Document and Entity Information
Document and Entity Information - shares | 3 Months Ended | |
Jun. 30, 2020 | Aug. 14, 2020 | |
Fair value of warrants and convertibility feature of long term debt | ||
Entity Registrant Name | Lightning Gaming, Inc. | |
Entity Central Index Key | 0001392545 | |
Document Type | 10-Q | |
Document Period End Date | Jun. 30, 2020 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Is Entity's Reporting Status Current? | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Common Stock, Shares Outstanding | 4,649,383 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2020 | |
EntityEmergingGrowthCompany | false | |
Entity Small Business | true | |
Entity Interactive Data Current | Yes | |
Entity Incorporation State Country Code | NV | |
Entity File Number | 000-52575 |
Consolidated Balance Sheets
Consolidated Balance Sheets - USD ($) | Jun. 30, 2020 | Dec. 31, 2019 |
ASSETS | ||
Cash | $ 1,500,325 | $ 1,598,749 |
Accounts receivable, net | 592,686 | 747,704 |
Inventory | 1,566,464 | 1,468,210 |
Prepaid expenses | 260,002 | 234,994 |
Total Current Assets | 3,965,900 | 4,255,446 |
Property, Plant and Equipment, net | 4,008,179 | 4,277,223 |
Other Assets | 8,193 | 8,193 |
License Fees, net of accumulated amortization | 24,589 | 36,005 |
Total Assets | 8,065,391 | 8,676,937 |
Liabilities and Stockholders' Deficit | ||
Accounts payable | 172,304 | 557,199 |
Accrued expenses | 77,526 | 382,806 |
Current portion of long term notes payable | 602,240 | 439,594 |
Interest payable | 69,931 | 101,083 |
Total Current Liabilities | 931,825 | 1,480,682 |
Long Term Debt and Other Liabilities | ||
Long term notes payable | 4,890,814 | 4,397,410 |
Interest payable and other liabilities | ||
Other long term liabilities | 17,944 | |
Fair value of warrants and convertibility feature of long term debt | 294,667 | 779,901 |
Total Long Term Debt and Other Liabilities | 5,185,481 | 5,195,255 |
Commitments | ||
Stockholders' Deficit | ||
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting capital stock 6,000,000 shares authorized, -0- shares issued and outstanding | ||
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,916,285 shares issued; 4,649,383 outstanding | 4,917 | 4,917 |
Nonvoting common stock: $0.001 par value; authorized 50,000,000 shares; 33,300,000 issued and outstanding | 33,300 | 33,300 |
Additional paid in capital | 30,564,008 | 30,532,427 |
Accumulated deficit | (28,688,329) | (28,548,833) |
Treasury stock, 266,902 shares at cost | (20,811) | (20,811) |
Total Stockholders' Equity | 1,948,085 | 2,001,000 |
Total Liabilities and Stockholders' Equity | $ 8,065,391 | $ 8,676,937 |
Consolidated Balance Sheets (Pa
Consolidated Balance Sheets (Parenthetical) - $ / shares | Jun. 30, 2020 | Dec. 31, 2019 |
Stockholders' Deficit | ||
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, authorized shares | 10,000,000 | 10,000,000 |
Preferred Stock Series A Nonvoting capital stock, authorized shares | 6,000,000 | 6,000,000 |
Preferred Stock Series A Nonvoting capital stock, issued shares | ||
Preferred Stock Series A Nonvoting capital stock, outstanding shares | ||
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, authorized shares | 90,000,000 | 90,000,000 |
Common stock, issued shares | 4,916,285 | 4,916,285 |
Common stock, outstanding shares | 4,649,383 | 4,649,383 |
Consolidated Statements of Oper
Consolidated Statements of Operations (Unaudited) - USD ($) | 3 Months Ended | |
Jun. 30, 2020 | Jun. 30, 2019 | |
Revenues | ||
License and service fees | $ 193,572 | $ 1,054,989 |
Sales of gaming products and parts | 378,110 | 1,463,480 |
Total revenues | 571,682 | 2,518,469 |
Costs and operating expenses | ||
Cost of products sold | 300,103 | 1,230,415 |
Operating expenses | 16,853 | 173,830 |
Research and development | 54,141 | 101,836 |
Selling, general & administrative expenses | 260,772 | 501,851 |
Depreciation and amortization | 258,606 | 142,600 |
Total costs and operating expenses | 590,372 | 920,117 |
Operating income (loss) | (318,793) | 367,937 |
Non-operating income (expense) | ||
Net interest expense | (231,642) | (138,776) |
Change in value of warrants | 59,759 | |
Other income (expense) | 2,157 | |
Net income | $ (488,519) | $ 224,461 |
Net loss per common share including Series A Nonvoting shares-basic and diluted | $ 0.01 | $ 0.01 |
Weighted average Series A Nonvoting shares outstanding-basic and diluted | 33,300,000 | 33,300,000 |
Weighted average common shares outstanding- basic and diluted | 4,649,383 | 4,649,383 |
Weighted average nonvoting common shares outstanding-basic and diluted | 33,300,000 | 33,300,000 |
Consolidated Statements of Cash
Consolidated Statements of Cash Flows (Unaudited) - USD ($) | 3 Months Ended | |
Jun. 30, 2020 | Jun. 30, 2019 | |
Adjustments to reconcile net loss to net cash used in operating activities; | ||
Gain on sale of equipment | $ (84,496) | $ 428,714 |
Stock based compensation | 31,581 | 32,353 |
Changes in Assets and Liabilities | ||
Decrease in accounts receivable | 155,019 | (68,446) |
Decrease in inventories | (98,254) | (166,683) |
Increase (decrease) in accounts payable | (384,896) | (46,176) |
Increase in accrued expenses | (305,281) | 125,954 |
Decrease in fair value of warrants and convertible feature of long term debt | (32,344) | |
NET CASH USED IN OPERATING ACTIVITES | (589,823) | 554,387 |
CASH FLOWS FROM INVESTING ACTIVITIES | ||
Purchase of equipment | (212,487) | (1,925,577) |
Proceeds from sale of fixed assets | ||
Decrease in license fees | (20,250) | |
Net cash Used in Investing activities | (232,737) | (1,925,577) |
CASH FLOWS FROM FINANCING ACTIVITIES | ||
Net proceeds from issuance of Notes | 990,000 | 2,079,131 |
Net proceeds from issuance of Series A Nonvoting Capital Stock | (265,864) | (416,028) |
Net cash provided by financing activities | 724,136 | 1,663,103 |
Net Increase (Decrease) in Cash | (98,424) | 291,913 |
Cash - Beginning of period | 1,598,749 | 565,461 |
Cash - End of period | 1,500,325 | 857,374 |
Supplemental Disclosure of Non-Cash Financing Activities: | ||
Issuance of nonvoting common stock | (265,864) | (416,028) |
Inventory transferred to fixed assets | 30,000 | 125,005 |
Cash paid for interest | $ 375,377 | $ 217,123 |
Nature of Business and Signific
