Attached files
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EX-32 - ILTS FORM 10Q FY2011Q3 31JAN2011 EXH32 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC | exhibit32fy2011q3jan312011.htm |
EX-31.2 - ILTS FORM 10Q FY2011Q3 31JAN2011 EXH31.2 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC | exhibit312fy2011q3jan312011.htm |
EX-31.1 - ILTS FORM 10Q FY2011Q3 31JAN2011 EXH31.1 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC | exhibit311fy2011q3jan312011.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2011
[ ] 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: 0-10294
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California
|
95-3276269
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
2310 Cousteau Court
Vista, California
(Address of principal executive offices)
|
92081-8346
(Zip Code)
|
(760) 598-1655
(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 ý Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, 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 o Noo
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.
Large accelerated filer
|
o
|
Accelerated filer
|
o
|
|
Non-accelerated filer
|
o
|
Smaller reporting company
|
ý
|
Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
|
Outstanding at March 16, 2011
|
|
Common Stock, no par value per share
|
12,962,999 shares
|
1
PART I
|
FINANCIAL INFORMATION
|
PAGE
|
Item 1.
|
3-12
|
|
Item 2.
|
13-16
|
|
Item 3.
|
17
|
|
Item 4.
|
17
|
|
PART II
|
OTHER INFORMATION
|
|
Item 1.
|
18
|
|
Item 1A.
|
18
|
|
Item 2.
|
18
|
|
Item 3.
|
18
|
|
Item 4.
|
||
Item 5.
|
18
|
|
Item 6.
|
19
|
|
|
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32
PART I
|
FINANCIAL INFORMATION
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands)
January 31, 2011
|
April 30, 2010
|
|||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$
|
3,111
|
$
|
2,363
|
||||
Certificates of deposit
|
1,247
|
1,745
|
||||||
Accounts receivable, net of allowance for doubtful accounts of $75
|
883
|
500
|
||||||
Costs and estimated earnings in excess of billings on uncompleted contracts
|
63
|
804
|
||||||
Inventories, net
|
820
|
1,042
|
||||||
Other current assets
|
162
|
224
|
||||||
Total current assets
|
6,286
|
6,678
|
||||||
Equipment, furniture and fixtures, net
|
470
|
405
|
||||||
Other noncurrent assets
|
61
|
73
|
||||||
Total assets
|
$
|
6,817
|
$
|
7,156
|
||||
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$
|
299
|
$
|
622
|
||||
Billings in excess of costs and estimated earnings on uncompleted contracts
|
391
|
440
|
||||||
Accrued payroll and related taxes
|
438
|
349
|
||||||
Warranty reserves
|
29
|
42
|
||||||
Payable to Parent
|
250
|
250
|
||||||
Other current liabilities
|
54
|
44
|
||||||
Deferred revenues
|
485
|
344
|
||||||
Total current liabilities
|
1,946
|
2,091
|
||||||
Long-term liabilities
|
17
|
6
|
||||||
Total liabilities
|
1,963
|
2,097
|
||||||
Commitments and contingencies
|
||||||||
Shareholders’ equity:
|
||||||||
Preferred shares, no par value; 20,000 shares authorized; no shares issued or outstanding
|
-
|
-
|
||||||
Common shares, no par value; 50,000 shares authorized; 12,963 shares issued and outstanding
|
56,370
|
56,370
|
||||||
Accumulated deficit
|
(51,516
|
)
|
(51,311
|
)
|
||||
Total shareholders' equity
|
4,854
|
5,059
|
||||||
Total liabilities and shareholders' equity
|
$
|
6,817
|
$
|
7,156
|
See notes to condensed consolidated financial statements
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
January 31,
|
January 31,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Revenues:
|
||||||||||||||||
Sales of products
|
$
|
1,146
|
$
|
910
|
$
|
4,390
|
$
|
3,483
|
||||||||
Services
|
226
|
174
|
676
|
531
|
||||||||||||
1,372
|
1,084
|
5,066
|
4,014
|
|||||||||||||
Cost of sales:
|
||||||||||||||||
Cost of product sales
|
1,023
|
674
|
3,401
|
2,789
|
||||||||||||
Cost of services
|
26
|
9
|
94
|
70
|
||||||||||||
1,049
|
683
|
3,495
|
2,859
|
|||||||||||||
Gross profit
|
323
|
401
|
1,571
|
1,155
|
||||||||||||
Research and development expenses
|
-
|
427
|
-
|
1,295
|
||||||||||||
Selling, general and administrative expenses
|
576
|
421
|
1,803
|
1,430
|
||||||||||||
Loss from operations
|
(253
|
)
|
(447
|
)
|
(232
|
)
|
(1,570
|
)
|
||||||||
Other income (expense):
|
||||||||||||||||
Interest and dividend income
|
2
|
1
|
5
|
8
|
||||||||||||
Other
|
-
|
|
-
|
12
|
(3
|
)
|
||||||||||
Loss before income taxes
|
(251
|
)
|
(446
|
)
|
(215
|
)
|
(1,565
|
)
|
||||||||
