT advanced $1.5 million (“the Advance”) to the Company. We are presently in negotiations with IGT to extend the term of the $1.5 million advance beyond August 15, 2009 and make it a longer term, interest only note payable with a 10% interest rate. Although the term has expired, negotiations are continuing. We expect the note to be extended to at least January 31, 2010. We granted a security interest in all of our present and future assets as security for such obligation.
The Company and IGT also agreed to amend the License and Application Support Agreement dated September 30, 2008 between the Company and IGT (the “LASA”), and the Intellectual Property Access Agreement dated September 30, 2008 between the Company and IGT (the “IPAA”). The amendments to the LASA include: (i) a requirement that the Company use its best efforts to utilize IGT’s sb (server based) Media Manager as the default infrastructure for the delivery of the Company’s PlayerVision® applications, where feasible, (ii) a requirement that the Company provide development support for IGT sb (server based) applications requested by IGT, (iii) an amendment to the amount of distribution fees, (iv) a granting to IGT of a “most favored distributor” status so that IGT is granted the most favorable terms on the Company’s software distributor rates for its server-based applications, and (v) a requirement that the Company escrow the source code for the applications that connect to IGT systems. IGT will have the right to access the source code only if the Company becomes insolvent, and IGT’s rights to utilize such software (if released) will be unlimited. The amendments to the IPAA include the Company’s agreement that IGT will have the right to initiate, coordinate, finance and assist in the prosecution, defense and enforcement of all Company owned intellectual property to which the Company has granted a right of first refusal to IGT.
7. Stockholders' Equity:
From time to time, the Company issues shares of common stock and preferred stock through transactions that are exempt from registration under the Securities Act of 1933 (Securities Act), either pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D. For the six months ended June 30, 2008, we issued 92,659 shares of Common Stock Series A as a result of the exercise of options and warrants. Additionally, we issued 130,500 shares of Common Stock Series A pursuant to the conversion of 26,100 shares of Series B Convertible Preferred Stock. During the six months ended June 30, 2008, we also issued 295,528 shares of Common Stock Series A for salaries, bonuses, services, and board of director fees and 500,000 shares of Common Stock Series A as part of our sale of Series F and Series G Convertible Preferred Stock.
During the six months ended June 30, 2009, we issued 229,000 shares of Common Stock Series A to an investor in return for cash used for working capital (this is the same investor who invested $1,000,000 in Series E Convertible Preferred Stock, $1,000,000 in Series F Convertible Preferred Stock, and $750,000 in Series G Convertible Preferred Stock).
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In February 2008, we received an advance from a stockholder of $250,000. In May 2008, this same stockholder purchased 200,000 shares of Series F Convertible Preferred Stock for $5 per share and 150,000 shares of Series G Convertible Preferred Stock for $5 per share for an aggregate purchase price of $1,750,000. Both Series F and Series G Convertible Preferred Stock are convertible into Common Stock Series A at the lower of $3.50 or 30% off the IPO price, where “IPO price” means the per share price to the public of any common shares offered by us that in the aggregate results in capital in excess of $10.0 million being raised and the shares of a class of our common stock being listed and traded on a national stock exchange. The proceeds of the Series F Convertible Preferred Stock were used to fund the $1,000,000 jackpot bankroll for our Gamblers Bonus Million Dollar Ticket game which launched on April 14, 2008. The proceeds of Series G Convertible Preferred Stock were used for general operating purposes, and the advance of $250,000 was offset against the Series G purchase price. As an incentive to do these transactions, the same stockholder was issued 500,000 shares of Common Stock Series A. Additionally, if our Common Stock Series A, as a result of a qualified financing, commences trading at less than $5 per share, the stockholder will receive additional shares of Common Stock Series A prorated for the percentage shortfall from $5 per share measured against the 500,000 shares, where a “qualified financing” is a capital raise of $10 million or more or a transaction at less than $5 per share resulting in a change in control of the Company. In addition, the Series F Convertible Preferred Stock stockholder was granted a security interest and other additional rights in connection with our separate account (and related insurance policy), and $1 million was set aside solely to satisfy our jackpot security requirements relating to the Gamblers Bonus Million Dollar Ticket game.
In the first quarter of 2009, we closed the Gamblers Bonus Million Dollar game due to a lack of ticket sales. Accordingly, we redeemed the $1,000,000 of Series F Preferred Stock from our investor. We closed our Million Dollar Ticket Game as well for the same reason. We also temporarily suspended our Nevada Numbers game to change the draw to hourly rather than daily. We restarted the Nevada Numbers game on March 1, 2009 but again suspended it on March 31, 2009 due to a lack of funds to meet our Nevada Gaming bankroll requirements. This suspension resulted from the change in ownership at Treasure Island and the new ownership’s decision to not continue bankrolling our game. The game will remain suspended until we can find approximately $4 million for the bankroll. When we restarted Nevada Numbers on March 1, 2009, we restored Series F Convertible Preferred Stock for $1,000,000 to be used as additional bankroll needed for Nevada Numbers. Due to the March 31 shutdown, the Nevada Numbers bankroll funds associated with Series F Convertible Preferred Stock were no longer needed. Therefore, in April 2009 we again redeemed the Series F Convertible Preferred Stock and the $1,000,000 was returned to the investor. In addition, in April 2009, he received another 7,156 shares of Common Stock Series A. These shares were awarded in lieu of cash dividends and as a reimbursement of legal fees for the restoration of Series F Convertible Preferred Stock for $1,000,000 to support the restarting of Nevada Numbers.
Series B Convertible Preferred Stock. Each share of Series B Convertible Preferred Stock is convertible at any time into Common Stock Series A at the election of the holders of the Series B Convertible Preferred Stock on a one-to-five basis.
A certain portion of the proceeds derived from the sale of Series B Convertible Preferred Stock provided jackpot security for two of our game products, Nevada Numbers and The Million Dollar Ticket. The terms of Series B Convertible Preferred Stock provide that if at any time we determine that these proceeds are no longer used by us to provide jackpot security for either our Nevada Numbers or Million Dollar Ticket game then, in each case, each holder of Series B Convertible Preferred Stock will have the option, for 90 calendar days from the date the holders of Series B Convertible Preferred Stock are noticed that such funds are no longer being so used, to put to us up to 50% of such holder's Series B Convertible Preferred Stock for $5.00 per share or convert on a one-to-five basis for Common Stock Series A.
