UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| For the fiscal year ended | December 31, 2009 | ||||||||||
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||
| 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 Parkway, Suite 450, Las Vegas, Nevada | 89169 | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
| Registrant’s telephone number, including area code: | (702) 871-7111 | ||||||||||
Securities registered under Section 12(b) of the Act: | |||||||||||
| Title of each class | Name of each exchange on which registered | ||||||||||
Securities registered under Section 12(g) of the Act: | |||||||||||
| Common Stock Series A, $.001 par value | |||||||||||
| (Title of each class) | |||||||||||
(Title of each class) | |||||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x | |||||||||||
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x | |||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o | |||||||||||
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained in herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Act). Yes o No x | |||||||||||
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $37,435,372 | ||
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. | ||
| Common Stock Series A, $.001 par value | 14,974,149 shares as of December 31, 2009 | |
Documents Incorporated By Reference: | ||
| ITEM 1. | 1 | |
| ITEM 1A. | 17 | |
ITEM 1B. | 17 | |
| ITEM 2. | 17 | |
| ITEM 3. | 17 | |
| ITEM 4. | 18 | |
| ITEM 5. | 19 | |
| ITEM 6. | 22 | |
| ITEM 7. | 22 | |
ITEM 7A. | 28 | |
| ITEM 8. | 28 | |
| ITEM 9. | 52 | |
ITEM 9A. | 52 | |
ITEM 9B. | 53 | |
| ITEM 10. | 54 | |
| ITEM 11. | 54 | |
| ITEM 12. | 54 | |
| ITEM 13. | 54 | |
| ITEM 14. | 54 | |
| ITEM 15. | 55 |
__________________________
PlayerVision, RoutePromo, NumberVision, WagerVision, AdVision, Nevada Numbers, The Million Dollar Ticket, and Nevada Keno are some of our trademarks. This Annual Report on Form 10-K contains trademarks and trade names of other parties, corporations and organizations.
PART I
ITEM 1. BUSINESS.
Overview
During 2009 we continued to focus our development efforts on our proprietary application delivery system, known as PlayerVision. Through our PlayerVision system, we offer gaming operators the ability to increase the productivity of their existing gaming machines by delivering additional wagering opportunities, customer service enhancements, entertainment applications, games, and other content to their existing gaming machines, such as slot machines, poker machines, and video lottery terminals. Our PlayerVision system is flexible and compatible with virtually all gaming machines currently produced by all major manufacturers. As a result, we view every gaming machine as a revenue opportunity for our PlayerVision system. Since we plan to offer an option to acquire PlayerVision at little or no up front capital cost to casino operators in exchange for a recurring licensing fee, we expect to provide operators with an ability to increase significantly the earning power and functionality of their gaming machines with little or no financial risk. In addition, we are currently a leading supplier of keno and bingo games, systems, and supplies.
The PlayerVision system consists of proprietary software that runs on our own hardware as well as other vendors’ server-based application delivery systems such as the sbX Experience Management System from International Gaming Technology (“IGT”). Our ability to deliver applications through our own delivery system as well as that of other server-based gaming systems provides our customers with the ability to achieve 100% gaming floor coverage without the need to replace their existing machines. Our system gives our customers a transition path from legacy machines to server-based gaming.
There are four delivery channels related to PlayerVision functionality: service, marketing, entertainment and gaming. Each application group addresses a specific cost reduction, revenue enhancing application set, player experience or operator control feature, including “Beverage-on-Demand”, NumberVision and WagerVision - turning each gaming machine into a multi-tasking touch-point for the customer who will see more, do more and - as a result - play more.
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In addition to the PlayerVision applications identified above, it is our mission to develop new applications that will position PlayerVision as a platform for a variety of new multimedia and gaming functions.
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 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 third quarter of 2010.
Based on the foregoing, and other than the insignificant revenue realized from our early adoption agreements, and subject to economic uncertainties discussed herein, and 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 third quarter of 2010. 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 third quarter of 2010 or at all.
We expect to continue to incur losses for the remainder of 2010, 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, 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 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 2010. 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.
Industry Overview
The domestic and global gaming markets have grown rapidly and consistently over most of the last decade despite some slowdown in the past two years due to the macroeconomic recession. This growth has generally brought increased social and political acceptance of legalized gaming throughout many diverse societies. As a result, there is a rising public sector/municipal dependency on gaming revenues for funding of programs and projects that would not otherwise exist. In the United States in 2007, the gaming industry was a $92.2 billion business consisting of casinos spread throughout 48 states. In addition, many jurisdictions are currently pushing for liberalization of existing gaming legislation and introduction of new regulations designed to augment sources of gaming tax revenue. Twelve states now allow commercial (non-tribal) gaming, compared to only two in 1980.
The conventional wisdom that the gaming industry is recession-proof has been challenged over the last 24 months. However, recent economic pressures have prompted new efforts to legalize casino gaming and to liberalize gaming laws to fill fiscal gaps. Furthermore, in the current environment, operators are pressured to extract the most out of existing operations by enhancing the competitiveness of their slot machine floor at minimal investment rather than deploying cash into new or expanded equipment or facilities. While historical U.S. trends suggest a resilient recovery will eventually be at hand, through our PlayerVision product we expect to offer the casino operator a product that will enhance the gaming machine’s productivity while simultaneously enhancing the customer’s playing experience – all with little or no money up front.
PlayerVision can also be deployed outside the United States. Casinos in jurisdictions such as Macau, Western and Central Europe, South Korea, Singapore, Australia, Japan, Vietnam, Taiwan, and the Philippines should be attracted to our product. However, we will need to get approval from the relevant regulatory bodies prior to a roll out of PlayerVision in these jurisdictions.
1.7 million EGMs (Electronic Gaming Machines or slot machines as they are commonly referred to) were installed worldwide as of the end of 2009, with approximately 50% in North America. These machines represent the gaming industry's most resilient and predictable revenue stream and usually comprise well over 50% of total gaming revenue for the typical casino operator. The historical EGM replacement cycle of 5-6 years will likely be stretched out over the next few years as the recession works its way out of the world economy. However, new technology may disrupt the normal replacement cycle. The last such technology was the "Ticket-In-Ticket-Out" revolution in 2000. We believe the next such revolution will be Server-Based Gaming, which allows operators to manage casino floors more effectively and efficiently. It will also usher into the gaming industry the art of multi-tasking as the EGM will now be able to provide the player several experiences concurrently with gambling on the next pull of the handle (or more typically, the next push of the button).
Increased popularity and social acceptance of gaming as a leisure activity is also fueling the growth of server-based gaming. According to the 2008 American Gaming Association Survey of Casino Entertainment, 84% of Americans believe that casino gaming is an acceptable activity for themselves or others, an increase of 5% since 2006. The simplicity and instant appeal of EGMs versus other gambling opportunities create familiarity and adoption across the board, characterized by ease-of-use and informality. EGMs have demonstrated greater appeal than any other gaming activity. Additionally, technology has become a significant part of the gaming experience, allowing for more innovative content and customer convenience. A new younger player demographic translates into a multi-tasking "user interface" that creates new revenue opportunities.
As the gaming machine base continues to grow we believe that our target market will continue to expand. We believe that a consistent need for improvement in gaming activities and demand for greater entertainment value for players will give us the ability to market PlayerVision aggressively and to provide gaming operators with a single solution to introduce additional functionality without a wholesale replacement of their existing gaming machines.
Our Strategy
Our strategy is to provide the premier enhancement system for the installed base of gaming machines by delivering additional wagering opportunities, cost saving opportunities, promotions, games, and other content on existing gaming machines and delivering those same applications over the newer server-based deliver systems and gaming machines. No assurance can be given, however, that we will be successful. In order to achieve this objective, we are pursuing the following strategies:
| · | Increased Revenue Potential for Operators. Our sales effort stresses the ability of our PlayerVision system to provide gaming operators with the opportunity to increase significantly the earning power and functionality of their gaming machines. Since our PlayerVision system directly interfaces with the existing video, audio, and printing functions of the machine, we are able to use the machine’s existing video screen (or attached alternatives) to deliver additional games, promotions, additional wagering opportunities, and other forms of entertainment. If desired by our customers, we have a kiosk driven ticket redemption system featuring its own accounting system separate and apart from the main slot accounting system. We can also provide alternative viewing options if the casino operator would prefer not to use the main screen. |
| · | Compelling Patron Experience. We expect to offer PlayerVision as a single multimedia delivery system for a wide range of content directly on the existing screens of gaming machines. By adding PlayerVision, a gaming machine is transformed from a single use, single wager option into a multimedia experience that can deliver to the player extra wagering opportunities and targeted, promotional content in addition to traditional slot play. Through PlayerVision, the operator will be able to enhance the functionality of its existing EGMs and deliver targeted gaming opportunities and promotional content to players. In exchange, the player will receive an enhanced playing experience, information about promotions, entertainment, and dining opportunities, and the opportunity to win jackpots and other prizes. |
| · | Reduce operating costs. Through our Beverage on Demand feature, an operator may be able to cut its drink delivery costs approximately in half. |
| · | Low Operator Risk. As an alternative, we expect to offer the gaming operators the ability to substantially reduce operating cost, extend the replacement cycle and increase significantly the earning power and functionality of their existing gaming machines at little or no up front capital cost. This strategy involves installing PlayerVision at little or no up front capital cost to gaming operators in exchange for recurring software license fees. |
| · | New Applications. We plan to continue the development of innovative applications to be delivered through our PlayerVision system. To date, we have designed our PlayerVision system to deliver advertisements, multimedia content, casino services, promotional materials, and wagering opportunities. Since PlayerVision engages the existing video, audio and printing functions of the gaming machine, and since our kiosk driven ticket redemption system features its own path to the slot accounting system, we believe that our PlayerVision system can be used as a platform to deliver a wide array of casino services, multimedia or gaming content directly to patrons. |
PlayerVision is a single, flexible, and dynamic platform that can be used to deliver casino services, multimedia or gaming content developed either by us or third parties. Because of the integration of PlayerVision with all of the functions of the gaming machine, we expect that PlayerVision can be used by gaming operators to control all aspects of their gaming machines. By establishing our PlayerVision system as the premier enhancement system for the installed base of gaming machines, we believe that we will be able to establish a significant barrier to entry for any potential competitors.
PlayerVision System
Through PlayerVision, players will at once enjoy a multi-wagering/multi-tasking immersive experience that results in a substantial increase in percentage of wallet for the operator. A powerful retrofit solution, we expect that PlayerVision will enable operators to reduce operating costs and increase efficiencies for both new and legacy gaming floors, featuring:
| · | On-the-fly machine "customization" by casino and customer at minimal cost, using existing slot screens for a variety of innovative applications; |
| · | Increased time on device with added wagering and targeted marketing; |
| · | Beverage-on-demand, allowing reduced head count with improved player experience; and |
| · | On-demand multimedia offering private access to shows, products and services. |
We expect to offer PlayerVision at a little to no up front capital cost to the operator in exchange for recurring license fees, thereby increasing earning power and functionality of gaming machines without financial risk.
Slot operations serve as the primary source of revenue in almost any gaming operation. In need of sources of incremental revenue and cost savings, the industry is primed for a technology that utilizes the processing power now available through server-based environments. By installing off-the-shelf CPUs into any EGM (a 30-minute process), PlayerVision converts a single-use slot machine into a multi-dimensional revenue generator and cost container. We believe we are the developer/owner of some of the most significant intellectual property/technology in the industry related to deployment of server-based gaming applications. No assurances can be given that the deployment of server-based gaming applications will be successful or that our intellectual property/technology will play a significant role in server-based gaming applications.
Casino Games
We offer two keno games, Nevada Numbers and The Million Dollar Ticket, and collect royalties on several bingo style games. The revenue generated from our casino games is primarily based on collecting per ticket or per game fees from our various customers. On March 31, 2009, our contract with Treasure Island to maintain the $3.9 million base jackpot bankroll for Nevada Numbers and The Million Dollar Ticket expired, and we shut down the games as a result. We expect to restart the games as soon as we find funding for the $3.9 million base jackpot.
Nevada Numbers
Nevada Numbers is a variation of classic keno, which prior to its shutdown noted above has been played in many casinos in Nevada. Keno is a game in which bets are made and recorded on a keno ticket. This ticket contains 80 numbered squares that correspond exactly to 80 numbered balls in a selection hopper. A player marks a ticket to play between two and 20 different numbers. The keno operator then draws 20 out of the 80 numbers and displays the results throughout the casino. The more numbers that match, the more money the player wins. Payout awards vary from casino to casino and depend on the amounts wagered.
Nevada Numbers differs from classic keno in that fewer numbers (five rather than 20) are drawn and a “linked’’ or “progressive’’ component has been added. We linked together the play of Nevada Numbers at multiple casinos so that players at several different locations all choose numbers that are matched to the same five-number draw. In addition, Nevada Numbers featured a starting jackpot of $5.0 million that was progressive, in that it grew with the purchase of each Nevada Numbers ticket and could be won at each draw. Any winner of the Nevada Numbers progressive jackpot will be paid the amount of the progressive meter in equal installments over a period of 20 years. At our sole discretion, we may offer the winner an option to receive a discounted value immediately. The process of linking games and creating a progressive jackpot provided an enticement to players because of the potential for a life-changing event.
Although Nevada Numbers has traditionally been limited to the keno lounges of casinos, we are taking measures to expand its visibility. First, we have incorporated Nevada Numbers as part of NumberVision. Through NumberVision, we propose to position Nevada Numbers as a dynamic game that will give players the opportunity to win a progressive jackpot of at least $5.0 million. Second, subject to regulatory approval of NumberVision, we will market the game to third-party race and sports books for use on their existing wagering terminals.
The Million Dollar Ticket
Based on the classic keno game, The Million Dollar Ticket offers the chance to win $1.0 million and a progressive jackpot. In order to win the $1.0 million and the progressive jackpot, the player must pick 10 numbers correctly out of 20 drawn from a pool of 80. As stated previously, we shut down this game on March 31, 2009 and will restart when we receive funding for the jackpot.
Super Bingo Games
Super Bingo Games are odds-based bingo games with life-changing prizes that are offered as side bets to existing bingo games. We offer these games at various jackpot levels-as high as $50,000 in some cases. We purchase insurance for the larger jackpots. Our Super Games are structured so that the bingo operator is guaranteed a profit for each wager made. We have placed Super Bingo Games in four Nevada casinos and ten non-Nevada locations.
Keno and Bingo Systems and Supplies
The worldwide keno system market is limited and has been declining for several years. We are attempting to invigorate the market and gain an additional share of the market by enhancing our keno system through the addition of several new games and features to the platform.
Keno and bingo supplies sales contribute significantly to our revenue, but consist of low margin items, including crayons, various paper products, and ink.
Other Businesses
We also generate revenue through various keno participation agreements and the maintenance of our equipment under service contracts.
| · | Nevada Keno and Related Participation Agreements. Through agreements with participating casinos, we offer Nevada Keno, a “satellite-linked’’ traditional keno game played in multiple casinos. We are currently operating Nevada Keno in three casinos. However, we believe we will soon be operating in 2-3 more. However, no assurances can be given that we will operate Nevada Keno in additional casinos. Additionally, principally in Nebraska, we provide equipment in return for a share in the revenue generated in various keno salons. |
| · | Service Contracts. Most of our customers that purchase keno and bingo equipment also purchase a service contract from us to provide routine maintenance for the equipment. |
| · | RoutePromo. RoutePromo is designed to deliver promotional tickets or vouchers to players upon the occurrence of an event specified by the operator, such as hitting a four-of-a-kind or better on a video poker machine. The key feature of RoutePromo is its ability to recognize a specified event generated by the game and deliver the programmed response to the specified event. |
RoutePromo is designed to work as follows:
| · | first, the operator specifies the events that will trigger RoutePromo, such as a four-of-a- kind or better on a video poker machine; |
| · | second, upon the occurrence of the specified event, RoutePromo is activated and a message is sent to the gaming machine to issue a promotional ticket or voucher; |
| · | third, the gaming machine alerts the player and prints the free promotional ticket or voucher; and |
| · | fourth, the gaming machine returns to its original state. |
We currently charge a fixed monthly fee for the ability to offer RoutePromo.