Benefit of income taxes
|
(10
|
)
|
(10
|
)
|
(10
|
)
|
(10
|
)
|
||||||||
Net loss
|
$
|
(241
|
)
|
$
|
(436)
|
$
|
(205
|
)
|
$
|
(1,555
|
)
|
|||||
Net loss per share:
|
||||||||||||||||
Basic and diluted
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
(0.02
|
)
|
$
|
(0.12
|
)
|
||||
Weighted average shares used in computation of net loss per share:
|
||||||||||||||||
Basic and diluted
|
12,963
|
12,963
|
12,963
|
12,963
|
See notes to condensed consolidated financial statements
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
Nine Months Ended
January 31,
|
||||||||
2011
|
2010
|
|||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$
|
(205)
|
$
|
(1,555)
|
||||
Adjustments to reconcile net loss to net cash provided by (used in)
|
||||||||
operating activities:
|
||||||||
Depreciation and amortization
|
87
|
105
|
||||||
Warranty reserve expense
|
21
|
11
|
||||||
Impairment charge for patent write-off
|
12
|
-
|
||||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(383)
|
(89)
|
||||||
Costs and estimated earnings in excess of billings on uncompleted contracts
|
741
|
3
|
||||||
Inventories
|
222
|
116
|
||||||
Other current assets
|
62
|
(221)
|
||||||
Accounts payable
|
(323)
|
(78)
|
||||||
Billings in excess of costs and estimated earnings on uncompleted contracts
|
(49)
|
1,338
|
||||||
Accrued payroll and related taxes
|
89
|
(65)
|
||||||
Warranty reserves
|
(34)
|
(9)
|
||||||
Other liabilities
|
21
|
(22)
|
||||||
Deferred revenues
|
141
|
118
|
||||||
Net cash provided by (used in) operating activities
|
402
|
(348)
|
||||||
Cash flows from investing activities:
|
||||||||
Purchases of certificates of deposit
|
(997)
|
(1,214)
|
||||||
Proceeds from redemption of certificates of deposit
|
1,495
|
1,803
|
||||||
Additions to equipment, furniture and fixtures
|
(150)
|
(34)
|
||||||
Additions to intangible asset
|
(2)
|
(8)
|
||||||
Net cash provided by investing activities
|
346
|
547
|
||||||
Net increase in cash and cash equivalents
|
748
|
199
|
||||||
Cash and cash equivalents at beginning of period
|
2,363
|
4,041
|
||||||
Cash and cash equivalents at end of period
|
$
|
3,111
|
$
|
4,240
|
||||
See notes to condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Description of the Business
International Lottery & Totalizator Systems, Inc. (“ILTS” or the “Company,” together with its subsidiary,) designs, manufactures, sells, manages, supports and services computerized wagering systems and terminals for the global online lottery and pari-mutuel racing industries. The wagering system features include real-time, secure processing of data received from multiple locations, hardware redundancy and complete communications redundancy in order to provide the highest level of fault tolerant operation. In addition, although the Company is not presently doing so, ILTS has demonstrated capability to provide full facilities management services to customer organizations authorized to conduct online lotteries. The Company is largely dependent upon significant contracts for its revenue, which typically include a deposit upon contract signing and up to six months lead time before delivery of hardware begins.
In recent years, the Company has devoted significant resources in developing certified end-to-end optical scan voting systems and a full-featured Election Management Software that provides precinct tabulation, ballot review and audio voting capability. In addition to the Inkavote Plus Precinct Ballot Counter (“PBC”) system certified to the National Association of State Election Directors (“NASED”) 2002 Voting System Standards (“VSS”), the Company received the 2005 Voluntary Voting System Guidelines (“VVSG”) certification from the United States Election Assistance Commission (“EAC”) in January 2010 for its OpenElect® digital optical scan election system. As part of a jurisdiction's procurement process, the Company will provide the OpenElect® products’ source code for independent review.
These efforts leverage the Company’s extensive experience to develop highly secure, mission-critical solutions that meet the NASED 2002 VSS and the EAC 2005 VVSG standards. In addition, the Company’s voting systems offer the following features:
• High level of security and vote encryption to ensure integrity and voter privacy;
• Electronic and paper audit trails that offer added security and redundancy for recounts;
• Minimal training for poll workers to set-up and operate; and
• Minimal voter re-education required.