On January 18, 2008, because Treasure Island began maintaining the required base jackpot bankroll for The Million Dollar Ticket, the holders of Series B Convertible Preferred Stock were notified pursuant to the terms and conditions of our Series B Convertible Preferred Stock of the ability to exercise the above options. The holders of Series B Convertible Preferred Stock had until April 17, 2008 to make their decision. At March 31, 2008 holders of
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
183,690 shares of Series B Convertible Preferred Stock had converted their shares on a one-to-five basis for 918,450 shares of Common Stock Series A. We also redeemed 35,900 shares of Series B Convertible Preferred Stock at $5 per share for a total redemption of $179,500 through March 31, 2008. In the second quarter of 2008, we redeemed 27,900 shares of Series B Convertible Preferred Stock, and holders of 98,650 shares of Series B Convertible Preferred Stock elected to convert on a one-to-five basis into 493,250 shares of Common Stock Series A. As of June 30, 2009, there were 50,000 outstanding shares of Series B Convertible Preferred Stock.
Series E Convertible Preferred Stock. Holders of Series E Convertible Preferred Stock are entitled to receive $5 per share as a liquidation preference after payment of all existing and future indebtedness and the liquidation preference of Series I and B Convertible Preferred Stock. Series E and Series G Convertible Preferred Stock are pari passu in liquidation preference. Series E Convertible Preferred Stock has a liquidation preference over Series H Convertible Preferred Stock. During the year ended December 31, 2008, we issued 67,000 shares of our Series E Convertible Preferred Stock raising $335,000. In February 2008, we closed our Series E Convertible Preferred Stock offering with a total of 810,800 shares issued and $4,054,000 raised.
Series G Convertible Preferred Stock. The holder of Series G Convertible Preferred Stock is entitled to receive $5 per share as a liquidation preference pari passu with the liquidation preference of Series E Convertible Preferred Stock and after payment of all existing and future indebtedness and the liquidation preference of Series I and B Convertible Preferred Stock. Series G Convertible Preferred Stock has a liquidation preference over Series H Convertible Preferred Stock. On May 9, 2008, we issued 150,000 shares of Series G Convertible Preferred Stock which carries a cumulative 12% dividend rate payable on January 1, 2010 immediately after paying IGT their 6.5% dividend on Series I Preferred Stock. Series G Convertible Preferred stock is convertible into Common Stock Series A at the lower of $3.50 or 30% off of the IPO price, where “IPO price” means the per share price to the public of any common shares offered by us that in the aggregate results in capital in excess of $10.0 million being raised and the shares of a class of our common stock being listed and traded on a national stock exchange.
Series H Convertible Preferred Stock. The holders of Series H Convertible Preferred Stock are entitled to receive $5 per share as a liquidation preference after payment of all existing and future indebtedness and the liquidation preference of Series I, Series B, Series E, and Series G Convertible Preferred Stock. During the year ended December 31, 2008, we issued 98,500 shares of Series H Convertible Preferred Stock at a price of $5 per share for a total capital raise of $492,500. The Series H Convertible Preferred offering closed June 21, 2008. Series H Convertible Preferred stock is convertible into Common Stock Series A at the lower of $2.50 or 30% off of the IPO price, where “IPO price” means the per share price to the public of any common shares offered by us that in the aggregate results in capital in excess of $10.0 million being raised and the shares of a class of our common stock being listed and traded on a national stock exchange.
Series I Preferred Stock. On October 1, 2008, IGT signed an investment agreement as of September 30, 2008, with us for 4,693,878 shares of our Series I Preferred Stock at $2.45 per share, or a total investment of $11.5 million. The Series I Preferred Stock is convertible into shares of Common Stock Series A on a one-for-one basis. The transaction closed on October 24, 2008. IGT had previously advanced $1.5 million of this total investment pursuant to an agreement dated July 17, 2008, as amended, so the net proceeds received by the Company on October 24, 2008 was $10 million. IGT also received a warrant to purchase 1.5 million shares of Common Stock Series A at an exercise price of $2.45 per share. The warrant has a three-year term and is fully vested. The shares of Series I Preferred Stock carry a dividend rate of 6.5% payable initially on January 1, 2010 and vote on an as converted basis, on all matters submitted to the Company’s stockholders. Based on the fully diluted outstanding shares of the Company, IGT is entitled to two seats on the Company’s Board of Directors, which to date they have not chosen to fill. In addition, IGT forgave a receivable from the Company from a prior legal settlement for $614,027. Also on October 1, 2008, we signed three agreements with IGT which became part of the legal settlement with IGT: 1) the Retrofit License Agreement, 2) the License and Application Support Agreement and 3) the Intellectual Property Access Agreement. On October 14, 2008, the legal case with IGT was dismissed by the Court with prejudice.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
With the additional $10 million of funding from IGT, we paid in full the CAMOFI note for $6,051,250, together with accrued interest and a payment penalty amounting to $1,567,272. We were released from any and all liens and claims that CAMOFI may have against us and the Registration Rights Agreement was terminated. CAMOFI has 2,675,000 warrants, with “piggy back” registration rights for its 300,000 shares of our common stock and underlying shares of common stock underlying its warrants, which registration rights are junior to the registration rights granted to IGT as part of the Series I Preferred Stock transaction.
In connection with the IGT transaction, we filed Amended and Restated Certificates of Designation with the Nevada Secretary of State with respect to our Series B, Series E, Series F, Series G and Series H Convertible Preferred Stock on October 22, 2008. We also filed Certificates of Withdrawal of Certificate of Designation with the Nevada Secretary of State with respect to our Series A, Series C, and Series D Convertible Preferred Stock on October 3, 2008, as no shares of such series were then issued or outstanding.
Stock Warrants and Options. Our 2009 Stock Option Plan (2009 Plan), adopted by our Board of Directors and approved by our stockholders, allows for the issuance of both qualified and non-qualified options. The Stock Option Committee of our Board of Directors administers the 2009 Plan. The 2009 Plan succeeds the 2000 Stock Option Plan (2000 Plan) that will expire later this year except as to options outstanding under the 2000 Plan. As of June 30, 2009, there were 885,387 qualified and 24,000 non-qualified options outstanding under the 2009 Plan. As of June 30, 2008 and 2009, respectively, there were 1,978,900 and 2,645,900 options outstanding under the 2000 Plan. As of June 30, 2008 and 2009, respectively, there were 425,000 and 650,000 non-qualified options outstanding that were issued outside of the plans. The exercise price of options issued pursuant to either plan cannot be less than the fair market value at the time of the grant and vesting is at the discretion of the Stock Option Committee, though limited to ten years. Only employees, directors and consultants are qualified to receive options. The stock subject to the 2000 Plan is limited to 2,500,000 shares of Common Stock Series A. The stock subject to the 2009 Plan is limited to 20% of the sum of the currently outstanding shares of Common Stock Series A and the outstanding shares of our preferred stock convertible into Common Stock Series A as of beginning of the period under consideration.