Nature of Business and Significant Accounting Policies | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Nature of Business and Significant Accounting Policies | Note 1. Nature of Business and Summary of Significant Accounting Policies Nature of Business Lightning Gaming, Inc. (the “Company”) was incorporated on March 1, 2007 and on January 29, 2008, completed a merger with Lightning Poker, Inc. (“Lightning Poker”) which became a wholly-owned subsidiary of the Company. Lightning Poker was formed to manufacture and market a fully automated, proprietary electronic poker table (the “Poker Table”) to commercial and tribal casinos, card clubs, and other gaming and lottery venues. Lightning Poker’s Poker Table was designed to improve economics for casino operators while improving overall player experience. In 2008, the Company, as the sole member, established Lightning Slot Machines, LLC (“Lightning Slots”) through which it commenced the design, manufacture, marketing, sale and operation of video slot machines to customers in various gaming jurisdictions. Our gaming products feature advanced graphics and engaging games based on proprietary themes. Our consolidated financial statements include the accounts of the Company, including All inter-company accounts and transactions have been eliminated. Basis of Presentation The unaudited interim financial statements contained herein should be read in conjunction with the Company’s annual report on Form 10-K filed on March 30, 2020 (“Form 10-K”). The accompanying interim financial statements are presented in accordance with the requirements of Article 8.03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, accordingly, do not include all the disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) with respect to annual financial statements. The interim consolidated condensed financial statements have been prepared in accordance with the Company’s accounting practices described in the Form 10-K but have not been audited. In management’s opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods presented. The consolidated balance sheet data as of December 31, 2019 was derived from the Company’s consolidated audited financial statements. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the entire year. The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. The Company recognized net losses for the three and six months ended June 30, 2020 and used approximately $590,000 in cash from operations for the six months ended June 30, 2020, however it has maintained and sustained a working capital surplus. Due to the outbreak of the novel coronavirus disease (COVID-19), the Company, as well as all other non-life-sustaining businesses within the state of Pennsylvania, was ordered by governor’s mandate to close physical operations on March 19, 2020. Due to COVID-19, all of our customers were mandated to close by March 31, 2020 and remained closed throughout the entire month of April 2020 which reduced our revenues to $-0- during that time period. Certain customers were able to start reopening their facilities in May 2020 and the Company was able to reopen its facility and operations on May 22, 2020, however operations are open with limitations and through strict adherence to guidelines established by the Centers for Disease Control and Prevention (“CDC”) and each facility’s respective state or tribal government. The ability to measure the degree to which COVID-19 will impact the Company’s performance in its aftermath will depend on the duration and spread of COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended. On May 7, 2020, we received $246,200 in funding under the federal loan program known as the Paycheck Protection Program (“PPP”) through the Small Business Association (“SBA”) which has helped to lessen the impact of COVID-19 for the expenses covered under the program. In addition, aggressive expense management has been employed to mitigate the adverse impact that COVID-19 has had on our operations and performance. We anticipate that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations, however the Company’s future performance will depend on the duration of COVID-19 and the Company’s ability to distribute its products and successfully market them to more casinos and gaming venues. Although we realized a net loss and used cash from operations for the six months ended June 30, 2020 due to COVID-19, based on our working capital surplus, financial condition, cash flow projections, anticipated revenues and financing agreements, we believe we have sufficient cash flows to support our operations for the next twelve months, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects for expansion. The Company’s continuance as a going concern is dependent upon these factors, among others. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accounts Receivable and Allowance for Doubtful Accounts Inventory Fair Value Measurements Accounting Standards Codification (“ASC”) 820 – Fair Value Measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 further establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques into the following three levels, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs: · Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity can access at the measurement date; · Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities that are observable, either directly or indirectly; · Level 3: Unobservable inputs for the asset or liability, including significant assumptions of the reporting entity and other market participants. The fair value of and the methodology used by the Company for the warrant liability is discussed in Note 9 Earnings per share: The Company uses the two-class method in computing earnings per share. Under the two-class method, undistributed earnings are allocated among common and participating shares to the extent each security may share in such earnings. In computing earnings per share, the Company's Nonvoting Stock is considered a participating security. Each share of Nonvoting Stock has identical rights, powers, limitations and restrictions in all respects as each share of common stock of the Company including the right to receive the same consideration per share payable in respect of each share of common stock, except that holders of Nonvoting Stock shall have no voting rights or powers whatsoever. The following table summarizes the number of dilutive shares, which may dilute future earnings per share, outstanding for each of the periods presented: June 30, 2020 June 30, 2019 Stock options 3,930,000 4,055,000 Warrant 7,000,000 — 10,930,000 4,055,000 Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued the update Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the estimation of credit losses from an “incurred loss” methodology to one that reflects “expected credit losses” (the Current Expected Credit Loss model, or “CECL”) which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Measurement under CECL is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability of reported amounts. The amendment became effective for the annual and interim periods ending after December 15, 2019 and did not have a material impact on our financial statements. In December 2019, the FASB issued an update within the scope of Topic 740, Income Taxes. The update simplifies the accounting for income taxes by removing certain exceptions to the general principles within the Topic and improves consistent application of and simplifies generally accepted accounting principles (“GAAP”) for other areas by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is gathering the information and performing the analyses required before the standard’s effective date to determine the impact this guidance will have on our financial statements. |