Berjaya Lottery Management (H.K.) Ltd. (“BLM” or the “Parent”) owns 71.3% of the outstanding voting stock of ILTS.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of ILTS and its wholly-owned subsidiary, Unisyn Voting Solutions, Inc. All significant inter-company accounts and transactions are eliminated in consolidation.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows have been included.
The results of operations for the interim periods shown in this report are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2010 filed with the SEC on July 8, 2010. The condensed consolidated balance sheet as of April 30, 2010 has been derived from the audited financial statements included in the Form 10-K for that year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. Actual results could differ from those estimates. Estimates may affect the reported amounts of assets and liabilities and revenues and expenses, and the disclosure of contingent assets and liabilities.
Deferred Revenues
Deferred revenues of approximately $485,000 as of January 31, 2011 represent prepayments for products and services which were related to the use of the PBC and OpenElect® voting systems, and other software and technical support services. The Company will recognize the revenues upon its fulfillment of the prescribed criteria for revenue recognition.
Warranty Reserves
Estimated warranty costs are accrued as revenues are recognized. Included in the warranty cost accruals are costs for basic warranties on products sold. A summary of product warranty reserve activity for the nine months ended January 31, 2011 is as follows:
(Amounts in thousands)
|
||||
Balance at May 1, 2010
|
$
|
42
|
||
Additional reserves
|
43
|
|||
Warranty reserve expense adjustments
|
(22)
|
|||
Charges incurred
|
(34)
|
|||
Balance at January 31, 2011
|
$
|
29
|
Segment Information
Segment Reporting requires companies to report certain information about operating segments in their condensed consolidated financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.
The Company divides its operations into two operating segments: the gaming business and the voting business. The gaming segment designs and develops computerized wagering systems and terminals for the online lottery and pari-mutuel racing industries worldwide. Presently the voting segment generates revenues from product servicing and software support services.
The Company’s segment information is presented below (in thousands):
As of and for the Three Months Ended
|
||||||||||||
January 31, 2011
|
||||||||||||
Gaming
Business
|
Voting
Business
|
Totals
|
||||||||||
Total revenues
|
$
|
1,272
|
$
|
100
|
$
|
1,372
|
||||||
Income (loss) from operations
|
57
|
(310)
|
(253)
|
|||||||||
Depreciation and amortization
|
26
|
6
|
32
|
|||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts
|
-
|
63
|
63
|
|||||||||
Equipment, furniture and fixtures, net
|
112
|
358
|
470
|
|||||||||
Deferred revenues
|
20
|
465
|
485
|
|||||||||
As of and for the Three Months Ended
|
||||||||||||
January 31, 2010
|
||||||||||||
Gaming
Business
|
Voting
Business
|
Totals
|
||||||||||
Total revenues
|
$
|
1,004
|
$
|
80
|
$
|
1,084
|
||||||
Income (loss) from operations
|
92
|
(539)
|
(447)
|
|||||||||
Depreciation and amortization
|
28
|
5
|
33
|
|||||||||
Equipment, furniture and fixtures, net
|
190
|
159
|
349
|
|||||||||
Deferred revenues
|
14
|
352
|
366
|
|||||||||
As of and for the Nine Months Ended
|
||||||||||||
January 31, 2011
|
||||||||||||
Gaming
Business
|
Voting
Business
|
Totals
|
||||||||||
Total revenues
|
$
|
4,716
|
$
|
350
|
$
|
5,066
|
||||||
Income (loss) from operations
|
683
|
(915)
|
(232)
|
|||||||||
Depreciation and amortization
|
68
|
19
|
87
|
|||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts
|
-
|
63
|
63
|
|||||||||
Equipment, furniture and fixtures, net
|
112
|
358
|
470
|
|||||||||
Deferred revenues
|
20
|
465
|
485
|
|||||||||
As of and for the Nine Months Ended
|
||||||||||||
January 31, 2010
|
||||||||||||
Gaming
Business
|
Voting
Business
|
Totals
|
||||||||||
Total revenues
|
$
|
3,750
|
$
|
264
|
$
|
4,014
|
||||||
Income (loss) from operations
|
140
|
(1,710)
|
(1,570)
|
|||||||||
Depreciation and amortization
|
90
|
15
|
105
|
|||||||||
Equipment, furniture and fixtures, net
|
190
|
159
|
349
|
|||||||||
Deferred revenues
|
14
|
352
|
366
|
|||||||||
Inventories
Inventories are stated at the lower of cost or the current estimated market values. Cost is determined using the first-in, first-out method. The Company periodically reviews inventory quantities on hand and records a provision for excess and obsolete inventories based on the following factors:
|
·
|
Terminal models still currently in the field;
|
|
·
|
The average life of the models; and
|
|
·
|
The requirement for replacement parts on older models.
