Lightning Gaming 10-Q 2022 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2022
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period __________  to __________

Commission File Number: 000-52575

Lightning Gaming, Inc.

(Exact name of registrant as specified in its charter)

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

23 Creek Circle, Boothwyn, PA 19061

(Address of principal executive offices)

(610) 494-5534

(Registrant’s telephone number)

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

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

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

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  ¨^{(Do not check if a smaller reporting company)} Smaller reporting company  x Emerging Growth Company ¨

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,649,383 shares of (voting) Common Stock as of November 14, 2022 and 33,300,000 shares of Nonvoting Common Stock as of November 14, 2022

1

TABLE OF CONTENTS
		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

1	Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 (audited);
2	Unaudited Consolidated Statements of Operations for the three months ended September 30, 2022 and 2021;
3	Unaudited Consolidated Statements of Operations for the nine months ended September 30, 2022 and 2021;
4	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021;
5	Notes to Unaudited Consolidated Financial Statements.

2

Item 1. Financial Statements.

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,  2022		December 31, 2021
	(unaudited)		(audited)
Assets
Current Assets
Cash	$	1,201,868	$	1,619,572
Accounts receivable, net		1,086,487		781,646
Inventory, net		672,256		834,264
Prepaid expenses		196,049		212,499
Total Current Assets		3,156,660		3,447,981
Property and Equipment, net		2,524,429		3,372,898
Right-of-use asset - building		331,625		383,000
Other assets		8,193		8,193
License fees, net of accumulated amortization		17,350		32,950
Total Assets	$	6,038,257	$	7,245,022
See Notes to Unaudited Consolidated Financial Statements

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LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

	September 30,  2022			December 31, 2021
	(unaudited)			(audited)
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	73,500		$	519,239
Accrued expenses		235,836			125,584
Accrued interest		92			188
Current portion of lease liability		81,658			75,239
Current portion of auto loan		15,291			14,669
Current portion of notes payable, net		761,942			683,484
Total Current Liabilities		1,168,319			1,418,403
Long-Term Debt and Other Liabilities
Long-term notes payable, net		3,373,942			3,956,899
Long-term portion of auto loan		40,603			52,147
Warrant liability		537,632			714,350
Long-term lease liability		293,511			355,360
Total Long-Term Debt and Other Liabilities		4,245,688			5,078,756
Total Liabilities		5,414,007			6,497,159
Commitments (Note 9)
Stockholders' Equity
Preferred stock: $0.001 par value; authorized 10,000,000 shares, Series A Nonvoting preferred stock 6,000,000 shares designated, -0- shares issued and outstanding		—			—
Common stock: $0.001 par value; authorized 90,000,000 shares; 4,916,285 shares issued and 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		30,656,277			30,647,509
Accumulated deficit		(30,049,433	)		(29,917,052	)
Treasury stock, 266,902 shares, at cost		(20,811	)		(20,811	)
Total Stockholders’ Equity		624,250			747,863
Total Liabilities and Stockholders’ Equity	$	6,038,257		$	7,245,022
See Notes to Unaudited Consolidated Financial Statements

4

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2022 and 2021

(Unaudited)

	September 30,  2022			September 30, 2021
Revenues
Lease and license fees	$	910,309		$	1,010,099
Sales of gaming products and parts		346,782			220,010
Total revenues		1,257,091			1,230,109
Costs of Revenue
Cost of products sold		134,337			146,848
Depreciation		280,160			295,540
License fees		2,142			8,640
Costs of revenue		416,639			451,028
Gross Profit	$	840,452		$	779,081
Operating expenses
Operating expenses		146,731			115,032
Research and development		168,697			123,811
Selling, general and administrative expenses		582,545			543,436
Depreciation and amortization		8,335			9,210
Total operating expenses		906,308			791,489
Operating (loss)	$	(65,856	)	$	(12,408	)
Non-operating income (expense)
Interest expense		(158,074	)		(181,966	)
Interest income		3,920			—
Gain (loss) on change in fair value of warrant liability		130,502			(228,984	)
Total non-operating expense		(23,652	)		(410,950	)
Net (loss) before income taxes		(89,508	)		(423,358	)
Income tax expense		(375	)		(375	)
Net (loss)	$	(89,883	)	$	(423,733	)
Net (loss) per common share - basic	$	(0.00	)	$	(0.01	)
Net (loss) per common share - diluted	$	(0.00	)	$	(0.01	)
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
See Notes to Unaudited Consolidated Financial Statements

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LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2022 and 2021

(Unaudited)

	September 30,  2022			September 30, 2021
Revenues
Lease and license fees	$	2,775,311		$	2,996,519
Sales of gaming products and parts		1,456,498			429,480
Total revenues		4,231,809			3,425,999
Costs of Revenue
Cost of products sold		812,474			226,903
Depreciation		855,276			849,726
License fees		2,142			20,860
Costs of revenue		1,669,892			1,097,489
Gross Profit	$	2,561,917		$	2,328,510
Operating expenses
Operating expenses		349,881			386,783
Research and development		516,663			289,017
Selling, general and administrative expenses		1,730,581			1,385,109
Depreciation and amortization		25,929			25,684
Total operating expenses		2,623,054			2,086,593
Operating (loss) income	$	(61,137	)	$	241,917
Non-operating income (expense)
Interest expense		(487,308	)		(555,430	)
Interest income		9,412			194
Gain (loss) on change in fair value of warrant liability		176,718			(555,980	)
Income from employee retention credits		231,059			—
Total non-operating expense		(70,119	)		(1,111,216	)
Net (loss) before income taxes		(131,256	)		(869,299	)
Income tax expense		(1,125	)		(2,844	)
Net (loss)	$	(132,381	)	$	(872,143	)
Net (loss) per common share - basic	$	(0.00	)	$	(0.02	)
Net (loss) per common share - diluted	$	(0.00	)	$	(0.02	)
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
See Notes to Unaudited Consolidated Financial Statements

6

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2022 and 2021

(Unaudited)

	September 30, 2022			September 30,  2021
Cash Flows from Operating Activities
Net loss	$	(132,381	)	$	(872,143	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		881,205			875,410
Stock based compensation		8,768			40,636
Amortization of debt discount		37,710			39,232
Loss (gain) on change in fair value of warrant liability		(176,718	)		555,980
Changes in Assets and Liabilities
Increase in accounts receivable		(304,841	)		(174,862	)
Decrease in inventory		351,486			862,360
Decrease in prepaid expenses		16,451			7,665
Increase in deposits with vendors		—			(271,633	)
(Increase) decrease in right-of-use asset and lease liability		(4,056	)		23,702
Decrease in accounts payable		(445,738	)		(70,385	)
Increase in accrued expenses		110,252			100,479
(Decrease) increase in accrued interest		(96	)		191
Net Cash Provided by Operating Activities		342,042			1,116,632
Cash Flows from Investing Activities
Purchase of equipment		(206,615	)		(875,986	)
Net Cash Used in Investing Activities		(206,615	)		(875,986	)
Cash Flows from Financing Activities
Proceeds from auto loan		—			78,248
Repayment of notes payable		(542,209	)		(475,931	)
Payments on auto loan		(10,922	)		(7,887	)
Net Cash Used in Financing Activities		(553,131	)		(405,570	)
Net Decrease in Cash		(417,704	)		(164,924	)
Cash - Beginning of period		1,619,572			1,857,901
Cash - End of period	$	1,201,868		$	1,692,977
See Notes to Unaudited Consolidated Financial Statements

7

LIGHTNING GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2022 and 2021 (Continued)

(Unaudited)

	September 30,  2022		September 30,  2021
Supplemental Disclosure of Non-Cash Financing Activities:
Transfers among inventory, equipment and licenses, net	$	189,478	$	83,159
Supplemental Information:
Cash paid for:
Interest	$	449,694	$	516,006
Income taxes	$	1,533	$	1,780
See Notes to Unaudited Consolidated Financial Statements

8

 LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

September 30, 2022

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 Lightning Poker and Lightning Slots. All inter-company accounts and transactions have been eliminated.

