UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K/A


Amendment No. 1





x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2009





OR





o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _____________________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)

(I.R.S. Employer Identification No.)





23 Creek Circle, Boothwyn, Pa 19061(Address of principal executive offices) (Zip Code)





(610) 494 5534


(Registrant’s telephone number, including area code)





Securities registered pursuant to Section 12(b) of the Act: None





Securities registered pursuant to Section 12(g) of the Act:


Common stock, par value $.001 per share





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes oNo x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes oNo x





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





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o





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





o
Large accelerated filer
o
Accelerated filero
Non-accelerated filer (do not check if a smaller reporting company)
x
Smaller reporting company





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










The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2009 was approximately $690,000 based upon the valuation determined by the board of directors when it set the exercise price of stock options on June 29, 2009.





The number of shares of the registrant’s common stock, par value $0.001, outstanding as of  March 19, 2010 was 4,652,474.





The number of shares of the registrant’s Series A Nonvoting Capital Stock, par value $0.001, outstanding as of  March 19, 2010 was 500,000.





EXPLANATORY NOTE





This Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2009, originally filed with the Securities and Exchange Commission on March 31, 2010, is being filed only for the purposes of (i) expanding the Liquidity and Capital Resources section of Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation in order to summarize certain information appearing elsewhere in the Form 10-K and (ii) clarifying certain terminology that previously appeared in the Liquidity and Capital Resources section.




Except as described above and except for the inclusion of exhibits required in this Form 10-K/A, no changes have been made to the Form 10-K as originally filed.  This Form 10-K/A does not reflect events occurring after the original filing date of our Form 10-K, and it does not update in any way the information or disclosures contained in the Form 10-K as originally filed.










TABLE OF CONTENTS





PART II




PageItem 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
1







PART IV




Item 15.
Exhibits and Financial Statement Schedules
10










(i)





PART II





Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.





CAUTIONARY STATEMENT





Throughout this report we make “forward-looking statements,” as that term is defined in Section 27A of the Securities Act 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” or “anticipate” or the negative of such terms and similar words and include all discussions about our ongoing or future plans, objectives or expectations.





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 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. Specific 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 those identified  in Item. 1A “RISK FACTORS”.





The historical financial 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.




1





Overview





We were formed to develop and market our 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.   Our System is designed to increase revenue and security while helping to reduce the labor costs associated with poker play.  Our 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. Our automated table has an added benefit of eliminating mistakes by both the dealer and the player, and eliminating the need to tip the dealer.   The automated nature of our 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 the quarter ended September 30, 2009, we commenced the design, manufacture, marketing, sale and operation of video and reel- spinning gaming machines to customers in various gaming jurisdictions. The current products are (i) a Video Scrabble bonus slot machine, (ii) a multi-rack slot machine and (iii) a spinning reel slot machine. We began to expand the scope of our product offerings and embarked on an initiative to market our game offerings to additional Native American jurisdictions as well as the commercial casino marketplace and cruise lines.





We have generated operating revenue, but we have a history of losses since our inception. We incurred a net loss of $4,166,974 in the fiscal year ended December 31, 2009.





We are registered as an approved vendor to distribute our System to casinos, tribal casinos and card rooms located in California, Connecticut, Iowa and New York. We have also placed our System in casinos in the Alberta and British Columbia provinces in Canada, Aruba, Australia, Bulgaria, Columbia, Curacao, Finland, Germany, Guatemala, Lebanon, Macau, Panama, Portugal, Romania, Spain, and the Czech Republic. We must obtain regulatory approvals in many additional jurisdictions, including Nevada, in order to fully effectuate our business plan. We may not receive any such regulatory approvals. We recently withdrew our licensing application in Nevada, without prejudice, due to current economic conditions. Due to these and a variety of other factors, including those described under “RiskFactors” in Item 1A of this report, we may be unable to generate significant revenues or margins, control operating expenses or achieve or sustain profitability in future years.





Critical Accounting Policies





The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to the valuation of equity awards issued. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.





We believe that of our significant accounting policies, which are described in Note 1 to our financial statements appearing elsewhere in this report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.





2





Revenue Recognition





We generate revenue from leasing our System and slot machines and from providing maintenance and support services to customers that license our System and slot machines.  We sell our Systems and slot machines outright (not including the software which is licensed and not sold) to some customers, with a recurring fee for maintenance. We recognize revenue in accordance with the FASB guidance on software revenue recognition.





We recognize revenue on sales of our products, net of rebates, discounts and allowances, when persuasive evidence of an agreement exists, the sales price is fixed or determinable, our System and slot machines are delivered and our ability to collect is reasonably assured. We recognize revenue generated under operating leases when the ability to collect is reasonably assured. The lease agreements are based on either a fixed monthly price or a pre-determined percentage of the monthly net “rake” revenue collected for each System and daily revenue collected for each slot machine.