Inventory
Inventory | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Inventory | Note 2. Inventory Inventory consists of the following: June 30, 2020 December 31, 2019 Finished products $ 1,222,654 $ 1,046,629 Raw materials and work in process 343,810 421,581 Inventory $ 1,566,464 $ 1,468,210 Inventory is stated at the lower of cost using the first-in, first-out method, or net realizable value. Slot machine cabinets, which are manufactured by a third-party, include monitors, toppers, stands and certain electronic components, are shown as finished products. Raw materials primarily consist of the flash drives, motherboards, spare parts and interchangeable electronic components for the slot machines. |
Property and Equipment
Property and Equipment | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Property and Equipment | Note 3. Property and Equipment Property and equipment consist of the following: June 30, 2020 December 31, 2019 Equipment, principally gaming equipment under lease $ 6,520,790 $ 6,281,476 Delivery truck 28,140 28,140 Furniture and fixtures 90,206 87,033 Leasehold improvements 91,794 91,794 Property and equipment 6,730,930 6,488,443 Less accumulated depreciation (2,722,751 ) (2,211,220 ) Property and equipment, net $ 4,008,179 $ 4,277,223 Depreciation expense related to the property and equipment included in the consolidated Statements of Operations was $257,773 and $141,766 for the three months ended June 30, 2020 and 2019, respectively. Depreciation expense related to the property and equipment included in the consolidated Statements of Operations was $511,531 and $246,179 for the six months ended June 30, 2020 and 2019, respectively. |
License Fees
License Fees | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
License Fees | Note 4. License Fees License fees consist of the following: June 30, 2020 December 31, 2019 Purchased licenses $ 367,410 $ 377,160 Less accumulated amortization (342,821 ) (341,155 ) License fees, net $ 24,589 $ 36,005 Through May 31, 2020, licenses for gaming machine patents and technology had been added to the cost of slot machines built for sale or lease using a capitalization rate per machine. The capitalization rate was based on expected annual machine production and adjusted accordingly based on actual versus projected units produced. As of May 31, 2020, machine production for the remainder of the 2020 calendar year was projected to be nominal due to COVID-19. Therefore, the cost of licenses for gaming technology as of that date of $27,000 are being expensed as license fees on a straight-line basis at $6,750 per month over the remaining initial term of the license period ending September 30, 2020. The weighted average useful life of purchased source code licenses is 3 years. Amortization expense included in the consolidated Statements of Operations relating to the source code licenses was $833 and $834 for the three months ended June 30, 2020 and 2019, respectively. Amortization expense included in the consolidated Statements of Operations relating to the purchased licenses was $1,666 for the six months ended June 30, 2020 and 2019, respectively. Estimated future capitalizable costs, amortization and expense related to recorded license fees is as follows: Year Ending Amount 2020 $ 22,366 2021 2,223 $ 24,589 |
Notes Payable
Notes Payable | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Notes Payable | Note 5. Notes Payable On July 17, 2018, the Company entered into a Master Loan Agreement (the “Prior Loan”) with PDS Gaming LLC (“PDS” or the “Lender”) to make a series of advances under the Prior Loan in the principal amount of up to $2,500,000 for the purposes of financing the purchase or manufacturing of equipment. The Loan was evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and secured by a Security Agreement dated of even date with the Loan, between the Company and the Lender granting a security interest to the Lender in all of the Company’s right, title and interest in and to personal property, tangible and intangible, wherever located or situated and whether now owned or acquired or created. The Loan was advanced, in parts, pursuant to the Prior Loan and in the amounts of each Note during the advance period which originally expired on July 17, 2019. Each subsequent advance being made at the Lender’s sole and absolute discretion. Under the original terms, the Notes bore interest on the outstanding principal amount at the lesser of the maximum rate or interest rate specified on each note based on a 360 day year. Payments consisting of principal and interest, as well as “Contingent Interest Payments” (“CIP”) of $3.50 per day for each on-line day up to a maximum of 730 on-line days for each unit financed under the Note were due and payable monthly. Each Note matured in 36 months and CIP obligations matured 48 months after the respective closing of each Note. On March 29, 2019, the Lender agreed to increase the total principal amount that may be borrowed under the Loan from $2,500,000 to $5,500,000. On April 15, 2019, the Lender agreed to additional amendments, extending the advance period to 24 months beyond the Prior Loan date expiring July 17, 2020, and defining the CIP in each Note. In addition, the original Notes on Advances 1 through 5 were amended (the “Amendment” or the “Amended Note[s]”), extending the maturity dates, reducing the base monthly payments of principal and interest, reducing the CIP to $3.00 per day for each on-line day, extending the CIP obligation maturity date to 60 months, and defining the remaining CIP days under each Amended Note. All other terms of the Notes and Prior Loan remained unchanged and in full