We have, from time to time, granted common stock, warrants and options to employees and others as employment incentives, in return for successful capital-raising efforts or as an inducement to invest in our common or preferred securities, in return for other services, and in conjunction with the initial capitalization of our company and business acquisitions. Warrants and options to purchase 870,000 and 931,387 shares of Common Stock Series A were issued to officers, directors and employees during the six months ended June 30, 2008 and 2009, respectively. Total compensation cost recognized in operations from grants of options and warrants amounted to $557,319 and $378,735 for the six months ended June 30, 2008 and June 30, 2009, respectively. Unrecognized costs related to employee stock options and warrants outstanding at June 30, 2009 totaled $879,536 and are expected to be amortized over a weighted average period of three years.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted average exercise price of our outstanding options and warrants at June 30, 2009, was $2.48. The following table summarizes our stock option and warrant activity followed by the applicable weighted average prices during the quarter ended June 30, 2009:
Options/Warrants | Weighted Average Price | |||||||
Balance, January 1, 2009 | 8,656,209 | $ | 2.46 | |||||
Granted | 931,387 | 2.50 | ||||||
Exercised | - | - | ||||||
Forfeited | (100,000 | ) | 1.00 | |||||
Balance, June 30, 2009 | 9,487,596 | $ | 2.48 |
As of June 30, 2009, 1,697,790 options and warrants are outstanding, but have not vested. The aggregate intrinsic value of options and warrants at June 30, 2009 is $879,536.
Non-vested Options | Weighted Average Price | |||||||
Balance, January 1, 2009 | 1,393,210 | $ | 3.45 | |||||
Granted | 580,790 | 2.50 | ||||||
Vested | (378,960 | ) | (3.79 | ) | ||||
Forfeited | - | - | ||||||
Balance, June 30, 2009 | 1,595,040 | $ | 3.02 |
Non-vested Warrants | Weighted Average Price | |||||||
Balance, January 1, 2009 | 110,417 | $ | 2.52 | |||||
Granted | 9,000 | 2.50 | ||||||
Vested | (16,667 | ) | (2.63 | ) | ||||
Forfeited | - | - | ||||||
Balance, June 30, 2009 | 102,750 | $ | 2.50 |
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes stock options and warrants outstanding at June 30, 2009, as to number exercisable and average remaining life in years:
Weighted Average | Weighted Average | |||||||||||||||||||
Exercise | Number | Remaining | Number | Remaining | ||||||||||||||||
Price | Outstanding | Life in years | Exercisable | Life in years | ||||||||||||||||
Options | $ | 1.00 | 270,000 | 0.50 | 270,000 | 0.50 | ||||||||||||||
$ | 2.00 | 460,000 | 3.79 | 310,000 | 3.79 | |||||||||||||||
$ | 2.50 | 1,576,387 | 4.51 | 495,347 | 4.54 | |||||||||||||||
$ | 3.00 | 100,900 | 0.67 | 100,900 | 0.67 | |||||||||||||||
$ | 4.55 | 25,000 | 0.50 | 25,000 | 0.50 | |||||||||||||||
$ | 5.00 | 1,123,000 | 3.22 | 759,000 | 3.16 | |||||||||||||||
Warrants | $ | 1.00 | 267,500 | 1.31 | 267,500 | 1.31 | ||||||||||||||
$ | 1.48 | 2,675,000 | 1.82 | 2,675,000 | 1.82 | |||||||||||||||
$ | 1.50 | 30,000 | 3.85 | 30,000 | 3.85 | |||||||||||||||
$ | 2.00 | 185,000 | 1.15 | 185,000 | 1.15 | |||||||||||||||
$ | 2.10 | 23,809 | 1.38 | 23,809 | 1.38 | |||||||||||||||
$ | 2.45 | 1,500,000 | 2.31 | 1,500,000 | 2.31 | |||||||||||||||
$ | 2.50 | 147,000 | 4.21 | 44,250 | 4.29 | |||||||||||||||
$ | 3.00 | 854,000 | 1.56 | 854,000 | 1.56 | |||||||||||||||
$ | 4.00 | 100,000 | 0.62 | 100,000 | 0.62 | |||||||||||||||
$ | 5.00 | 150,000 | 1.78 | 150,000 | 1.78 | |||||||||||||||
9,487,596 | 2.53 | 7,789,806 | 2.17 |
There are 1,697,790 options and warrants that have been issued but not vested. Of these options and warrants 247,800 will vest during the remainder of 2009, 778,496 in 2010, 478,497 in 2011 and 192,997 in 2012.
8. Contingencies:
a. Economic conditions and related risks and uncertainties. The United States is currently experiencing a widespread recession accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming, other recreational activities and general discretionary consumer spending, and is also engaged in war, all of which are likely to continue to have far-reaching effects on economic conditions in the country for an indeterminate period. The effects and duration of these developments and related risks and uncertainties on our future operations and cash flows, including our access to capital or credit financing, cannot be estimated at this time but have been and may continue to be significant. We are presently unable to satisfy our obligations as they come due and do not have enough cash to sustain our expected working capital requirements for the remainder of 2009. Accordingly, unless we obtain third-party debt or equity financing or otherwise raise capital, for example, through the possible sale of assets, in the near future, we will not be able to continue as a going concern.
Based on circumstances described in the foregoing paragraph, and the related uncertainties as to the success of management’s plans to continue as a going concern, we are unable to make cash flow forecasts based on reasonably objective assumptions. Accordingly, as of June 30, 2009, impairment evaluations relative to these assets were based on our expectation of recoverability of at least their carrying values through a possible sale thereof using fair value estimates that are based on Level 3 inputs, as defined in Statement of Financial Accounting Standards No. 157, Fair Value Measurements. However, except as discussed in Note 12 to our consolidated financial statements, no such asset sales are presently expected and, therefore, no assets are currently classified as held for sale. It is possible based on future developments, even in the near term, that asset impairment writedowns may become necessary and that they may be significant.
To address the going concern uncertainty, we are in discussions to engage an investment banking firm to assist us in raising capital and are presently in due diligence with possible strategic partners in the gaming industry for an equity investment. We are also creating a sales deployment pipeline which should provide momentum to our capital raising efforts. We have also engaged in some cost cutting and are in the process of negotiating for the sale of our bingo and keno business. (See Note 12.)