Basis of Presentation

The unaudited interim consolidated financial statements contained herein should be read in conjunction with the Company’s annual report on Form 10-K filed on March 30, 2022 (“Form 10-K”). The accompanying interim consolidated 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 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 consolidated 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, 2021 was derived from the Company’s consolidated audited financial statements. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the entire year.

The accompanying interim 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. Although the Company recognized a net loss, it generated approximately $342,000 in cash from operations for the nine months ended September 30, 2022 and has maintained and sustained a working capital surplus. Due to the ongoing effects of the outbreak of the novel coronavirus disease (COVID-19), and the continued waves of variants and subvariants of COVID-19, the Company’s operations have been significantly impacted. The ability to measure the degree to which COVID-19 will continue to impact the Company’s performance in its aftermath will depend on the duration and spread of COVID-19 and its variants and sub-variants, as well as any continued or future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended.

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LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

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

Basis of Presentation (Continued)

In 2021, we received funding under the federal Paycheck Protection Program (“PPP”), the loan program through the Small Business Administration (“SBA”) as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, that helped to lessen the impact of COVID-19 for eligible expenses under the program. Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 enacted in December 2020, certain provisions of the CARES Act were modified with respect to the Employee Retention Credit (“ERC”) which provided a refundable credit paid on qualified wages, extended the application of the ERC to wages paid after December 31, 2020 and before July 1, 2021, and amended qualifications for eligible employers who could apply for the ERC. Under the revised provisions, the Company qualified for application of the ERC on qualified wages for the period March 13, 2020 through June 30, 2021 and we submitted the request for refunds under the ERC in February 2022. In June 2022, we received ERC refunds totaling $231,059. See Note 12 for further details regarding the ERC.

In addition to the PPP loan proceeds and the ERC refunds, aggressive expense management was and continues to be employed to mitigate the adverse impact that COVID-19 has had on our operations and performance. We anticipate that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations, however the Company’s future performance will depend on the duration of COVID-19 and the Company’s ability to distribute its products and successfully market them to more casinos and gaming venues.

Although we realized a net loss for the nine months ended September 30, 2022, based on our working capital surplus, financial condition, cash flow projections, anticipated revenues and financing agreements, we believe we have sufficient cash flows to support our operations for the next twelve months, however if supplemental financing becomes necessary, there is no assurance that the Company would be able to obtain such financing, on reasonable and feasible terms, or at all. If the Company needs additional funding and is unable to obtain it, its financial condition would be adversely affected. In that event, it would have to postpone or discontinue planned operations and projects for expansion. The Company’s continuance as a going concern is dependent upon these factors, among others. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Cash: For the purposes of reporting the statement of cash flows, the Company considers all cash accounts and highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintained and will maintain cash balances with highly reputable financial institutions, which at times throughout the year exceeded the federally insured amount of $250,000. The Company has not experienced any losses from deposits above the federally insured amount and the amount of funds in excess of the federally insured amount was $752,693 as of September 30, 2022 and $1,136,895 as of December 31, 2021.

Accounts Receivable and Allowance for Doubtful Accounts: In January 2022, the Company adopted Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, an update issued by the Financial Accounting Standards Board (“FASB”). The update 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 broad 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.

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LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

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

Accounts Receivable and Allowance for Doubtful Accounts (Continued)

The Company regularly evaluates the collectability of its trade receivable balances based on a combination of factors. When a customer’s account becomes past due, dialogue is initiated with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results, financial position, or other material events impacting its business, a specific reserve is recorded for bad debts to reduce the related receivable to the amount expected to be recovered, given all information presently available. Except for this reserve, the Company believes its receivables are collectible. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change. Recoveries of receivables previously written off are recorded as revenue when recovered. Delinquency of accounts receivable is determined based on contractual terms, customer payment history, and current creditworthiness. The Company does not charge interest on its past due receivables.

Under CECL, the Company determined that a weighted average reserve of .5% of the outstanding accounts receivable balance was sufficient to cover unexpected credit losses and maintained a reserve of $6,593 as of September 30, 2022 and December 31, 2021. During each of the three and nine months ended September 30, 2022 and 2021, respectively, the Company wrote off $-0- of accounts receivable considered to be uncollectible.

Inventory: Inventory is stated at the lower of cost using the first-in, first-out method, or net realizable value. Inventory is routinely evaluated to identify damaged, obsolete, and unusable inventory and for physical inventory differences. A reserve of approximately 5% to 10% of the parts balance is maintained to account for obsolescence and physical inventory differences and impaired inventory is written off when necessary. The Company maintained a reserve of $4,416 and $3,996 as of September 30, 2022 and December 31, 2021, respectively.

Fair Value Measurements: Given their short-term nature and expected maturity, the carrying amounts reported in these financial statements for cash, prepaid and other current assets, accounts payable, and accrued expenses approximate fair value.

Accounting Standards Codification (“ASC”) 820 – Fair Value Measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 further establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques into the following three levels, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs:

· Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity can access at the measurement date;

· Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities that are observable, either directly or indirectly;

· Level 3: Unobservable inputs for the asset or liability, including significant assumptions of the reporting entity and other market participants.

The fair value of and the methodology used by the Company for the warrant liability is discussed in Note 10.

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LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

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

Earnings per share: The Company computes earnings per share in accordance with generally accepted accounting principles which require presentation of both basic and diluted earnings per share ("EPS") on the face of the Statement of Operations. Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted to common stock. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.

The Company uses the two-class method in computing earnings per share. Under the two-class method, undistributed earnings are allocated among common and participating shares to the extent each security may share in such earnings.

In computing earnings per share, the Company's Nonvoting Stock is considered a participating security. Each share of Nonvoting Stock has identical rights, powers, limitations and restrictions in all respects as each share of common stock of the Company including the right to receive the same consideration per share payable in respect of each share of common stock, except that holders of Nonvoting Stock shall have no voting rights or powers whatsoever.

The following table summarizes the number of dilutive shares, which may dilute future earnings per share, outstanding for each of the periods presented:

	September 30, 2022		September 30, 2021
Stock options		2,975,000		3,375,000
Warrants		7,000,000		7,000,000
		9,975,000		10,375,000

Note 2.  Inventory

Inventory consists of the following:

	September 30, 2022			December 31, 2021
Finished products	$	483,138		$	613,939
Raw materials and work in process		193,534			224,321
Less reserve		(4,416	)		(3,996	)
Inventory	$	672,256		$	834,264

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.

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LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 3.  Property and Equipment

Property and equipment consist of the following:

	September 30, 2022			December 31, 2021
Equipment, principally gaming equipment under lease	$	5,970,877		$	6,150,286
Delivery truck		78,247			78,247
Office equipment, furniture and fixtures		89,162			89,162
Leasehold improvements		91,794			91,794
Property and equipment		6,230,080			6,409,489
Less accumulated depreciation and amortization		(3,705,651	)		(3,036,591	)
Property and equipment, net	$	2,524,429		$	3,372,898

Depreciation expense related to the gaming equipment under lease is listed separately in the consolidated Statements of Operations as costs of revenue. Depreciation expense related to all other property and equipment included in the consolidated Statements of Operations was $8,335 and $8,655 for the three months ended September 30, 2022 and 2021, respectively, and $25,929 and $23,462 for the nine months ended September 30, 2022 and 2021, respectively.

