Notes Payable

3 Months Ended

Jun. 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 $48,814 and $59,701 as of June 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 $59,675 and $73,975 as of June 30, 2022 and December 31, 2021, respectively.

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. As of June 30, 2022, the Company is in compliance with or has obtained waivers for the amended financial ratio covenants.

As of June 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			June 30, 2022			December 31, 2021

PDS Gaming Advance 9	11/27/2019	12/1/2024	$	5,000,000	$	91,616		13	%	$	3,604,708		$	3,889,153
PDS Gaming Advance 10	1/29/2020	2/1/2025	$	1,000,000	$	18,309		13	%		703,685			751,230

Total Notes Payable											4,308,393			4,640,383
Less: amounts classified as current											(734,542	)		(683,484	)
Long-Term Notes Payable										$	3,573,851		$	3,956,899

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

Year Ending December 31,		Amount
	Remaining 2022	$	351,494
	2023		790,371
	2024		2,768,025
	2025		398,503
		$	4,308,393

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 June 30, 2022 and 2021:

	June 30, 2022		June 30, 2021

Interest on Notes payable	$	149,115	$	171,192
Amortization of debt discount		12,577		13,078
	$	161,692	$	184,170

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

	June 30, 2022		June 30, 2021

Interest on Notes payable	$	302,372	$	345,586
Amortization of debt discount		25,188		26,094
	$	327,560	$	371,680

Lightning Gaming, Inc. 10-Q