If multiple units of our products are included in any one sale or lease agreement, we allocate revenue to each unit based upon its respective fair value against the total contract value and defer revenue recognition on those units where we have not met all requirements of revenue recognition.





We recognize revenue from maintenance and support services ratably over the term of the support services agreement. We intend to recognize any revenues from professional services not essential to the customers’ use of the software under time-and-materials-based agreements as services are performed.





Research and Development





All employee and product costs associated with the development of our products are expensed until technological feasibility is reached. Technological feasibility is established when a product design and a working model of the software product have been completed and the completeness of the working model and its consistency with the product design have been confirmed by testing.





Capitalized Software





We expense internally-developed software costs in accordance with guidance by the Financial Accounting Standards Board (“FASB”) with respect to research and development costs. Research and development costs relating principally to the design and development of products are expensed as incurred.





Equity-based Compensation





We account for our stock-based employee compensation awards in accordance with FASB issued guidance on transactions in which an entity exchanges its equity instruments for goods or services. The FASB guidance also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments. We value stock options issued based upon the Black-Scholes option-pricing model and recognize this value as an expense over the period in which the options vest.





We estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model that used the assumptions noted in the following table.  Expected volatility is based upon publicly traded companies with similar characteristics.  We use 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.




3





Year ended

December 31,

Year ended

December 31,2009

2008Weighted average volatility


49
%


32.1
%Expected dividends


0



0Expected term (in years)


10



10Weighted average risk-free interest rate


3.5
%


3.3
%





Based on the Black-Scholes model, we recorded $118,407 and $125,941 of compensation expense during the years ended December 31, 2009 and  2008, respectively.





Income Taxes





We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The accounting for income taxes involves significant judgments and estimates and deals with complex tax regulations. The recoverability of certain deferred tax assets is based in part on estimates of future income and the timing of temporary differences, and the failure to fully realize such deferred tax assets could result in a higher tax provision in future periods.





In June 2006, the FASB issued guidance that clarifies the accounting for uncertainty in income taxes recognized in financial statements.  It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation became effective for Lightning Poker beginning in 2007. The adoption by Lightning Poker of the guidance on income taxes did not have any material impact on its results of operations, financial position or cash flows.





Recent Accounting Pronouncements





In September 2006, the FASB issued guidance that defines fair value, establishes a framework for measuring fair value  and expands disclosures about fair value measurements. The guidance  established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.





The Company adopted the guidance on fair value as of January 1, 2008, for financial instruments measured at fair value on a recurring and nonrecurring basis. Although the adoption of  the guidance did not materially impact our financial condition, results of operations, or cash flows, we are now required to provide additional disclosures as part of our financial statements.





In December 2007, the FASB issued guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, including noncontrolling interests, contingent consideration,and certain acquired  contingencies. The guidance on business combinations also requires acquisition –related transaction expenses and restructuring costs be expensed as incurred  rather than capitalized. The guidance also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The guidance  became effective for us on January 1, 2009 and must be applied to business combinations completed on or after that date.





In December 2007, the FASB issued guidance on the accounting and reporting for a noncontrolling interest  in a subsidiary.The guidance  is effective for fiscal years beginning on or after December 15, 2008.  The adoption of the guidance  did not have any effect on our results of operations, financial condition, or cash flows.




4





In March 2008, the FASB issued guidance on disclosures about derivative instruments and hedging activities.The guidance requires enhanced disclosures on derivative instruments to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. The guidance  is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are not currently the holder of any derivative instruments; thus, adoption of the guidance did not have any effect on our results of operations, financial condition, or cash flows.





In April 2008, the FASB issued guidance on determining  the useful life of intangible assets. The guidance  is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. It became effective for our fiscal year that began in January 2009.  The guidance requires the   determination of  the useful life of a recognized intangible asset be applied prospectively to intangible assets acquired after the effective date. However, the disclosure requirements of the guidance  must be applied prospectively to all intangible assets recognized in the Company’s financial statements as of the effective date. The adoption of the guidance did not have any effect on our results of operations, financial condition, or cash flows.





In May 2008, the FASB issued guidance  on accounting for convertible debt instruments that may be settled in cash upon conversion.The guidance requires that convertible debt instruments that may be settled in cash upon conversion be separated into a debt and equity component. The debt component will be equal to the fair value of a similar liability and reflect the entity's borrowing rate for nonconvertible instruments. The equity component will be the residual difference between the proceeds and the value of the debt component. The guidance is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and requires retrospective restatement of all periods presented. It became effective for our fiscal year that began in January 2009.  The adoption of the guidance did not have any effect our consolidated financial statements.