Note 4.  License Fees

License fees consist of the following:

	September 30, 2022			December 31, 2021
Purchased licenses	$	364,060		$	379,660
Less accumulated amortization		(346,710	)		(346,710	)
License fees, net	$	17,350		$	32,950

Under a patent cross license agreement with a licensor, the Company was required to pay an upfront per unit license fee on games (slot machines) placed in service, each identifiable by a unique serial number. Upon amendments of the patent cross license agreement in March and October 2020, license fees incurred after September 30, 2020 at $45,000 per quarter were expensed on a straight-line basis at $15,000 per month. On November 30, 2021, the agreement was further amended reverting to a per unit fee on machines. In December 2021, the Company paid $32,500 upfront for the first 50 machines to be deployed under the new agreement, with subsequent fees due and payable on a quarterly basis and based on machines initially deployed in the preceding calendar quarter. The $650 per unit fee for the licenses is being added to the cost of slot machines as they are built for sale or lease. The remaining per unit license fee as of September 30, 2022 and December 31, 2021 was $16,900 and $32,500, respectively. See Note 9 for further details regarding the patent cross license agreement.

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 $-0- and $555 for the three months ended September 30, 2022 and 2021, respectively, and $-0- and $2,222 for the nine months ended September 30, 2022 and 2021, respectively. The purchased source code license was fully amortized as of September 30, 2021.

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LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 5.  Notes Payable

On November 27, 2019 (the “Closing Date”), the Company entered into a 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 existing outstanding indebtedness of the Company 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 evidenced by Promissory Notes (each a “Note” and collectively the “Notes”) executed by the Company payable to the order of the Lender, and is secured by a Security Agreement dated of even date with the Loan, between the Company and the Lender granting a security interest to the Lender in all of the Company’s right, title and interest in and to personal property, tangible and intangible, wherever located or situated and whether now owned or acquired or created. The Loan was advanced, in parts, pursuant to the Loan and in the amounts of each Note during the advance period which ran until November 30, 2020.

The Notes bear interest on the outstanding principal amount at a rate per annum equal to an annual rate of 13%. Payments consisting of principal and interest for each advance financed under the Note are due and payable monthly based on an 84-month amortization and mature in 60 months, 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 which is evidenced by a Note in the principal amount of $1,000,000. 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 10 for further details regarding the Warrant.

On the Closing Date, the Company recorded the percentage of the Loan remaining for advance in proportion to the total Loan, i.e. 2/7 ($2,000,000/$7,000,000) or 28.6% or $229,829, as a deferred debt commitment fee which was amortized on a straight-line basis until the end of the advance period which expired on November 30, 2020. 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. The balance of the debt discount attributable to the advance taken in January 2020 was $43,372 and $59,701 as of September 30, 2022 and December 31, 2021, respectively.

Debt discount of $137,509 was calculated as the cost associated with the debt in proportion to the total cost of the debt that was 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 $52,594 and $73,975 as of September 30, 2022 and December 31, 2021, respectively.

14

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 5. Notes Payable (Continued)

The Loan is subject to covenant clauses whereby the Company is required to meet certain key financial ratios. Due to the material effect that COVID-19 had on the Company’s revenues, the Lender amended the Loan in September 2020, providing a waiver of compliance with the financial ratio covenants and extending and resetting the compliance with the covenants until the quarter ending June 30, 2021. Due to the continued impact of COVID-19 on the Company’s operations, the Lender executed a second amendment to the Loan in March 2021, which waived compliance with the financial ratio covenants and further extended and reset compliance with the covenants commencing with the quarter ending December 31, 2021. In August 2022, the Lender executed a third amendment which reset the financial ratio covenants through June 30, 2023. As of September 30, 2022, the Company is in compliance with the amended financial ratio covenants.

As of September 30, 2022 and December 31, 2021, Notes payable, net of debt discount, consist of the following:

	Advance Date	Maturity Date	Note Amount		Monthly Payment		Interest Rate			September 30, 2022			December 31, 2021
PDS Gaming Advance 9	11/27/2019	12/1/2024	$	5,000,000	$	91,616		13	%	$	3,457,011		$	3,889,153
PDS Gaming Advance 10	1/29/2020	2/1/2025	$	1,000,000	$	18,309		13	%		678,873			751,230
Total Notes Payable											4,135,884			4,640,383
Less: amounts classified as current											(761,942	)		(683,484	)
Long-Term Notes Payable										$	3,373,942		$	3,956,899

The following table lists the future principal payments due on the Notes as of September 30, 2022:

Year Ending December 31,		Amount
	Remaining 2022	$	178,985
	2023		790,371
	2024		2,768,025
	2025		398,503
		$	4,135,884

The following table provides a breakdown of the interest expense in the consolidated Statements of Operations related to the Notes payable for the three months ended September 30, 2022 and 2021:

	September 30, 2022		September 30, 2021
Interest on Notes payable	$	144,744	$	167,807
Amortization of debt discount		12,522		13,139
	$	157,266	$	180,946

15

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 5. Notes Payable (Continued)

The following table provides a breakdown of the interest expense in the consolidated Statements of Operations related to the Notes payable for the nine months ended September 30, 2022 and 2021:

	September 30, 2022		September 30, 2021
Interest on Notes payable	$	447,116	$	513,394
Amortization of debt discount		37,710		39,232
	$	484,826	$	552,626

Note 6. Auto Loan

On January 30, 2021, the Company financed the purchase of a 2021 Ford F-650 box truck to be used as its delivery truck. The purchase price of the truck of $78,248 was financed with Ford Credit (“FC”) for a term of sixty months at an annual percentage rate of 5.54%. Monthly payments of $1,500 commenced March 16, 2021. Interest expense in the consolidated Statements of Operations related to the auto loan for the three months ended September 30, 2022 and 2021 was $808 and $1,020, respectively. Interest expense related to the auto loan for the nine months ended September 30, 2022 and 2021 was $2,482 and $2,804, respectively.

As of September 30, 2022 and December 31, 2021, the principal balance of the auto loan was as follows:

	September 30, 2022			December 31, 2021
Total Auto Loan	$	55,894		$	66,816
Less: amounts classified as current		(15,291	)		(14,669	)
Long-Term Portion of Auto Loan	$	40,603		$	52,147

The following table lists the future principal payments due to FC on the auto loan as of September 30, 2022:

Year Ending December 31,		Amount
	Remaining 2022	$	3,746
	2023		15,502
	2024		16,377
	2025		17,313
	2026		2,956
		$	55,894

Note 7. Deferred Income

In March 2020, Congress established the Paycheck Protection Program (“PPP”) to provide relief to small businesses during the coronavirus pandemic (“COVID-19”) as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The legislation authorized Treasury to use the Small Business Association’s (“SBA’s”) 7(a) small business lending program to fund forgivable loans that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities during the “Covered Period” defined as the 8-week period starting on the date the PPP loan proceeds are received. Upon meeting certain criteria as specified in the PPP program, the loans are eligible for partial or total forgiveness.

16

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 7. Deferred Income (Continued)

On June 5, 2020, the PPP Flexibility Act of 2020 (the “Act”) was signed into law, giving borrowers flexibility with certain criteria under the PPP program including extension of the Covered Period to 24 weeks from 8 weeks, reduction to 60% of the payroll costs requirement (previously 75%), extension of the payment deferral period, extension of the full-time equivalent (“FTE”) restoration deadline to December 31, 2020, and safe harbor provisions to remove the FTE reduction in forgiveness under limited circumstances.

