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LIGHTNING GAMING, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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," "projections" 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 severe economic downturn that the gaming industry is suffering; the dramatic decline in national and global economic conditions; 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 or to refinance our long- term debt that will become due in 2013, and may also adversely affect the ability of our customers to purchase our product and services; interest rates; 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. 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 financial statements and should be read together with the financial statements and related notes contained elsewhere in this report. Overview The Company was formed to develop and market its System, 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. The System is designed to increase revenue and security while helping to reduce the labor costs associated with poker play. The System enables up to ten players to make their wagers and game decisions via individual touch- screen betting stations. It utilizes a software application written in Java, which runs on a Linux-based multi-game table platform. The System achieves the goal of increasing revenue by allowing a larger number of hands to be played per hour, increasing the "rake" or per- hand fee collected by the operator commensurately. The elimination of a live dealer also reduces labor costs and permits more tables to be operational in jurisdictions where skilled poker dealers are in short supply. The System has an added benefit of eliminating mistakes by the dealer or the player, and it 18 --------------------------------------------------------------------------------eliminates the need to tip the dealer. The System also provides an opportunity to present information about the game to the players via individual player screens and via the common center monitor. In 2008 the Company developed a newer version of the System, which eliminated the need for a separate, stand-alone cashing station. The newer version allows for cashing out at the System. In the quarter ended September 30, 2009 the Company commenced the design, manufacture, marketing, sale and operation of video and reel-spinning slot machines to customers in various gaming jurisdictions. Our video slot machines contain games where the casino patron wagers on multiple pay lines. The branded games combine advanced graphics, digital music and sound effects and secondary bonus games. The current products are (i) Video Scrabble bonus slot machines, (ii) multi-rack slot machines and (iii) spinning reel slot machines. The Company seeks to develop games and gaming machines that offer high entertainment value to casino patrons and generate greater revenues for casinos and other gaming machine operators than the games and gaming machines offered by our competitors. The Company's gaming products feature advanced graphics and engaging games, and the games incorporate secondary bonus rounds. Currently the Company's games are based on the licensed, well-recognized brands SCRABBLE, the cartoon characters POPEYE and his related family of characters and Speed Racer. Substantially all of the gaming machines utilize technologies and intellectual property licensed from third parties. In 2009 the Company began to expand the scope of its product offerings and embarked on an initiative to market its video and reel-spinning slot machines to additional Native American jurisdictions as well as the commercial casino marketplace and cruise lines. The Company currently has 43 such machines placed in 11 casinos in seven jurisdictions and cruise ships. The Company is working to secure licensing to place those slot machines and the System in a number of new jurisdictions across North America. The licensing process includes specific jurisdictional approvals from the appropriate testing laboratory and from the appropriate regulatory agency. The Company has filed and will continue to file applications for licensure in various gaming jurisdictions. The Company evaluates economic impact of each jurisdiction in determining the priority of filing in a jurisdiction. The Company believes that the use of brand name intellectual property will contribute to the appeal and success of its gaming machines and that its future ability to license, acquire or develop new brand names is important to its success. The Company plans to increase its sales of gaming products in various legal gaming jurisdictions worldwide. The manufacture and distribution of gaming equipment and related software are subject to regulation and approval by various city, county, state, provincial, federal, tribal and foreign agencies. The Company will continue to devote resources to obtain all necessary approvals to manufacture and distribute its gaming products in various legal gaming jurisdictions worldwide. The Company has a history of losses since its inception. The Company incurred a net loss of approximately $2,232,000 in the six months ended June 30, 2011. 