force, including the interest rate which remained at 11% on each Note. On November 27, 2019 (the “Closing Date”), the Company entered into a new Master Loan Agreement (the “Loan”) with PDS Gaming – Nevada, LLC (“PDS Gaming” or the “Lender”) to make a series of advances under the Loan in the principal amount of up to $7,000,000 in order to (i) re-finance the existing outstanding indebtedness of the Company under the Prior Loan and Amendment for Advances 1 through 8 which totaled $3,765,792, (ii) finance the Company’s purchase or manufacturing of equipment and (iii) to be used for general working capital. The Loan is and will be evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and is secured by a Security Agreement dated of even date with the Loan, between the Company and the Lender granting a security interest to the Lender in all of the Company’s right, title and interest in and to personal property, tangible and intangible, wherever located or situated and whether now owned or acquired or created. The Loan will be advanced, in parts, pursuant to the Loan and in the amounts of each Note during the advance period which runs until November 30, 2020. The Notes will bear interest on the outstanding principal amount at a rate per annum equal to an annual rate of 13%. Payments consisting of principal and interest for each advance financed under the Note are due and payable monthly based on an 84-month amortization and mature in 60 months, at which time the entire principal balance plus all accrued and unpaid interest under the Notes are due and payable in full. Each Note is prepayable subject to a sliding scale prepayment fee, declining 1% from 4% in the first twelve months to 0% after the 48th month, based on then-outstanding principal amount of the Note. The initial advance dated November 27, 2019 is evidenced by a Note in the principal amount of $5,000,000 (“Advance 9”). Monthly payments of $91,616 on Advance 9 commenced on January 1, 2020 and will mature on December 1, 2024. On January 29, 2020, the Company closed on Advance 10 under the Loan with PDS Gaming. The advance is evidenced by a Note in the principal amount of $1,000,000 and bears interest at an annual rate of 13%. Monthly payments of $18,309 commenced on March 1, 2020, and the Note matures on February 1, 2025. As inducement to the Lender to make the Loan, the Company issued to the Lender a warrant (“Warrant”) entitling the Lender to purchase up to 7,000,000 shares of common stock of the Company which was equal to 15.6% of the outstanding common stock on the Closing Date. The Warrant is detachable with an exercise price of $0.05 per share and expires ten years from the Closing Date. The Warrant cannot be exercised until PDS Gaming is fully licensed in all of the Company’s gaming jurisdictions. The Company calculated the fair value of the Warrant to be $779,901 at the time of issuance using the Black-Scholes pricing model, and under ASC 480, recorded the Warrant as a liability. See Note 9 The Company incurred a closing fee of 1% on the principal amount of the Note, excluding the portion of the principal amount of the first Note that is attributable to the refinancing of the Prior Loan as of the closing date, of $12,342. In addition, the Company paid $1,879 for out of pocket expenses and the total fees of $14,221 were recorded as expense on the Closing Date. On November 27, 2019, the Company recorded the percentage of the Loan remaining for advance in proportion to the total Loan, i.e. 2/7 ($2,000,000/$7,000,000) or 28.6% or $229,829, as a deferred debt commitment fee which is being amortized on a straight-line basis until the earlier of the end of the advance period or until the remaining advances under the Loan are made. In January 2020, a $10,000 loan fee was paid to the Lender and the fee as well as the proportionate amount of the unamortized deferred fee attributable to the $1,000,000 advance of $92,845 were reclassified as debt discount and are being amortized over the life of the advance using the interest method. When the remaining advances under the Loan are made, the proportionate amount of the unamortized deferred fee remaining will be reclassified as debt discount and amortized over the life of the advance using the interest method. The balance of the debt discount attributable to the advance taken in January 2020 was $93,393 as of June 30, 2020. ASC Topic 470 – Debt, requires an analysis to determine if the debt instruments under a refinancing transaction are substantially different by testing the present value (“PV”) of the cash flows under the terms of the new debt instrument versus the PV of the remaining cash flows under the terms of the original instrument. In cases where the transactions are deemed to be significantly different, an extinguishment has occurred, the old debt is derecognized and the new debt is recorded at fair value and fees paid to the lender on the old debt are expensed. The difference between the net carrying value of the original debt and the fair value of the new debt is recorded as a gain or a loss and interest expense is recorded based on the effective rate of interest on the new debt. The Company prepared the analysis and determined that the change in PV of cash flows is greater than 10%, the threshold established in ASC 470, and considered the transaction an extinguishment. The total cost of the debt of $557,072 was calculated as the difference between the fair value of the Warrant and the deferred debt commitment fee and the portion of the cost of debt reacquired associated with the carrying value of the old debt of $419,563 (75.3% x $557,072) was recognized as a loss on extinguishment of debt on the Closing Date, November 27, 2019. Debt discount of $137,509 was calculated as the cost associated with the new debt in proportion to the total cost of the debt refinanced or reacquired and is presented as a direct reduction to the value of the debt and is being amortized over the life of the advance using the interest method. The balance of the debt discount attributable to the advance taken on November 27, 2019 was $119,267 and $134,574 as of June 30, 2020 and December 31, 2019, respectively. The Loan is subject to covenant clauses whereby the Company is required to meet certain key financial ratios. The Company did not meet the maximum debt to EBITDA, defined as Earnings Before Interest Taxes, Depreciation and Amortization, ratio as required in the Loan for the quarter ended June 30, 2020, a direct effect from COVID-19 casino closures and slot machine social distancing requirements. Due to the material