In June 2020, the AICPA issued Technical Question and Answer (“TQA”) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program. The TQA addresses accounting for nongovernmental entities that are not Not-For-Profits, i.e. business entities, that believe the PPP loan represents, in substance, a grant that is expected to be forgiven, it may account for the loan as a deferred income liability. The TQA further states that if such an entity expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standard (“IAS”) 20 to account for the PPP loan.

IAS 20 provides a model for the accounting of different forms of government assistance, which includes forgivable loans. Under this model, government assistance is not recognized until there is reasonable assurance (similar to the probable threshold in U.S. GAAP) that any conditions attached to the assistance will be met and the assistance will be received. Once there is reasonable assurance that the conditions will be met, the earnings impact of the grant is recorded on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Hence, a business entity would record the cash inflow from the PPP loan as a deferred income liability and subsequently reduce the liability, with the offset through earnings as either a credit in the income statement or a reduction of the related expenses, as it recognizes the related cost to which the loan relates, for example, payroll expense.

In December 2020, the Consolidated Appropriations Act was passed providing additional COVID-19 relief to small businesses by providing a second round of PPP loans, referred to as PPP2, including a second PPP loan for small businesses facing significant revenue declines in any 2020 quarter compared to the same quarter in 2019. In addition, borrowers can select any Covered Period between 8 and 24 weeks.

The Company applied for and received proceeds of $237,030 through the PPP2 program on February 12, 2021 and elected a 12-week Covered Period. The Company determined both through internal calculations and those provided by the AICPA’s forgiveness model, that all criteria for forgiveness based on both the CARES Act and the Act have been met as of December 31, 2021 and that the PPP2 loan will be 100% forgiven. In analogizing to IAS 20, the Company considered the PPP2 loan a grant that is expected to be forgiven and as such, recorded the proceeds as a deferred income liability when received and recognized the PPP2 grant as a reduction of the related expenses to which the loan was intended to compensate.

17

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 7. Deferred Income (Continued)

For the Covered Period February 12, 2021 through May 6, 2021, the Company incurred the following costs related to and compensated through the PPP2 proceeds and which were expected to be forgiven in their entirety:

Salaries and wages	$	228,541
401K match		7,295
Payroll taxes		1,194
Total eligible and forgivable expense under PPP2 program	$	237,030

As of December 31, 2021, in accordance with methods acceptable under IAS 20, the Company reduced the PPP2 deferred income liability and offset the expenses listed above by their respective amounts, leaving a balance remaining of $-0- as of that date.

In February 2022, the Company received notification from its bank that the application for forgiveness was approved by the SBA, confirming that the PPP2 loan has been forgiven in its entirety.

Note 8. Leases

In November 2009, the Company entered into a lease agreement for its corporate office and warehouse facility which became effective in January 2010 for a term of sixty-seven months. In September 2014, the lease was amended to include the following: 1) an extension of the lease term to February 28, 2021; 2) modification of the minimum annual and monthly rents for the extended lease term; 3) a rent abatement period of six months commencing October 1, 2014; and 4) an option to extend the term for a period of five years. In August 2020, a second amendment to the lease was executed to include: 1) an extension of the lease term to August 31, 2026; 2) modification of the minimum annual and monthly rents for the second extended lease term; 3) a rent abatement period of six months commencing October 1, 2020; and 4) removal of the option to extend the term beyond the amended expiration date.

On September 30, 2020, the right-of-use asset and corresponding lease liability of $462,858 were recorded to account for the second amendment to the lease.

The following table summarizes the right-of-use asset and lease liability as of September 30, 2022:

Right-of-use Asset	$	331,625
Lease Liability
Current		$	81,658
Long-term			293,511
		$	375,169

Lease expense for each of the three months ended September 30, 2022 and 2021 was $40,654 and lease expense for the nine months ended September 30, 2022 and 2021 was $121,776 and $122,446, respectively.

18

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 8. Leases (Continued)

The following table summarizes the Company’s scheduled future minimum lease payments as of September 30, 2022:

Year Ended December 31:
Remaining 2022	$	27,180
2023		109,299
2024		111,612
2025		113,925
2026		77,106
Minimum lease payments		439,122
Less: imputed interest		(63,953	)
Present value of minimum lease payments		375,169
Less: current maturities of lease liability		(81,658	)
Long-term lease liability	$	293,511

As of September 30, 2022 and December 31, 2021, the weighted-average remaining lease term for the building lease was 3.9 years and 4.7 years, respectively. Due to the fact that we do not have access to the rate implicit in the lease, we utilized our incremental borrowing rate as the discount rate. The weighted average discount rate associated with the lease as of September 30, 2022 and December 31, 2021 was 8%.

Note 9. 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 and October 13, 2020, the Company and a licensor amended the terms under a patent cross license agreement 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. The March 2020 amendment removed the upfront per unit license fee in the original agreement 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 was to terminate after five years from October 1, 2019, or September 30, 2024. The October 2020 amendment allowed the Company to defer the payment of the quarterly fees according to the deferred payment schedule delineated in the amendment, extended the termination of the agreement to December 31, 2024, increased the final four quarterly payments to $50,000 and extended the final four quarterly payments beyond the termination date to 2025.

On November 30, 2021, the agreement was further amended reverting to a per unit fee on games. The amendment stipulated that the Company pay fees outstanding under the previous amendment plus upfront fees for the first 50 games/serial numbers to be deployed under the new agreement. Subsequent fees are due and payable on a quarterly basis and based on games initially deployed in the preceding calendar quarter. In December 2021, upon payment of $45,000 for fees outstanding under the previous amendment plus $32,500 for the initial games to be deployed under the amendment, the Company was released from all claims under the previous amendment. In November 2021, the Company reversed the remaining $195,000 in accrued liability for the quarterly license fee which resulted in a reduction to the operating expenses.

19

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 9. Commitments (Continued)

License fees included as operating expenses in the consolidated Statements of Operations for the three months ended September 30, 2022 and 2021 were $-0- and $45,000, respectively. License fees included as operating expenses in the consolidated Statements of Operations for the nine months ended September 30, 2022 and 2021 were $-0- and $135,000, respectively.

Note 10. Stockholders’ Equity

Stock Option Plan: 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.

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 2022 under the 2016 Plan is as follows:

	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2021		2,975,000	$	0.13
Options granted		—		—
Options exercised		—		—
Options cancelled		—		—
Options outstanding at September 30, 2022		2,975,000	$	0.13
Options available for grant under the 2016 Plan at September 30, 2022		2,725,000

20

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 10.  Stockholders’ Equity (Continued)

Stock Option Plan (Continued)

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 was recognized over the vesting period. Compensation expense related to stock options for the three months ended September 30, 2022 and 2021 was $93 and $11,738, respectively. Compensation expense related to stock options for the nine months ended September 30, 2022 and 2021 was $8,768 and $40,636, respectively.

The following table summarizes information with respect to stock options outstanding at September 30, 2022:

	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
2016 Plan	2,975,000	4.6	$0.13	-	2,885,000	4.5	$0.13	-

The following table summarizes information with respect to stock options outstanding at December 31, 2021:

	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
2016 Plan	2,975,000	5.3	$0.13	-	2,290,000	5.2	$0.13	-

As of September 30, 2022, there was approximately $884 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2016 Plan. The cost is expected to be recognized over a weighted-average period of 3.4 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.

Warrants: On November 27, 2019 in connection with the Loan obtained by the Company, the Company issued to PDS Gaming a Warrant entitling the Lender to purchase up to 7,000,000 shares of (voting) common stock of the Company at an exercise price of $.05 per share, expiring 120 months* after the issue date. The Warrant cannot be exercised until PDS Gaming is licensed in all of the Company’s gaming jurisdictions and cannot be exercised in a cashless exercise within the first six months following issuance.