Through our agreement with United Coin Machine Company, the largest slot route operator in Nevada, we developed a variation of our keno game called The Million Dollar Ticket, known as the Gamblers Bonus Million Dollar Ticket, to be used in conjunction with RoutePromo. Gamblers Bonus Million Dollar Ticket is a free promotional game that gives players the chance to win various prizes, including a $1.0 million grand prize, by matching numbers on their promotional tickets with numbers picked in a random weekly drawing. Under our agreement, we are obligated to provide software, hardware, and support to United Coin for the game. In addition, we are financially responsible for the payouts associated with the game. In return, United Coin is obligated to pay us $1.25 for each ticket distributed. During the second quarter of 2008, we rolled out Gamblers Bonus Million Dollar Ticket at approximately 100 United Coin route locations. On January 31, 2009, we closed down the game with United Coin because there was little interest among bar owners and convenience store owners to offer an expensive promotion in difficult economic times.
Manufacturing
We outsource the manufacturing of the various components of our PlayerVision 3 system to Apple, Hitachi, and various other key suppliers. Lead times for certain key components can be as long as eight weeks.
Marketing and Distribution
PlayerVision
As part of our objective to provide the leading single multimedia and game delivery system, we have started to implement a plan that will market our PlayerVision system to customers through direct and indirect channels. Our plan involves the following steps:
| · | Direct Sales Efforts. Through the hiring of additional personnel to our sales and marketing staff, we will market PlayerVision to operators located primarily in North America and to Native American tribes. As part of our direct sales efforts, we attend trade shows, such as G2E in Las Vegas, Nevada. |
| · | Strategic Partnerships. We supplement our direct sales efforts by targeting third-party distributors and regional operators. IGT and Ebet are key examples of entities that we expect will be distributing our product. By forming strategic relationships with these parties, we hope to gain access to smaller and more fragmented markets around the globe and secure the broadest placement for PlayerVision. |
We plan to conduct all of our sales and marketing efforts from our headquarters in Las Vegas, Nevada. Although we do not have any current plans to open any sales offices, we will review the need for such additional offices in response to the needs of our customers and our strategic partners.
Casino Games
We license our games directly to casinos. We make initial contacts through the mailing of marketing materials, referrals, or direct solicitation by our employees and marketing agents. We promote licensed games to the general public using various types of media, including billboards, newspapers, magazines, radio, and television. Advertising within a particular casino may include advertisement on strategically placed LCDs, table tents, flyers, signs on the tops of gaming machines, and show cards to stimulate curiosity and game play.
Keno and Bingo Systems and Supplies.
We are one of the world’s few keno equipment suppliers. Most sales in this area result from unsolicited inquiries or direct solicitation of customers by our sales staff. The marketplace for bingo equipment, electronic playing devices, and supplies in Nevada is relatively small, consisting of approximately 40 potential customers. However, we believe that the recent introduction of wireless gaming devices into the marketplace in Nevada and other jurisdictions may increase the potential market for bingo-related products. No assurance can be given that the market for bingo-related products will increase. Direct sales to the casino are the primary means of sale for these products. The marketplace for gaming supplies is large and geographically dispersed. Our primary marketing tool is a catalog that we periodically distribute to our customers and potential customers.
Competition
PlayerVision System
We encounter significant competition in the market for innovative gaming technologies that deliver interactive gaming, animated content, and cross-promotional opportunities to gaming operators. The key competitive factors are functionality, accuracy, reliability, and pricing. We believe that PlayerVision is a single, integrated solution because of the following:
| · | PlayerVision uses the existing primary screen of the gaming machine or a smaller secondary video screen or a mounted side screen; |
| · | PlayerVision engages the existing video, audio and printing functions of the gaming machine regardless of the manufacturer; |
| · | PlayerVision involves little or no up front capital cost to gaming operators; and |
| · | PlayerVision delivers a broad range of functionalities. |
We are unaware of any other product that delivers casino services, multimedia and gaming content through the existing various screens of gaming machines. Although we face competition from products that use smaller secondary video screens and cost thousands of dollars, such as iView developed by Bally Systems and NexGen developed by IGT, we expect to be able to deliver content for little or no up front capital cost and deliver the content directly to the patron through all existing screens rather than just an auxiliary 2x6-inch screen.
Since we are able to use all existing screens of a gaming machine, as well as its existing video, audio and printing functions, we expect to offer to gaming operators a solution that requires little or no up front capital cost, involves minimal installation time, and interfaces with virtually all gaming machines. In addition, although there are products that deliver advertising or promotional content through secondary video screens installed onto gaming machines, we do not believe that there are currently any products that can deliver the additional wagering opportunities that PlayerVision can or any products that can provide an expandable platform for additional content on the existing screens of gaming machines.
Nevertheless, there is no guarantee that PlayerVision will be accepted in the marketplace. Many of our potential competitors possess substantially greater financial, technical, marketing, and other resources than we do, which affords them competitive advantages over us. As a result, our competitors may introduce products that have advantages over PlayerVision in terms of features, functionality, ease of use, and revenue producing potential. If we are unable to compete effectively, or incur any delays, either regulatory or otherwise, in our ability to fully introduce PlayerVision, our operations and financial condition may be adversely affected.
Keno and Bingo Systems and Supplies.
The keno and bingo systems and supplies industry is characterized by limited competition. We compete primarily with other companies that provide keno and bingo systems, including electronic systems, keno, bingo supplies, and related services. In addition, we compete with other similar forms of entertainment, including casino gaming, other forms of Class II gaming, and lotteries. Our key competitor is XpertX in the keno market. We compete by providing superior service, lower prices, innovative games, and a quality fully functional keno system.
Research and Development
Our research and development efforts focus on developing new applications for our PlayerVision system and reducing its cost. During 2008 we considerably expanded our internal R&D effort by employing 5 new software engineers, one of which became our Chief Technical Officer in March 2008. We layed off all of our software engineers in December 2009 in order to conserve cash. We will hire software engineers back to work when we raise significant capital. We plan to engage, from time to time, independent consultants and advisors to assist us.
Intellectual Property and Other Proprietary Rights
We hold several patents, including a patent related to Nevada Numbers. We have been recently issued a patent for “closed loop,” a key application in our PlayerVision technology. In addition, we have several more patents pending with respect to the PlayerVision system and certain of its various applications. We also hold several trademarks filed with the state of Nevada and the U.S. Patent and Trademark Office, including trademark rights to PlayerVision, Nevada Numbers and The Million Dollar Ticket, and other intellectual property that is protected by federal copyright and trade secret laws.
We rely on the proprietary nature of our intellectual property, primarily in the form of patent protection, for development of our products. We believe that our success depends in part on protecting our intellectual property. If we cannot protect our intellectual property against the unauthorized use by others, our competitive position could be harmed.
The risks associated with our intellectual property, include the following:
| · | The inability of intellectual property laws to protect our intellectual property rights; |
| · | Attempts by third parties to challenge, invalidate, or circumvent our intellectual property rights; |
| · | The unauthorized use by third parties of information that we regard as proprietary despite our efforts to protect our proprietary rights; |
| · | The independent development of similar technology; |
| · | The inability to protect our intellectual property rights in foreign jurisdictions; and |
| · | A lack of adequate capital to defend and protect our intellectual property. |
We may not be able to obtain effective patent, trademark, service mark, copyright, and trade secret protection in every country in which our products are used. We may find it necessary to take legal action to enforce or protect our intellectual property rights or to defend against claims of infringement, and such actions may be unsuccessful. In addition, we may not be able to obtain a favorable outcome in any intellectual property litigation. Significant amounts could be expended to defend and protect our intellectual property. Moreover, our competitors may develop products or technologies similar to ours without infringing on our intellectual property rights.
Government Regulation
We are subject to regulation by governmental authorities in most jurisdictions in which we operate. Gaming regulatory requirements vary from jurisdiction to jurisdiction, and obtaining licenses and findings of suitability for our officers, directors, and principal stockholders, registrations, and other required approvals with respect to us, our personnel, and our products are time consuming and expensive. Generally, gaming regulatory authorities have broad discretionary powers and may deny applications for or revoke approvals on any basis they deem reasonable. We have approvals that enable us to conduct our business in numerous jurisdictions, subject in each case to the conditions of the particular approvals. These conditions may include limitations as to the type of game or product we may sell or lease, as well as limitations on the type of facility, such as riverboats, and the territory within which we may operate, such as tribal nations.
Jurisdictions in which we, and specific personnel, where required, have authorizations with respect to some or all of our products and activities include New Jersey, Nevada, Arizona, Nebraska, Oregon, Washington, and Montana. In addition to these jurisdictions, we have authorizations with respect to certain Native American tribes throughout the United States that have compacts with the states in which their tribal dominions are located or operate or propose to operate casinos. These tribes may require suppliers of gaming and gaming-related equipment to obtain authorizations.
Overview
Gaming Devices and Equipment. We sell or lease products that are considered to be “gaming devices’’ or “gaming equipment’’ in jurisdictions in which gaming has been legalized. Although regulations vary among jurisdictions, each jurisdiction requires various licenses, findings of suitability, registrations, approvals, or permits for companies and their key personnel in connection with the manufacture and distribution of gaming devices and equipment.
Associated Equipment. Some of our products fall within the general classification of “associated equipment.’’ “Associated equipment’’ is equipment that is not classified as a “gaming device,’’ but which has an integral relationship to the conduct of licensed gaming. Regulatory authorities in some jurisdictions have the discretion to require manufacturers and distributors to meet licensing or suitability requirements prior to or concurrently with the use of associated equipment. In other jurisdictions, the regulatory authorities must approve associated equipment in advance of its use at licensed locations. We have obtained approval of our associated equipment in each jurisdiction that requires such approval and in which our products that are classified as associated equipment are sold or used.
Regulation of Officers, Directors, and Stockholders. In many jurisdictions, any officer or director is required to file an application for a license, finding of suitability, or other approval and, in the process, subject himself or herself to an investigation by those authorities. As for stockholders, any beneficial owner of our voting securities or other securities may, at the discretion of the gaming regulatory authorities, be required to file an application for a license, finding of suitability, or other approval and, in the process, subject himself or herself to an investigation by those authorities. The gaming laws and regulations of most jurisdictions require beneficial owners of more than 5% of our outstanding voting securities to file certain reports and may require our key employees or other affiliated persons to undergo investigation for licensing or findings of suitability.
In the event a gaming jurisdiction determines that an officer, director, key employee, stockholder, or other personnel of our company is unsuitable to act in such a capacity, we will be required to terminate our relationship with such person or lose our rights and privileges in that jurisdiction. This may have a materially adverse effect on us. We may be unable to obtain all the necessary licenses and approvals or ensure that our officers, directors, key employees, affiliates, and certain other stockholders will satisfy the suitability requirements in each jurisdiction in which our products are sold or used. The failure to obtain such licenses and approvals in one jurisdiction may affect our licensure and approvals in other jurisdictions. In addition, a significant delay in obtaining such licenses and approvals could have a material adverse effect on our business prospects.
Regulation and Licensing – Nevada
The manufacture, sale, and distribution of gaming devices for use or play in Nevada or for distribution outside of Nevada, the manufacturing and distribution of associated equipment for use in Nevada, and the operation of gaming machine routes and inter-casino linked systems in Nevada are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder and various local ordinances and regulations. These activities are subject to the licensing and regulatory control of various Nevada gaming authorities, including the Nevada Gaming Commission, the Nevada State Gaming Control Board, and various local, city, and county regulatory agencies, collectively referred to as the Nevada Gaming Authorities.
The laws, regulations, and supervisory practices of the Nevada Gaming Authorities are based upon declarations of public policy with the following objectives:
| · | preventing any direct or indirect involvement of any unsavory or unsuitable persons in gaming or the manufacture or distribution of gaming devices at any time or in any capacity; |
| · | strictly regulating all persons, locations, practices, and activities related to the operation of licensed gaming establishments and the manufacturing or distribution of gaming devices and equipment; |
| · | establishing and maintaining responsible accounting practices and procedures; |
| · | maintaining effective controls over the financial practices of licensees, including requirements covering minimum procedures for internal fiscal controls and safeguarding assets and revenue, reliable recordkeeping, and periodic reports to be filed with the Nevada Gaming Authorities; |
| · | preventing cheating and fraudulent practices; and |
| · | providing and monitoring sources of state and local revenue based on taxation and licensing fees. |
Change in such laws, regulations, and procedures could have an adverse effect on our operations.
We are registered with the Nevada Gaming Commission as a publicly traded corporation, or a Registered Corporation. We are also licensed in Nevada as a manufacturer and distributor of gaming devices and as an operator of an inter-casino linked system. We have obtained from the Nevada Gaming Authorities the various authorizations they require to engage in manufacturing, distribution, and inter-casino linked system activities in Nevada. The regulatory requirements set forth below apply to us as a Registered Corporation and as a manufacturer, distributor, and operator of an inter-casino linked system. Our gaming approvals and licenses are also conditioned to allow the Chairman of the Nevada State Gaming Control Board or his designee to order us to cease any gaming activities if the Chairman determines that the minimum bankroll requirements set forth in the Nevada Gaming Control Act are not being met.
All gaming devices that are manufactured, sold, or distributed for use or play in Nevada, or for distribution outside of Nevada, must be manufactured by licensed manufacturers and distributed and sold by licensed distributors. The Nevada Gaming Commission must approve all gaming devices manufactured for use or play in Nevada before distribution or exposure for play. The Chairman of the Nevada State Gaming Control Board must administratively approve associated equipment before it is distributed for use in Nevada. Inter-casino linked systems must also be approved by the Nevada Gaming Commission. The approval process for an inter-casino linked system includes rigorous testing by the Nevada State Gaming Control Board, a field trial, and a determination as to whether the inter-casino linked system meets standards that are set forth in the regulations of the Nevada Gaming Commission. On November 19, 2001, we received the final approval of the Nevada Gaming Commission for our inter-casino linked system known as Nevada Numbers. In November 2007, we received final approval from Nevada for our AdVision and Live TV software applications on the PlayerVision 2 platform on IGT Game King Machines only. In May 2009, we received approval for nine software applications on our PlayerVision 3 platform from the Nevada Gaming Control Board. These software applications include Beverage-on-Demand, ServiceVision, VoyeurVision, Live TV, AdVision, YouTube, CasinoTunes, ValetVision, and BurstVision. In addition, the Nevada Gaming Control Act requires any person, such as our company as an operator of an inter-casino linked system, that receives a share of gaming revenue from a gaming device operated on the premises of a licensee, to remit and be liable to the licensee for that person’s proportionate share of the license fees and tax paid by the licensee. The gross revenue fees for non-restricted locations are 6.75% of gross revenue, which is equal to the difference between amounts wagered by casino players and payments made to casino players. Significant increases in the fixed fees or taxes currently levied per machine or the fees currently levied on gross revenue could have a material adverse effect on our operations.
As a gaming licensee (a “Registered Corporation”), we are periodically required to submit detailed financial and operating reports to the Nevada Gaming Commission and furnish any other information the Nevada Gaming Commission may require. No person may receive any percentage of gaming revenue from us without first obtaining authorizations from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, us in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Our officers, directors, and certain key employees are required to file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause that they deem reasonable. A finding of suitability is comparable to licensing. Both require submission of detailed personal and financial information, which is followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities. In addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have the power to disapprove a change in corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.
We are required to submit detailed financial and operating reports to the Nevada Gaming Commission. In addition, we are required to report to or have approved by the Nevada Gaming Commission substantially all material loans, leases, sales of securities, and similar financing transactions.
Should we be found to have violated the Nevada Gaming Control Act, the licenses we hold could be limited, conditioned, suspended, or revoked. In addition, we and the persons involved could be required to pay substantial fines, at the discretion of the Nevada Gaming Commission, for each separate violation of the Nevada Gaming Control Act. The limitation, conditioning, or suspension of any of our licenses could, and revocation of any license would, materially adversely affect our manufacturing, distribution, and inter-casino linked system operations.
