Stockholders Equity

3 Months Ended

Mar. 31, 2024

Note 9. 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 2024 under the 2016 Plan is as follows:

	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2023		2,875,000	$	0.13
Options granted		—		—
Options exercised		—		—
Options cancelled		—		—
Options outstanding at March 31, 2024		2,875,000	$	0.13
Options available for grant under the 2016 Plan at March 31, 2024		2,825,000

Stock-based compensation expense is recognized in the consolidated Statements of Operations based on awards ultimately expected to vest and may be reduced for estimated forfeitures. Additional compensation expense arising from the modification of the exercise price was recognized over the vesting period. Compensation expense related to stock options for the three months ended March 31, 2024 and 2023 was $71 and $92, respectively.

The following table summarizes information with respect to stock options outstanding at March 31, 2024:

	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	2,875,000	3.1	$0.13	-	2,815,000	3.0	$0.13	-

The following table summarizes information with respect to stock options outstanding at December 31, 2023:

	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	2,875,000	3.3	$0.13	-	2,810,000	3.3	$0.13	-

As of March 31, 2024, there was approximately $394 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 2.1 years at an estimated forfeiture rate of 0% for executives and 20% for non-executives.

Warrant: 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 reissued on December 27, 2019 and defined the Expiration Date as 119 months from date of issuance of the amended Warrant, which was the original intent between the Company and the Lender.

The Warrant contains a put feature providing the right to the holder, i.e. the Lender, for a net cash settlement in the event of a fundamental transaction which is defined under the Warrant as a sale of all of the stock, voting stock, or all, or substantially all, of the assets of the Company. Under such a transaction, the holder can require the Company to purchase any unexercised shares under the Warrant at the pro-rata share of the sales price or calculated value less the exercise price of the Warrant share.

The fair value of the warrant is estimated using the Black-Scholes pricing model and is recognized as a liability in the accompanying consolidated Balance Sheets. The following assumptions were used to determine the fair value of the Warrant at March 31, 2024 and December 31, 2023:

	March 31, 2024			December 31, 2023
Stock price	$	0.06		$	0.08
Exercise price	$	0.05		$	0.05
Weighted average volatility		48.9	%		50.5	%
Expected dividend yield		—			—
Expected term (in years)		5.7			5.9
Weighted average risk free interest rate		4.2	%		3.8	%

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 $0.06 and $0.08 price per share was used in the Black Scholes model to determine fair value of the Warrant at March 31, 2024 and December 31, 2023, 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, 2023	$	358,964
Net change in fair value		(140,963	)
Balance at March 31, 2024	$	218,001

The following table is a summary of the Warrant activity for the three months ended March 31, 2024:

	Shares		Weighted Average Exercise Price
Warrants at December 31, 2023		7,000,000	$	0.05
Warrants granted		—		—
Warrants exercised		—		—
Warrants cancelled		—		—
Warrants at March 31, 2024		7,000,000	$	0.05
Warrants exercisable at March 31, 2024		7,000,000

The following table summarizes information with respect to the Warrant outstanding at March 31, 2024:

Warrant Outstanding
	Weighted
	Average	Weighted
	Remaining	Average	Aggregate
	Contractual	Exercise	Intrinsic
Shares	Life (Years)	Price	Value
7,000,000	5.7	$0.05	-

The following table summarizes information with respect to the Warrant outstanding at December 31, 2023:

Warrant Outstanding
	Weighted
	Average	Weighted
	Remaining	Average	Aggregate
	Contractual	Exercise	Intrinsic
Shares	Life (Years)	Price	Value
7,000,000	5.9	$0.05	-

- Definition

The entire disclosure for shareholders' equity comprised of portions attributable to the parent entity and noncontrolling interest, including other comprehensive income. Includes, but is not limited to, balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings, accumulated balance for each classification of other comprehensive income and amount of comprehensive income.

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+ Details

Lightning Gaming, Inc. 10-Q