|
Inventories consisted of the following:
January 31,
|
April 30,
|
|||||||
2011
|
2010
|
|||||||
(Amounts in thousands)
|
||||||||
Raw materials and subassemblies
|
$
|
820
|
$
|
1,038
|
||||
Work-in-process
|
-
|
4
|
||||||
$
|
820
|
$
|
1,042
|
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are carried at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets which approximate three to seven years. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the lease term. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10, “Property, Plant and Equipment,” the Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, or when the net book value of such assets exceeds the future undiscounted cash flow attributed to such assets. At January 31, 2011 and April 30, 2010, and during the three and nine months ended January 31, 2011 and fiscal year ended April 30, 2010, no indicators of impairment were identified.
Net equipment, furniture and fixtures consisted of the following (in thousands):
January 31,
|
April 30,
|
|||||||
2011
|
2010
|
|||||||
(Amounts in thousands)
|
||||||||
Plant and machinery
|
$
|
678
|
$
|
678
|
||||
Computer equipment
|
1,367
|
1,217
|
||||||
Leasehold improvement
|
183
|
183
|
||||||
Furniture, fixtures and equipment
|
91
|
91
|
||||||
Construction in progress
|
1
|
1
|
||||||
2,320
|
2,170
|
|||||||
Accumulated depreciation
|
(1,850
|
)
|
(1,765
|
)
|
||||
Net equipment, furniture and fixtures
|
$
|
470
|
$
|
405
|
Net Loss per Share
Basic net loss per share is based on the weighted average number of shares outstanding during the period.
During the three months ended October 31, 2009, 84,000 options outstanding expired. Therefore, there were no outstanding options at January 31, 2011.
Shared-based Compensation
The Company requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Stock-based employee compensation expense is recognized on a straight-line basis over the requisite service period. There was no share-based compensation expense related to employee stock options recognized during the three and nine month periods ended January 31, 2011 and 2010.
Major Customers
The following table summarizes major customers who individually accounted for more than 10% of revenues for the periods presented.
Three Months Ended
January 31,
|
Nine Months Ended
January 31,
|
|||||||
2011
|
2010
|
2011
|
2010
|
|||||
Revenue:
|
||||||||
From unrelated customers
|
Two customers accounted for 43% of total revenue
|
One customer accounted for 21% of total revenue
|
One customer accounted for 16% of total revenue
|
One customer accounted for 16% of total revenue
|
||||
From related customers
|
Two customers accounted for 43% of total revenue
|
Two customers accounted for 64% of total revenue
|
Two customers accounted for 59% of total revenue
|
One customer accounted for 64% of total revenue
|
Related Party Transactions
During the three months ended January 31, 2011 and 2010, revenues from all related party agreements for sales of products and services totaled approximately $669,000 (49% of total revenue) and $771,000 (71% of total revenue), respectively. Related party revenues for the nine months ended January 31, 2011 and 2010 were approximately $3.3 million (65% of total revenue) and $3.1 million (77% of total revenue), respectively. Included in accounts receivable at January 31, 2011 was approximately $673,000 from these customers. Descriptions of the transactions with the Company’s related parties in the three and nine months ended January 31, 2011 and 2010 are presented below.
Berjaya Lottery Management (H.K.) Ltd. (“BLM”)
In 1996, the Company entered into an agreement to purchase specific inventory on behalf of BLM, the owner of 71.3% of ILTS’s outstanding voting stock as of January 31, 2011. Title to the inventory resides with BLM and is on consignment; therefore, no amounts are reflected in the Company’s condensed consolidated balance sheets for inventory purchased on BLM’s behalf.
Over time, the Company has sold or used portions of the BLM inventory in unrelated third party transactions. The sale or use of the inventory results in a liability to BLM for the cost of the items utilized.
The financial activities and balances related to BLM were as follows:
•
|
There were no related party sales to BLM in the three and nine months ended January 31, 2011 and 2010;
|
•
|
There were no accounts receivable balances from BLM as of January 31, 2011 and April 30, 2010; and
|
•
|
Liabilities to BLM arising from the sale or use of the BLM inventory, recorded as “Payable to Parent,” were $250,000 as of January 31, 2011 and April 30, 2010.
|
|
|
Philippine Gaming Management Corporation
On January 11, 2010, the Company received from Philippine Gaming Management Corporation (“PGMC”), a related party and a subsidiary of BLM, an order valued at approximately $1.8 million for lottery products. Shipments of these products began in the first quarter of fiscal 2011 and were completed in the third quarter of fiscal 2011.