Regulation of Security Holders. Any beneficial holder of our voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his or her suitability as a beneficial holder of our voting securities determined if the Nevada Gaming Commission finds reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Gaming Control Act requires any person that acquires beneficial ownership of more than 5% of a Registered Corporation’s voting securities to report the acquisition to the Nevada Gaming Commission. It also requires beneficial owners of more than 10% of a Registered Corporation’s voting securities to apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada State Gaming Control Board mails a written notice requiring such filing. Under certain circumstances, an “institutional investor,’’ as defined in the Nevada Gaming Control Act, which acquires more than 10%, but not more than 25%, of the Registered Corporation’s voting securities may apply to the Nevada Gaming Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor that has obtained a waiver may, in certain circumstances, own more than 25%, but not more than 29% of a Registered Corporation’s voting securities for a limited period of time and maintain the waiver.
An institutional investor is deemed to hold voting securities for investment purposes if the voting securities were acquired and are held in the ordinary course of its business as an institutional investor and were not acquired and are not held for the purpose of causing, directly or indirectly (1) the election of a majority of the members of the board of directors of the Registered Corporation; (2) any change in the Registered Corporation’s corporate charter, bylaws, management, policies, or operations or those of any of its gaming affiliates; or (3) any other action that the Nevada Gaming Commission finds to be inconsistent with holding the Registered Corporation’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include (a) voting on all matters voted on by stockholders; (b) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in management, policies or operations; and (c) other activities the Nevada Gaming Commission may determine to be consistent with investment intent. If the beneficial holder of voting securities that must be found suitable is a corporation, partnership, or trust, it must submit detailed business and financial information, including a list of beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or the Chairman of the Nevada State Gaming Control Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder of a Registered Corporation found unsuitable and that holds, directly or indirectly, any beneficial ownership in the voting securities beyond such period of time as the Nevada Gaming Commission may specify for filing any required application may be guilty of a criminal offense. Moreover, the Registered Corporation will be subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Registered Corporation, it (i) pays that person any dividend on its voting securities; (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities ownership; (iii) pays remuneration in any form to that person for services rendered or otherwise; or (iv) fails to pursue all lawful efforts (including, if necessary, the immediate purchase of said voting securities for cash at fair value) to require such unsuitable person to completely divest all voting securities held.
The Nevada Gaming Commission, in its discretion, may require the holder of any debt security of a Registered Corporation to file applications, be investigated, and be found suitable to own the debt security of a Registered Corporation if the Nevada Gaming Commission finds reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. If the Nevada Gaming Commission determines that a person is unsuitable to own such security, it may sanction the Registered Corporation, which sanctions may include the loss of its approvals if, without the prior approval of the Nevada Gaming Commission, it: (i) pays to the unsuitable person any dividend, interest, or other distribution; (ii) recognizes any voting right of such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.
Regulation of Capital Stock. We are required to maintain current stock ledgers in Nevada that may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record owner may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record owner unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owners of our securities. The Nevada Gaming Commission has the power to require us to imprint our stock certificates with a legend stating that the securities are subject to the Nevada Gaming Control Act. To date, the Nevada Gaming Commission has not imposed such a requirement on us.
We may not make a public offering of our securities without the prior approval of the Nevada Gaming Commission if the securities or proceeds are to be used to construct, acquire, or finance gaming facilities in Nevada or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation, or approval by the Nevada Gaming Commission or the Nevada State Gaming Control Board as to the accuracy or adequacy of the prospectus or the investment merit of the offered securities, and any representation to the contrary is unlawful. Any offer by us to sell common stock will require the review of, and prior approval by, the Nevada Gaming Commission.
Changes in Control. Changes in control of a Registered Corporation through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct, by which anyone obtains control, may not lawfully occur without the prior approval of the Nevada Gaming Commission. Entities seeking to acquire control of a Registered Corporation must meet the strict standards established by the Nevada State Gaming Control Board and the Nevada Gaming Commission prior to assuming control of a Registered Corporation. The Nevada Gaming Commission also may require persons that intend to become controlling stockholders, officers, or directors, and other persons who expect to have a material relationship or involvement with the acquired company, to be investigated and licensed as part of the approval process.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities, and corporate defense tactics affecting Nevada corporate gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Gaming Commission has established a regulatory scheme to minimize the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to:
| · | assure the financial stability of corporate gaming licensees and their affiliates, |
| · | preserve the beneficial aspects of conducting business in the corporate form, and |
| · | promote a neutral environment for the orderly governance of corporate affairs. |
In certain circumstances, approvals are required from the Nevada Gaming Commission before the Registered Corporation can make exceptional repurchases of voting securities above market price and before a corporate acquisition opposed by management can be consummated. The Nevada Gaming Control Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation’s board of directors in response to a tender offer made directly to the Registered Corporation’s stockholders for the purpose of acquiring control of the Registered Corporation.
License Fees and Taxes. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, must be paid to the state of Nevada and to the counties and cities in which gaming operations are conducted. These fees and taxes, depending upon their nature, are payable monthly, quarterly, or annually and are based upon either a percentage of the gross revenue received or the number of gaming devices operated. Annual fees are also payable to the state of Nevada for renewal of licenses as an operator of a gaming machine route, manufacturer, and/or distributor.
Any person who is licensed, required to be licensed, registered, required to be registered, or who is under common control with any such persons, collectively, “Licensees,’’ and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada State Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada State Gaming Control Board of his or her participation outside of Nevada. The revolving fund is subject to increase or decrease at the discretion of the Nevada Gaming Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Gaming Control Act. Licensees also are subject to disciplinary action by the Nevada Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the non-Nevada gaming operations, fail to conduct the foreign gaming operations in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enter into associations that are harmful to the state of Nevada or its ability to collect gaming taxes and fees, or employ, contract with, or associate with, a person in the non-Nevada operations who has been denied a license or finding of suitability in Nevada on the ground of unsuitability.
Other Jurisdictions
All other jurisdictions that have legalized gaming require various licenses, registrations, findings of suitability, permits, and approvals of manufacturers and distributors of gaming devices and equipment as well as licensure provisions related to changes in control. In general, such requirements involve restrictions similar to those of Nevada.
For gaming device and system approvals, most jurisdictions in the United States, including most Native American tribes and state regulatory agencies, accept testing results from GLI, a leading private gaming device and systems testing laboratory. GLI also provides testing services for over 400 gaming regulatory bodies worldwide. GLI has already approved NumberVision, AdVision and Live TV on our PlayerVision2 platform. We expect to submit for approval all of our software applications on the PlayerVision 3 platform to GLI sometime during the third quarter of 2010. If necessary, we also plan to apply directly for approvals from those jurisdictions that do not accept GLI testing results for certain devices and systems, such as New Jersey, Pennsylvania, and Montana.
Federal Regulation
The Federal Gambling Devices Act of 1962, or the Federal Act, makes it unlawful, in general, for any person to manufacture, transport, or receive gaming machines, gaming machine type devices, and components across state lines or to operate gaming machines unless that person has first registered with the Attorney General of the United States. We have registered and must renew our registration annually. In addition, the Federal Act imposes various record keeping and equipment identification requirements. Violation of the Federal Act may result in seizure and forfeiture of the equipment, as well as other penalties.
Application of Future or Additional Regulatory Requirements
In the future, we intend to seek the necessary registrations, licenses, approvals, and findings of suitability for us, our products, and our personnel in other jurisdictions throughout the world where significant sales of our products are expected to be made. However, we may be unable to obtain these registrations, licenses, approvals, or findings of suitability, which if obtained may be revoked, suspended, or conditioned. In addition, we may be unable to obtain on a timely basis, or to obtain at all, the necessary approvals of our future products as they are developed, even in those jurisdictions in which we already have existing products licensed or approved. If a registration, license, approval or finding of suitability is required by a regulatory authority and we fail to seek or do not receive the necessary registration, license, approval or finding of suitability, we may be prohibited from selling our products for use in that jurisdiction or may be required to sell our products through other licensed entities at a reduced profit.
Employees
As of December 31, 2009, we had 27 full-time employees, 13 of whom were involved in keno and bingo operations, 1 of whom was involved in engineering and research and development, 4 of whom were involved in sales, and 9 of whom were involved in finance and administration. With the implementation of our new business focus on our PlayerVision system and upon receipt of sufficient funding, we anticipate an increase in employees dedicated to developing and growing this business in the third quarter of 2010. Our employees are not subject to any collective bargaining agreement with us. We have never experienced a work stoppage, and we believe our employee relations to be good.
Corporate History
We were incorporated in the State of Nevada on April 28, 1998.
ITEM 1A. RISK FACTORS.
Not required.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our corporate headquarters and our PlayerVision business is located at 3980 Howard Hughes Parkway, Suite 450, Las Vegas, Nevada 89169 and comprised of approximately 8,300 square feet of office space under a favorable sublease agreement through July 31, 2011. This space adequately meets our facility and capacity requirements. Our bingo and keno headquarters are located at 4000 West Ali Baba, Suite D, Las Vegas, Nevada 89118, which is comprised of approximately 4,800 square feet of office space and 5,700 square feet of warehouse space under a month-to-month sublease. We had a Reno, Nevada office consisting of approximately 7,500 square feet under an executed lease that expires in 2013. Due to our poor financial condition, we have broken the lease and moved from the facility and are in final settlement negotiations with the landlord. We also lease an Omaha, Nebraska service office consisting of approximately 900 square feet of space under a month-to-month lease.
ITEM 3. 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. In August 2009, a Motion of Summary Judgment was granted and the case was dismissed.
On August 26, 2009, a lawsuit was filed by Adline Network Holdings, LLC, a Georgia Corporation, Adline Media LLC, a Georgia Limited liability company, Adline Network LLC, a Georgia limited liability company, and Sam Johnson, a former officer and employee, alleging breach of an Acquisition Agreement, breach of a Consulting Agreement, breach of a covenant of good faith and fair dealing, negligent misrepresentation, common law fraud (fraud in the inducement/fraudulent misrepresentation), 10b-5 securities violations and declaratory relief. In response to our Motion to Dismiss filed on October 16, 2009, the plaintiffs filed a first amended complaint. Since then, the plaintiffs have filed a second amended complaint with essentially the same allegations, but naming the Chairman of the Board, the Chief Executive Officer, and Chief Financial Officer individually in the lawsuit also. We are unable to estimate minimum costs, if any, to be incurred by us upon the ultimate disposition of this matter and, accordingly, no provision has been made.
On December 22, 2009, a lawsuit was filed by Zak Khal, a former officer and employee of the Company alleging a severance benefit of $100,000 and unused vacation time of $29,135 are owed him and additional damages in excess of $10,000 to be specifically determined at trial. We are vigorously defending this lawsuit and are unable to estimate minimum costs, if any, to be incurred by us upon the ultimate disposition of this matter and, accordingly, no provision has been made.
On April 26, 2010, a lawsuit was filed by 990 Rock LLC, the landlord for our Reno office space for breaching the lease agreement which provided for a total monthly rent payment of $11,123 through April 30, 2013. The landlord alleges that they spent $335,735 on tenant improvements prior to our occupancy. The plaintiff is alleging damages in excess of $10,000. We are unable to estimate minimum costs to be incurred by us upon the ultimate disposition of this matter and, accordingly, no provision has been made.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2009.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our authorized capital stock consists of 90,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share, that may be issued in one or more series.
Common Stock
Our Board of Directors has designated two series of common stock, one referred to as “Common Stock’’ and the other referred to as “Common Stock Series A.” As of December 31, 2009, there were no shares of our Common Stock outstanding and 14,974,149 shares of our Common Stock Series A outstanding held of record by 580 stockholders. There is no active market for our Common Stock or our Common Stock Series A.
Each share of Common Stock and Common Stock Series A has identical rights and privileges in every respect. Each holder of either Common Stock or Common Stock Series A has the right to cast one vote for each share held of record on all matters submitted to a vote of our holders of common stock. The holders of either series of common stock vote together as a single class except to the extent that voting as a separate class or series is required by law. The holders of both series of common stock are entitled to receive dividends on a pro rata basis, payable in cash, stock, or otherwise, as may be declared by our Board of Directors out of any funds legally available for the payment of dividends, subject to the rights of holders of any outstanding preferred stock. We did not declare any cash dividend on our Common Stock or Common Stock Series A in fiscal 2009 or 2008. Upon our liquidation, dissolution or winding-up, the holders of both series of common stock will be entitled to receive after distribution in full of any preferential amounts owed to debt holders or holders of our preferred stock, all of the remaining assets available for distribution ratably in proportion to the number of shares of common stock held by them. Neither series of our common stock provides holders with preferences or any preemptive, conversion or exchange rights. There are no redemption or sinking fund provisions applicable to either series of common stock.
Preferred Stock
Our articles of incorporation authorize our Board of Directors, without further stockholder action, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, and privileges of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms, and number of shares constituting any series or the designation of any series. Our Board of Directors, without stockholder approval, has the authority to issue preferred stock with voting, conversion, or other rights that could adversely affect the voting power and other rights of the holders of common stock. Depending upon the terms of preferred stock established by our Board of Directors, any or all series of preferred stock could have preference over common stock with respect to dividends and other distributions and upon our liquidation, and could have the effect of delaying or preventing a change in control or making removal of management more difficult. If any shares of preferred stock are issued with voting powers, the voting power of the outstanding common stock would be diluted. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of our common stock.
Our Board of Directors has designated the following six series of preferred stock, where the conversion ratio, the authorized number of shares and the outstanding number of shares for each series are provided:
| · | “Series B Convertible Preferred Stock’’ – convertible into Common Stock Series A on a one-to-five basis, 76,750 shares authorized and 50,000 shares outstanding as of December 31, 2009. |
| · | “Series E Convertible Preferred Stock” – convertible into Common Stock Series A on a one-to-one basis, 810,800 shares authorized and outstanding as of December 31, 2009. |
| · | “Series F Convertible Preferred Stock” – 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. There are 200,000 shares authorized and 0 shares outstanding as of December 31, 2009. |
| · | “Series G Convertible Preferred Stock” – 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. There are 150,000 shares authorized and outstanding as of December 31, 2009. |
| · | “Series H Convertible Preferred Stock” – convertible into Common Stock Series A at the lower of $2.50 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. There are 98,500 shares authorized and outstanding as of December 31, 2009. |
| · | “Series I Preferred Stock” – convertible into Common Stock Series A on a one-for-one basis. There are 4,693,878 shares authorized and outstanding as of December 31, 2009. |
In October 2008, we filed Certificates of Withdrawal with the Nevada Secretary of State whereby we withdrew the designations of our Series A, Series C and Series D Convertible Preferred Stock, as no shares of these series were then outstanding. Except for Series F, G and I, none of our series of preferred stock have dividend rights. In 2009, we paid $32,877 in dividends to the holder of Series F and issued 7,156 shares of Common Stock Series in lieu of cash dividends and as a reimbursement of legal fees associated with the redemption of Series F Preferred Stock for $1,000,000. In 2008, we paid $97,233 in dividends to the holders of our Series F and G Convertible Preferred Stock. Except for Series I Preferred Stock, none of our series of preferred stock have voting rights. With respect to the rights upon liquidation, dissolution, or winding up, our preferred stock ranks senior to both series of common stock, but junior to any existing or future indebtedness. Among the holders of our outstanding preferred stock, the following preferences upon liquidation, dissolution or winding up are applicable:
| · | first, holders of Series I Preferred Stock are entitled to receive $2.45 per share; |
| · | second, holders of Series B Convertible Preferred Stock are entitled to receive $5.00 per share; |
| · | third, holders of Series E and G Convertible Preferred Stock are entitled to receive $5.00 per share; and |
| · | fourth, holders of Series H convertible Preferred Stock are entitled to receive $5.00 per share. |
The liquidation preference for each series of preferred stock is equal to the original purchase price of the preferred stock.