effect that COVID-19 has on the Company’s revenues and prior to June 30, 2020, the Lender has agreed to provide a grace period for compliance of financial ratio covenants until September 30, 2020. As of June 30, 2020 and December 31, 2019, Notes payable, net of debt discount, consist of the following: Advance Date Maturity Date Note Amount Monthly Payment Interest Rate June 30, 2020 December 31, 2019 PDS Gaming Advance 9 11/27/2019 12/1/2024 $ 5,000,000 $ 91,616 13 % $ 4,623,162 $ 4,837,004 PDS Gaming Advance 10 1/29/2020 2/1/2025 $ 1,000,000 $ 18,309 13 % 869,892 — Total Notes Payable 5,493,054 4,837,004 Less: amounts classified as current (602,240 ) (439,594 ) Long-Term Notes Payable $ 4,890,814 $ 4,397,410 The following table lists the future principal payments due on the Notes as of June 30, 2020: Year Ending Amount Remaining 2020 $ 261,553 2021 591,118 2022 683,484 2023 790,371 2024 2,768,025 2025 398,503 $ 5,493,054 The following table provides a breakdown of the interest expense in the consolidated Statements of Operations for the three months ended June 30, 2020 and 2019: June 30, 2020 June 30, 2019 Interest on Notes payable $ 190,557 $ 84,843 Contingent interest obligations — 53,933 Amortization of deferred debt commitment fee 27,854 — Amortization of debt discount 13,231 — $ 231,642 $ 138,776 The following table provides a breakdown of the interest expense in the consolidated Statements of Operations for the six months ended June 30, 2020 and 2019: June 30, 2020 June 30, 2019 Interest on Notes payable $ 375,377 $ 143,163 Contingent interest obligations — 90,420 Amortization of deferred debt commitment fee 64,992 — Amortization of debt discount 24,760 — $ 465,129 $ 233,583 |
Deferred Income
Deferred Income | 3 Months Ended |
Jun. 30, 2020 | |
Revenue Recognition and Deferred Revenue [Abstract] | |
Deferred Income | Note 6. Deferred Income (Continued) In June 2020, the AICPA issued Technical Question and Answer (“TQA”) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program IAS 20 provides a model for the accounting of different forms of government assistance, which includes forgivable loans. Under this model, government assistance is not recognized until there is reasonable assurance (similar to the probable threshold in U.S. GAAP) that any conditions attached to the assistance will be met and the assistance will be received. Once there is reasonable assurance that the conditions will be met, the earnings impact of the grant is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Hence, a business entity would record the cash inflow from the PPP loan as a deferred income liability and subsequently reduce the liability, with the offset through earnings as either a credit in the income statement or a reduction of the related expenses, as it recognizes the related cost to which the loan relates, for example, payroll expense. The Company applied for and received proceeds of $246,200 through the PPP program on May 7, 2020, prior to the enactment of the Act. Based on the flexibility provided under the Act, the Company has elected to extend its Covered Period to 24 weeks. The Company has determined both through internal calculations and those provided by the AICPA’s forgiveness model, that all criteria for forgiveness based on both the CARES Act and the Act have been met as of July 15, 2020 and that the PPP loan will be 100% forgiven. In analogizing to IAS 20, the Company considers the PPP loan a grant that is expected to be forgiven and as such, has recorded the proceeds as a deferred income liability and will recognize the PPP grant as a reduction of the related expenses to which the loan is intended to compensate. For the period May 7, 2020 through June 30, 2020, the Company incurred the following costs related to and compensated through the PPP proceeds and which are expected to be forgiven in their entirety: Salaries and wages $ 156,224 Group health insurance 32,758 401K match 4,157 Subtotal payroll expenses 193,139 Rent 40,925 Utilities 2,312 Total eligible and forgivable expense under PPP program $ 236,376 On June 30, 2020, in accordance with methods acceptable under IAS 20, the Company reduced the PPP deferred income liability and offset the expenses listed above by their respective amounts, leaving a balance remaining of $9,824 as of that date. |
Leases
Leases | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Note Payable Related Party | Note 7. Leases In November 2009, the Company entered into a lease agreement for its corporate office and warehouse facility which became effective in January 2010 for a term of sixty-seven months. In September 2014, the lease was amended to include the following: 1) an extension of the lease term to February 28, 2021; 2) modification of the minimum annual and monthly rents for the extended lease term; 3) a rent abatement period of six months commencing October 1, 2014; and 4) an option to extend the term for a period of five years. Since the original lease inception, rental expense had been recognized on a straight-line basis over the life of the lease and was recorded as a deferred rent obligation during the abatement period. The deferred rent was reduced by the difference between the rent due and the straight-line expense upon commencement of the rental payments, which was identical to the lease expense that would have been recognized applying the principals under ASC 842 – Leases, which became effective and the Company adopted on January 1, 2019. Since there was no difference in the lease versus rent expense calculation, there was no effect to prior periods and the balance sheet adjustment to record the remaining balances in the right-of-use asset of $177,521, lease liability of $209,864, and to eliminate the balance remaining in the deferred rent account of $32,343 was made as of January 1, 2019. The following table summarizes the right-of-use asset and lease liability as of June 30, 2020: Right-of-use Asset $ 58,530 Lease Liability Current $ 69,931 Net of the PPP forgivable amount as listed in Note 6 The following table summarizes the Company’s scheduled future minimum lease payments as of June 30, 2020: Year Ended December 31: 2020 $ 53,930 2021 18,124 Minimum lease payments 72,054 Less: imputed interest (2,123 ) Present value of minimum lease payments 69,931 Less: current maturities of lease liability 69,931 Long-term lease liability $ — |
Commitments