In addition, the Company provides terminal spare parts to PGMC on an ongoing basis.
The financial activities and balances related to transactions with PGMC were as follows:
•
|
Revenues recognized on the sale of lottery products and support service during the three and nine months ended January 31, 2011 totaled approximately $302,000 and $2.2 million, respectively. Revenues recognized on the sale of lottery products, software and support service during the three and nine months ended January 31, 2010 totaled approximately $489,000 and $2.5 million, respectively;
|
•
|
In connection with the lottery product order dated January 11, 2010 mentioned above, there were no costs and estimated earnings in excess of billings nor billings in excess of costs and estimated earnings as of January 31, 2011, compared to billings in excess of costs and estimated earnings totaled $440,000 as of April 30, 2010;
|
•
|
There was no deferred revenue as of January 31, 2011. Deferred revenue on software support services totaled $6,000 as of April 30, 2010; and
|
•
|
Accounts receivable from the sale of lottery products and services totaled $235,000 as of January 31, 2011, compared to $10,000 as of April 30, 2010.
|
Sports Toto Malaysia Sdn. Bhd.
The Company provides lottery products, software development and software support services to Sports Toto Malaysia (“STM”), an affiliate of BLM and a related party.
The financial activities and balances related to transactions with STM were as follows:
•
|
Revenues of $78,000 and $233,000 were recognized on the sale of support services during the three and nine months ended January 31, 2011. Revenues of $73,000 and $295,000 were recognized on the sale of support services and lottery products during the three and nine months ended January 31, 2010, respectively;
|
•
|
There were deferred revenues of $9,000 on software support services as of January 31, 2011 and April 30, 2010; and
|
•
|
There was no accounts receivable balance from STM as of January 31, 2011, compared to $13,000 as of April 30, 2010.
|
Natural Avenue Sdn. Bhd.
The Company provides Natural Avenue Sdn. Bhd. (“Natural Avenue”), an affiliate of BLM and a related party, with lottery and software products, support services and spare parts.
On December 16, 2009, the Company signed a contract with Natural Avenue for a complete online DataTrak lottery system valued at approximately $3.6 million. The contract is scheduled to be completed by the fourth quarter of fiscal 2011.
The financial activities and balances related to transactions with Natural Avenue were as follows:
•
|
Revenues of $289,000 and $800,000 were recognized on the performance of contract deliverables and sale of support services during the three and nine months ended January 31, 2011, respectively. Revenues of $209,000 and $240,000 were recognized on the performance of software development and sale of support services during the three and nine months ended January 31, 2010, respectively;
|
•
|
Net billings in excess of costs and estimated earnings relating to the abovementioned contract dated December 16, 2009 totaled approximately $203,000 as of January 31, 2011, compared to net costs and estimated earnings in excess of billings of approximately $799,000 as of April 30, 2010; and
|
•
|
Accounts receivable totaled approximately $372,000 at January 31, 2011, compared to $440,000 as of April 30, 2010.
|
|
|
Sports Toto Computers Sdn. Bhd.
The Company engages Sports Toto Computers Sdn. Bhd. (“STC”), a related party, to provide consulting, programming and other related services to the Company.
During the three and nine months ended January 31, 2011, the Company incurred approximately $50,000 and $163,000, respectively, which are shown as part of cost of sales. During the three and nine months ended January 31, 2010, the Company incurred approximately $47,000 and $130,000, respectively, which are shown as part of cost of sales.
Ascot Sports Sdn. Bhd.
The Company provided Ascot Sports Sdn. Bhd. (“Ascot Sports”), an affiliate of BLM and a related party, with software products.
·
|
During the three months ended January 31, 2011, there was no revenue recognized from Ascot Sports. During the nine months ended January 31, 2011, the Company recognized revenue of $66,000 for software product development. There was no revenue recognized in the prior year periods.
|
·
|
Accounts receivable totaled approximately $66,000 at January 31, 2011. There was no account receivable balance as of April 30, 2010.
|
Fair Value of Financial Instruments
The Company’s material financial instruments consist of its cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable and related party payables. The carrying amounts of the Company’s financial instruments generally approximated their fair values at January 31, 2011 and April 30, 2010 due to the short-term maturity of the instruments.