During 2008, all shares of Series C and D Convertible Preferred Stock were converted to Common Stock Series A.
During the year ended December 31, 2008, holders of 52,850 shares of Series B Convertible Preferred Stock converted their shares on a one-to-five basis for 264,250 shares of Common Stock Series A. We also redeemed 27,500 shares of Series B Convertible Preferred Stock at $5 per share for a total redemption of $137,500 during the year ended December 31, 2008.
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 $3.9 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, 2009 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.
Options
As of December 31, 2009, we had outstanding options to purchase an aggregate of 2,452,142 of our Common Stock Series A at exercise prices ranging from $2.00 to $5.00 per share, with a weighted average exercise price of $3.27 per share.
Warrants
As of December 31, 2009, we had outstanding warrants to purchase an aggregate of 5,658,476 shares of our Common Stock Series A at exercise prices ranging from $1.00 to $5.00 per share with a weighted average exercise price of $2.12 per share.
Unregistered Sales of Equity Securities
During the quarter ended March 31, 2009, we issued 225,000 shares of Common Stock Series A at $2.50 per share for a total investment of $562,500 to the holder of our Series F and G Convertible Preferred Stock. During the quarter 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. In October 2009, we sold 40,000 shares of Common Stock Series A for $100,000. 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.
During the year ended December 31, 2009, we issued options and warrants to purchase a total of 1,122,440 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 four-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.
Related party transactions:
Our Board Chairman and CFO, were each granted 30,000 stock options respectively for personal guarantees of stockholder advances and personal loans made to the Company during 2009. They were also granted 30,000 and 35,000 stock options, respectively, for personal guarantees of stockholder advances, and the CFO was granted 5,000 shares for advances personally made to the Company during 2008.
ITEM 6. SELECTED FINANCIAL DATA.
Not required.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes included in this report. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below as well as those discussed elsewhere in this report. We disclaim any obligation to update information contained in any forward-looking statement.
Overview
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 includes Nevada Numbers, Super Bonanza Bingo, and Million Dollar Ticket. On March 31, 2009, because of the expiration of our contract with Treasure Island whereby Treasure Island had agreed to maintain the $3.9 million base jackpot bankroll, we shut down Nevada Numbers and Million Dollar Ticket. We expect to restart the games as soon as we find funding for the $3.9 million base jackpot. 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. Although we have recently focused our business on the development of our proprietary multimedia delivery system, known as PlayerVision, we have not generated significant revenues 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. Due to our focus on the development of our PlayerVision system, we have incurred expenses in excess of our revenue and have generated losses for 2008 and 2009.
We have received regulatory approval from Nevada with respect to RoutePromo, and we have received regulatory approval from Nevada and GLI for AdVision and Live TV on IGT Game King, WMS, and Aristocrat machines on our PlayerVision 2 platform. We have also received approval from GLI with respect to NumberVision on our PlayerVision 2 platform. PlayerVision 3 is the next generation of our PlayerVision system. We received regulatory review and approval from Nevada in May 2009, with respect to our PlayerVision 3 platform: Beverage-on-Demand, ServiceVision, ValetVision, AdVision, Live TV, CasinoTunes, YouTube, BurstVision and VoyeurVision. We expect to submit these same nine software applications for GLI approval in 2010. We expect to submit WagerVision and NumberVision for regulatory review and approval on the PlayerVision 3 platform in Nevada and GLI sometime in the fourth quarter of 2010. Because the regulatory approval of new gaming applications is a complex process, we may experience delays in developing and introducing the PlayerVision 3 applications.
We will continue for 2010 to incur expenses related to the development and regulatory approval for the remaining PlayerVision modules, and we will face competition from larger, more formidable competitors as we enter the gaming machine market. Due to continuing expenses related to our PlayerVision system without substantial generation of revenues during this time, we will be using cash, and we will require funds from third party financing sources, in addition to funds from operations, to sustain our operations in 2010. As discussed below under “Liquidity – Outlook,” our ability to continue our operations as a going concern may be in doubt.
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. The revenue from Player Vision 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. We recognize distribution royalties from the placement of electronic bingo devices over time, based on customer usage. 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 wins and losses. We reflect amounts due to the owners of the facilities in which the keno games are conducted (effectively contingent rent) as an expense.
Intangible Assets
We review goodwill and other intangible assets for impairment annually, and whenever events or circumstances indicate the carrying value may not be recoverable or warrant a revision to the estimated remaining useful life.
Our forecasted future cash flows used to test the recoverability or determine the fair value of intangibles are based on assumptions that are consistent with plans used to manage the underlying business. Factors used in our evaluations of potential impairment and fair value 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. Changes in these estimates and assumptions could materially affect the determination of recoverability or fair value. While we believe that our estimates of future revenues and cash flows are reasonable, different assumptions could materially affect our assessment of useful lives, recoverability and fair values. Application of the goodwill impairment test requires judgment, including 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. We determine the fair value of our reporting units using the discounted cash flow method, and compare the implied valuation multiples to a group of guideline public companies under the Market approach to test the reasonableness of the discounted cash flow results.
Our intangible assets consist of key patents and technology rights with a five year life related to PlayerVision which went to market for the first time during the fourth quarter of 2007. We recorded an intangible impairment charge of $606,667 during the year ended December 31, 2008, as we have abandoned our plans to develop and market “at home” wagering. In addition, since our keno business is now incurring monthly losses and since our keno liabilities far exceed our keno assets and since we recently sold this business for $100,000 (Note 13), we recorded an impairment charge for our keno business goodwill of $326,942 during the year ended December 31, 2009.
Income Taxes
We have effectively provided a full valuation allowance for the tax effects of our net operating losses at December 31, 2008 and 2009 to offset the deferred tax asset that might otherwise have been recognized as a result of operating losses in the current period and prior periods 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
Casino Jackpot Liabilities
On March 18, 2010, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification 924-405, Casino Jackpot Liabilities, which states that jackpots on which the Company can avoid payment do not meet the definition of a liability until the jackpot is won. This is effective for years beginning on or after December 15, 2010 and may have a significant effect on the financial statements of the Company which has not yet been determined.
There are no more recent accounting pronouncements that would have a significant effect on our future financial position, results of operations and operating cash flows.
Results of Operations
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
Revenue. Casino games revenue for the year ended December 31, 2009, decreased $778,000 or 30.8% to $1,748,000 from $2,526,000 for the year ended December 31, 2008. The lower casino games revenue principally resulted from a reduction of $328,000 of revenue for Gamblers Bonus Million Dollar Ticket which was not in existence for eleven months of 2009 but was being played for nine months of 2008, a reduction of $289,000 of revenue for Nevada Numbers and Million Dollar Ticket due to the discontinuance of the game on March 31, 2009, and a reduction of $159,000 of revenue from Super Coverall Bingo, offset by a $50,000 license fee received from the buyer of our bingo business for a license to distribute Nevada Numbers.
Product sales for the year ended December 31, 2009, decreased by $247,000 or 19.6% to $1,008,000 from $1,255,000 for the year ended December 31, 2008. Keno equipment sales amounted to $178,000 for the year ended December 31, 2009 compared to $225,000 during the year ended December 31, 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 and keno supplies sales also declined by $173,000 during the year ended December 31, 2009 versus the same period in the prior year due to loss of market share.
Other revenue for the year ended December 31, 2009, increased by $66,000 or 6.5% to $1,063,000 from $998,000 for the year ended December 31, 2008. Revenue from Keno route and participation agreements increased $165,000 for the year ended December 31, 2009, compared to the year ended December 31, 2008, due to the opening of three new route locations, two in Nevada, for the entire year ended December 31, 2009 and one in Oklahoma for seven months for the year ended December 31, 2009, versus the two new Nevada locations being opened for seven months during the year ended December 31, 2008. Our bingo and keno parts and service business declined by $99,000 in the year ended December 31, 2009 versus the same period in the prior year.
Cost and Expenses. Cost and expenses of casino games for the year ended December 31, 2009, decreased by $1,495,000 or 50.6% to $1,459,000 from $2,954,000 for the year ended December 31, 2008. The decrease resulted primarily from the lower costs and expenses associated with the discontinuance of the Nevada Number, Million Dollar Ticket, and Super Coverall Bingo games as previously discussed.
Product cost and expenses for the year ended December 31, 2009, decreased $697,000 or 53.2% to $611,000 from $1,307,000 for the year ended December 31, 2008. This decrease resulted primarily from the decline in Keno equipment sales and the $678,000 writedown of our PlayerVision 2 inventory for obsolescence in 2008. The writedown was due to the replacement of PlayerVision 2 with the more robust PlayerVision 3 platform, which is the product we are taking to market. Gross margin on product sales has declined from 49.9% to 39.5% (exclusive of the $678,000 writedown in 2008 noted above) as we have had to do more discounting on Keno equipment sales.
Other cost and expenses for the year ended December 31, 2009, decreased $356,000 or 28.9% to $875,000 from $1,232,000 for the year ended December 31, 2008 as we reduced salary expenses by $371,000 through headcount reductions in our Keno service staff. Our keno route jackpot expense and participation fees increased by $42,000 during the year ended December 31, 2009 versus the same period in the prior year consistent with the increase in keno route and participation revenue mentioned previously.
Other Operating Expenses. Selling, general and administrative expenses for the year ended December 31, 2009, decreased by $2,320,000 or 34.9% to $4,327,000 from $6,647,000 for the year ended December 31, 2008, as legal, auditing and consulting fees decreased by $1,132,000 during the year ended December 31, 2009, compared to the same period in 2008. These fees decreased primarily as a result of a reduction in legal fees resulting from settlement of the IGT lawsuit in October 2008. In addition, the following items contributed to the decrease in operating expenses: (1) Board of Directors fees were reduced by $38,000 versus the prior year as we have not had the cash available to compensate our Board; (2) salaries were reduced by $499,000 versus the prior year due to the furlough of eight PlayerVision administrative employees on August 1, 2009; (3) travel and entertainment costs were reduced by $245,000 versus the prior year as part of our cost reduction measures; and (4) marketing and promotions expense were reduced by $388,000 versus the prior year as part of our cost reduction measures.
Research and development cost for the year ended December 31, 2009, have decreased by $1,021,000 or 72.5% to $386,000 from $1,407,000 for the year ended December 31, 2008, due to the furlough of seven engineering employees on August 1, 2009 and due to the capitalization of internal and external engineering costs during the period of January 1, 2009 through June 30, 2009 of $709,000 as we had proven technological feasibility of PlayerVision 3 late in the fourth quarter of 2008. We stopped capitalizing these costs on July 1, 2009 when we began our attempt to deploy our product to the gaming marketplace.
Depreciation and amortization for the year ended December 31, 2009, decreased $548,000 or 37.9% to $897,000 from $1,445,000 for the year ended December 31, 2008, because more of our aging asset base has been fully depreciated and because our asset base has decreased due to the sale of our bingo business on August 19, 2009.
Finance Costs. Finance costs for the year ended December 31, 2009, decreased $2,294,000 or 95.0% to $119,000 from $2,413,000 for the year ended December 31, 2008, due to the elimination of certain costs previously paid to our primary lender, CAMOFI, who was paid in full in October 2008 with proceeds from equity capital invested by IGT.
Interest and Other Income. Interest and other income for the year ended December 31, 2009, increased by $88,000 to $(31,000) from $(119,000) from the year ended December 31, 2008. The increase was primarily due to the decline in fair value on our marketable securities of $78,000 during the year ended December 31, 2008, offset by a decrease in the loss on the sale of assets of $44,000 during the year ended December 31, 2009 versus the same period in the prior year.
Liquidity and Capital Resources
Outlook
The United States has been experiencing a widespread and 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. We have been grossly undercapitalized in 2009 and unable to deploy PlayerVision given our severe lack of cash resources, an inability to raise a significant amount of capital, and the lower and more restrictive capital expenditure budgets exhibited by our potential gaming operator customers in this very difficult economic climate.
The continuing 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, and in its audit report on our consolidated financial statements, our independent registered accounting firm has expressed substantial doubt as to our ability to continue as a going concern (see Note 8 to our consolidated financial statements).
We presently are unable to satisfy our obligations as they come due and do not have enough cash, inclusive of the sale of our bingo and keno businesses, to sustain our anticipated working capital requirements and our business expansion plans for the remainder of 2010. 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 the remainder of the calendar year 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 and/or the failure to obtain additional third-party financing, 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. 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 and our current default on our $1.5 million note with IGT and our dividends in arrears to our Series I and Series G shareholders totaling $995,000, 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 2009 were down and are expected to remain down for 2010, we believe that if our PlayerVision system is placed in casinos, such casinos will generate additional revenue and possibly achieve cost savings. Because of the selling points, we believe that our product has 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 third quarter of 2010, 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. A 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.
Cash Flows
Cash used in operating activities decreased by $3,994,000 for the year ended December 31, 2009, versus the same period in the prior year primarily because of our reduction in net loss of $7,859,000 offset by a reduction in noncash charges of $2,761,000, a decrease in accounts receivable of $143,000, and an increase in accounts payable and accrued expenses of $1,036,000. Our cash provided by investing activities consisted principally of net cash inflows in connection with the reduction in the jackpot reserve deposits of $1,012,000 because of the discontinuance of the Gamblers Bonus Million Dollar Ticket game in January 2009 and $931,000 for the sale of our bingo assets offset by cash outflows for capital expenditures of $825,000. Our cash inflows from financing activities of $1,076,000 in the year ended December 31, 2009, consisted principally of $662,500 of new capital from the sale of Common Stock Series A, advances from the buyer of our bingo business assets of $494,000, a borrowing from IGT for $1,500,000 advances from stockholders of $300,000 offset by the net redemption of Series F Convertible Preferred Stock for $1,000,000 following the shutdown of the Nevada Numbers game and the repayment of shareholder advances of $845,000.
Capital Expenditures
Capital expenditures increased by $384,000 which includes a decrease in capital expenditures of $248,000 for the year ended December 31, 2009, compared to the same period in the prior year offset by capitalizing $632,000 of our PlayerVision 3 engineering costs in 2009 prior to the projected rollout to the marketplace of nine new software applications. For 2010, 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.
The foregoing notwithstanding, due to uncertainties about our ability to continue as a going concern and general economic conditions, 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.
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 with IGT whereby IGT advanced $1.5 million to us. On September 4, 2009 (effective June 1, 2009), we signed a Secured Promissory Note for the advance in favor of IGT which carries an interest rate of 10% per annum and is due January 29, 2010, which we are presently in default on. We sold our bingo business on August 19, 2009 and received proceeds of $1.1 million. We agreed to sell our keno business on November 4, 2009, for $100,000, which we have received $52,000 to date as a loan in late January, 2010 and pending regulatory approval, we will receive the remaining $48,000 in the future. During the year ended December 31, 2009, we sold $662,500 of Common Stock Series A.