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
We often carry cash and cash equivalents, including jackpot reserves, on deposit with financial institutions substantially in excess of federally-insured limits, and the risk of losses related to such concentrations may be increasing as a result of recent economic developments and uncertainties discussed in the foregoing paragraph. The extent of a future loss as a result of uninsured deposits in the event of a future failure of a bank or other financial institution, if any, is not subject to estimation at this time.
Though the two progressive jackpot games are currently shut down, we may still become liable for the unpaid progressive portion of each game. That possible liability is currently $218,604 and is provided for with a deposit in one of our brokerage accounts.
b. Legal Matter. A lawsuit is pending against LVGI and certain other defendants concerning their provisional patent for “Slot Lottery.” Management is unable to estimate minimum costs, if any, to be incurred by the Company upon the ultimate disposition of this matter and, accordingly, no provision has been made, but management believes the case is without merit and will vigorously defend the Company. No assurance can be given that the Company will be successful with respect to this matter.
c. Gaming Regulation and Licensing. We are licensed with the State of Nevada as an operator of inter-casino-linked systems, supplier and distributor of keno and bingo products, parts, and service, and as a keno route operator. From time to time, we seek licensure in other gaming jurisdictions so that we may similarly participate in the gaming revenue produced by customers from our products in those jurisdictions. Failure to comply with applicable gaming regulations, retain our Nevada licenses, or obtain and retain the necessary licenses in other jurisdictions, would likely have a material adverse effect on our future operations and cash flows.
Adopted amendments to Regulation 5.115 of the Nevada Gaming Commission, as amended on November 18, 1999, allow licensees to use the “reserve method” to fund periodic payments of any game, including a race book or sports pool, tournament, contest, or promotional activity provided that the licensee complies with certain financial monitoring and reporting requirements as follows: 1) current ratio of 2:1 and 2) interest coverage ratio of 3:1. We have frequently found it impossible, primarily due to the absence of earnings, to be in compliance with these ratios and in the past have been successful in presenting an alternative plan acceptable to the Nevada Gaming Commission to satisfactorily meet the objectives of the Regulation if not cure the situation prospectively through expected future raises of capital. The Nevada Gaming Commission has the right to demand that a one-year letter of credit be posted when a licensee is not in compliance with the foregoing financial ratios but has not made any such demand on the Company to date.
The foregoing notwithstanding, in July, 2008, we received two “Orders to Show Cause” from the Nevada Gaming Control Board (NGCB). One order dealt with deficiencies in meeting the financial requirements of Regulation 5.115 as to 1) resources in restricted accounts; 2) current ratio or working capital; 3) interest coverage ratio or debt to EBITDA ratio; and 4) bankroll. We have paid a fine of $10,000 in full settlement and satisfaction of the allegations in this matter. The second order dealt with deficiencies in filing timely reports with the NGCB as to new hires and termination of personnel. Our response set forth some remedial action taken by us, which was deemed adequate during the three months ended March 31, 2009, and to date, no further disciplinary action has been taken.
9. Income Taxes:
As of June 30, 2009, net operating loss carryforwards for federal income tax reporting purposes total approximately $40.0 million and expire between 2013 and 2028. However, because we have not as yet achieved profitable operations, realization of any future income tax benefit of the net operating loss carryforwards accumulated to date is not yet viewed by management at this time as more likely than not. Therefore, the related deferred tax asset of $14.2 million has been effectively reduced by a 100% valuation allowance. In addition, we may be limited in our ability to fully utilize our net operating loss carryforwards and realize any benefit therefrom in the event of any of certain ownership changes, if any, described in Internal Revenue Code Section 382.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. Financial Instruments:
The Company’s financial instruments consist of cash, jackpot reserve deposits, progressive jackpot liability, and debt. The estimated fair values of these financial instruments are approximately equal to book value because of their short-term nature and/or interest rates approximating current market interest rates based on Level 2 inputs, as defined in Statement of Financial Accounting Standards No. 157, Fair Value Measurements, as amended.
11. Segment Information:
We conduct our operations in three primary business segments: “Casino Games”, “Products” and “Other.” The “Casino Games” segment generates income from four games which have been played in 25 casinos and 100 bars and convenience stores in Nevada and another 14 casinos outside Nevada.
Operating results, certain unallocated expenditures, and identifiable assets for these segments are set forth below.
Six months ended June 30, | ||||||||
2008 | 2009 | |||||||
Revenue | ||||||||
Casino Games | $ | 1,159,507 | $ | 984,565 | ||||
Product Sales | 673,369 | 531,349 | ||||||
Other | 477,890 | 588,050 | ||||||
$ | 2,310,766 | $ | 2,103,964 | |||||
Operating income (loss) | ||||||||
Casino Games | $ | (161,322 | ) | $ | 72,664 | |||
Product Sales | 355,171 | 260,299 | ||||||
Other | (105,836 | ) | 96,010 | |||||
Unallocated | (4,489,276 | ) | (3,225,239 | ) | ||||
$ | (4,401,263 | ) | $ | (2,796,266 | ) | |||
Identifiable assets | ||||||||
Casino Games | $ | 3,802,910 | $ | 1,591,825 | ||||
Product Sales | 332,849 | 240,765 | ||||||
Other | 366,874 | 428,487 | ||||||
Unallocated | 2,275,926 | 2,846,101 | ||||||
6,778,559 | $ | 5,107,178 |
Identifiable assets of $5,107,178 at June 30, 2009, included recorded goodwill of $2,371,178 that relates to the Product Sales segment from prior acquisitions.
Six months ended June 30, | ||||||||
Capital expenditures | 2008 | 2009 | ||||||
Casino Games | $ | 31,177 | $ | 16,050 | ||||
Product Sales | - | - | ||||||
Other | 56,726 | 36,604 | ||||||
Unallocated | 24,093 | 32,585 | ||||||
$ | 111,996 | $ | 85,239 |
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. Subsequent Event:
We began a voluntary unpaid furlough of 15 PlayerVision division employees on August 1, 2009, which furlough is expected to continue until we raise additional capital and/or begin deploying our product.