*The “Expiration Date” was initially defined under the Warrant as 36 months. The Warrant was revoked, amended and 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.

21

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 10.  Stockholders’ Equity (Continued)

Warrants (Continued)

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 September 30, 2022 and December 31, 2021:

	September 30, 2022			December 31, 2021
Stock price	$	0.10		$	0.13
Exercise price	$	0.05		$	0.05
Weighted average volatility		69.7	%		68.2	%
Expected dividend yield		—			—
Expected term (in years)		7.2			7.9
Weighted average risk free interest rate		4.0	%		1.4	%

There currently is no public market for the Company’s stock price. The valuation of the Company was determined by utilizing a formula of six (6) times the Company’s Earnings Before Interest Taxes, Depreciation and Amortization (“EBITDA”) for the prior twelve (12) month period minus all outstanding debt of the Company plus all cash and cash equivalents owned by the Company which is defined in the Warrant agreement as the Calculated Value (“CV”) of the Company. Volatility is based on the average stock price of comparable public companies in the industry.

Based on the volatility in stock price of the comparable public companies and the calculation of the CV per the formula above, the resulting stock price of $0.10 and $0.13 price per share was used in the Black Scholes model to determine fair value of the Warrant at September 30, 2022 and December 31, 2021, respectively.

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, 2021	$	714,350
Net change in fair value		(46,771	)
Balance at March 31, 2022		667,579
Net change in fair value		555
Balance at June 30, 2022		668,134
Net change in fair value		(130,502	)
Balance at September 30, 2022	$	537,632

22

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 10.  Stockholders’ Equity (Continued)

Warrants (Continued)

The following table is a summary of the Warrant activity for the nine months ended September 30, 2022:

	Shares		Weighted Average Exercise Price
Warrants at December 31, 2021		7,000,000	$	0.05
Warrants granted		—		—
Warrants exercised		—		—
Warrants cancelled		—		—
Warrants at September 30, 2022		7,000,000	$	0.05
Warrants exercisable at September 30, 2022		7,000,000

The following table summarizes information with respect to the Warrant outstanding at September 30, 2022:

Warrant Outstanding
	Weighted
	Average	Weighted
	Remaining	Average	Aggregate
	Contractual	Exercise	Intrinsic
Shares	Life (Years)	Price	Value
7,000,000	7.2	$0.05	-

The following table summarizes information with respect to the Warrant outstanding at December 31, 2021:

Warrant Outstanding
	Weighted
	Average	Weighted
	Remaining	Average	Aggregate
	Contractual	Exercise	Intrinsic
Shares	Life (Years)	Price	Value
7,000,000	7.9	$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:

	September 30, 2022		September 30, 2021
Common Stock		7,000,000		7,000,000
Nonvoting Common Stock		2,975,000		3,375,000

23

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 10.  Stockholders’ Equity (Continued)

The following table reconciles the changes in stockholders’ equity for the three and nine months ended September 30, 2022:

	Common Stock				Nonvoting Common Stock				Additional Paid In		Accumulated			Treasury Stock
	Shares		Amount		Shares		Amount		Capital		Deficit			Shares		Amount				Total
Balances at December 31, 2021		4,916,285	$	4,917		33,300,000	$	33,300	$	30,647,509	$	(29,917,052	)		266,902	$	(20,811	)	$	747,863
Net loss		—		—		—		—		—		(95,197	)		—		—			(95,197	)
Stock based compensation		—		—		—		—		8,570		—			—		—			8,570
Balances at March 31, 2022		4,916,285	$	4,917		33,300,000	$	33,300	$	30,656,079	$	(30,012,249	)		266,902	$	(20,811	)	$	661,236
Net income		—		—		—		—		—		52,699			—		—			52,699
Stock based compensation		—		—		—		—		105		—			—		—			105
Balances at June 30, 2022		4,916,285	$	4,917		33,300,000	$	33,300	$	30,656,184	$	(29,959,550	)		266,902	$	(20,811	)	$	714,040
Net loss		—		—		—		—		—		(89,883	)		—		—			(89,883	)
Stock based compensation		—		—		—		—		93		—			—		—			93
Balances at September 30, 2022		4,916,285	$	4,917		33,300,000	$	33,300	$	30,656,277	$	(30,049,433	)		266,902	$	(20,811	)	$	624,250

The following table reconciles the changes in stockholders’ equity for the three and nine months ended September 30, 2021:

	Common Stock				Nonvoting Common Stock				Additional Paid In		Accumulated			Treasury Stock
	Shares		Amount		Shares		Amount		Capital		Deficit			Shares		Amount				Total
Balances at December 31, 2020		4,916,285	$	4,917		33,300,000	$	33,300	$	30,595,461	$	(28,994,572	)		266,902	$	(20,811	)	$	1,618,295
Net loss		—		—		—		—		—		(1,124	)		—		—			(1,124	)
Stock based compensation		—		—		—		—		15,653		—			—		—			15,653
Balances at March 31, 2021		4,916,285	$	4,917		33,300,000	$	33,300	$	30,611,114	$	(28,995,696	)		266,902	$	(20,811	)	$	1,632,824
Net loss		—		—		—		—		—		(447,286	)		—		—			(447,286	)
Stock based compensation		—		—		—		—		13,245		—			—		—			13,245
Balances at June 30, 2021		4,916,285	$	4,917		33,300,000	$	33,300	$	30,624,359	$	(29,442,982	)		266,902	$	(20,811	)	$	1,198,783
Net loss		—		—		—		—		—		(423,733	)		—		—			(423,733	)
Stock based compensation		—		—		—		—		11,738		—			—		—			11,738
Balances at September 30, 2021		4,916,285	$	4,917		33,300,000	$	33,300	$	30,636,097	$	(29,866,715	)		266,902	$	(20,811	)	$	786,788

24

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 11.  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. If multiple units of the products are included in any one sale or lease agreement or ancillary services are provided such as delivery, installation, or placement of the product on the gaming floor (“placement fees”), revenue is allocated to each unit or service based upon its respective fair value against the total contract value, and revenue recognition is deferred on those units or services until each of the performance obligation requirements under the applicable section(s) of that agreement have been completed.

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

There may be instances in which a lease is offered to a customer with the option to convert to a sale upon the completion of certain obligations such as a pre-determined paid or reduced-rate lease term and/or a free-trial period. In addition, circumstances may arise in which a customer wishes to purchase machines after being on lease at their facility. In all of these situations, the initial revenue is recorded as lease revenue as described above, and the agreed upon sales price is shown as sales revenue when the lease is converted to a sale and all performance obligations of the sale have been met.

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

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 September 30, 2022 and December 31, 2021, 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 September 30, 2022 or December 31, 2021, respectively.