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 and Contractual Obligations
At December 31, 2009, we had total payments due under our various contractual obligations as follows.
| Less than | |||||||||||||||||
| Type of Obligation | Total | one year | 1-3 years | 3-5 years | Longer | ||||||||||||
| Notes Payable | 1,522,977 | 1,506,711 | 16,266 | ||||||||||||||
| Operating lease obligations | |||||||||||||||||
| Real estate | 789,052 | 341,122 | 447,930 | ||||||||||||||
| Other | 114,169 | 55,972 | 54,357 | 3,840 | |||||||||||||
| Total | 2,426,198 | 1,903,805 | 518,553 | 3,840 | |||||||||||||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
| Report of Independent Registered Public Accounting Firm | 29 |
| Consolidated Balance Sheets | 30 |
| Consolidated Statements of Operations | 31 |
| Consolidated Statements of Stockholders' Equity | 32 |
| Consolidated Statements of Cash Flows | 34 |
| Notes to Consolidated Financial Statements | 35 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Las Vegas Gaming, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Las Vegas Gaming, Inc. and subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Las Vegas Gaming, Inc. and Subsidiaries as of December 31, 2008 and 2009, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ PIERCY BOWLER TAYLOR & KERN
PIERCY BOWLER TAYLOR & KERN,
Certified Public Accountants & Business Advisors
A Professional Corporation
May 12, 2010
LAS VEGAS, NEVADA
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| ASSETS | 2008 | 2009 | ||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 497,529 | $ | 5,293 | ||||
| Investment in marketable securities | 5,068 | - | ||||||
| Accounts receivable, net of allowance of $578 and $1,762 | 576,847 | 336,352 | ||||||
| Inventories | 454,026 | 223,287 | ||||||
| Prepaid expenses, deposits and other | 79,881 | 34,311 | ||||||
| Jackpot reserve deposits | 1,230,761 | 218,628 | ||||||
| 2,844,112 | 817,871 | |||||||
| Equipment, net of accumulated depreciation of $1,238,738 and $978,785 | 924,256 | 505,486 | ||||||
| Other assets | ||||||||
| Goodwill | 2,371,178 | 1,413,901 | ||||||
| Patents and other intangibles, net of accumulated amortization of $1,165,742 and $1,415,905 | 278,330 | 757,267 | ||||||
| Other | 56,451 | 42,212 | ||||||
| $ | 6,474,327 | $ | 3,536,737 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) | ||||||||
| Current liabilities | ||||||||
| Note payable | $ | - | $ | 1,500,000 | ||||
| Advances from buyer of bingo business | - | 494,342 | ||||||
| Advances from stockholders | 600,000 | 55,000 | ||||||
| Accounts payable | 1,227,430 | 1,017,375 | ||||||
| Accrued salaries | 22,458 | 391,122 | ||||||
| Accrued dividends | 178,959 | 994,607 | ||||||
| Other payables and accrued expenses | 195,893 | 189,574 | ||||||
| Current portion of long-term debt | 11,957 | 6,711 | ||||||
| Deferred gain on the sale of bingo business | - | 68,991 | ||||||
| Progressive jackpot liability | 1,555,360 | 1,612,946 | ||||||
| 3,792,057 | 6,330,668 | |||||||
| Long-term debt, net of current portion | 23,119 | 16,266 | ||||||
| Conditionally redeemable equity | ||||||||
| Series B Convertible Preferred Stock, $.001 par value, 130,350 and 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 and 810,800 shares issued and outstanding | 811 | 811 | ||||||
| Series F: 200,000 shares authorized, 200,000 and 0 shares issued and outstanding | 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, $.001 par value, 90,000,000 shares authorized: | ||||||||
| Common Stock Series A: 25,000,000 shares authorized, 14,849,690 and 14,974,149 shares issued and outstanding | 14,850 | 14,974 | ||||||
| Common Stock: 65,000,000 shares authorized, no shares issued or outstanding | - | - | ||||||
| Additional paid-in capital | 44,160,702 | 44,245,949 | ||||||
| Less stock subscriptions receivable | (188,245 | ) | - | |||||
| Deficit | (41,584,110 | ) | (47,326,874 | ) | ||||
| 2,409,151 | (3,060,197 | ) | ||||||
| $ | 6,474,327 | $ | 3,536,737 |
The accompanying notes are an integral part of these financial statements.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008 AND 2009
| 2008 | 2009 | |||||||
| Revenues | ||||||||
| Casino games | $ | 2,525,884 | $ | 1,747,571 | ||||
| Product sales | 1,255,428 | 1,008,202 | ||||||
| Other | 997,680 | 1,063,481 | ||||||
| 4,778,992 | 3,819,254 | |||||||
| Costs and expenses | ||||||||
| Casino games | 2,953,973 | 1,459,236 | ||||||
| Product costs | 1,307,205 | 610,611 | ||||||
| Other | 1,231,820 | 875,371 | ||||||
| 5,492,998 | 2,945,218 | |||||||
| Gross operating income (loss) | (714,006 | ) | 874,036 | |||||
| Other operating expenses | ||||||||
| Selling, general, and administrative | 6,646,859 | 4,326,765 | ||||||
| Research and development | 1,407,308 | 386,337 | ||||||
| Depreciation and amortization | 1,445,129 | 897,362 | ||||||
| 9,499,296 | 5,610,464 | |||||||
| Operating loss | (10,213,302 | ) | (4,736,428 | ) | ||||
| Other income and expense | ||||||||
| Finance costs | (2,413,102 | ) | (119,136 | ) | ||||
| Interest income and other | (119,095 | ) | (30,785 | ) | ||||
| Net loss | (12,745,499 | ) | (4,886,349 | ) | ||||
| Preferred stock dividends | (276,192 | ) | (856,415 | ) | ||||
| Net loss attributed to common stockholders | $ | (13,021,691 | ) | $ | (5,742,764 | ) | ||
| Net loss per common share | $ | (0.96 | ) | $ | (0.38 | ) | ||
| Weighted average shares outstanding | 13,611,837 | 15,064,821 | ||||||
The accompanying notes are an integral part of these financial statements.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2008 AND 2009
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 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 | (12,745,499 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividends payable Series F and Series G Convertible Preferred Stock | (276,192 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants and options | 103 | 118,696 | (16,831 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants for services | 356,109 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other Stock based compensation | 1,065 | 2,128,269 | 52,000 | |||||||||||||||||||||||||||||||||||||||||||||
| Cash received from employees and stockholders | 12,000 | |||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series B Convertible Preferred Stock to Common Stock Series A | 264 | 263,986 | ||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series C Convertible Preferred Stock to Common Stock Series A | (35 | ) | 175 | (140 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series D Convertible Preferred Stock to Common Stock Series A | (125 | ) | 125 | |||||||||||||||||||||||||||||||||||||||||||||
| 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 Series I Preferred Stock | 4,694 | 11,290,207 | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants to IGT | 819,126 | |||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Common Stock Series A to Employees | 55 | 110,667 | ||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Common Stock Series A | 500 | 629,574 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2008 | $ | - | $ | - | $ | - | $ | 811 | $ | 200 | $ | 150 | $ | 99 | $ | 4,694 | $ | 14,850 | $ | 44,160,702 | $ | (188,245 | ) | $ | (41,584,110 | ) | ||||||||||||||||||||||
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 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 | (4,886,349 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividends Payable to Series F and Series G Convertible Preferred Stock and Series I Preferred Stock | (856,415 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock options and warrants for services | 574,693 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock Series A to reimburse for legal expenses | 27 | 17,863 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of Common Stock Series A | (168 | ) | (169,744 | ) | 182,245 | |||||||||||||||||||||||||||||||||||||||||||
| Cancellation of Series F Convertible Preferred Stock | (400 | ) | (1,999,600 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Re-issuance of Series F Convertible Preferred Stock | 200 | 999,800 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash received from employees and stockholders | 6,000 | |||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Common Stock Series A | 265 | 662,235 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2009 | $ | - | $ | - | $ | - | $ | 811 | $ | - | $ | 150 | $ | 99 | $ | 4,694 | $ | 14,974 | $ | 44,245,949 | $ | (- | ) | $ | (47,326,874 | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2008 AND 2009
2008 | 2009 | |||||||
| Operating activities | ||||||||
| Net loss | $ | (12,745,499 | ) | $ | (4,886,349 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Write off of debt issuance costs and costs of warrants associated with extinguished debt | (569,368 | ) | - | |||||
| Marketable security received for licensing fee | 82,814 | 5,068 | ||||||
| Depreciation and amortization of equipment and software | 355,404 | 267,707 | ||||||
| Market write down of inventory for obsolescence | 678,175 | 64,761 | ||||||
| Loss on disposal of assets | 72,040 | 29,360 | ||||||
| Bad Debt Expense | 10,697 | 51,720 | ||||||
| Impairment of keno equipment | - | 50,000 | ||||||
| Capitalization of engineering costs | - | (631,899 | ) | |||||
| Amortization of debt issuance costs | 1,287,804 | - | ||||||
| Amortization of intangibles | 578,628 | 250,161 | ||||||
| Impairment of intangibles | 606,667 | 324,942 | ||||||
| Fair value adjustment of debt derivative liability | (168,449 | ) | - | |||||
| Stock-based compensation | 823,450 | 584,693 | ||||||
| Other | (2,604 | ) | 22,015 | |||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | (20,358 | ) | 123,365 | |||||
| Inventories | 46,907 | 57,145 | ||||||
| Prepaid expenses, deposits and other | 124,415 | 45,569 | ||||||
| Accounts payable | 135,312 | (171,506 | ) | |||||
| Accrued salaries | 22,458 | 368,664 | ||||||
| Other payables and accrued expenses | 183,196 | (6,320 | ) | |||||
| Progressive jackpot liability | 1,179,852 | 57,586 | ||||||
| Deferred gain on the sale of bingo business | - | 68,991 | ||||||
| Net cash used in operating activities | (7,318,459 | ) | (3,324,327 | ) | ||||
| Investing activities | ||||||||
| Purchase of property and equipment | (327,303 | ) | (193,566 | ) | ||||
| Proceeds from sale of equipment | 55,250 | 6,950 | ||||||
| Proceeds from sale of bingo business | - | 930,927 | ||||||
| Decrease in jackpot reserve deposits | 1,096,468 | 1,240,319 | ||||||
| Increase in jackpot reserve deposits | (2,051,217 | ) | (228,186 | ) | ||||
| Net cash provided by (used in) investing activities | (1,226,802 | ) | 1,756,444 | |||||
| Financing activities | ||||||||
| Dividends paid on Series F Convertible Preferred Stock | (97,233 | ) | (32,877 | ) | ||||
| Redemption of Series F Convertible Preferred Stock | - | (2,000,000 | ) | |||||
| Re-issuance of Series F Convertible Preferred Stock | - | 1,000,000 | ||||||
| Redemption of Series B Convertible Preferred Stock | (137,500 | ) | - | |||||
| Repayment of debt | (6,122,549 | ) | (9,318 | ) | ||||
| 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 | - | ||||||
| Sale of Series I Preferred Stock | 11,500,000 | - | ||||||
| Advances from stockholders | 2,435,000 | 300,000 | ||||||
| Repayment of advances from stockholders | (1,835,000 | ) | (845,000 | ) | ||||
| Increase in notes payable | - | 1,500,000 | ||||||
| Advances from buyer of bingo business assets | - | 494,342 | ||||||
| Exercise of warrants and options for Common Stock Series A | 110,387 | - | ||||||
| Collection of stock subscriptions receivable | 12,000 | 6,000 | ||||||
| Sale of Common Stock Series A | 740,796 | 662,500 | ||||||
| Net cash provided by financing activities | 8,553,528 | 1,075,647 | ||||||
| Net increase (decrease) in cash and cash equivalents | 8,267 | (492,236 | ) | |||||
| Cash and cash equivalents, beginning of period | 489,262 | 497,529 | ||||||
| Cash and cash equivalents, end of period | $ | 497,529 | $ | 5,293 | ||||
| Non-cash investing and financing activities | ||||||||
| Conversion of Series B Convertible Preferred Stock to Common Stock Series A | $ | 264,250 | $ | - | ||||
| Exercise of stock warrants and options increasing subscriptions receivable | 8,412 | - | ||||||
| Conversion of Series C Convertible Preferred Stock to Common Stock Series A | 35 | - | ||||||
| Conversion of Series D Convertible Preferred Stock to Common Stock Series A | 125 | - | ||||||
| Equipment acquired directly with proceeds of borrowing | 34,025 | - | ||||||
| Debt retired through issuance of Common Stock Series A | 107,500 | - | ||||||
| Prepayment of lease costs with Common Stock Series A | 106,000 | - | ||||||
| Accrued and prepaid interest added to face amount of note due to debt modification | 801,250 | - | ||||||
| Unpaid dividends declared on Series F, and Series G Convertible Preferred Stock and I Preferred Stock | 276,192 | 856,415 | ||||||
| Forgiveness of debt and related issuance of warrant | 614,027 | - | ||||||
| Acquisition of business for common stock Series A | 1,495,882 | - | ||||||
| Exchange of automobile for notes receivable | 16,500 | |||||||
| Write-off of subscriptions receivable due to non-collectability | 169,912 | |||||||
| Dividends paid on Series F Preferred Stock through issuance of Common Stock Series A | 7,890 | |||||||
The accompanying notes are an integral part of these financial statements.
LAS VEGAS GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 includes Nevada Numbers, Super Bonanza Bingo, and Million Dollar Ticket. On March 31, 2009, because of the expiration of our contract with Treasure Island whereby Treasure Island had agreed to maintain the $3.9 million base jackpot bankroll, we shut down Nevada Numbers and Million Dollar Ticket. We expect to restart the games as soon as we find funding for the $3.9 million base jackpot. 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, which was subsequently shut down on January 31, 2009. Although we have recently focused our business on the development of our proprietary multimedia delivery system, known as PlayerVision, we have not generated significant revenues 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. In large part because of our focus on the development of our PlayerVision system, in addition to recent economic developments, we have incurred expenses in excess of our revenue and have generated losses for 2008 and 2009 (Note 6).
2. Summary of significant accounting policies:
Principles of consolidation and basis of accounting. The consolidated financial statements include the accounts of the parent company, Las Vegas Gaming, Inc. (“LVGI”), Imagineering Gaming, Inc. and Las Vegas Gaming Acquisition Corp., our wholly owned subsidiaries, and Las Vegas Keno Incorporated, an inactive 85%-owned subsidiary (collectively, the “Company” or “we”). All significant intercompany transactions and balances have been eliminated in consolidation.
The Company has elected not to adopt the fair value to measure any of its eligible financial instruments or other items. Accordingly, it continues to measure all of its assets and liabilities on the historical cost basis of accounting except as required by generally accepted accounting principles and otherwise disclosed herein.
Revenue and cost recognition.
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 (Note 3). 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.
Winners of the Nevada Numbers progressive jackpot are to be paid the amount of the progressive meter in equal installments over 20 years (Notes 3 and 8). However, we may, at our discretion, offer the winner an option to receive a discounted value immediately using a designated prime rate of interest as a discount rate. Once an inter-linked progressive jackpot is won, in the event a discounted value is not paid immediately at the option of the winner, management would become obligated to purchase discounted U.S. Treasury securities to meet the obligation for the annual payments. We expect to classify these investments as “held-to-maturity,” included as noncurrent assets initially at cost and adjusted over the term of the security for the amortization or accretion of any premiums or discounts using the interest method.
On March 18, 2010, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification 924-405, Casino Jackpot Liabilities, which states that jackpots on which the Company can avoid payment do not meet the definition of a liability until the jackpot is won. This is effective for years beginning on or after December 15, 2010 and may have a significant effect on the financial statements of the Company which has not yet been determined.
Products. We generally recognize sales of bingo and keno equipment when installed (since we are responsible for installation) and sales of supplies when the products are shipped since title to the products has passed when they leave our shipping dock. Sales and similar revenue-based taxes collected from customers are excluded from revenue but rather are recorded as a liability payable to the appropriate taxing authority and included in accrued expenses. Shipping and handling charges to customers and related costs are included respectively in sales revenues and cost of sales. For keno system installations, we require a 50% deposit in advance as a good faith down payment for, and recorded as a liability until completion and customer acceptance of, the system installation. Warranty costs and related liabilities associated with product sales have not been material. We recognize fees from equipment maintenance contracts sold separately (rather than as bundled deliverables) evenly over the term of the contract. Prior to shipment, we include equipment and supplies in inventories (see below). We had a market write-down of our PlayerVision 2 inventory of $678,000 for obsolescence in 2008 as it has been replaced by a more robust PlayerVision 3 platform, which is the product we will soon offer.
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 wins and losses. We reflect amounts due to the owners of the facilities in which the keno games are conducted (effectively contingent rent) as an expense.
Cash and cash equivalents and jackpot reserve deposits. We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. For financial statement purposes, jackpot reserve deposits (Notes 3 and 8), a form of restricted cash, is excluded from cash and cash equivalents. Changes in the funds set aside for such purposes are treated as investing activities and reported net in the statement of cash flows. We classify these funds as current assets because we use these restricted funds to support current operations.