On August 6, 2009, we signed a Technology Royalty Agreement with Perfect Storm Software, LLC, whose members include five of our engineers, one of whom is our Chief Technology Officer, who began employment in 2008 and brought preexisting technology with them which was used in the development of PlayerVision 3. The Technology Royalty Agreement calls for (1) a one-time royalty fee of $1,000 due and payable on the date of execution, (2) an annual license reissue fee in the amount of $20,000 due and payable on each anniversary of the Effective Date beginning on the first anniversary, (3) a royalty bonus equal to 5% of net PV 3 sales for software licensed products, (4) a royalty bonus equal to 5% of net sales for hardware utilized to operate software licensed products where the markup percentage of the hardware is greater than 20%, and (5) a royalty bonus of 750,000 shares of the our Common Stock Series A contingent upon any change in control of us.
We have been negotiating the sale of our bingo and keno businesses since June 2, 2009. However, since approval by the board of directors of a formal plan for the sale did not take place until July 2009, there has been no reclassification to discontinued operations. Retroactive reclassification will be reflected in our consolidated financial statements beginning in the third quarter, 2009. The sale would be an asset sale for $1.2 million and an assumption of approximately $200,000 in liabilities. The sale of the bingo business for $1.1 million is expected to close by the end of August 2009, and the sale of the keno business for $100,000 is expected to close by the end of 2009, subject to the final approval of the Nevada Gaming Control Board. The buyer of the bingo business has advanced $500,000 as a refundable deposit against the sale of the bingo business.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with our unaudited consolidated financial statements and the accompanying notes. This discussion contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including statements regarding our expected realization of more significant revenue from PlayerVision during the fourth quarter of 2009 and our expected financial position, business and financing plans. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates,” or other comparable terms. Forward-looking statements involve inherent risks and uncertainties which could cause actual results to differ materially from those in the forward looking statements. Such risks and uncertainties include any adverse judgment, ruling or order, lack of market acceptance of our PlayerVision system, our inability to secure additional third-party financing, the current economic recession, the lack of operating history of our PlayerVision system, the ability of our competitors to introduce products having advantages over our PlayerVision system, the failure to obtain regulatory approval for our PlayerVision modules, restrictions on our ability to install our PlayerVision system on existing gaming machines, our failure to protect our intellectual property rights and additional risks discussed herein and elsewhere in our Form 10-K for the year ended December 31, 2008. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. These historical financial statements may not be indicative of our future performance. (See “Liquidity and Capital Resources,” below.)
Overview
Historically, we have been one of the leading suppliers of keno and bingo games, systems, and supplies, a relatively small market associated with nominal growth and smaller companies. Our current principal business is the delivery of new, linked-progressive, mega jackpot games to the worldwide gaming industry. However, to date, we have devoted a significant portion of our resources toward the development, regulatory approval, and marketing of our PlayerVision system. In comparison to the keno and bingo market, we believe that the potential market for our PlayerVision system, i.e., the gaming machine market is much larger and more dynamic. While we continue to provide equipment, supplies and games for use by our customers in the keno and bingo segments of the gaming industry, subject to our ability to continue as a going concern, addressed below, we expect these revenues will continue to decline as we focus on the deployment of PlayerVision. PlayerVision has not had a significant revenue effect on our financial statements to date. Due primarily to our focus on the development of our PlayerVision system and other factors, we have incurred expenses in excess of our revenue and have generated losses to date.
In May 2009, we received approval for nine software applications on our more robust and scalable PlayerVision 3 platform from the Nevada Gaming Control Board laboratory. These software applications include Beverage-on-Demand, ServiceVision, VoyeurVision, Live TV, AdVision, YouTube, CasinoTunes, ValetVision, and BurstVision. We will submit these same applications for Gaming Laboratories International (GLI) approval, an independent accredited testing laboratory, in the second half of 2009.
Based on the foregoing, and other than the insignificant revenue realized from our early adoption agreements, and subject to economic uncertainties discussed herein, subject to our ability to continue as a going concern, as discussed below, we expect to begin to realize more significant revenue from our PlayerVision system during the fourth quarter of 2009. This would mark a significant shift in the type of revenue recognized by us. The anticipated revenue would be from the installation of our nine software applications on the PlayerVision 3 platform in the United States, primarily Nevada for now. No assurance can be given, however, that we will begin installing our PlayerVision 3 applications or begin realizing revenue from our PlayerVision system during the fourth quarter of 2009 or at all.
We expect to continue for the remainder of 2009 to incur expenses related to the development and regulatory approval for the remaining PlayerVision modules, and we expect to face competition from larger, more formidable competitors as we attempt to enter the gaming machine market. Due to continuing expenses related to our PlayerVision system, in addition to any funds from operations, we plan to continue to rely on funds from third party financing sources, if available, in addition to funds from operations to sustain our operations in 2009 and 2010.
We are presently unable to satisfy our obligations as they come due and do not have enough cash to sustain our anticipated working capital requirements for the remainder of 2009 and, unless we obtain third-party financing or otherwise raise capital through the sale of assets or otherwise in the near future, we will be unable to continue as a going concern. See discussion in “Liquidity – Outlook” below.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions provide a 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, and these differences may be material.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
PlayerVision. Any revenue from PlayerVision will result from installation fees, activation fees, fees for services, and revenue sharing arrangements. We will recognize installation and activation fees for PlayerVision upon installation and recognize the costs associated with the installation (labor and supplies) at that time. We will recognize revenue from the revenue sharing arrangements as earned and recognize maintenance expenses as incurred against the corresponding revenue. Manufacturing costs will be capitalized and depreciated over the life of the asset.
Casino Games. As wagers are made within our inter-linked systems, we recognize our share of each wager made as revenue. Based on the revenue proceeds, we purchase insurance to fund the base jackpot. We also estimate the cost for any uninsured base jackpot and the expense for any progressive jackpot and, accordingly, establish a liability on our balance sheet as a progressive jackpot liability. For our other casino games, we recognize our share of revenue upon the sale of each ticket. We have the discretion to purchase insurance to fund jackpots. We recognize costs associated with uninsured jackpots as each ticket is sold based on mathematical probabilities dictated by the odds of the game.
Products. We generally recognize sales of bingo and keno equipment when installed and sales of supplies when the products are shipped. Warranty costs and related liabilities associated with product sales have not been material. We recognize fees from equipment maintenance contracts sold separately (with no bundled deliverables) evenly over the term of the contract. Prior to shipment, we include equipment and supplies in inventories and stated at the lower of cost, as determined on a “first-in first-out’’ basis, or market.
Other. We include keno revenue from the operation of a keno route subject to multiple participation agreements in other revenue in an amount equal to the net win from such gaming activities, which is the difference between gaming handle and amounts paid to customers. We reflect amounts due to the owners of the facilities in which the keno games are conducted (effectively contingent rent) as an expense.