In May 2008, the FASB issued The Hierarchy of Generally Accepted Accounting Principles  ( the” Hierarchy”). The Hierarchy identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements that are presented in conformity with GAAP. The GAAP hierarchy was previously set forth in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles . Though the FASB does not expect a change in current practice, the FASB issued the Hierarchy in order for the GAAP hierarchy to reside in the accounting literature established by the FASB. The Hierarchy is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles . Any effect of applying the provisions of the hierarchy shall be reported as a change in accounting principle in accordance with  FASB guidance on  accounting changes and error corrections. We are currently reviewing the guidance  to determine its impact on the Company’s financial statements upon adoption.





In June 2008, the FASB issued guidance on determining whether instruments granted in share-based payment transactions are participating securities. The FASB concluded  that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the calculation of earnings per share pursuant to the two-class method. The guidance  is effective for financial statements issued for fiscal years beginning after December 15, 2008, requiring all prior-period earnings per share data to be adjusted retrospectively. The adoption of the guidance did not have any effect our consolidated financial statements.





Effective January 1, 2009 we adopted the provisions of the FASB guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The guidance  applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by the FASB guidance  on accounting for derivative instruments and hedging activities,” and to


5


any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting the guidance , our outstanding warrants exercisable for 7,009,145 shares, previously treated as equity pursuant to the derivative treatment exemption, were no longer afforded equity treatment. These warrants have a weighted average exercise price of $1.70 per share and a weighted average remaining life of 3 years. As such, effective January 1, 2009 we reclassified the fair value of these  warrants, which have exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue. On January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $909,000 to beginning retained earnings and $16,000 to a long-term warrant liability to recognize the fair value of such warrants on such date. The fair value of these warrants increased to $338,000 as of December 31, 2009. We recognized a net loss from the change in fair value of these warrants for the year ended December 31, 2009 of approximately $307,000.





In accordance with loans obtained by the Company (Note 5), the lenders hold warrants to purchase 7,009,145 shares of the Company’s common stock at any time through June 2013 at prices ranging between $1.10 and $2.00 per share.  The purchase price is subject to adjustment from time to time pursuant to the provisions of the respective warrant agreements. The warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. The Company measures its warrants at fair value. In accordance with the FASB guidance , warrants are classified within Level 3 because they are valued using the Black-Scholes model. Some of the inputs to these valuations are unobservable in the market and are significant.





In May 2009, the FASB issued guidance on  subsequent events.  The guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The guidance  is effective for interim or annual financial periods ending after June 15, 2009. The adoption of  the guidance did not have a material impact on the Company.





In June 2009, the FASB issued guidance on the accounting standards codification and the hierarchy of generally accepted accounting principles. The guidance  names the FASBAccounting Standards Codification ("ASC") as the source of authoritative accounting and reporting standards in the United States, in addition to guidance issued by the SEC.  The ASC is a restructuring of accounting and reporting standards designed to simplify user access to all authoritative GAAP by providing the authoritative literature in a topically organized structure.  The ASC reduces the GAAP hierarchy to two levels, one that is authoritative and one that is not.  The ASC is not intended to change GAAP or any requirements of the SEC.  The ASC became authoritative upon its release on July 1, 2009 and is effective for interim and annual periods ending after September 15, 2009.





In October 2009, the FASB issued guidance on revenue recognition for multiple-deliverable revenue arrangements. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The guidance  addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. We are currently evaluating the impact the guidance will have on our consoldiated financial statements.





In October 2009, the FASB issued guidance on certain revenue arrangements that include software elements. The guidance  reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the guidance many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under this new guidance, the following components would be excluded from the scope of software revenue recognition guidance: the tangible element of the product, software products bundled with tangible products where the software components and non-software components function


6


together to deliver the product's essential functionality, and undelivered components that relate to software that is essential to the tangible product's functionality. The guidance also addresses how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). This guidance will be effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. However, we must elect the same transition method for this guidance as that chosen for revenue recognition for  multiple-deliverable revenue arrangements . We are currently evaluating the impact the guidance  will have on our consolidated financial statements.





Twelve Months Ended December 31, 2009 Compared to Twelve  Months Ended December 31, 2008





Revenue





The Company’s revenues for the year ended December 31, 2009 were $2,828,000 compared to $1,479,000 for the  prior year. The increase in revenues was due to the sale of Systems in the current period to international customers, a sale of the Video Scrabble machines and commencement of new System and Video Scrabble installations.