Receivables. We write off accounts receivables after all reasonable collection efforts have been exhausted.
Inventories. Inventories consist primarily of bingo and keno finished goods, including keno equipment and spare parts, and are stated at the lower of cost or market, with cost determined using the first-in, first-out (“FIFO”) cost method. Appropriate markdowns are made when necessary to reduce the cost of excess and obsolete inventories to their estimated net realizable value.
Intangible assets. Intangible assets other than goodwill consist primarily of the costs of patents, (some of which are pending (Note 5)). Other intangible assets are amortized on a straight line basis over the estimated economic life of the asset, usually less than 10 years. We review goodwill and other intangible assets for impairment annually and whenever events or circumstances indicate the carrying values are not likely to be recoverable or warrant a revision to the estimated remaining useful life.
Use of estimates. The preparation of these financial statements requires the use of estimates and judgments and the reported actual results may differ from these estimates under different assumptions or conditions, and these differences may be material. Management’s estimates related to the recoverability of the carrying values of the intangible assets and goodwill are particularly vulnerable to material changes in the next year.
Our forecasted future cash flow used to test the recoverability or estimate the fair value of intangibles are based on assumptions that we believe are objective and consistent with our expectations and the plan used to manage the underlying business (primarily level 3 inputs as defined in U.S. generally accepted accounting principles). Factors used in the evaluations of potential impairment and fair value estimates require significant judgments and respective estimated useful lives, risk rates, expected market growth rates, brand history, competitive environment, market share, future business prospects and success of our products. Changes in these expectations and related estimates and assumptions, for example, resulting from the economic conditions and uncertainties such as those discussed in Note 8, could materially affect the estimated recoverability and/or estimated fair value. While we believe that our estimates of future revenues and cash flows are reasonable, different assumptions could materially affect our assessments of useful lives, recoverability and fair values. Application of the goodwill impairment test also requires judgment regarding such factors as the identification of reporting units, allocation of related goodwill, assignment of corporate shared assets and liabilities to reporting units, and determination of estimated fair value of each reporting unit. We estimate the fair value of our operating components using the discounted cash flow method, and compare the implied valuation multiples to guidelines for public companies under the market approach to test the reasonableness of the discounted cash flow results. In addition, since our keno business is now incurring monthly losses, since our keno liabilities far exceed our keno assets, and we recently agreed to sell this business for $100,000 (Note 13), we recorded an impairment charge for our keno business goodwill of $327,000 during the year ended December 31, 2009. Our recorded goodwill relates to our unallocated sales omponent and to our recent acquisition of Adline Network Holdings, Inc. (Note 7). Losses during 2008 and 2009 resulted from significant cash resources expensed on the development, regulatory approval, administrative infrastructure, and marketing of PlayerVision.
Based on the circumstances and the related uncertainties as to the success of management’s plans to continue as a going concern, as of December 31, 2009, described in Note 8, 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 based on level 3 inputs. 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.
Marketable securities. Investments in marketable securities are classified as “trading securities” and carried in the financial statements as current assets valued at fair value based on current market quotes (level 1 inputs). Unrealized and realized gains and losses are included in earnings currently.
Equipment and depreciation. Equipment is stated at cost. Depreciation is provided using the straight-line method over the useful lives of the assets (three to ten years).
Certain issuances of our Common Stock Series A. Our Common Stock Series A does not trade in the market and, therefore, quoted stock prices are not available. A limited number of sales between stockholders and third parties interested in buying our Common Stock Series A have predominately occurred at $2.00 per share in 2008. We used this price as the best indication of the fair value of Common Stock Series A until the International Game Technology (“IGT”) investment transaction on October 24, 2008, at which time we performed a reevaluation of the price given the strategic nature of IGT’s investment and established a new fair value of $2.50 per share. In January 2009, this price was further validated as the fair value as we raised $562,500 by selling 225,000 shares of Common Stock Series A at $2.50 per share. We also sold 40,000 shares at $2.50 per share in early October 2009.
Net loss per share. Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the year. Potentially dilutive securities such as convertible preferred stock, options and warrants for a total of 29,250,730 shares were not considered outstanding because the effect would have been anti-dilutive.
Stock-based compensation. We use the Black-Scholes option pricing model to estimate the fair value of options and warrants and the amounts to be expensed as it relates to employee and non-employee stock-based compensation. In using the Black-Scholes option-pricing model, the principal assumptions selected to value the options and warrants for calculating the “minimum value,” included a “risk-free” interest rate of approximately 2%, expected option life of four to 10 years, estimated volatility of 30% and no expected dividends.
Advertising. Advertising costs are expensed as incurred and totaled $83,770 and $20,528 for 2008 and 2009, respectively.
Income taxes. Our policy is to treat any income tax-related interest or penalties as a component of income tax expense (benefit).
Reclassifications. Certain minor reclassifications to previously reported amounts have been made to conform to the current year presentation.
3. Jackpot reserve deposits and related obligations:
At December 31, 2008 and 2009, as required by gaming regulators, we held aside cash on deposit of $1,230,761 and $218,628, respectively, that is restricted for funding our various regulatory obligations for jackpot-oriented games (Note 8).
On March 18, 2010, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification 924-405, Casino Jackpot Liabilities, which states that jackpots on which the Company can avoid payment do not meet the definition of a liability until the jackpot is won. This is effective for years beginning on or after December 15, 2010 and will have a significant effect on the financial statements of the Company.
4. Equipment:
Equipment consists of the following:
| December 31, 2008 | December 31, 2009 | |||||||
| Production equipment | $ | 1,561,513 | $ | 1,166,383 | ||||
| Office equipment, furniture, and fixtures | 557,855 | 317,888 | ||||||
| Leasehold improvements | 43,627 | - | ||||||
| 2,162,995 | 1,484,271 | |||||||
| Less accumulated depreciation and amortization | 1,238,739 | 978,785 | ||||||
| $ | 924,256 | $ | 505,486 | |||||
As previously mentioned in Note 2, since our keno business is now incurring monthly losses, our keno liabilities far exceed our keno assets, and we recently agreed to sell this business for $100,000 (Note 13), we recorded an impairment charge for our keno production equipment of $50,000 during the year ended December 31, 2009.
5. Other intangible assets:
Patents and other intangible assets consist of the following:
| December 31, 2008 | December 31, 2009 | |||||||
| PlayerVision technology patents | $ | 1,016,236 | $ | 1,016,236 | ||||
| Software | 427,836 | 432,775 | ||||||
| Capitalized engineering costs | - | 724,160 | ||||||
| 1,444,072 | 2,173,171 | |||||||
| Less accumulated amortization | 1,165,742 | 1,415,904 | ||||||
| $ | 278,330 | $ | 757,267 | |||||
Intangible assets are amortized over their estimated useful lives, which are currently 5 years. Total amortization for other intangible assets amounted to $541,474 and $250,161 for the years ended December 31, 2008 and 2009, respectively. Since we are not proceeding with “at home” wagering as part of our strategic product plan in the future, we expensed $606,667 of then remaining unamortized asset value in the fourth quarter of 2008, which was included in depreciation and amortization in our consolidated statement of operations. Estimated aggregate future amortization assuming we begin amortizing PlayerVision engineering costs in July 2010 is as follows:
| 2010 | $ | 148,260 | ||
| 2011 | 246,266 | |||
| 2012 | 242,048 | |||
| 2013 | 120,693 | |||
| $ | 757,267 |
6. Debt:
On May 1, 2008, we amended our financing with CAMOFI Master LOC (“CAMOFI”) and entered into an Amended and Restated Senior Secured Convertible Note due January 1, 2010 (the “CAMOFI Note”), and an Amended and Restated Registration Rights Agreement (the “Registration Rights Agreement”) with CAMOFI. The commitment fees due under the original CAMOFI note on April 1, 2008, July 1, 2008, October 1, 2008, and January 1, 2009 of $131,250 and prior accrued commitment fees were added to the face amount of the CAMOFI Note which increased from $5,250,000 to $6,051,250. We were also to pay commitment fees of $403,417 on January 1, 2009, and $302,563 on July 1, 2009 and January 1, 2010. The Registration Rights Agreement required us to file a registration statement with the Securities and Exchange Commission on the earlier of the closing of a Qualified Financing (as defined in the Registration Rights Agreement) or April 30, 2009 with the effectiveness date remaining 120 calendar days after the filing date. The maturity date of the CAMOFI Note was changed from January 1, 2009 to January 1, 2010.
Because of the Registration Rights Agreement with CAMOFI, the registration of CAMOFI’s converted shares and warrants were outside of our control. The Registration Rights Agreement with CAMOFI stated that if 125% of the registered securities for CAMOFI were not effective by the 120th calendar day following the filing date of September 30, 2008, we would have to pay cash liquidating damages equal to 1.5% of the outstanding principal of the bridge financing and an additional 1.5% for any subsequent 30-day period thereafter. If we failed to pay any partial liquidating damages within seven days from the date payable, we were to accrue 20% annual interest on any amount in arrears. Settlement of the warrants with unregistered shares and the payment of a penalty would have been an uneconomic settlement alternative and thereby would not have been considered a realistic alternative for us. Consequently, the initial value of the warrants was recorded as a derivative liability and changes to the fair value of those warrants were included in the statement of operations.
On October 24, 2008, the CAMOFI note for $6,051,250, a prepayment penalty of $1,210,250 and accrued interest of $357,022 were paid off with the proceeds of the IGT investment (Note 7). This early extinguishment of debt resulted in a loss of $640,882. After the payoff, CAMOFI has 2,675,000 warrants at $1.48 and incidental registration rights which allows CAMOFI to join a registration statement after the Company’s and IGT’s shares have been registered if there is availability in any future registration statement.
Long term debt at December 31, is as follows:
| 2008 | 2009 | |||||||
| Notes payable | $ | 35,076 | $ | 22,977 | ||||
| Less amounts due within one year | 11,957 | 6,711 | ||||||
| $ | 23,119 | $ | 16,266 | |||||
Scheduled debt maturities are as follows:
| 2010 | $ | 6,711 | ||
| 2011 | 7,417 | |||
| 2012 | 8,196 | |||
| 2013 | 653 | |||
| $ | 22,977 |
During 2008, we received five stockholder advances totaling $2,435,000 and paid back all but $600,000 of those advances by December 31, 2008, and $600,000 in January 2009. During 2009, an additional $300,000 was advanced from three principal stockholders. Of this amount, $245,000 has been paid back as of December 31, 2009. The buyer of our bingo business assets advanced us $494,342 for working capital purposes (Note 12).
We have received all monies due from a settlement with a customer of our wholly-owned subsidiary, Imagineering, and have distributed all monies due except for $107,500 which is due to the prior owners of Imagineering who agreed to convert their debt into Common Stock Series A at $2.00 per share or 53,750 shares in March 2008. As part of the IGT investment on October 24, 2008 (Note 7), the $614,027 due IGT above under settlement was forgiven and has been included, along with the $11,500,000 cash investment by IGT, in the allocation between the Series I Preferred Stock (valued at $11,294,901) and the 1,500,000 warrant (valued at $819,126).
On February 13, 2009, we signed a binding term sheet with IGT whereby IGT advanced $1.5 million to the Company. We signed a note effective June 1, 2009, for this advance, which carries an interest rate of 10% per annum and is due on January 29, 2010. We granted a security interest in all of our present and future assets as security for such obligation (Note 14).
The Company and IGT amended 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: (1) 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, (2) a requirement that the Company provide development support for IGT sb (server-based) applications requested by IGT, (3) an amendment to the amount of distribution fees, (4) 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 (5) 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, we issue shares of common stock and preferred stock through transactions that are exempt from registration under the Securities Act of 1933 (the “Securities Act”), or pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D.
During the year ended December 31, 2008, we issued 260,917 shares of Common Stock Series A for salaries, bonuses, consulting services, and board of directors fees, 500,000 shares of Common Stock Series A as an incentive for our sale of Series F and Series G Convertible Preferred Stock, and 102,659 shares of Common Stock Series A pursuant to the exercise of options and warrants. Additionally, if our Common Stock Series A, as a result of a qualified financing, commences trading at less than $5 per share, the holders of our Series F and G Convertible Preferred Stock will also 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. We also issued 53,750 shares of Common Stock Series A to retire $107,500 of long-term debt. In addition, we sold 55,361 shares of Common Stock Series A to employees and 10,100 shares to present stockholders. On October 24, 2008, we declared a cash dividend of $97,233 on our Series F and G Convertible Preferred Stock in total.
On October 1, 2008, we acquired the tangible and intangible assets of AdLine Network Holdings Inc. (“AdLine”), AdLine Media LLC, AdLine Network LLC and Freeview Network LLC for 750,000 shares of our Common Stock Series A. The intent of the transaction was to reacquire and consolidate all of the rights associated with various technologies and intellectual property licenses held by AdLine, including the license previously granted to AdLine. The transaction was structured as an asset purchase to ensure the complete reacquisition of the licenses and technologies. Any other assets acquired were immaterial and incidental. The purchase price of $1,500,000 was allocated as follows: $80,000 to fixed assets, $4,117 to miscellaneous expense and $1,415,883 to goodwill. In addition, one of the owners of AdLine received a one-year consulting agreement with LVGI for $17,200 per month.
Also on October 1, 2008 (effective as of September 30, 2008), IGT signed an investment agreement with us to purchase 4,693,878 shares of our Series I Preferred Stock at $2.45 per share, or a total investment of $11.5 million. (The transaction closed on October 24, 2008.) The Series I Preferred Stock is convertible into shares of Common Stock Series A on a one-for-one basis. 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% that was payable initially on January 1, 2010, and the right to vote on an as converted basis, on all matters submitted to the Company’s stockholders. Based on what amounts to pro forma fully diluted outstanding shares of the Company, IGT is entitled to one seat on the Company’s Board of Directors, which to date they have not chosen to fill. In addition, in connection with this investment agreement, IGT forgave a receivable due from the Company from a prior legal settlement for $614,027 (Note 6). Also on October 1, 2008, we signed three agreements with IGT, which became part of the legal settlement with IGT called: (1) the Retrofit License Agreement; (2) the LASA; and (3) the IPAA. On October 14, 2008, the legal case with IGT was dismissed by the Court with prejudice.
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 had against us and a related registration rights agreement was terminated. CAMOFI now 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 Convertible Preferred Stock transaction.
In connection with the foregoing IGT transaction, we filed Amended and Restated Certificates of Designation with 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.
During 2009, we issued 272,156 shares of Common Stock Series A to two investors in return for cash of $662,500 used for working capital and for payment of Series F dividends in lieu of cash and reimbursement of legal fees (one of these investors who purchased 232,156 of these shares 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).
In 2009, we closed the Gamblers Bonus Million Dollar game as a result of a lack of ticket sales. Accordingly, we redeemed the $1,000,000 of Series F Convertible Preferred Stock from our investor. We also closed our Million Dollar Ticket Game for the same reason and 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 Casino (in Las Vegas) 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, the investor 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. Holders of Series B Convertible Preferred Stock have a liquidation preference of $5 per share. The Series B liquidation preference is over holders of Series E, Series G, and Series H Convertible Preferred Stock.
On January 28, 2008, because Treasure Island Casino (in Las Vegas) had begun maintaining the required base jackpot bankroll for 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 exchange their shares of Series B Convertible Preferred Stock for either (1) their original investment in the shares exchanged, i.e., $5 per share, or (2) shares of Common Stock Series A at the rate of five shares of Common Stock Series A for each share of Series B Convertible Preferred Stock. The holders of Series B Convertible Preferred Stock had until April 28, 2008 to make their decision. At December 31, 2008 holders of 52,850 shares of Series B Convertible Preferred Stock had converted their shares on a one-to-five basis for 264,250 shares of Common Stock Series A. We also redeemed 27,500 shares of Series B Convertible Preferred Stock at $5 per share for a total redemption of $137,500 during the year ended December 31, 2008.
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 F, 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. During the year ended December 31, 2007, we issued 392,800 shares of Series E Convertible Preferred Stock and raised $1,964,000.