Commitments | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Commitments | Note 8. Commitments The Company routinely enters into license agreements for the use of intellectual properties and technologies. These agreements generally provide for license fee payments when the agreements are signed and minimum commitments, which are cancellable in certain circumstances. On March 10, 2020, the Company and a licensor amended the terms under a patent cross license agreement dated February 28, 2017, which required the Company to pay an upfront per unit license fee on games (slot machines) placed in service after the agreement date and for a period of five years, and settled on the amount due upon audit conducted by the licensor for the period March 1, 2017 through September 30, 2019. Upon the payment of the $158,250 audit settlement amount, the Company was released from all claims under the agreement. The amendment removed the upfront per unit license fee and replaced it with a quarterly un-recoupable fee of $45,000 payable within fifteen days after the end of each calendar quarter and removed all audit provisions. The amendment terminates after five years from October 1, 2019, or September 30, 2024. The $66,000 difference between the $203,250 combined amount paid by the Company for the audit settlement and the quarterly license fee, and the $269,250 balance in the estimated liability for the license fee, was reversed in March 2020 and is included as a reduction to the operating expenses in the consolidated Statements of Operations for the six months ended June 30, 2020. |
Stockholders Equity
Stockholders Equity | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Stockholders' Deficit | Note 9. Stockholders’ Equity Stock Option Plans In order to provide an incentive to designated employees, officers, directors, consultants, independent contractors and other service providers who perform services contributing to the growth of the Company, and by aligning the interests of participants with the interests of stockholders, the Board declared it advisable and in the Company’s best interest and on May 25, 2016, approved the 2016 Stock Option Plan (the “2016 Plan”). The 2016 Plan permits the granting of nonqualified stock options. The shares underlying the options will be shares of the Company’s nonvoting common stock, par value $0.001 per share, and the total aggregate number of shares that may be issued under the 2016 Plan is 5,700,000 shares. The purchase price of each option will be determined by the Board at the time the option is granted, but in no event will be less than 100% of the fair market value of the common stock at the time of grant. Options granted will not be exercisable after 10 years from the grant date. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based upon publicly traded companies with characteristics similar to those of the Company. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. A summary of option transactions in 2020 under the 2007 Plan is as follows: Shares Weighted Average Exercise Price Outstanding at December 31, 2019 5,000 $ 2.00 Options granted — — Options exercised — — Options cancelled — — Options outstanding at June 30, 2020 5,000 $ 2.00 There are no awards available for grant remaining under the 2007 Plan. On March 8, 2017, the Board of Directors approved by unanimous written consent, the authorization to grant to employees with at least one year of service, non-qualified stock options to purchase shares of nonvoting common stock of the Company under its 2016 Plan. The options were issued at an exercise price of $.28 per share and vest ratably over five years. The options are subject to the terms and conditions of the 2016 Plan and each individual’s stock option agreement. On November 30, 2018, the Board of Directors, based on current valuation information available, authorized the reduction of the option exercise price to $.13 per share which was determined to be the market price of the Company’s stock on that date. The Company calculated the incremental fair value by calculating the fair value of the options immediately before and immediately after the modification. The fair value of the options immediately before the repricing is based on assumptions (e.g., volatility, expected term, etc.) reflecting the current facts and circumstances on the modification date and therefore, differs from the fair value calculated on the grant date. A summary of option transactions in 2020 under the 2016 Plan is as follows: Shares Weighted Average Exercise Price Outstanding at December 31, 2019 3,925,000 $ 0.13 Options granted — — Options exercised — — Options cancelled — — Options outstanding at June 30, 2020 3,925,000 $ 0.13 Options available for grant under the 2016 Plan at June 30, 2020 1,775,000 Stock-based compensation expense is recognized in the consolidated Statements of Operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures. Additional compensation expense arising from the modification of the exercise price is being recognized over the vesting period. Compensation expense related to stock options for the three months ended June 30, 2020 and 2019 was $15,726 and $16,128, respectively. Compensation expense related to stock options for the six months ended June 30, 2020 and 2019 was $31,581 and $32,354, respectively. The following table summarizes information with respect to stock options outstanding at June 30, 2020: Options Outstanding Vested Options Weighted Average Weighted Weighted Weighted Remaining Average Aggregate Average Average Aggregate Contractual Exercise Intrinsic Contractual Exercise Intrinsic Number Life Years Price Value Number Term Years Price Value 2007 Plan 5,000 0.1 $2.00 - 5,000 0.1 $2.00 - 2016 Plan 3,925,000 6.7 $0.13 - 2,325,000 6.7 $0.13 - The following table summarizes information with respect to stock options outstanding at December 31, 2019: Options Outstanding Vested Options Weighted Average Weighted Weighted Weighted Remaining Average Aggregate Average Average Aggregate Contractual Exercise Intrinsic Contractual Exercise Intrinsic Number Life Years Price Value Number Term Years Price Value 2007 Plan 5,000 0.6 $2.00 - 5,000 0.6 $2.00 - 2016 Plan 3,925,000 7.2 $0.13 - 1,540,000 7.2 $0.13 - As of June 30, 2020, all compensation costs related to share-based compensation arrangements granted under the 2007 Plan had been fully recognized. As of June 30, 2020, there was approximately $105,983 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2016 Plan. The cost is expected to be recognized over a weighted-average period of 1.7 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives. Warrants *The “Expiration Date” was initially defined under the Warrant as 36 months. The Warrant was revoked, amended and