Recent Accounting Pronouncements
In October 2009, the FASB issued authoritative guidance on revenue recognition, ASC ASU 2009-14, “Certain Revenue Arrangements that Include Software Elements,” that will become effective for the Company beginning May 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We adopted this new guidance as of May 1, 2010. The adoption of this new guidance did not have a material impact on our condensed consolidated financial statements.
The FASB had issued certain other accounting pronouncements as of January 31, 2011 that will become effective in subsequent periods; however, the Company does not believe that any of those pronouncements are germane to our business or would have significantly affected our financial accounting measurements or disclosures had they been in effect during fiscal 2011.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
SAFE HARBOR STATEMENT PURSUANT TO SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934
This report contains certain forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under the heading "Risk Factors" and elsewhere in, or incorporated by reference into, this report. In some cases, you can identify forward looking statements by terms such as "may," "intend," "might," "will," "should," "could," "would," "expect," "believe," "anticipate," "estimate," "predict," "potential," or the negative of these terms. These terms and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. The forward-looking statements in this report are based upon management's current expectations and belief, which management believes are reasonable. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially from those contained in any forward looking statements. You are cautioned not to place undue reliance on any forward-looking statements. These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including, such factors, among others, as market acceptance and market demand for our products and services, pricing, the changing regulatory environment, the effect of our accounting policies, potential seasonality, industry trends, adequacy of our financial resources to execute our business plan, our ability to attract, retain and motivate key technical, marketing and management personnel, and other risks described from time to time in periodic and current reports we file with the United States Securities and Exchange Commission, or the "SEC." You should consider carefully the statements under "Item 1A. Risk Factors" described in our Annual Report on Form 10-K for the year ended April 30, 2010 which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
Our condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable. We base our estimates on historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Estimates affect the reported amounts and related disclosures. Actual results may differ from initial estimates. There have been no material changes to the critical accounting policies outlined in the Company’s annual report on form 10-K for the fiscal year ended April 30, 2010.
RESULTS OF OPERATIONS
Revenue Analysis
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||
(Amounts in thousands)
|
January 31,
|
January 31,
|
||||||||||||||||||||||
Revenues
|
2011
|
2010
|
Change
|
2011
|
2010
|
Change
|
||||||||||||||||||
Products:
|
||||||||||||||||||||||||
Contracts
|
$
|
976
|
$
|
523
|
$
|
453
|
$
|
3,557
|
$
|
2,372
|
$
|
1,185
|
||||||||||||
Spares
|
170
|
387
|
(217)
|
833
|
1,111
|
(278)
|
||||||||||||||||||
Total Products
|
1,146
|
910
|
236
|
4,390
|
3,483
|
907
|
||||||||||||||||||
Services:
|
||||||||||||||||||||||||
Software Support
|
192
|
170
|
22
|
540
|
497
|
43
|
||||||||||||||||||
Product Servicing and Support
|
34
|
4
|
30
|
136
|
34
|
102
|
||||||||||||||||||
Total Services
|
226
|
174
|
52
|
676
|
531
|
145
|
||||||||||||||||||
$
|
1,372
|
$
|
1,084
|
$
|
288
|
$
|
5,066
|
$
|
4,014
|
$
|
1,052
|
Significant fluctuations in period-to-period contract revenue are expected in both gaming and voting industries since individual contracts are generally considerable in value, and the timing of contracts does not occur in a predictable trend. Contracts from the same customer generally may not recur or generally do not recur in the short-term. Accordingly, comparative results between quarters may not be indicative of trends in contract revenue.
The current domestic and global economic slowdown and tightening of the credit markets may adversely affect our business and financial condition in ways that we cannot reasonably predict. For the gaming business, due to the tightening of the credit markets, our potential and existing customers may not be able to secure financing for lottery projects which could effectively impact our revenue potential. For the voting business, various government entities and jurisdictions have experienced severe budget constraints which could compel them to delay or cancel their purchasing decisions, and hence, impact our ability to generate revenue.
Contract revenue for the three months ended January 31, 2011 was $976,000, compared to $523,000 in the same period in 2010. For the nine months ended January 31, 2011, contract revenue was $3.6 million, compared to $2.4 million for the corresponding period in 2010. There were increased contract activities with unrelated customers in the three and nine months ended in January 31, 2011 compared to the corresponding periods in 2010.
Spares revenue for the three months ended January 31, 2011 was $170,000, compared to $387,000 for the corresponding period in 2010. Spares revenue for the nine months ended January 31, 2011 was $833,000, compared to $1.1 million for the corresponding period in 2010. The decreases in spares revenue in the periods ended January 31, 2011 are due to lower demand from the same pool of customers. Customer demand for spare parts fluctuates from period to period.