Cost of Products Sold





For the year ended December 31, 2009, cost of products sold increased $153,000 to $686,000 from $533,000 for the year ended December 31, 2008. This increase was due to the cost associated with sale of Systems to international customers. Gross margins were 59% for the year ended December 31, 2009 compared with 51% for the year ended December 31, 2008. The increase in gross margin was principally due to lower selling costs.





Operating Expenses





Operating expenses decreased by $192,000 to $559,000 for the year ended December 31, 2009, from $751,000 for the year ended December 31, 2008.  This decrease was primarily the result of lower System design costs due to the maturing of the System design, partly offset by lower System assembly activity and increased commissions on new System installations.





Research and Development Expenses





Research and development expenses decreased by $300,000 to $1,100,000 for the year ended December 31 2009, from $1,400,000 for the year ended December 31, 2008. Research and development expenses are primarily related to lower System development costs, partly offset by development of our new Video Scrabble gaming product.





Selling, General and Administrative Expenses





Selling, general and administrative expenses decreased by $99,000 to $1,867,000 for the year ended December 31, 2009, from $1,966,000 for the year ended December 31, 2008.  This decrease was primarily the result of the absence of Merger expenses of $136,000, lower insurance costs and lower staffing costs partly offset by higher regulatory fees, compliance costs and collection reserves.





Depreciation and Amortization





Depreciation and amortization decreased from $1,391,000 for the year ended December 31, 2008 to $1,289,000 for the year ended December 31, 2009. This decrease was primarily related to lower depreciation charges as a result of he impairment charge in 2008, partly offset by the depreciation of  Systems placed under contracts and amortization of brand licenses.




7





Net Interest Expense





Net interest expense increased from $1,009,000 for the year ended December 31, 2008 to $1,188,000 for the year ended December 31, 2009. This change was the result of the issuance of notes payable and related warrants during 2008 of $4,000,000 and lower interest earning on lower investable cash balances.





Change in Value of Warrants





In June 2008, the FASB issued  guidance on determining whether an instrument  is indexed to an entity's own stock. The guidance  lays out a procedure to determine if a company's equity-linked financial instrument (or embedded feature) is indexed to its own common stock. The guidance is effective for fiscal years beginning after December 15, 2008. The outstanding warrants that were previously classified in equity were reclassified to derivative liabilities on January 1, 2009 in accordance with the guidance.  We estimated the fair value of these liabilities as of January 1, 2009 to be $16,000. The fair value of these liabilities was $338,000 at December 31, 2009. $307,000 of the $322,000 change in fair value is reported in our consolidated statement of operations as a “Change in value of warrants”. The remaining $15,000 was related to the value of new warrants issued in connection with the sale of 500,000 warrants by a lender.





Liquidity and Capital Resources





We have incurred net losses since inception.  We have historically funded our operating costs, research and development activities, working capital investments and capital expenditures associated with our growth strategy with proceeds from the issuances of our stock, and loans. These transactions are described in more detail following the discussion of cash flows below:








Discussion of Statement of Cash Flows





Years Ended December 31,2009


2008


ChangeNet cash used in operating activities

$
(1,567,955
)

$
(3,000,533
)

$
1,432,578Net cash used in investing activities


(386,888
)


(1,300,550
)


913,662Net cash provided by (used in) financing activities


(16,795
)


4,092,310



(4,109,105
)Net decrease in cash and cash equivalents


(1,971,638
)


(208,773
)

$
(1,762,865
)Cash and cash equivalents, beginning of year


2,429,493



2,638,266Cash and cash equivalents, end of period

$
457,855


$
2,429,493





For the year ended December 31, 2009, net cash used in operating activities improved $1.4 million (48%) to $1.6 million as compared to $3.0 million for the year ended December 31, 2008. The improvement was primarily due to the reduction in net loss and reductions in working capital spending.  Our net loss declined by $.9 million and we also significantly curtailed inventory purchases.





Net cash used in investing activities decreased $.9 million (70%) to $.4 million for the year ended December 31, 2009, from $1.3 million for the year ended December 31, 2008.  Cash used in investing activities is primarily a function of the net investment in property, plant and equipment, principally systems used in our operations, and software and brand licenses.




8





Net cash used in financing activities was $17,000 for the year ended December 31, 2009, compared to cash provided by financing activities of $4.1 million during the year ended December 31, 2008.   During 2009, cash used in financing activities was primarily due to payments on our capital lease obligation.  During 2008, cash provided from financing activities consisted primarily of proceeds from issuance of notes ($4 million), our capital lease obligation ($81,000) and issuance of common stock ($19,000).