resissued on December 27, 2019 and defined the Expiration Date as 119 months from date of issuance of the amended Warrant, which was the original intent between the Company and the Lender. The Warrant contains a put feature providing the right to the holder, i.e. the Lender, for a net cash settlement in the event of a fundamental transaction which is defined under the Warrant as a sale of all of the stock, voting stock, or all, or substantially all, of the assets of the Company. Under such a transaction, the holder can require the Company to purchase any unexercised shares under the Warrant at the pro-rata share of the sales price or calculated value less the exercise price of the Warrant share. The fair value of the warrant is estimated using the Black-Scholes pricing model and is recognized as a liability in the accompanying consolidated condensed Balance Sheets. The following assumptions were used to determine the fair value of the Warrant at June 30, 2020 and December 31, 2019: June 30, 2020 December 31, Stock price $ 0.06 $ 0.14 Exercise price $ 0.05 $ 0.05 Weighted average volatility 65.2 % 44.8 % Expected dividend yield — — Expected term (in years) 9.4 10.0 Weighted average risk free interest rate 0.7 % 1.8 % There currently is no public market for the Company’s stock price. Historically, the valuation of the Company was determined by utilizing a formula of six (6) times the Company’s Earnings Before Interest Taxes, Depreciation and Amortization (“EBITDA”) for the prior twelve (12) month period minus all outstanding debt of the Company plus all cash and cash equivalents owned by the Company which is defined in the Warrant agreement as the Calculated Value (“CV”) of the Company. Volatility is based on the average stock price of comparable public companies in the industry. It was determined that the CV formula needed to be modified at the June 30, 2020 measurement date taking into consideration the effect that the pandemic COVID-19 has had on the Company and in order to determine a more realistic and reasonable fair value of the Warrant as of that date. The percentage decrease in the stock prices in the comparable public companies used as the basis for volatility was approximately 41% for the six months ending June 30, 2020. Based on the reductions in stock price of the comparable public companies and the projected significant impact to the Company’s revenues, the CV was discounted by 37% and the resulting price per share of $.06 was used in the Black Scholes model to determine fair value of the Warrant at June 30, 2020. The following table reconciles the change in the fair value of the warrant liability classified as Level 3 in the fair value hierarchy: Warrant Liability Balance at December 31, 2019 $ 779,901 Net change in fair value (425,475 ) Balance at March 31, 2020 354,426 Net change in fair value (59,759 ) Balance at June 30, 2020 $ 294,667 The following table is a summary of the Warrant activity for the six months ended June 30, 2020: Shares Weighted Average Exercise Price Warrants at December 31, 2019 7,000,000 $ 0.05 Warrants granted — — Warrants exercised — — Warrants cancelled — — Warrants at June 30, 2020 7,000,000 $ 0.05 Warrants exercisable at June 30, 2020 7,000,000 The following table summarizes information with respect to the Warrant outstanding at June 30, 2020: Warrant Outstanding Weighted Average Weighted Remaining Average Aggregate Contractual Exercise Intrinsic Shares Life (Years) Price Value 7,000,000 9.4 $0.05 - The following table summarizes information with respect to the Warrant outstanding at December 31, 2019: Warrant Outstanding Weighted Average Weighted Remaining Average Aggregate Contractual Exercise Intrinsic Shares Life (Years) Price Value 7,000,000 9.9 $0.05 - In computing earnings per share, the Company's Nonvoting Stock is considered a participating security. Each share of Nonvoting Stock has identical rights, powers, limitations and restrictions in all respects as each share of common stock of the Company including the right to receive the same consideration per share payable in respect of each share of common stock, except that holders of Nonvoting Stock shall have no voting rights or powers whatsoever. The following table summarizes the number of dilutive shares outstanding for each of the periods presented which may dilute future earnings per share, and is included in the calculation of diluted earnings per share on the consolidated Statements of Operations: June 30, June 30, Common Stock 7,005,000 15,000 Nonvoting Common Stock 3,925,000 4,040,000 The following table reconciles the changes in stockholder’s equity for the six months ended June 30, 2020: Common Stock Nonvoting Common Stock Additional Paid In Accumulated Treasury Stock Shares Amount Shares Amount Capital Deficit Shares Amount Total Balances at December 31, 2019 4,916,285 $ 4,917 33,300,000 $ 33,300 $ 30,532,427 $ (28,548,833 ) 266,902 $ (20,811 ) $ 2,001,000 Net income — — — — — 404,023 — — 404,023 Stock based compensation — — — — 15,855 — — — 15,855 Balances at March 31, 2020 4,916,285 4,917 33,300,000 33,300 $ 30,548,282 (28,144,810 ) 266,902 (20,811 ) 2,420,878 Net loss — — — — — (488,519 ) — — (488,519 ) Stock based compensation — — — — 15,726 — — — 15,726 Balances at June 30, 2020 4,916,285 $ 4,917 33,300,000 $ 33,300 $ 30,564,008 $ (28,633,329 ) 266,902 $ (20,811 ) $ 1,948,085 The following table reconciles the changes in stockholder’s equity for the six months ended June 30, 2019: Common Stock Nonvoting Common Stock Additional Paid In Accumulated Treasury Stock Shares Amount Shares Amount Capital Deficit Shares Stock Total Balances at December 31, 2018 4,916,285 $ 4,917 33,300,000 $ 33,300 $ 30,467,906 $ (28,835,250 ) 266,902 $ (20,811 ) $ 1,650,062 Net income — — — — — 204,253 — — 204,253 Stock based compensation — — — — 16,226 — — — 16,226 Balances at March 31, 2019 4,916,285 4,917 33,300,000 33,300 30,484,132 $ (28,630,997 ) 266,902 (20,811 ) 1,870,541 Net income — — — — — 224,461 — — 224,461 Stock based compensation — — — — 16,128 — — — 16,128 Balances at June 30, 2019 4,916,285 $ 4,917 33,300,000 $ 33,300 $ 30,500,260 $ (28,406,536 ) 266,902 $ (20,811 ) $ 2,111,130 |
Revenue