Equipment, Goodwill and other Intangible Assets
We review the carrying values of equipment, goodwill and other intangible assets for impairment at least annually, and whenever events or circumstances indicate the carrying value may not be recoverable or warrant a revision to the estimated remaining useful life, in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and SFAS 142, Goodwill and Other Intangible Assets.
Based on circumstances described in “Liquidity and Capital Resources,” below, and the related uncertainties as to the success of management’s plans to continue as a going concern, we are unable to make cash flow forecasts based on reasonably objective assumptions. Accordingly, as of June 30, 2009, impairment evaluations relative to these assets were based on our expectation of recoverability of at least their carrying values through a possible sale thereof using fair value estimates that are based on Level 3 inputs, as defined in Statement of Financial Accounting Standards No. 157, Fair Value Measurements. However, except as discussed in Note 12 to our consolidated financial statements, no such asset sales are presently expected and, therefore, no assets are currently classified as held for sale. It is possible based on future developments, even in the near term, that asset impairment writedowns may become necessary and that they may be significant.
Factors used in our evaluations of potential impairment and estimated recoverable values require significant judgments about respective estimated useful lives, risk rates, forecasted growth rates, brand history, expected market growth, competitive environment, market share, future business prospects and success of our products, including with respect to goodwill, the identification of reporting units, allocation of related goodwill, assignment of corporate shared assets and liabilities to reporting units, and determination of the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of recoverability or fair value. While we believe that our estimates of recoverable values are reasonable, different assumptions could materially affect our assessment of useful lives, recoverability and fair values. Based on the foregoing analysis, we recorded no goodwill or other impairment charges during the six months ended June 30, 2009.
Our intangible assets consist of key patents with a five-year life and software with a three-year life. PlayerVision 3 costs are being capitalized as we have proven technological feasibility and, subject to our ability to continue as a going concern, as discussed above and below, will be depreciated once our product is brought to market.
Income Taxes
We have effectively provided a full 100% valuation allowance for the deferred tax effects of our net operating losses at June 30, 2008 and 2009. We have effectively recorded a 100% valuation allowance to offset the deferred tax asset resulting from operating loss carryforwards arising in the current and prior periods that might otherwise have been recognized since, because of our history of operating losses, management is unable to conclude at this time that realization of such benefit is currently more likely than not.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements issued, but not yet effective or early adopted, that are of significance, or potential significance to the Company.
Results of Operations
Three Months Ended June 30, 2009, Compared with Three Months Ended June 30, 2008.
Revenue. Casino games revenue for the three months ended June 30, 2009, decreased $190,000 or 30.8%, compared to the three months ended June 30, 2008. The lower casino games revenue principally resulted from a reduction of $121,000 of revenue for Gamblers Bonus Million Dollar Ticket which was not in existence in the second quarter of 2009 but was being played in the second quarter of 2008, and Nevada Numbers and Million Dollar Ticket declined by $104,000 due to the discontinuance of the game on March 31, 2009 offset by higher revenue from Super Coverall Bingo of $35,000.
Product sales for the three months ended June 30, 2009, decreased by $98,000 or 28.0% compared to the three months ended June 30, 2008. Keno equipment sales amounted to $17,000 for the three months ended June 30, 2009 compared to $86,000 during the three months ended June 30, 2008. This decrease in keno equipment sales was due to a delay by customers to buy new keno systems due to the state of the economy. Bingo supplies sales also declined by $25,000 during the three months ended June 30, 2009 versus the same period in the prior year due to loss of market share.
Other revenue for the three months ended June 30, 2009, increased by $96,000 or 46.5% compared to the three months ended June 30, 2008. Revenue from Keno route and participation agreements increased by $93,000 for the three months ended June 30, 2009, compared to the three months ended June 30, 2008, due to two new route locations being open in Las Vegas during the three months ended June 30, 2009 versus none being open during the three months ended June 30, 2008.
Cost and Expenses. Cost and expenses of casino games for the three months ended June 30, 2009, decreased by $148,000 or 26.8% compared to the three months ended, June 30, 2008. The decrease resulted primarily from the discontinuance of the Nevada Numbers and Million Dollar Ticket games offset by the increase in Super Coverall Bingo as discussed previously.
Product cost and expenses for the three months ended June 30, 2009, decreased $32,000 or 19.1% compared to the three months ended June 30, 2008, consistent with the decline in Keno equipment sales. Gross margin on product sales has declined from 52.6% to 46.8% as we have had to do more discounting on Keno equipment sales.
Other cost and expenses for the three months ended June 30, 2009, decreased $30,000 or 12.2% compared to the three months ended June 30, 2008 as we reduced salary expenses by $48,000 through headcount reductions in our Keno service staff.
Other Operating Expenses. Selling, general and administrative expenses for the three months ended June 30, 2009, decreased by $485,000 or 27.5%, as legal and consulting fees decreased by $488,000 during the three months ended June 30, 2009, compared to the same period in 2008 primarily as a result of a reduction in legal fees resulting from settlement of the IGT lawsuit in October 2008.
Research and development costs for the three months ended June 30, 2009, have decreased by $235,000 or 59.0% compared to the three months ended June 30, 2008, as we began capitalizing development costs of our PlayerVision 3 platform.
Depreciation and amortization for the three months ended June 30, 2009, decreased $77,000 or 36.4% compared to the three months ended June 30, 2008, as our asset base is older and more assets are becoming fully depreciated.
Finance Costs. Finance costs for the three months ended June 30, 2009, decreased $578,000 or 99.5% compared to the three months ended June 30, 2008, due to the payoff of our primary third party lender, CAMOFI, in October 2008 with proceeds from equity capital invested.
Interest and Other Income. Interest and other income for the three months ended June 30, 2009, increased by $46,000 or 64.5% compared to the three months ended June 30, 2008. The increase was due to the decrease in the loss on the sale of equipment of $46,000 in the three months ended June 30, 2009 versus the comparable period in the prior year.
Results of Operations
Six Months Ended June 30, 2009, Compared with Six Months Ended June 30, 2008.
Revenue. Casino games revenue for the six months ended June 30, 2009, decreased $175,000 or 15.1%, compared to the six months ended June 30, 2008. The lower casino games revenue principally resulted from a reduction of $104,000 of revenue for Gamblers Bonus Million Dollar Ticket which was not in existence in the second quarter of 2009 but was being played in the second quarter of 2008, and Nevada Numbers and Million Dollar Ticket declined by $153,000 due to the discontinuance of the game on March 31, 2009 offset by higher revenue from Super Coverall Bingo of $84,000.