19 --------------------------------------------------------------------------------Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010 (All amounts rounded to the nearest $1,000)Revenues The Company's revenues for the three months ended June 30, 2011 were $324,000 compared to $1,824,000 for the comparable prior year period. The decrease in revenues was principally due to the absence of sales of Systems and parts, and the decline in the installed base of Systems, partly offset by revenues of $225,000 from the placement of our slot machines . Sales of gaming products and parts decreased by $1,633,000 (97%) to $57,000 for the three months ended June 30, 2011 as compared to $1,690,000 for the three months ended June 30, 2010 principally due to the placement of additional Systems at existing international customers in 2010. License and service fees increased by $133,000 (99%) to $267,000 for the three months ended June 30, 2011 as compared to $134,000 for the three months ended June 30, 2010 due to new placement of our slot machines in casinos, partly offset by the $45,000 decline in placement of Systems at new and existing casino customers. Cost of Products Sold For the three months ended June 30, 2011, cost of products sold decreased $735,000 (99%) to $8,000 as compared to $743,000 for the three months ended June 30, 2010 due to the absence of System placements. Gross margins were 86% for the three months ended June 30, 2011 compared with 56% for the three months ended June 30, 2010. The increase in gross margin for the three months ended June 30, 2011 was principally due to the sale of a refurbished system in the current period which earned a higher margin as a result of it having a lower cost basis. Operating Expenses Operating expenses increased by $19,000 to $130,000 for the three months ended June 30, 2011, from $111,000 for the three months ended June 30, 2010. This increase was primarily the result of lower overhead cost absorption in the current period, as System production declined in 2011. Research and Development Expenses Research and development expenses increased by $154,000 to $343,000 for the three months ended June 30, 2011, from $189,000 for the three months ended June 30, 2010. Research and development expenses are primarily related to the development of the System and gaming equipment. Research and development expenses increased as a result of the development of our new slot machines. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by $141,000 to $482,000 for the three months ended June 30, 2011, from $623,000 for the three months ended June 30, 2010. This decrease was primarily due to lower facility costs, regulatory fees and compliance costs. Depreciation and Amortization Depreciation and amortization decreased by $ 11,000 to $178,000 for the three months ended June 30, 2011 from $189,000 for the three months ended June 30, 2010. This decrease was primarily due to the absence of depreciation related to the assets impaired in 2010. 20 --------------------------------------------------------------------------------Net Interest Expense Net interest expense increased by $57,000 to $354,000 for the three months ended June 30, 2011 from $297,000 for the three months ended June 30, 2010. This change was the result of higher warrant expense in the current period as a result of the amended terms of the warrants in 2011. Change in Value of Warrants and Convertibility Feature of Long Term Debt The change in fair value of our warrants and convertibility feature of long term debt of $6,335 was mainly due to the declines in the remaining life of the warrants and convertibility feature of long term debt and the estimated fair market value of our common stock. Other Income The Company receives payment in Euros for certain license fees and sales revenues from certain international customers. Other income represents the change in the Euro/US dollar foreign exchange rate. Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010 Revenue The Company's revenues for the six months ended June 30, 2011 were $493,000 compared to $2,221,000 for the comparable prior year period. The decrease in revenues was due to lower sales of refurbished Systems in the current period and lower license fees due to lower System placements, partly offset by $224,000 of license fees earned on the placement of our slot machines. Cost of Products Sold For the six months ended June 30, 2011, cost of products sold decreased $779,000 to $29,000 from $808,000 for the six months ended June 30, 2010. This decrease was due to lower sales of refurbished Systems. Gross margins were 66% for the six months ended June 30, 2011 compared with 58% for the six months ended June 30, 2010. The increase in gross margin was principally due to lower System cost a refurbished System sold in 2011 and lower selling costs. Operating Expenses Operating expenses increased by $61,000 to $264,000 for the six months ended June 30, 2011, from $203,000 for the six months ended June 30, 2010. This increase was primarily the result of lower production of Systems in 2011 partly offset by lower commissions due to the decline in license fees. Research and Development Expenses Research and development expenses increased by $109,000 to $558,000 for the six months ended June 30, 2011, from $449,000 for the six months ended June 30, 2010. Research and development expenses are primarily related to the development of new slot machines. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by $235,000 to $921,000 for the six months ended June 30, 2011, from $1,156,000 for the six months ended June 30, 2010. This decrease was primarily the result of lower marketing staff costs, regulatory fees, compliance and maintenance costs. 21 --------------------------------------------------------------------------------Depreciation and Amortization Depreciation and amortization decreased from $377,000 for the six months ended June 30, 2010 to $326,000 for the six months ended June 30, 2011. This decrease was primarily related to the lower installed base of Systems during 2011. Change in Value of Warrants and Convertibility Feature of Long Term Debt The change in fair value of our warrants and convertibility feature of long term debt of $125,614 was mainly due to the declines in the remaining life of the warrant and convertibility feature of long term debt and the estimated fair market value of our common stock. Net Interest Expense Net interest expense increased from $612,000 for the six months ended June 30, 2010 to $644,000 for the six months ended June 30, 2011. This change was due to higher warrant cost as a result of the amendment of terms of the warrants in June 2011. |