Revenue | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Revenue | Note 10. Revenue The Company applies the guidance under ASC 606 in recognizing revenue, which is generated from leasing and selling slot machines and from sales of parts and certain services relating to the slot machines. Revenue is recognized on sales of products, net of rebates, discounts and allowances, when an agreement exists, typically an approved sales proposal or contract, or upon receipt of customer’s purchase order, in which the sales price is fixed or determinable, and when the performance obligations under that agreement have been completed. This typically occurs when products are delivered and/or installed and upon receipt of regulatory approval, if required. If multiple units of the products are included in any one sale or lease agreement or ancillary services are provided such as delivery or installation, revenue is allocated to each unit or service based upon its respective fair value against the total contract value, or itemized price within the contract, and revenue recognition is deferred on those units or services until all of the performance obligation requirements under the applicable section(s) of that agreement have been completed. Revenue generated under the leasing model is recognized when the ability to collect is reasonably assured. Lease agreements are based on either a fixed daily or a pre-determined percentage of the monthly net “participation” revenue collected, i.e. revenue share, for each slot machine, subject to monthly minimums and maximums. Customers under fixed daily rate agreements are invoiced on the first day of the month at the agreed upon daily rate per unit for the number of days the unit is leased during the month, typically the total number of days in the month. Customers under revenue share agreements are invoiced when participation reports are remitted to us detailing the monthly per unit information including coin-in, net win, and days on the floor data. Revenue under both of these bases is recorded as lease revenue and recognized in the month to which the lease data pertains. There may be instances in which a lease is offered to a customer with the option to convert to a sale upon the completion of certain obligations such as a pre-determined paid or reduced-rate lease term and/or a free-trial period. In addition, circumstances may arise in which a customer wishes to purchase machines after being on lease at their facility. In all of these situations, the initial revenue is recorded as lease revenue as described above, and the agreed upon sales price is shown as sales revenue when the lease is converted to a sale and all performance obligations of the sale have been met. For sales of slot machines, a warranty on parts is typically offered which expires after a defined period of time, usually 90 days after delivery or installation date. One slot machine theme conversion per unit sold is also typically offered during the one year period beginning upon the delivery and/or installation of the slot machine, and only if the slot game fails to earn at least eighty percent of the rolling monthly slot machine gaming floor area average for the customer. The game theme must be approved in the customer's gaming jurisdiction for use in the slot machine and the customer must provide written notice requesting the conversion, including certification of the average that serves as the basis for any such game theme conversion. In addition, the customer must return the original game theme components to the Company upon conversion of the slot game theme. The cost of the warrantied and theme conversion items are borne by the Company. Historically, these costs have been immaterial and are expensed at time of issuance, however the Company has and will continue to assess these post-sales costs to determine whether they constitute performance obligations and should be recorded at time of sale. A contract asset is recorded when the performance obligations of the Company have been met and the customer has not been billed. A contract liability is recorded when the Company has an obligation to transfer products or services to a customer for which consideration has been received. As of June 30, 2020 and December 31, 2019, respectively, there were no performance obligations outstanding and there was no revenue expected to be recognized in future periods related to performance obligations. As such, there were no contract liabilities recorded as of June 30, 2020 or December 31, 2019, respectively. The following table provides a breakdown of the revenue by category as included in the consolidated Statements of Operations: Three months ended Six months ended 2020 2019 2020 2019 Lease and license fees: Flat daily rate lease $ 94,440 $ 795,360 $ 937,078 $ 1,436,574 Participation lease 99,132 259,629 346,971 483,914 $ 193,572 $ 1,054,989 $ 1,284,049 $ 1,920,488 Sales of gaming products and parts: Slot machine sales $ 372,000 $ 324,662 $ 462,000 $ 1,051,800 Parts and ancillary items sales 6,110 1,138,818 52,972 1,138,818 $ 378,110 $ 1,463,480 $ 514,972 $ 2,190,618 The following table provides a breakdown of the lease revenue by product type: Three months ended Six months ended 2020 2019 2020 2019 Lease and license fees by product: Slot machines $ 193,572 $ 1,054,989 $ 1,284,049 $ 1,920,264 Poker Tables — — — 224 $ 193,572 $ 1,054,989 $ 1,284,049 $ 1,920,488 |
Income Taxes
Income Taxes | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Income Taxes | Note 11. Income Taxes The Company recognizes and measures deferred income tax benefits and liabilities based on the likelihood of their realization in future years. A valuation allowance must be established to reduce deferred income tax benefits if it is more likely than not that a portion of the deferred benefits will not be realized. As of June 30, 2020, the Company has available, for federal and state income tax purposes, NOL carryforwards of approximately $13,481,000, which expire at various times through 2037. The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods. The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the financial statements. The current tax provision represents the amount of estimated state taxes payable based on the calculation of the apportioned pre-tax income, net of available state net operating loss deductions. |
Concentration of Risk
Concentration of Risk | 3 Months Ended |
Jun. 30, 2020 | |
PaymentOnCapitalLease | |
Related Party | Note 12. Concentration of Risk – Major Customers The Company generated approximately 31% and 47% of its revenue from its top three customers for each of the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020, accounts receivable from one casino customer represented 62% of total accounts receivable. At December 31, 2019, accounts receivable from two casino customers represented 44% of total accounts receivable. One customer represented 32% of the accounts receivable balance as of December 31, 2019. |