Product sales for the six months ended June 30, 2009, decreased by $142,000 or 21.1% compared to the six months ended June 30, 2008. Keno equipment sales amounted to $68,000 for the six months ended June 30, 2009 compared to $182,000 during the six months ended June 30, 2008. This decrease in Keno equipment sales was due to a delay by customers to buy new keno systems due to the state of the economy. Bingo supplies sales also declined by $33,000 during the six months ended June 30, 2009 versus the same period in the prior year due to loss of market share.
Other revenue for the six months ended June 30, 2009, increased by $110,000 or 23.1% compared to the six months ended June 30, 2008. Revenue from Keno route and participation agreements increased $102,000 for the six months ended June 30, 2009, compared to the six months ended June 30, 2008, due to two new route locations being open in Las Vegas for the entire six months ended June 30, 2009 versus two being opened for one month during the six months ended June 30, 2008.
Cost and Expenses. Cost and expenses of Casino Games for the six months ended June 30, 2009, decreased by $409,000 or 30.9% compared to the six months ended June 30, 2008. The decrease resulted primarily from the discontinuance of the Nevada Number and Million Dollar Ticket games offset by an increase in Super Coverall Bingo as previously discussed.
Product cost and expenses for the six months ended June 30, 2009, decreased $47,000 or 14.8% compared to the six months ended June 30, 2008, consistent with the decline in Keno equipment sales. Gross margin on product sales has declined from 52.7% to 49.0% as we have had to do more discounting on Keno equipment sales.
Other cost and expenses for the six months ended June 30, 2009, decreased $92,000 or $15.7% compared to the six months ended June 30, 2008 as we reduced salary expenses by $103,000 through headcount reductions in our Keno service staff.
Other Operating Expenses. Selling, general and administrative expenses for the six months ended June 30, 2009, decreased by $590,000 or 17.6%, as legal and consulting fees, decreased by $610,000 during the six months ended June 30, 2009, compared to the same period in 2008 primarily as a result of a reduction in legal fees resulting from settlement of the IGT lawsuit in October 2008.
Research and development costs for the six months ended June 30, 2009, have decreased by $515,000 or 73.8% compared to the six months ended June 30, 2008, as we began capitalizing development costs of our PlayerVision 3 platform.
Depreciation and amortization for the six months ended June 30, 2009, decreased $158,000 or 36.9% compared to the six months ended June 30, 2008, as our asset base is older and more assets are becoming fully depreciated.
Finance Costs. Finance costs for the six months ended June 30, 2009, decreased $1,108,000 or 98.7% compared to the six months ended June 30, 2008, due to the payoff of our primary third party lender, CAMOFI, in October 2008 with proceeds from equity capital invested.
Interest and Other Income. Interest and other income for the six months ended June 30, 2009, increased by $63,000 or 69.5% compared to the six months ended June 30, 2008. The increase was due to decrease in the loss on the sale of equipment of $46,000 in the six months ended June 30, 2009 versus the comparable period in the prior year and an additional loss in fair value incurred on or marketable securities of $31,000.
Liquidity and Capital Resources
Cash Flows
Cash used in operating activities decreased by $623,000 for the six months ended June 30, 2009 primarily because of accounts receivable and inventory decreases of $148,000 offset by increases in accounts payable and accrued expenses of $971,000. Investing activities consisted principally of net cash inflows in connection with the reduction in the jackpot reserve deposits of $1,029,000 because of the discontinuance of the Gamblers Bonus Million Dollar Ticket game in January 2009 offset by cash outflows for capital expenditures of $617,000. Our cash inflows from financing activities of $640,000 in the six months ended June 30, 2009, consisted principally of $562,500 of new capital from the sale of Common Stock Series A and net proceeds from advances from stockholders of $1,110,000 offset by the redemption of Series F Convertible Preferred Stock following the shutdown of the Nevada Numbers game.
Capital Expenditures
Capital expenditures increased by $605,000 for the six months ended June 30, 2009 compared to the same period in the prior year as we began capitalizing our PlayerVision 3 engineering costs prior to the projected rollout to the marketplace of nine new software applications. For 2009, other than our obligation to pay any jackpots that may be won, we anticipate that our most significant capital resource requirement will relate to the purchase of approximately $10 million of PlayerVision control units for the rollout of our PlayerVision System.
No assurance can be given that we will be able purchase sufficient control units or that such control units will be available at an acceptable price, or at all. No assurance can be given that we will be able to secure any third-party financing or that such financing will be available to us on acceptable terms. As discussed further under the heading Outlook below, it may be difficult for us to secure additional third-party financing at this time.
Sources of Capital
We have traditionally relied on various forms of third party financing in order to sustain our operations. On February 13, 2009, we signed a binding term sheet (“Term Sheet”) with IGT whereby IGT advanced $1.5 million (“the Advance”) to the Company. We are presently in negotiations with IGT to extend the term of the $1.5 million advance beyond August 15, 2009 and make it a longer term, interest only note payable with a 10% interest rate. Although the term has expired, negotiations are continuing. We expect the note to be extended to at least January 31, 2010. We granted a security interest in all of our present and future assets as security for such obligation.
Outlook
The United States has been experiencing a severe economic recession that, among other things, has curtailed casino gaming development, activity and profitability, both nationwide and particularly in our local market, and has resulted in highly reduced availability of credit and capital financing and heightened economic risks. The effects and duration of these developments and related uncertainties on the Company’s future operations and cash flows cannot be estimated at this time but likely will be significant.
We presently are unable to satisfy our obligations as they come due and do not have enough cash, inclusive of the possible sale of our bingo and keno business, to sustain our anticipated working capital requirements and our business expansion plans for the remainder of 2009. Subject to unforeseen effects of the economic risks and uncertainties discussed in the foregoing paragraph and to our ability to raise working capital, we expect to continue for at least the calendar year 2009 and 2010 to incur expenses related to the development and regulatory approval for the remaining PlayerVision modules and additional modules presently in development. The further delay of the rollout of our PlayerVision system, the failure to obtain additional third-party financing, and/or the failure to sell our bingo and keno business will have material adverse effects on our cash flow, results of operations and financial condition including significant uncertainty as to our ability to continue as a going concern for the remainder of 2009. No assurance can be given that we will be able to secure any third party financing or that such financing will be
available to us on acceptable terms. Given the current financial market disruptions, credit crisis and economic recession, including the current downturn in the gaming industry, it is difficult at this time to obtain any third-party financing on acceptable terms, whether public or private equity or debt, strategic relationships, capital leases or other arrangements. In addition, we have significant restrictive covenants under our recent financing with IGT that may prohibit us, in certain circumstances, from obtaining third party financing without IGT’s prior written consent. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require that we relinquish rights to certain of our technologies or products or agree to other material obligations and covenants.