Series F Convertible Preferred Stock. The holder of Series F Convertible Preferred Stock is entitled to receive $5 per share as a liquidation preference after payment of all existing and future indebtedness and before Series I, Series B, Series E, Series G and Series H Convertible Preferred Stock as to the $1,000,000 jackpot bankroll reserve for our Gamblers Bonus Million Dollar Ticket game. On January 31, 2009, we discontinued the Gamblers Bonus Million Dollar Ticket game and the jackpot bankroll reserve of $1,000,000 was transferred to our Nevada Numbers game. On May 9, 2008, we issued 200,000 shares of Series F 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 F 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 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 F, 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 F, 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.
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. We have both a qualified and a non-qualified stock option plan. There are 1,810,642 qualified options presently outstanding under the qualified plan, with another 641,500 non-qualified options also outstanding. 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 and consultants are able to receive qualified options. The stock subject to the 2009 Stock Option Plan is limited to 20% of the issued and outstanding shares of Common Stock Series A at the beginning of the most recent quarter.
We have, from time to time, granted common stock, warrants to others in addition to options granted to employees 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 960,000 and 566,367 shares of Common Stock Series A were issued to officers and directors during the years ended December 31, 2008 and 2009, respectively. Total compensation cost recognized in operations from grants of options and warrants amounted to $742,398 and $574,693 for the years ended December 31, 2008 and 2009, respectively. Unrecognized costs related to employee stock options and warrants outstanding at December 31, 2009 totaled $389,897 and are expected to be amortized over a weighted average period of 33 months.
The weighted average exercise price of our outstanding options and warrants at December 31, 2009, was $2.46. The following table summarizes our stock option and warrant activity followed by the applicable weighted average prices during the year ended December 31, 2009:
Options/Warrants | Weighted Average Price | |||||||
Balance, January 1, 2009 | 8,656,209 | $ | 2.46 | |||||
Granted | 1,122,440 | 2.50 | ||||||
Forfeited | (1,668,031 | ) | (2.50 | ) | ||||
Balance, December 31, 2009 | 8,110,618 | 2.46 | ||||||
As of December 31, 2009, 737,858 options and warrants are outstanding, but have not vested. The aggregate estimated intrinsic value of options and warrants at December 31, 2009, is $389,897.
Non-vested Options | Weighted Average Price | |||||||
Balance, January 1, 2009 | 1,393,210 | $ | 3.45 | |||||
Granted | 650,080 | 2.50 | ||||||
| Vested/Forfeited | (1,320,932 | ) | (3.22 | ) | ||||
Balance, December 31, 2009 | 722,358 | 3.02 | ||||||
Non-vested Warrants | Weighted Average Price | |||||||
Balance, January 1, 2009 | 110,417 | $ | 2.52 | |||||
Granted | 15,500 | 2.50 | ||||||
| Vested | (110,417 | ) | (2.52 | ) | ||||
Balance, December 31, 2009 | 15,500 | 2.50 | ||||||
The following table summarizes stock options and warrants outstanding at December 31, 2009, as to number exercisable and average remaining life in years:
| Exercise Price | Number Outstanding | Weighted Average Remaining Life in years | Number Exercisable | Weighted Average Remaining Life in years | ||||||||||||||||
| Options | $ | 2.00 | 310,000 | 3.3 | 310,000 | 3.3 | ||||||||||||||
| $ | 2.50 | 1,290,642 | 4.0 | 718,284 | 4.0 | |||||||||||||||
| $ | 3.00 | 46,500 | .3 | 46,500 | .3 | |||||||||||||||
| $ | 5.00 | 805,000 | 2.6 | 655,000 | 2.7 | |||||||||||||||
| Warrants | $ | 1.00 | 110,000 | 2.5 | 110,000 | 2.5 | ||||||||||||||
| $ | 1.48 | 2,675,000 | 1.3 | 2,675,000 | 1.3 | |||||||||||||||
| $ | 1.50 | 30,000 | 3.3 | 30,000 | 3.3 | |||||||||||||||
| $ | 2.00 | 185,000 | .6 | 185,000 | .6 | |||||||||||||||
| $ | 2.10 | 23,809 | .9 | 23,809 | .9 | |||||||||||||||
| $ | 2.45 | 1,500,000 | 1.8 | 1,500,000 | 1.8 | |||||||||||||||
| $ | 2.50 | 30,667 | 4.4 | 15,167 | 4.3 | |||||||||||||||
| $ | 3.00 | 854,000 | 1.1 | 854,000 | 1.1 | |||||||||||||||
| $ | 4.00 | 100,000 | .1 | 100,000 | .1 | |||||||||||||||
| $ | 5.00 | 150,000 | 1.3 | 150,000 | 1.3 | |||||||||||||||
| 8,110,618 | 2.0 | 7,372,760 | 1.8 | |||||||||||||||||
There are 737,858 options and warrants that have been issued but have not vested. Of these options and warrants 371,869 will vest in 2010, 261,869 in 2011, and 104,120 in 2012.
8. Concentrations, commitments, economic risks, uncertainties and contingencies:
We often carry cash and cash equivalents, and restricted 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.
There are no significant concentrations of credit risk among our receivables. Our receivables are uncollaterized. The maximum losses that we would incur if a customer or customers failed to pay would be limited to the amount due after any allowances provided. In managing credit risk and establishing any allowance necessary for doubtful collection, we consider the customer’s credit history and our relationship, the relative strength of our legal position, the related cost of any proceedings, and general economic conditions. Historically, we have depended on relatively few suppliers for components and programming for certain of our games. However, we believe that other suppliers are sufficiently available so that any disruption of service would be brief and not have a material adverse effect on our business, financial condition, cash flows or results of operations.
The United States is currently experiencing a severe and 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 collections and other and cash flows, including our access to capital or credit financing, cannot be estimated at this time but may likely 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 2010. 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. We are presently negotiating term sheets with several possible investors. We are also in negotiations with several casinos to deploy our technology (see next paragraph). In addition, our plan is to ramp up our PlayerVision 3 sales using the new capital invested and be profitable by the end of the calendar year 2010 through PlayerVision revenue growth and by keeping our fixed costs low so we may begin to significantly expand our operations and experience positive net cash flows and profits.
To address the going concern uncertainty, we have also engaged an investment banking firm to assist us in raising capital and are presently in discussion 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 initiated some major cost cutting measurements and have sold our bingo and keno businesses. (See Note 12)
Severance arrangements. We have agreed to severance arrangements with all executive officers that provide for the payment of thirty-five months of base salary (except one year for our CEO) following termination of employment for other than cause, for an aggregate $1,553,333 of contingent financial commitment. These employment agreements include covenants not to compete.
Gaming regulations 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 for our products in those jurisdictions. Failure to retain our Nevada licenses or to obtain and retain the necessary licenses in other jurisdictions would likely have a material adverse effect on us.
We purchase insurance to fund the base progressive jackpots for Nevada Numbers, Super Bonanza Bingo (in some circumstances), and The Million Dollar Ticket. Nevada Numbers and the Million Dollar Ticket were suspended on March 31, 2009 and replaced by Nevada Numbers Lite, a nine spot keno game which began with the progressive jackpots of Nevada Numbers and the Million Dollar Ticket of $218,000 in October, 2009. We fund any uninsured portion plus increases to the progressive jackpot through operations. We are ultimately liable for the entire jackpot. The following tables illustrate our liability for progressive jackpots at December 31, and related assumptions:
| Progressive jackpot liability: | 2008 | 2009 | ||||||
Nevada Numbers | $ | 932,467 | $ | 852,969 | ||||
| Nevada Numbers Lite | 0 | 219,005 | ||||||
Million Dollar Ticket | 151,263 | 50,000 | ||||||
Super Bonanza | 471,630 | 490,972 | ||||||
| $ | 1,555,360 | $ | 1,612,946 | |||||
Noncompliance. Regulation 5.115 of the Nevada Gaming Commission, as amended on November 18, 1999, allows 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. In our ten-year history, all of our jackpot liabilities have been paid by us or through insurance coverage, and we have no reason to believe that it will not continue to be the case in the future. The Nevada Gaming Commission has the right to demand that a one-year letter of credit be posted when a company is not in compliance with the foregoing financial ratios but has not made any such demand to date.
The forgoing 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. For this matter we paid a fine of $10,000 in full settlement and satisfaction of the allegations. However, we can give no assurance that we will be in compliance with these financial requirements in the future. 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 and no further disciplinary action was taken in such regard.
Lease commitments. We lease office and warehouse space under various non-cancellable operating leases expiring through 2014. The lease agreements require us to pay fixed monthly base rent plus variable common area maintenance charges. Future minimum lease payments under the leases are:
| 2010 | $ | 397,094 | ||
| 2011 | 287,954 | |||
| 2012 | 154,677 | |||
| 2013 | 59,656 | |||
| 2014 | 3,840 | |||
| $ | 903,221 |
Rent expense on all operating leases for 2008 and 2009 was $419,650 and $512,117 respectively.
Legal matters. On September 12, 2007, IGT filed a lawsuit against us alleging copyright infringement, trademark infringement, trade dress infringement and false designation of origin relating to the operation of our PlayerVision system on IGT’s Game King® gaming machines. IGT was seeking injunctive and monetary relief in the case, including treble damages and profits, claiming that IGT would be irreparably harmed by us if our PlayerVision system was deployed in the marketplace. On June 12, 2008, IGT and LVGI jointly filed a “stay” of the lawsuit and began settlement negotiations. On October 14, 2008, pursuant to the settlement effective September 30, 2008 (Note 7), the case was dismissed with prejudice.
On September 15, 2008, a lawsuit was filed against us, among other defendants regarding a non-disclosure agreement executed in 2002 pertaining to the plaintiffs’ gaming concepts. In August, 2009, a Motion of Summary Judgment was granted and the case was dismissed.
On August 26, 2009, a lawsuit was filed by Adline Network Holdings, LLC, a Georgia Corporation, Adline Media LLC, a Georgia Limited liability company, Adline Network LLC, a Georgia limited liability company, and Sam Johnson, a former officer and employee, alleging breach of an Acquisition Agreement, breach of a Consulting Agreement, breach of a covenant of good faith and fair dealing, negligent misrepresentation, common law fraud (fraud in the inducement/fraudulent misrepresentation), 10b-5 securities violations and declaratory relief. In response to our Motion to Dismiss on October 16, 2009, the plaintiffs filed a first amended complaint. Since then, then plaintiffs have filed a second amended complaint with essentially the same allegations as the first amended complaint, but naming the Chairman of the Board, the Chief Executive Officer, and Chief Financial Officer individually in the lawsuit also. We are unable to estimate minimum costs, if any, to be incurred by us upon the ultimate disposition of this matter and, accordingly, no provision has been made.
On December 22, 2009, a lawsuit was filed by a former officer and employee of the Company alleging a severance benefit of $100,000 and unused vacation time of $29,135 are owed him and damages in excess of $10,000 to be specifically determined at trial. We are vigorously defending this lawsuit and are unable to estimate minimum costs, if any, to be incurred by us upon the ultimate disposition of this matter and, accordingly, no provision has been made.
9. Income taxes:
As of December 31, 2009, net operating loss carryovers for federal income tax reporting purposes were approximately $40 million and expire between 2013 and 2027. However, because we have not achieved a satisfactory level of operations, realization of any future income tax benefit of the net operating loss carryovers 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 million has been effectively reduced by a 100% valuation allowance. In addition, we could be limited in our ability to utilize our net operating loss carryforwards and realize any benefit therefrom in the event of any of certain ownership changes described in Internal Revenue Code Section 382. Tax years that are still subject to IRS examination are 2006 through 2008.
10. Financial instruments:
Our financial instruments consist of cash, accounts receivable and debt. The estimated fair values of these financial instruments (based on level 2 inputs) are approximately equal to book value because of their short-term nature and/or interest rates approximating current market interest rates.
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 are played in 11 casinos and 100 bars and convenience stores in Nevada and another 10 casinos outside Nevada.
Our Casino Games activities consist of keno style games (Nevada Numbers and The Million Dollar Ticket), and Super Bonanza, a bingo style game and Gamblers Bonus Million Dollar Ticket, a promotional sweepstakes game, which was launched on April 14, 2008 and discontinued on January 31, 2009. The composition of our casino games revenue was approximately 69.6% bingo, 16.7% keno and 13.7% promotional sweepstakes during the year ended December 31, 2008 and approximately 91.4% bingo, 7.6% keno and 1% promotional sweepstakes for 2009.
The “Products” segment generates revenue essentially through the sale of keno and bingo supplies and keno equipment. Supplies include paper products, inside/outside tickets, promotional items and ink for bingo daubers. Supplies accounted for 73% and 89% of our products sales during 2008 and 2009, respectively. Keno system sales accounted for 27% and 18% of products sales for 2008 and 2009, respectively.
The “Other” segment includes revenue from equipment maintenance contracts which accounted for 64% and 51% of other revenue during the 2008 and 2009, respectively; operation of a keno route (16% and 29% for the 2008 and 2009, respectively), and keno route participation agreements (20% and 18% for 2008 and 2009, respectively).
Operating results, certain unallocated expenditures, and identifiable assets for these segments are set forth below.
| 2008 | 2009 | |||||||
| Revenue | ||||||||
Casino Games | $ | 2,525,884 | $ | 1,747,571 | ||||
Product Sales | 1,255,428 | 1,008,202 | ||||||
Other | 997,680 | 1,063,481 | ||||||
| $ | 4,778,992 | $ | 3,819,254 | |||||
| Operating income (loss) | ||||||||
Casino Games | $ | (428,089 | ) | $ | 288,335 | |||
Product Sales | (51,777 | ) | 397,591 | |||||
Other | (234,140 | ) | 188,110 | |||||
Unallocated | (9,499,296 | ) | (5,610,464 | ) | ||||
| $ | (10,213,302 | ) | $ | (4,736,428 | ) | |||
| Identifiable assets | ||||||||
Casino Games | $ | 2,668,200 | $ | 1,422,438 | ||||
Product Sales | 381,176 | 265,833 | ||||||
Other | 386,004 | 201,321 | ||||||
Unallocated | 3,038,947 | 1,647,145 | ||||||
| $ | 6,474,327 | $ | 3,536,737 | |||||
Identifiable assets of $6,474,327 and $3,536,737 at December 31, 2008 and 2009, respectively, included recorded goodwill of $2,371,178 and $1,413,901 at December 31, 2008 and 2009, respectively, that relates to the Unallocated Sales segment.
| Capital expenditures | 2008 | 2009 | ||||||
Casino Games | $ | 197,790 | $ | 15,053 | ||||
Product Sales | - | - | ||||||
Other | 109,034 | 43,823 | ||||||
Unallocated | 134,504 | 35,474 | ||||||
| $ | 441,328 | $ | 94,350 | |||||
12. Related party transactions:
Our Board Chairman and CFO, were each granted 30,000 stock options respectively for personal guarantees of stockholder advances and personal loans made to the Company during 2009. They were also granted 30,000 and 35,000 stock options, respectively, for personal guarantees of stockholder advances, and the CFO was granted 5,000 shares for advances personally made to the Company during 2008.
13. Sale of assets
We completed the sale of our bingo business, keno intellectual property, and our route promo business assets with United Coin to Gaming Arts, LLC (GA) on August 19, 2009, for $1,050,000. GA also executed a Nevada Numbers License Agreement for $50,000 for an exclusive license to operate, grant sublicenses and enforce the Nevada Numbers intellectual property in any non-slot application. In addition, GA received a non-exclusive license to operate, grant one sublicense, and enforce the Nevada Numbers intellectual property in any slot machine application for 50% of the net profits after GA or its sub-licensee receives the first $100,000 in net profits. However, since GA has not received the necessary regulatory approval to be a gaming operator, the Company continues to maintain control of these assets and manage them on a day-to-day basis for an indefinite period pending such approvals. The gain on the sale of these assets has been deferred pending such approvals. As a result of significant uncertainty as to the achievement and timing of such regulatory approvals, we are unable to conclude that the disposition of these business assets and activities within one year is probable. Therefore, pursuant to accounting principles generally accepted in the United States, we have not classified the related assets as held for sale nor the operations of these businesses as discontinued.