Software support revenue for the three months ended January 31, 2011 was $192,000, compared to $170,000 for the same period in 2010. For the nine months ended January 31, 2011, software support revenue was $540,000, compared to $497,000 in the same period in 2010. The increases in 2011 are primarily due to additional software support provided to an unrelated customer and higher fees charged to the same pool of customers from the corresponding periods in 2010.
Product servicing and support revenues for the three months ended January 31, 2011 and 2010 were $34,000 and $4,000, respectively. For the nine months ended January 31, 2011, product servicing and support revenue was $136,000, compared to $34,000 for the same period in the prior year. The increase is due to several additional service arrangements with unrelated and related customers.
Related party revenue of approximately $669,000 accounted for 49% of total revenue in the three months ended January 31, 2011, compared to $771,000 or 71% of total revenue in the corresponding period in 2010. For the nine months ended January 31, 2011, related party revenue of approximately $3.3 million accounted for 65% of total revenue, compared to $3.1 million or 77% of total revenue in the corresponding period in 2010.
Cost of Sales and Gross Profit Analysis
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||||||
January 31,
|
January 31,
|
January 31,
|
January 31,
|
|||||||||||||||||||||||||||||
(Amounts in thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||||||||||
Products
|
$
|
1,146
|
84
|
%
|
$
|
910
|
84
|
%
|
$
|
4,390
|
87
|
%
|
$
|
3,483
|
87
|
%
|
||||||||||||||||
Services
|
226
|
16
|
%
|
174
|
16
|
%
|
676
|
13
|
%
|
531
|
13
|
%
|
||||||||||||||||||||
Total revenues
|
$
|
1,372
|
100
|
%
|
$
|
1,084
|
100
|
%
|
$
|
5,066
|
100
|
%
|
$
|
4,014
|
100
|
%
|
||||||||||||||||
Cost of sales:
|
||||||||||||||||||||||||||||||||
Products
|
$
|
1,023
|
75
|
%
|
$
|
674
|
62
|
%
|
$
|
3,401
|
67
|
%
|
$
|
2,789
|
69
|
%
|
||||||||||||||||
Services
|
26
|
2
|
%
|
9
|
1
|
%
|
94
|
2
|
%
|
70
|
2
|
%
|
||||||||||||||||||||
Total costs of sales
|
$
|
1,049
|
77
|
%
|
$
|
683
|
63
|
%
|
$
|
3,495
|
69
|
%
|
$
|
2,859
|
71
|
%
|
||||||||||||||||
Gross profit:
|
||||||||||||||||||||||||||||||||
Products
|
$
|
123
|
9
|
%
|
$
|
236
|
22
|
%
|
$
|
989
|
20
|
%
|
$
|
694
|
17
|
%
|
||||||||||||||||
Services
|
200
|
14
|
%
|
165
|
15
|
%
|
582
|
11
|
%
|
461
|
12
|
%
|
||||||||||||||||||||
Total gross profit
|
$
|
323
|
23
|
%
|
$
|
401
|
37
|
%
|
$
|
1,571
|
31
|
%
|
$
|
1,155
|
29
|
%
|
Individual contracts are generally significant in value and are awarded in a highly competitive bidding process. The gross profit margin varies from one contract to another, depending on the size of the contract and the competitiveness of market conditions. Accordingly, comparative results between quarters may not be indicative of trends in gross profit margin.
Overall gross profit margins were at 23% for the three months ended January 31, 2011, compared to 37% for the corresponding period in 2010. Lower profit margins in 2011 were due to increased unabsorbed production labor costs, higher labor cost incurred on gaming contracts and higher material costs incurred on spares. For the nine months ended January 31, 2011, overall gross profit margins were at 31%, compared to 29% in the same period in 2010. The increase is primarily due to higher profitability achieved on the sales of custom spare parts, partially offset by higher labor cost incurred on gaming contracts.
Research and Development Expenses (“R&D”)
For the three and nine months ended January 31, 2011, we did not incur any R&D expenses, compared to $427,000 and $1.3 million in the same periods in 2010. We attribute the significant decreases to the successful completion of the development of new voting system products. While we continue to enhance our products, we anticipate that R&D expenses will be minimal, if any, in the remaining quarter of fiscal 2011 as we focus and dedicate our efforts on the marketing and sale of the new voting system.