Although casino gaming development, activity and profitability for 2008 and the first six months of 2009 were down and are expected to remain down for the remainder of 2009, we believe that our PlayerVision system will provide casinos with an additional revenue sources or cost reductions attractive enough to appeal even in the current depressed gaming environment. Other than the insignificant revenue realized from our early adoption agreements, we do not expect to begin to realize revenue from our PlayerVision system until the fourth quarter of 2009, though we cannot provide assurance that the market will ever accept our PlayerVision system. Any failure by us to install our PlayerVision system within our expected schedule or on terms acceptable to us will likely have a material adverse impact on our cash flow, results of operations and financial condition. In addition, we expect to face competition from larger, more formidable competitors as we enter the gaming machine market. An unexpected lack of market acceptance of our PlayerVision system, failure to obtain additional financing, or unforeseen adverse competitive, economic, or other factors may adversely impact our cash position, and thereby materially adversely affect our financial condition and business operations.
We presently do not use any derivative financial instruments to hedge our exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices, or other market risks, nor do we invest in speculative financial instruments.
Off Balance Sheet Financing Arrangements
We have operating leases totaling $1,271,075 that have the following payment schedule by calendar year: $248,176 in 2009, $500,948 in 2010, $324,253 in 2011, $147,804 in 2012, and $49,894 in 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4(T). Controls and Procedures.
We evaluated the effectiveness of our disclosures controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision, and with the participation, of Jon D. Berkley, our Chief Executive Officer, and Bruce A. Shepard, our Chief Financial Officer. Based on this evaluation, Mr. Berkley and Mr. Shepard concluded that our disclosure controls and procedures are effective to ensure the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Mr. Berkley and Mr. Shepard also concluded that there have been no significant changes in internal controls or in other factors that have materially affected, or would be reasonably likely to materially affected, our internal control over financial reporting during the quarter most recently ended.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
On September 15, 2008, Steven Brandstetter and J & S Gaming filed a lawsuit against us, among other defendants, in Department 11 of the Nevada Eighth Judicial District Court captioned Brandstetter, et al. v. Bally Gaming, Inc., et al., case no. 08-A-571641-C alleging against us claims of breach of contract, misrepresentation, breach of fiduciary duty and unjust enrichment regarding a non-disclosure agreement executed in May 2002 pertaining to the plaintiffs’ gaming concepts. The plaintiffs are seeking monetary damages, including attorney’s fees and costs. We filed an answer to the complaint on December 8, 2008 citing eighteen affirmative defenses. Depositions have been scheduled for some of the executives of the larger company defendants. No depositions have been requested of any of our executives. We are unable to estimate minimum costs, if any, to be incurred by us upon the ultimate disposition of this matter an accordingly, no provision has been made.
Item 1A. Risk Factors.
Not required.
Item 2. Unregistered Sales of Equity Securities.
During the three months ended June 30, 2009, we issued 7,156 shares of Common Stock Series A to our Series F Convertible Preferred Stock investor in lieu of legal fees incurred by him for the restoration of Series F Convertible Preferred Stock and for cash dividends on Series F Convertible Preferred Stock when it was redeemed in April 2009. This issuance was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act in that the issuance did not involve a public offering.
During the three months ended June 30, 2009, we issued options and warrants to purchase a total of 697,359 shares of Common Stock Series A to our employees and members of our board of directors, all with an exercise price of $2.50 per share, primarily with a three-year vesting schedule and a five-year life. These issuances were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act in that the issuance did not involve a public offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Our 2009 annual meeting of the stockholders was held on May 26, 2009. Items of business set forth in our proxy statement dated April 24, 2009 that were voted on and approved at the annual meeting are as follows:
(1) | Election of Directors to serve until our next annual meeting and until their successors are elected and qualified: |
Votes | ||||
Nominee | For | Withheld | ||
Russell R. Roth | 11,438,807 | 1,511,021 | ||
Jon D. Berkley | 11,214,632 | 1,735,196 | ||
Richard H. Irvine | 11,438,807 | 1,511,021 | ||
Kyleen E. Cane | 11,438,807 | 1,511,021 | ||
Terry L. Caudill | 11,438,807 | 1,511,021 | ||
Robert M. McMonigle | 6,744,929 | 6,204,899 | ||
Harlan D. Braaten | 11,438,807 | 1,511,021 |
(2) | Adoption of our 2009 Stock Option Plan: |
For | Withheld | Abstain | Broker Non-vote | |||
11,403,307 | 1,594,921 | 59,400 | - |
(3) | Ratification of Piercy Bowler Taylor & Kern as our Independent Registered Public Accounting Firm: |
For | Withheld | Abstain | Broker Non-vote | |||
12,936,628 | 2,200 | - | - |
Item 5. Other Information.
On August 6, 2009, we signed a Technology Royalty Agreement with Perfect Storm Software, LLC, whose members include five of our engineers, one of whom is our Chief Technology Officer, who began employment in 2008 and brought preexisting technology with them which was used in the development of PlayerVision 3. The Technology Royalty Agreement calls for (1) a one-time royalty fee of $1,000 due and payable on the date of execution, (2) an annual license reissue fee in the amount of $20,000 due and payable on each anniversary of the Effective Date beginning on the first anniversary, (3) a royalty bonus equal to 5% of net PV 3 sales for software licensed products, (4) a royalty bonus equal to 5% of net sales for hardware utilized to operate software licensed products where the markup percentage of the hardware is greater than 20%, and (5) a royalty bonus of 750,000 shares of our Common Stock Series A contingent upon any change in control of us.
Item 6. Exhibits
10.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Las Vegas Gaming, Inc. | ||||
(Registrant) | ||||
Date: | August 19, 2009 | By: | /s/ Jon D. Berkley | |
Jon D. Berkley | ||||
Its: | President and Chief Executive Officer | |||
(Principal Executive Officer) | ||||
Date: | August 19, 2009 | By: | /s/ Bruce A. Shepard | |
Bruce A. Shepard | ||||
Its: | Chief Financial Officer | |||
(Principal Financial Officer) |
EXHIBIT INDEX
Exhibit | Document Description | ||
10.1 | |||
31.1 | |||
31.2 | |||
32.1 |
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