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LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 11.  Revenue (Continued)

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

	Three months ended September 30,				Nine months ended  September 30,
	2022		2021		2022		2021
Lease and license fees:
Flat daily rate lease	$	624,503	$	695,043	$	1,823,137	$	2,144,417
Participation lease		283,426		306,056		949,794		830,372
License fees		2,380		9,000		2,380		21,730
	$	910,309	$	1,010,099	$	2,775,311	$	2,996,519
Sales of gaming products and parts:
Slot machine sales	$	309,209	$	111,000	$	1,374,395	$	279,680
Parts and ancillary items sales		37,573		109,010		82,103		149,800
	$	346,782	$	220,010	$	1,456,498	$	429,480

Note 12. Income from Employee Retention Credits

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act enacted in March 2020 contained a provision that provided an Employee Retention Credit (“ERC”) against certain employment taxes equal to 50% of eligible wages. Qualified wages were capped at $10,000 per employee for wages paid from March 13, 2020 to December 31, 2020 for eligible employers, for a maximum credit of $5,000 per employee for the year. Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“Tax Relief Act”) enacted in December 2020, certain provisions of the CARES Act were modified with respect to the ERC. The Tax Relief Act increased the credit to 70% of eligible wages capped at $10,000 per employee per quarter or $7,000, extended the application of the ERC to wages paid after December 31, 2020 and before July 1, 2021, and retroactively removed the ERC exclusion for entities that had received PPP loans with the stipulation that wages used for forgiveness under the PPP loan were barred as qualified wages for use in application of the ERC. Under these revised provisions, the Company qualified for application of the ERC. The calculation of qualified wages, which included qualified health plan expenses, for the period March 13, 2020 through June 30, 2021 was completed in February 2022 and the respective employer quarterly federal tax claim for refund forms were submitted. In June 2022, the Company received refunds for the full amount of the ERC claimed of $231,059 plus interest of $2,756.

Note 13.  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 September 30, 2022, the Company has available, for federal and state income tax purposes, NOL carryforwards of approximately $14,919,000. $12,773,000 of the NOL carryforwards expire at various times through 2038 and $2,146,000 of the NOLs can be carried forward indefinitely. The utilization of the NOL carryforwards is dependent upon the ability of the Company to generate sufficient taxable income during the carryforward periods. The NOL carryforwards are also subject to certain limitations on their utilization should changes in Company ownership occur. The Company has not recognized any NOL carryforward benefits or other net deferred tax assets in the consolidated financial statements.

The current tax expense represents the amount of estimated minimum state taxes payable.

26

LIGHTNING GAMING, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements (Continued)

September 30, 2022

Note 14. Concentration of Risk – Major Customers

The Company generated approximately 28% and 19% of its revenue from its top three customers for each of the nine months ended September 30, 2022 and 2021, respectively.

At September 30, 2022, accounts receivable from three casino customers represented 60% of total accounts receivable. At December 31, 2021, accounts receivable from four casino customers represented 45% of total accounts receivable. One customer represented 43% of the accounts receivable balance as of September 30, 2022 and one customer represented 13% of the accounts receivable balance as of December 31, 2021.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Throughout this report we make “forward-looking statements,” as that term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include the words “may,” “will,” “could,” “would,” “likely,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “project” and “anticipate” or the negative of such terms and similar words and include all discussions about our ongoing or future plans, objectives or expectations.

We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of those safe-harbor provisions. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. You should read this report completely and with the understanding that actual future results may be materially different from what we currently expect. We do not plan to update forward-looking statements unless applicable law requires us to do so, even though our situation or plans may change in the future. 

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section or elsewhere in this report. In light of these and other risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. Factors that might cause our actual results to differ from our expectations, might cause us to modify our plans or objectives, or might affect our ability to meet our expectations include, but are not limited to: the duration and spread of the outbreak of the novel coronavirus disease COVID-19, as well as any future restrictions placed on us or our customers due to the outbreak; the economic downturn in the financial markets and the dramatic decline in national and global economic conditions, especially in the gaming industry and in the wake of COVID-19; the tightening of credit in financial markets generally and the particularly severe tightening of them for the gaming industry, which may adversely affect our ability to raise funds through debt or equity financing, and may also adversely affect the ability of our customers to purchase our product and services; our ability to obtain additional gaming licenses; fuel price increases; legislative/regulatory changes; competition; changes in generally accepted accounting principles; and fluctuations in foreign currency exchange rates.

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The most significant factors affecting our suppliers, customers and employees, and causing disruptions in current and future plans for operations and expansion, revolve around the impact of COVID-19. In the aftermath of COVID-19, customers may continue to lose patrons due to fears about being in public and potential exposure to COVID-19 or future pandemics. Customers may experience significant losses due to the COVID-19 outbreak and may terminate their existing contracts or postpone or ultimately cancel future planned orders and contracts due to those losses. Travel may be restricted to certain areas which may limit our ability to obtain new customers or jurisdictions, or to provide services in those areas in which our customers are currently located. We may experience a shortage of labor due to quarantine or prolonged illness within our own organization or at supplier or customer locations.

In 2021, we received funding under the federal PPP loan program through the SBA that helped to lessen the impact of COVID-19 for eligible expenses under the program. In June 2022, we received ERC refunds totaling $231,059 which assisted further in decreasing the impact of COVID-19. In addition, aggressive expense management has been employed to mitigate the adverse impact that COVID-19 has had and continues to have on our operations and performance. The situation surrounding COVID-19 is fluid and the ability to measure the degree to which COVID-19 will impact the Company’s performance in its aftermath will depend on the duration and spread of COVID-19 and its variants and sub-variants, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended.

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 severity of its effects on us, our customers and our suppliers.

Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the Securities and Exchange Commission (“SEC”).

The information contained in this section has been derived from our consolidated financial statements and should be read together with the consolidated financial statements and related notes contained elsewhere in this report.

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Overview

We were formed to develop and market our Poker Table, which is an electronic poker table that provides a fully automated table gaming experience without a dealer in casinos and card rooms in regulated jurisdictions worldwide.

In 2009, we commenced the design, manufacture, marketing, sale and operation of video slot machines to customers in various gaming jurisdictions. Our video slot machines contain games where the casino patron wagers on multiple pay lines and contain secondary bonus games. The current slot machine products are:

·	Around the World in 80 Days	·	Lightning Lotto
·	Beauty and the Beast	·	Lucky Shamrock – Screaming Links
·	Bierfeier – Screaming Links	·	Penny Palooza
·	Candy Cash	·	Pixiu – Quick Link
·	Cash Flow	·	Prosperous Buddha – Persistent Link
·	Cinderella	·	Scarabs of Egypt – Screaming Links
·	Crazy 8’s Link Deluxe	·	Si Shou
·	Drachma – Quick Link	·	Si Shou Zao Ci
·	Duck Dynamite	·	Si Xiang – Screaming Links
·	Electric Sevens – Quick Link	·	Slotto
·	Eye of RA – Persistent Link	·	Snow White
·	Fins N Wins	·	Snow White – Screaming Links
·	Fruit Jackpots	·	Swamp Fever
·	Fruit Treasure	·	Swamp Fever – Persistent Link
·	Golden Egg	·	Swamp Frenzy
·	Goyaate	·	Thunder Spirit – Quick Link
·	Great Balls of Fire – Screaming Links	·	Ultimate Screaming Links – Golden Egg
·	Hao Yun	·	Ultimate Screaming Links – Golden Geigi
·	Hua Mulan – Screaming Links	·	Ultimate Screaming Links – Great Balls of Fire
·	Jackpot Link Deluxe – Jackpot Link Deluxe	·	Vampires Fortune
·	Jumbo Fish Stacks	·	Xingyun Gou – Quick Link
·	Jungle Book	·	Year of the Horse
·��	Jungle Jackpots – Screaming Links	·	Ye Xian
·	Just Jackpots	·	Zhang Jiao – Screaming Links
·	Lava Queen – Quick Link	·	Zuo Ci – Screaming Links

When we expanded our products to include slot machines, we embarked on an initiative to market our slot machines to Native American jurisdictions as well as the commercial casino marketplace.

Our slot machines are placed into the market using a daily lease model or a revenue sharing model. We are registered as an approved vendor to distribute products to gaming venues located in 21 state jurisdictions. As of September 30, 2022, we had 353 video slot machines out on lease or revenue share placed in 51 different casinos.