Selling, General and Administrative (“SG&A”)
SG&A expenses for the three months ended January 31, 2011 were $576,000, compared to $421,000 in the same period in 2009. For the nine months ended January 31, 2011, SG&A expenses were $1.8 million, compared to $1.4 million. The significant increases in SG&A expenses are primarily related to higher expenses incurred in marketing activities for the voting and gaming segments, higher personnel costs associated with increased headcount and higher consulting fees associated with the voting segment. We anticipate that SG&A expense will remain relatively constant in the remaining quarter of fiscal 2011.
Other Income
Other income in the three and nine months ended January 31, 2011 and 2010 remained relatively insignificant.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our net working capital at January 31, 2011 was $4.3 million.
Contract backlog at January 31, 2011 was approximately $783,000. Of this amount, approximately $243,000 will be derived from a gaming contract executed with a related customer. The remaining contract backlog amount of approximately $540,000 relates to voting and gaming contracts with unrelated customers.
Additional sources of cash through January 31, 2012 are expected to be derived from spares, software and technical support and licensing revenues. Uses of cash are expected to be for normal operating expenses and costs associated with contract deliverables.
While we anticipate that we will be successful in obtaining additional product or service contracts to enable us to continue normal operations through January 31, 2012, there can be no assurance that we will be able to acquire new contracts.
In the highly competitive industry in which we operate, operating results may fluctuate significantly from period to period. We anticipate that our cash flows from operations, expected contract payments and available cash will be sufficient to enable us to meet our liquidity needs through at least January 31, 2012. Although we are not aware of any particular trends, in the event that we are unable to secure new business, we may experience reduced liquidity or insufficient cash flows.
The following table summarizes our cash flow activities:
Nine Months Ended
|
||||||||||||
January 31,
|
January 31,
|
Increase
|
||||||||||
2011
|
2010
|
(Decrease)
|
||||||||||
(Amounts in thousands)
|
||||||||||||
Condensed cash flow comparative:
|
||||||||||||
Operating activities
|
$
|
402
|
$
|
(348)
|
$
|
750
|
||||||
Investing activities
|
346
|
547
|
(201)
|
|||||||||
Net increase in cash and cash equivalents
|
$
|
748
|
$
|
199
|
$
|
549
|
Cash Flow Analysis
Net cash provided by operating activities was $402,000 for the nine months ended January 31, 2011, compared to net cash used in operating activities of $348,000 for the same period in 2010. The primary factors contributing to the variability in the reported cash flow amounts relate to the net loss of $205,000 in 2011 compared to the net loss of $1.6 million in 2010 which resulted principally from the incurrence of research and development expenses. In addition, we attribute the variability in the reported cash flow amounts to the timing of customer contract performance and milestone invoicing which effectively impacted the cost and earnings in excess of billings and billings in excess of costs and estimated earnings on uncompleted contracts. Furthermore, the reduction in vendor deposits and timing of payroll cycle coupled with the change in inventories balance contributed to the variability in the reported cash flow amounts.
Net cash provided by investing activities was $346,000 for the nine months ended January 31, 2011, compared to $547,000 in 2010. The lower net cash provided by investing activities in the nine months ended January 31, 2011 resulted largely from the increase in capital expenditures related to the voting equipment to be used for marketing purposes and computer equipment which amounted to $150,000 in the nine months ended January 31, 2011, compared to $34,000 in 2010.
There were no financing activities during the nine months ended in January 31, 2011 or 2010.
Capital Resources
As of January 31, 2011, there were no credit facilities.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable
ITEM 4.
|
CONTROLS AND PROCEDURES
|
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in SEC Rule 13a-15(e) and 15d-15 (e)) as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (ii) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have not been any changes in the Company’s internal control over financial reporting during the quarter ended January 31, 2011 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II
|
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
The Company is currently not a party to any pending legal proceedings, and no such action by or, to the best of its knowledge, against the Company has been threatened as of the date of this report.
ITEM 1A.
|
RISK FACTORS
|
There have been no material changes to the risk factors relating to our business as disclosed in our Form 10-K for the fiscal year ended April 30, 2010 filed with the SEC on July 8, 2010.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Not applicable
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
Not applicable
ITEM 4.
|
Not applicable
ITEM 5.
|
OTHER INFORMATION
|
Not applicable
ITEM 6.
|
EXHIBITS
|
A. Exhibits
Exhibit Number
|
Document Description
|
||
31.1 |
Certification of the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
31.2 |
Certification of the Chief Financial Officer of the Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
32 |
Certification Pursuant to 18 United States Code Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 16, 2011
|
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
|
|
/s/
|
Jeffrey M. Johnson
Jeffrey M. Johnson
|
|
President
|
||
/s/
|
T. Linh Nguyen
|
|
T. Linh Nguyen
|
||
Chief Financial Officer and Corporate Secretary
|
||