In September 2009 CI II agreed to extend to June 30, 2011 the maturity date of $5,500,000 of promissory notes that Lightning Poker issued to CI II in 2006 and 2007.





In February 2010 we borrowed $1,000,000 from CI II and $1,000,000 from Greenebaum and we issued to each lender a warrant to purchase up to 500,000 shares of common stock at $2 per share. The loans were for a three-year term, with interest at 8% per annum. At the discretion of the lenders, all principal and interest outstanding on the loan may be converted into shares of our capital stock in our next equity financing. The warrants are exercisable through 2013. The aggregate fair market value of the warrants at the time we issued them was $99,980.





Also in February 2010, Greenebaum and we entered into a Debt Conversion Agreement under which a $1,000,000 note that Lightning Poker issued to Greenebaum in 2007 was converted into 500,000 shares of our Nonvoting Stock. All amounts payable under that note, other than the principal amount, were canceled.





In March 2008, we entered into a 60- month capital lease obligation to finance the purchase of a recreational vehicle.  Annual payments, including interest, under the capital lease are $22,152. The capital lease is secured by the vehicle and a certificate of deposit in the amount of $40,000. The certificate of deposit is included in other assets.





In June 2008, we entered into a $4,000,000 three-year loan agreement with interest at 8% per annum.  The notes issued under the loan agreement are secured by the assets of Lightning Poker.  At the discretion of the lender, all principal and interest outstanding on the loan may be converted into shares of our capital stock in our next equity financing at the same price and upon the same terms as the shares issued in the next equity financing. In connection with the loan, we issued warrants to purchase $4,000,000 worth of common stock at an exercise price of $2.00 per share.  The warrants are exercisable through June 2013.





Operations and Liquidity Management.





For the year ended December 31, 2009, we incurred a net loss of $4,166,936 and used $1,567,955 of cash in operating activities. At December 31, 2009, we had an accumulated deficit of $16,044,372. During 2009, we reduced our operating expenses, significantly improving our operating results and use of cash.   As of December 31, 2009, our cash balance was $0.5 million.  The generation of cash flow sufficient to meet our cash needs in the future will depend on our ability to obtain the regulatory approvals required to distribute our products and successfully market them to casinos and card clubs.





Our current cash requirements are approximately $160,000 to $260,000 per month, principally for salaries, professional services, licenses, marketing, office expenses and the purchase of the hardware components for our products.





Based on our cash flow projections and anticipated revenues, we believe we will be able to support our operations during our 2010 fiscal year and we do not expect to have to raise additional capital to fund our operations during 2010. However, if revenue from our products does not meet, or our expenses exceed, our projections, we may need to raise additional funds through an offering of securities or a credit facility. If that becomes necessary, there is no assurance that such funding would be available to us, particularly during this economic recession and severe downturn in the gaming industry. If we need additional funding and are unable to obtain it, our financial condition would be adversely affected.




9





In addition, our ability to sell or lease our products on a large scale may require additional financing for working capital. There is no assurance that such additional financing would be available to us at all, or on reasonable terms, particularly for the reasons mentioned above. Our inability to obtain such financing on terms that allow us to lease our products profitably would hamper our ability to distribute our products on a large scale. Please see Item 1A, “Risk Factors” for discussion of other risks and uncertainties that may also impact our liquidity.





Contractual Obligations





The table below sets forth our known contractual obligations as of December 31, 2009:





Total


Less than

1 year


1 - 3 years


3 - 5 years


More than

5 yearsDebt obligations(1)

$
16,354,411


$
-


$
16,354,411


$
-


$
-Operating lease obligations(2)


467,131



-



292,735



174,396



-Capital lease obligations(3)


71,994



22,152



49,842



-



-Royalty and license fees obligations(4)


1,350,000



150,000



1,200,000



-Other long-term liabilities


-



-



-



-



-Total

$
18,243,536


$
172,152


$
17,896,988


$
174,396


$
-




(1)
Represents the outstanding principal amount of note and interest at the rate of 8% annually.(2)
Represents operating lease agreements for office and warehouse facilities.(3)
Represents outstanding principal and interest payable under capital lease obligation related to our purchase of a recreational vehicle.(4)
Represents royalty and license fee commitments for brand licenses.








PART IV




Item 15.  Exhibits and Financial Statement Schedules.The following exhibits are filed or furnished in this 
Form 10-K/A:




EXHIBIT

NUMBER
EXHIBIT DESCRIPTION23.1
Consent of McGladrey & Pullen, LLP31.1
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




10





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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.





Lightning Gaming, Inc.Date: September 2, 2010
By:
/s/ Brian HavesonBrian HavesonChief Executive Officer