We realized a net loss of $132,381 and generated $342,042 in cash from operations in the nine months ended September 30, 2022.

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Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

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

Revenues

The Company’s revenues for the three months ended September 30, 2022 were $1,257,000 compared to $1,230,000 for the comparable prior year period, an increase of $27,000. Lease and license fees decreased by a net of $100,000 to $910,000 for the three months ended September 30, 2022 as compared to $1,010,000 for the three months ended September 30, 2021. This decrease was attributable to the decrease in the average daily rate on our leased slot machines, a result of the pressure placed on our customers to reduce operating expenses to combat the effects of COVID-19, as well as sales of slot machines previously on lease.

Sales of slot machines and related parts increased by $127,000 to $347,000 for the three months ended September 30, 2022 as compared to $220,000 for the three months ended September 30, 2021. The Company sold 17 slot machines, 10 of which were previously on lease, for $309,000 and had miscellaneous parts sales of $38,000 during the quarter ending September 30, 2022. The Company had a large parts sale to a single customer for $84,000 plus $25,000 in additional miscellaneous parts sales and sold 6 slot machine units that were previously leased for $111,000 during the quarter ending September 30, 2021.

Costs of Revenue

Cost of products sold, which consists of the cost of slot machines and parts inventory sold, for the three months ended September 30, 2022 were $134,000 as compared to $147,000 for the three months ended September 30, 2021, a decrease of $13,000.

Depreciation on slot machine units out on lease decreased by $16,000 to $280,000 for the three months ended September 30, 2022 from $296,000 for the three months ended September 30, 2021. This decrease was the result of slot machines that were fully depreciated and sales of slot machines previously out on lease.

Operating Expenses

Operating expenses increased a net of $32,000 to $147,000 for the three months ended September 30, 2022, from $115,000 for the three months ended September 30, 2021. This increase was the result of the increase in payroll and related expenses as well as service, conversion, hardware, and supply costs due to the increase in the slot machines serviced and sold during the quarter ended September 30, 2022.

Research and Development Expenses

Research and development expenses increased by $45,000 to $169,000 for the three months ended September 30, 2022, from $124,000 for the three months ended September 30, 2021. Research and development expenses are primarily related to the development of new gaming equipment themes and technology and consist mainly of payroll and related expenses for programmers and graphic artists, software, and consulting fees. This increase is attributable to the increase in payroll and benefit costs associated with the addition of two programmers during the latter part of 2021 and one part-time programmer in early 2022.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses were $583,000 for the three months ended September 30, 2022 versus $543,000 for the three months ended September 30, 2021, an increase of $40,000. This increase is the result of the increase in payroll and related expenses due to the addition of a regional sales director in January 2022 as well as the increase in payroll and benefit costs associated with existing personnel. In addition, travel, meals, and entertainment were significantly reduced during the quarter ended September 30, 2021 due to sustained casino and travel restrictions because of COVID-19.

Depreciation and Amortization

Depreciation and amortization decreased $1,000 to $8,000 for the three months ended September 30, 2022, from $9,000 for the three months ended September 30, 2021, a result of fully depreciated assets during the three months ended September 30, 2022.

Interest Expense

Interest expense decreased $24,000 for the three months ended September 30, 2022, from $182,000 for the three months ended September 30, 2021, to $158,000 due to the paydown of principal on the notes payable and auto loan.

Interest Income

Interest income of $4,000 for the three months ended September 30, 2022 was the result of interest received on the ERC refunds as well as interest recognized on installment sales.

Gain (Loss) on Change in Fair Value of Warrant Liability

The estimated fair market value of our common stock decreased from $.12 to $.10 per share during the three months ended September 30, 2022. This resulted in a gain on the change in fair value of the warrant liability of $131,000 during the three months ended September 30, 2022. The loss of $229,000 during the three months ended September 30, 2021 was due to the increase in the estimated fair market value of our common stock, a result of the improvement in performance during the quarter ended September 30, 2021.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Revenue

The Company’s revenues for the nine months ended September 30, 2022 were $4,232,000 compared to $3,426,000 for the nine months ended September 30, 2021, an increase of $806,000. Lease and license fees decreased by $222,000 to $2,775,000 for the nine months ended September 30, 2022 as compared to $2,997,000 for the nine months ended September 30, 2021. This decrease was attributable to the decrease in the average daily rate on our leased slot machines as a result of the pressure placed on our customers to reduce operating expenses to combat the effects of COVID-19, the sale of slot machines previously on lease, and the decrease in license fee revenue.

Sales of slot machines and related parts increased by $1,026,000 to $1,456,000 for the nine months ended September 30, 2022 as compared to $430,000 for the nine months ended September 30, 2021. The increase is mainly attributable to slot machine sales made under a distribution agreement that occurred in the nine months ending September 30, 2022, which generated $657,000 in revenues.

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Costs of Revenues

For the nine months ended September 30, 2022, cost of products sold increased $585,000 to $812,000 from $227,000 for the nine months ended September 30, 2021, a direct result of the increase in sales of slot machines as described above.

Depreciation on slot machine units out on lease increased by $6,000 to $855,000 for the nine months ended September 30, 2022 from $849,000 for the nine months ended September 30, 2021. This increase was the result of the increase in fixed assets built and placed in service during the latter part of 2021 and the first quarter of 2022.

Operating Expenses

Operating expenses decreased $37,000 to $350,000 for the nine months ended September 30, 2022, from $387,000 for the nine months ended September 30, 2021. This decrease was the result of the elimination of the patent cross license fee of $135,000 that was incurred during the nine months ended September 30, 2021, offset by the increases in payroll and related expenses as well as service and conversion costs, freight, hardware and supplies due to the increase in the slot machines installed and sold during the nine months ended September 30, 2022.

Research and Development Expenses

Research and development expenses increased by $228,000 to $517,000 for the nine months ended September 30, 2022, from $289,000 for the nine months ended September 30, 2021. Research and development expenses are related to the development of gaming equipment and consist mainly of payroll and related expenses for programmers and graphic artists and the costs to acquire and develop new brands. This increase is attributable to the increase in payroll and benefit costs associated with the addition of two programmers during the latter part of 2021 and one part-time programmer in early 2022, as well as the application of PPP2 proceeds against payroll and related expenses during the covered period of February 12, 2021 to May 6, 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $345,000 to $1,731,000 for the nine months ended September 30, 2022, from $1,385,000 for the nine months ended September 30, 2021. This increase is the result of the addition of a regional sales director and the application of PPP2 proceeds against payroll and related expenses during the covered period of February 12, 2021 through May 6, 2021. In addition, travel, meals, and entertainment increased during the nine months ended September 30, 2022 due to the addition of sales personnel and the easing and elimination of casino and travel restrictions that were in place during the nine months ended September 30, 2021 from COVID-19.

Depreciation and Amortization

Depreciation and amortization increased $1,000, from $25,000 for the nine months ended September 30, 2021 to $26,000 for the nine months ended September 30, 2022. This increase was the result of the delivery truck that was purchased and placed in service in January 2021.

Interest Expense

Interest expense decreased $68,000 for the nine months ended September 30, 2022, from $555,000 for the nine months ended September 30, 2021, to $487,000 as a result of the paydown of principal on the notes payable and auto loan.

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Interest Income

Interest income of $9,000 for the nine months ended September 30, 2022 was the result of interest received on the ERC refunds as well as interest on installment sales.

Gain (Loss) on Change in Fair Value of Warrant Liability

A $733,000 swing in fair value of the warrant liability was caused by the change in the estimated fair market value of our common stock. The estimated fair value of our common stock increased as a result of the improved performance during the nine months ended September 30, 2021. This resulted in a loss of $556,000 during the nine months ended September 30, 2021 versus a gain in fair value of the warrant liability of $177,000 during the nine months ended September 30, 2022.