We also executed an agreement for the sale of our keno business to Session Gaming, Inc. for $100,000 on November 4, 2009. This transaction likewise will not close until Session Gaming, LLC, has been approved for licensing by the appropriate gaming authorities in various jurisdictions.
14. Subsequent events:
On January 29, 2010, the Company defaulted on its $1.5 million note payable due to IGT, its largest stockholder, which is carried among current liabilities. The default totaled $1,587,945 including accrued interest since June 1, 2009. Thus far, IGT has cooperated with the Company and not foreclosed on the note due to potential funding sources the Company is in discussions with to pay off the defaulted amount owed IGT and to inject new working capital into the Company. Due to the default, the interest rate increased to 18% on January 30, 2010.
The Company is also in default on dividends payable to IGT of $886,760 which is included in accounts payable and accrued expenses on its Series I Preferred Stock and is in default with Triangle Holdings VI LLC (Triangle), a shareholder who has invested in Series E Preferred Stock and Common Stock, on its Series G Convertible Preferred Stock of $107,847 at December 31, 2009. The Company executed a Stock Repurchase Agreement with Triangle Holdings VI LLC on March 23, 2010, for its $750,000 of Series G Preferred Stock and its $107,847 of accrued dividends. Triangle Holdings VI LLC also loaned the Company $150,000 for current working capital purposes and the Company committted to a $100,000 loan fee for the loan. To securitize the stock redemption, the accrued dividends, the loan and the loan fee, the Company signed a Secured Second Position Promissory Note for $1,107,847 with Triangle, which will be due if IGT is paid off their defaulted note, interest, and dividends.
The above represents all subsequent events necessary for disclosure through the date of our filing our annual form 10-K which is May 12, 2010.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are intended to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer.
Our management, including the Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(c) as of December 31, 2009. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were not effective given the material weakness in the internal control over financial reporting discussed below.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was intended to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.
Management and the Company’s independent registered accounting firm have identified a group of control deficiencies with regard to key business processes, which we believe, in the aggregate, represents a material weakness in the Company’s internal control over financial reporting as of December 31, 2009.
Among the most significant of these deficiencies were inadequate segregation of duties, including the need for a corporate controller and additional accounting personnel. Many of these deficiencies had the effect of causing undetected material misstatements in financial reporting to occur that required correction with significant audit adjustments. In addition, such deficiencies had the potential for causing further misstatements to occur and not be detected by the Company’s internal control.
Management assessed the effectiveness of our internal control over financial reporting (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on the assessment performed on the effectiveness of our internal controls, management believes that, as of December 31, 2009, our internal controls were not effective based on the above criteria.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
Management believes that the hiring of a controller and additional accounting personnel will properly address segregation of duties issues and significant deficiencies in its internal accounting control system. We will hire these key accounting personnel with the next round of capital that is raised by us.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Code of Ethics
Our Board of Directors has adopted a code of conduct and ethics applicable to each of our directors, officers and employees. The full text of the code of conduct and ethics and the code of ethics are available at our website at www.lvgi.com.
Audit Committee
The Company has an Audit Committee consisting of two members, Harlen Braaten and Rich Irvine. The Board determined that Harlan Braaten and Rich Irvine are “independent directors” as that term is defined in NASDAQ National Stock Market rules and Rule 10A-3 of the Securities Exchange Act of 1934 and that Mr. Braaten is an “audit committee financial expert” as that term is defined in Item 407 of Regulation S-B promulgated by the SEC. Mr. Braaten is the chair of the Audit Committee. The Board has also adopted an audit committee charter.
The remaining information required by this Item will be filed with the SEC either through an amendment to this Report (the “Amendment”) or through the definitive proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC (the “2010 Proxy Statement”).
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be filed through either the Amendment or the 2010 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item will be filed through either the Amendment or the 2010 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item will be filed through either the Amendment or the 2010 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANTS’ FEES AND SERVICES.
The information required by this Item will be filed through either the Amendment or the 2010 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Documents Filed as Part of this Report:
(1) Financial Statements
Included in Part II of this report:
Consolidated Balance Sheets at December 31, 2008 and 2009.
Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2009.
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2008 and 2009.
Consolidated Statements of Cash Flow for the Years Ended December 31, 2008 and 2009.
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Not required.
(3) Exhibits
See response to (b) below
(b) Exhibits
Included as Exhibits are the items listed in the Exhibit Index.
(c) Financial Statement Schedules:
Not required
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Las Vegas Gaming, Inc. (Registrant) | |
| By: | /s/ Jon D. Berkley |
Jon D. Berkley President and Chief Executive Officer (Principal Executive Officer) | |
| Date: | May 12, 2010 |
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/ Jon D. Berkley | Director, President and Chief Executive | May 12, 2010 | ||
| Jon D. Berkley | Officer (Principal Executive Officer) | |||
| /s/ Bruce A. Shepard | Chief Financial Officer and | May 12, 2010 | ||
| Bruce A. Shepard | Treasurer (Principal Financial and Accounting Officer) | |||
| /s/ Russell R. Roth | Director | May 12, 2010 | ||
| Russell R. Roth | ||||
| /s/ Harlan D. Braaten | Director | May 12, 2010 | ||
| Harlan D. Braaten | ||||
| /s/ Richard H. Irvine | Director | May 12, 2010 | ||
| Richard H. Irvine |
EXHIBIT INDEX
| Exhibit | Document Description | |
| 2.1 | Stock Purchase Agreement dated June 30, 2002, by and among registrant, Imagineering Systems, Inc., Ron Mach, and Alicia Mach and Bill Williams, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 2.2 | Agreement and Plan of Merger dated April 30, 2003 among registrant, Las Vegas Twin, Inc., Triple Win in Nevada, Inc. and Robert G. Ducaj, II, John Mulligan, Leta K. Mulligan, and Michael Cassidy, incorporated by reference to registrant’s Quarterly Report on Form 10-QSB, as filed with the SEC on May 20, 2003. | |
| 2.3 | Closing Agreement for Stock Purchase dated July 1, 2003 by and among the registrant, Imagineering Systems, Inc., Ron Mach and Alicia Mach and Bill Williams, incorporated by reference to registrant’s Quarterly Report on Form 10-QSB, as filed with the SEC on August 9, 2003. | |
| 2.4 | Agreement and Plan of Merger dated January 14, 2005, among the registrant, AdLine Gaming, Inc. and AdLine Network, LLC, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on January 24, 2005. | |
| 3.1 | Articles of Incorporation, as filed with the Nevada Secretary of State on April 28, 1998, incorporated by reference to registrant’s Registration Statement on Form 10-SB12G/A, as filed with the SEC on June 19, 2000. | |
| 3.2 | Certificate of Amendment to Articles of Incorporation, as filed with the Nevada Secretary of State on June 7, 2000, incorporated by reference to registrant’s Annual Report of Form 10-KSB, as filed with the SEC on April 12, 2001. | |
| 3.3 | Certificate of Amendment to Articles of Incorporation, as filed with the Nevada Secretary of State on December 8, 2005, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 3.4 | Certificate of Correction, as filed with the Nevada Secretary of State on July 14, 2006, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on July 19, 2006. | |
| 3.5 | Certificate of Designation for Common Stock, as filed with the Nevada Secretary of State on July 17, 2006, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on July 19, 2006. | |
| 3.6 | Certificate of Withdrawal of Certificate of Designation for Series A Convertible Preferred Stock, as filed with the Nevada Secretary of State on October 3, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 7, 2008. | |
| 3.7 | Certificate of Withdrawal of Certificate of Designation for Series C Convertible Preferred Stock, as filed with the Nevada Secretary of State on October 3, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 7, 2008. | |
| 3.8 | Certificate of Withdrawal of Certificate of Designation for Series D Convertible Preferred Stock, as filed with the Nevada Secretary of State on October 3, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 7, 2008. | |
| 3.9 | Amended and Restated Certificate of Designation for Series B Convertible Preferred Stock, as filed with the Nevada Secretary of State on October 22, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 28, 2008. | |
| 3.10 | Amended and Restated Certificate of Designation for Series E Convertible Preferred Stock, as filed with the Nevada Secretary of State on October 22, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 28, 2008. |
| Exhibit | Document Description | |
| 3.11 | Amended and Restated Certificate of Designation for Series F Convertible Preferred Stock, as filed with the Nevada Secretary of State on October 22, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 28, 2008. | |
| 3.12 | Amended and Restated Certificate of Designation for Series G Convertible Preferred Stock, as filed with the Nevada Secretary of State on October 22, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 28, 2008. | |
| 3.13 | Amended and Restated Certificate of Designation for Series H Convertible Preferred Stock, as filed with the Nevada Secretary of State on October 22, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 28, 2008. | |
| 3.14 | Certificate of Designation for Series I Preferred Stock, as filed with the Nevada Secretary of State on October 22, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 28, 2008. | |
| 3.15 | Restated Bylaws of registrant, incorporated by reference to registrant’s Registration Statement on Form 8-A12G, as filed with the SEC on January 26, 2009. | |
| 3.16 | First Amendment to Restated Bylaws, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on April 24, 2009. | |
| 10.1 | Stock Option Plan (2000), incorporated by reference to Appendix A of registrant’s definitive proxy statement dated October 29, 2007, as filed with the SEC on October 29, 2007.(1) | |
| 10.2 | First Amendment to the Stock Option Plan (2000), incorporated by reference to Appendix B of registrant’s definitive proxy statement dated October 29, 2007, as filed with the SEC on October 29, 2007.(1) | |
| 10.3 | Consulting Agreement dated March 31, 2005 by and between registrant and Michael Shillan/Shillan Co., LLC, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.4 | Gamblers Bonus Sweepstakes Agreement dated March 31, 2005 between registrant and United Coin Machine Company, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.5 | License Agreement dated July 8, 2005 between registrant and Leroy’s Sports and Horse Place, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.6 | License Agreement dated July 11, 2005 between registrant and Leroy’s Sports and Horse Place, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.7 | Memorandum of Understanding for the Use of PortalVision for Account Wagering between registrant and Computerized Bookmaking Systems, Inc., incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.8 | Waiver and Release Agreement dated February 1, 2006 between registrant and AdLine Network, LLC incorporated by reference to registrant’s Annual Report on Form 10-KSB, as filed with the SEC on April 17, 2006. | |
| 10.9 | Assignment Agreement dated February 1, 2006 between registrant and AdLine Network, LLC, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.10 | Securities Purchase Agreement dated March 31, 2006 between registrant and CAMOFI Master LDC, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on April 7, 2006. |
| Exhibit | Document Description | |
| 10.11 | Amended and Restated Senior Secured Convertible Note with Original Issue Date of March 31, 2006 in favor of CAMOFI Master LDC, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on August 19, 2008. | |
| 10.12 | Amended and Restated Registration Rights Agreement dated April 30, 2008 between registrant and CAMOFI Master LDC, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on August 19, 2008. | |
| 10.13 | Warrant Agreement dated March 31, 2006 between registrant and CAMOFI Master LDC, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.14 | Security Agreement dated March 31, 2006 between registrant and CAMOFI Master LDC, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.15 | First Amendment to Security Agreement dated April 30, 2008, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on August 19, 2008 | |
| 10.16 | Subsidiary Guarantee dated March 31, 2006 between registrant and CAMOFI Master LDC, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.17 | First Amendment to Subsidiary Guarantee dated April 30, 2008, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on August 19, 2008. | |
| 10.18 | Consulting Agreement dated April 1, 2006 between registrant and JMC Investments, L.L.C., incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.19 | Subcontractor Purchase Agreement dated May 20, 2006 between registrant and Spectral Response, Inc, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on July 28, 2006. | |
| 10.20 | Form Offer of Employment, incorporated by reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19, 2006. | |
| 10.21 | Executive Employment Agreement of Jon D. Berkley dated May 15, 2007, incorporated by reference to registrant’s Quarterly Report on Form 10-QSB, as filed with the SEC on August 14, 2007.(1) | |
| 10.22 | Form of Non-Qualified Stock Option Agreement, incorporated by reference to registrant’s Quarterly Report on Form 10-QSB, as filed with the SEC on November 19, 2007. | |
| 10.23 | Form of Warrant Agreement, incorporated by reference to registrant’s Quarterly Report on Form 10-QSB, as filed with the SEC on November 19, 2007. | |
| 10.24 | Asset Acquisition Agreement between registrant, Las Vegas Gaming Acquisition Corp., Adline Network Holdings, Inc., Adline Media, LLC, Adline Network, LLC, Freeview Network, LLC, Sam Johnson and Larry L. Enterline dated September 29, 2008 , incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 3, 2008. | |
| 10.25 | Investment Agreement between registrant and IGT dated September 30, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 7, 2008. | |
| 10.26 | Form of Warrant to purchase Common Stock and Common Stock Series A issuable to IGT, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 7, 2008. |
| Exhibit | Document Description | |
| 10.27 | Satisfaction and Termination Agreement between registrant, Imagineering Gaming, Inc., Las Vegas Keno, Inc. and CAMOFI Master LDC dated October 24, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 28, 2008. | |
| 10.28 | First Amendment to Warrants between registrant and CAMOFI Master LDC dated October 24, 2008, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on October 28, 2008. | |
| 10.29 | License Application and Support Agreement between registrant and IGT dated September 30, 2008, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on November 19, 2008.(2) | |
| 10.30 | Intellectual Property Access Agreement between registrant and IGT dated September 30, 2008, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on November 19, 2008. | |
| 10.31 | Retrofit License Agreement between registrant and IGT dated September 30, 2008, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on November 19, 2008.(2) | |
| 10.32 | Binding Term Sheet between registrant and IGT dated February 13, 2009, incorporated by reference to registrant’s Annual Report on Form 10-K, as filed with the SEC on April 8, 2009.(3) | |
| 10.33 | ||
| 10.34 | ||
| 10.35 | ||
| 10.36 | Technology Royalty Agreement dated August 6, 2009 between registrant and Perfect Storm Software, LLC, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on August 19, 2009. | |
| 10.37 | Asset Purchase Agreement dated August 19, 2009 between registrant and Gaming Arts, LLC, incorporated by reference to registrant’s Current Report on Form 8-K/A, as filed with the SEC on August 27, 2009. | |
| 10.38 | ||
| 10.39 | Asset Purchase Agreement dated November 4, 2009 between registrant and Session Gaming, LLC, incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the SEC on November 20, 2009. | |
| 10.40 | Secured Promissory Note dated June 1, 2009 in favor of IGT, incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on November 23, 2009. | |
| 10.41 | First Addendum to Intellectual Property Access Agreement between registrant and IGT dated September 4, 2009 (to be effective June 1, 2009), incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on November 23, 2009. | |
| 10.42 | First Addendum to License and Application Support Agreement between registrant and IGT dated September 4, 2009 (to be effective June 1, 2009), incorporated by reference to registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on November 23, 2009.(4) | |
| 10.43 | ||
| 10.44 | ||
| 10.45 | ||
| 10.46 |
| Exhibit | Document Description | |
| 10.47 | ||
| 21.1 | ||
| 31.1 | ||
| 31.2 | ||
| 32.1 | ||
| (*) | Filed herewith. | |
| (1) | Management contracts or compensatory plans or arrangements that were previously filed as exhibits pursuant to Item 601(b)(10)(iii) of Regulation S-K. | |
| (2) | Confidential treatment has been granted by the SEC for portions of this exhibit. These portions have been omitted from the exhibit as filed with the registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on November 19, 2008. | |
| (3) | Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from the exhibit as filed with the registrant’s Annual Report on Form 10-K, as filed with the SEC on April 8, 2009. | |
| (4) | Confidential treatment has been requested by the SEC for portions of this exhibit. These portions have been omitted from the exhibit as filed with the registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on November 23, 2009. |
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