Income from Tax Retention Credits

Income from tax retention credits increased $231,000 for the nine months ended September 30, 2022 from $-0- for the nine months ended September 30, 2021, the result of the refunds received in June 2022 from the Employee Retention Tax credits under the CARES Act.

Liquidity and Capital Resources

We recognized a net loss of $132,000 and funded our working capital investments and capital expenditures associated with our growth strategy with the revenue generated from leases and proceeds from the sales of our gaming products. These transactions that occurred in 2022 and 2021 are described in more detail following the discussion of cash flows below:

Discussion of Statement of Cash Flows

	Nine Months Ended September 30,
	2022			2021			Change
Net cash provided by operating activities	$	342,000		$	1,117,000		$	(775,000	)
Net cash used in investing activities		(206,000	)		(876,000	)		670,000
Net cash used in financing activities		(553,000	)		(406,000	)		(147,000	)
Net decrease in cash		(417,000	)		(165,000	)	$	(252,000	)
Cash, beginning of year		1,619,000			1,858,000
Cash, end of period	$	1,202,000		$	1,693,000

For the nine months ended September 30, 2022, cash provided by operating activities decreased $775,000, from $1,117,000 for the nine months ended September 31, 2021 to $342,000. The decrease in cash from operating activities was due to the timing of payments to creditors, suppliers and vendors for inventory purchases and license agreements.

Net cash used in investing activities decreased by $670,000, from $876,000 used in investing activities for the nine months ended September 30, 2021 to $206,000 used in investing activities for the nine months ended September 30, 2022. Cash used in investing activities is primarily the function of the net investment in property and equipment, principally slot machines used in our operations. This decrease in cash used was due to the decrease in slot machines built and placed in service during the period, as well as the purchase of the delivery truck in January 2021.

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Net cash used in financing activities was $553,000 for the nine months ended September 30, 2022, versus $406,000 for the nine months ended September 30, 2021. Proceeds of $78,000 were received for the auto loan taken during the nine months ended September 30, 2021. Total principal payments on the notes and auto loan were $553,000 for the nine months ended September 30, 2022 and $484,000 for the nine months ended September 30, 2021, an increase in principal payments of $69,000. The decrease in the auto loan, coupled with the increase in principal payments on the notes and the auto loan resulted in the net increase in cash used in financing activities of $147,000.

Operations and Liquidity Management

For the nine months ended September 30, 2022, we sustained a net loss of $132,000, however we generated $342,000 in cash from operating activities and maintained and sustained a working capital surplus.

Due to the ongoing effects of the outbreak of the novel coronavirus disease (COVID-19), and the continued waves of variants and subvariants of COVID-19, the Company’s operations have been significantly impacted. In the aftermath of COVID-19, customers may continue to lose patrons due to fears about being in public and potential exposure to COVID-19 or future pandemics. Customers may experience significant losses due to the COVID-19 outbreak and may terminate their existing contracts or postpone or ultimately cancel future planned orders and contracts due to those losses. Travel may be restricted to certain areas which may limit our ability to obtain new customers or jurisdictions, or to provide services in those areas in which our customers are currently located. We may experience a shortage of labor due to quarantine or prolonged illness within our own organization or at supplier or customer locations.

The situation surrounding COVID-19 is fluid and the ability to measure the degree to which COVID-19 will impact the Company’s performance in its aftermath will depend on the duration and spread of COVID-19 and its variants and sub-variants, as well as any future restrictions placed on us or our customers due to the outbreak, whether mandated or recommended. The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to continue to obtain the regulatory approvals required to distribute our products and successfully market them to casinos, the development of new slot machine themes and new cabinets that are appealing to our customers and their patrons, and the effects of COVID-19 on us, our customers, and suppliers.

Prior to the outbreak of COVID-19, our operating cash requirements were approximately $260,000 to $300,000 per month, principally for salaries, professional services, licenses, marketing, office expenses, approximately $500,000 for the purchase of the hardware components for our products, and $110,000 for debt service. The full effects of COVID-19 on our revenues cannot be projected at this time, however, we have employed aggressive expense management measures and received funding through participation in the federal PPP and ERC programs that have enabled us to mitigate the adverse impact COVID-19 has had on our performance.

As of September 30, 2022, our cash balance was $1,202,000 and our current gross cash requirements are approximately $270,000 to $300,000 per month, principally for salaries, professional services, and office expenses and $111,000 for debt service. We currently have adequate inventory to meet existing orders awaiting shipment and expected future orders and believe that the purchase of hardware components for our products will not be necessary for several months. We expect that the effects of COVID-19 on our operations will be temporary and we will continue to have the ability to meet our obligations. Based on our cash flow projections and anticipated revenues, we believe we have sufficient cash flow to support our operations for the next twelve months.

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Contractual Obligations

The table below sets forth our known contractual obligations as of September 30, 2022:

	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Lease liability obligations (1)	$	375,169	$	81,658	$	191,610	$	101,901	$	—
Auto loan (2)		55,894		15,290		33,230		7,374		—
Debt obligations (3)		4,135,884		761,942		3,373,942		—		—
Total	$	4,566,947	$	858,890	$	3,568,782	$	109,275	$	—

(1)	Represents operating lease agreement for office and warehouse facility.
(2)	Represents principal payments on auto loan.
(3)	Represents outstanding amounts of notes payable.

Off-Balance Sheet Arrangements

As of September 30, 2022, there were no off-balance sheet arrangements.

Going Concern

The Company’s financial statements have been prepared on a going concern basis, which assumes realization of all assets and settlement or payment of all liabilities in the ordinary course of business. The Company sustained a net loss for the nine months ended September 30, 2022 however it generated cash from operations and has maintained and sustained a working capital surplus. Due to the outbreak of the novel coronavirus disease (COVID-19), the Company’s performance has been significantly impacted. As the situation surrounding COVID-19 is fluid, 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.

The Company is subject to covenant clauses in its Loan Agreement with the Lender whereby it is required to meet certain key financial ratios. Due to the material effect that COVID-19 has on the Company’s revenues, the Lender amended the Loan in September 2020 and again in March 2021, providing a waiver of compliance with the financial ratio covenants and extending and resetting the compliance with the covenants until the quarter ending December 31, 2021. The Lender further amended the Loan in
August 2022 by resetting the financial ratio covenants from June 30, 2022 through June 30, 2023. As of September 30, 2022, the Company is in compliance with the amended financial ratio covenants.

We received funding under the federal PPP2 loan that helped to lessen the impact of COVID-19 by covering costs incurred during the covered period for payroll and payroll related expenses. We also received employee retention credit refunds on qualified wages. In addition, aggressive expense management has been employed to mitigate the adverse impact that COVID-19 has 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. Based on our current performance, financial condition, cash flow projections, anticipated revenues and financing agreements, we believe we have sufficient cash flows to support our operations for twelve months from the date of this report.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4. Controls and Procedures.

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

As of September 30, 2022, we conducted an evaluation, under the supervision and with the participation of our management including our CEO and Controller, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and Controller have concluded that as of September 30, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.

PART II - OTHER INFORMATION

Item 1.   Legal Proceedings.

None

Item 1A. Risk Factors.

None

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

None.

Item 3.  Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable

Item 5.   Other Information.

None

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Item 6.   Exhibits.  

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

SIGNATURES

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

Date:  November 14, 2022	Lightning Gaming, Inc.
	By:	/s/ Brian Haveson                                         Brian Haveson Chief Executive Officer and Director

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