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EXCEL - IDEA: XBRL DOCUMENT - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCFinancial_Report.xls
EX-32 - ILTS FORM 10Q Q1FY2012 31JUL2011EXH32 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCiltsexhibit32q1fy1231jul11.htm
EX-31.1 - ILTS FORM 10Q Q1FY2012 31JUL2011EXH31.1 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCiltsexhibit311q1fy1231jul11.htm
EX-31.2 - ILTS FORM 10Q Q1FY2012 31JUL2011EXH31.2 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCiltsexhibit312q1fy1231jul11.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 July 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)
 
ILTS Logo
 
 
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 ý 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 September 14, 2011
 
Common Stock, no par value per share
 
12,962,999 shares




 
 
 
 
 
1

 
[Missing Graphic Reference]
 
 







PART I
FINANCIAL INFORMATION
 
PAGE
 
Item 1.
    3-11  
Item 2.
 
    12-16  
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






 

 

 

 

 

 

 

 

 

 






 
 
 
 
 
 
 
2





 
FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands)

   
July 31, 2011
   
April 30, 2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
4,225
   
$
3,881
 
Certificates of deposit
   
250
     
499
 
Accounts receivable, net of allowance for doubtful accounts of $75
   
75
     
203
 
Costs and estimated earnings in excess of billings on uncompleted contracts
   
-
     
32
 
Deferred cost of revenue
   
75
     
113
 
Inventories, net
   
907
     
436
 
Other current assets
   
233
     
132
 
Total current assets
   
5,765
     
5,296
 
Equipment, furniture and fixtures, net
   
424
     
432
 
Other noncurrent assets
   
65
     
65
 
Total assets
 
$
6,254
   
$
5,793
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
 
$
553
   
$
152
 
Billings in excess of costs and estimated earnings on uncompleted contracts
   
146
     
231
 
Accrued payroll and related taxes
   
381
     
326
 
Warranty reserves
   
24
     
31
 
Payable to Parent
   
252
     
251
 
Other current liabilities
   
58
     
67
 
Deferred revenues
   
1,477
     
615
 
Total current liabilities
   
2,891
     
1,673
 
Long-term liabilities
   
7
     
12
 
Total liabilities
   
2,898
     
1,685
 
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
   
(53,014
)
   
(52,262
)
Total shareholders' equity
   
3,356
     
4,108
 
Total liabilities and shareholders' equity
 
$
6,254
   
$
5,793
 

See notes to condensed consolidated financial statements









 
 
 
 
 
 
 
3



 
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)

   
Three Months Ended
 
   
July 31,
 
 
2011
   
2010
 
Revenues:
           
Sales of products
 
$
321
   
$
1,451
 
Services
   
288
     
261
 
     
609
     
1,712
 
Cost of sales:
               
Cost of product sales
   
657
     
1,156
 
Cost of services
   
92
     
43
 
     
749
     
1,199
 
Gross profit (loss)
   
(140
)    
513
 
                 
Selling, general and administrative expenses
   
610
     
629
 
Loss from operations
   
          (750
)
   
(116
)
                 
Other income (expense):
               
Interest and dividend income
   
1
     
1
 
Other
   
(3)
     
12
 
Net loss
 
$
(752
)
 
$
(103
)
                 
Net loss per share:
               
Basic and diluted
 
$
(0.06
)
 
$
(0.01
)
Weighted average shares used in computation of net loss per share:
               
Basic and diluted
   
12,963
     
12,963
 


See notes to condensed consolidated financial statements













 
 
 
 
 
 
 
4







INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)


   
Three Months Ended
July 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
 
$
(752
)  
$
(103
)
Adjustments to reconcile net loss to net cash provided by (used in)
               
operating activities:
               
Depreciation and amortization
   
32
     
24
 
Warranty reserve expense
   
2
     
6
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
128
     
(885
)
Costs and estimated earnings in excess of billings on uncompleted contracts
   
32
     
778
 
Deferred cost of revenue
   
38
     
-
 
Inventories
   
(471
)    
(168
)
Other current assets
   
      (101
)    
117
 
Accounts payable
   
401
     
(120
)
Billings in excess of costs and estimated earnings on uncompleted contracts
   
(85
)    
92
 
Accrued payroll and related taxes
   
55
     
56
 
Warranty reserves
   
(9
)    
(12
)
Other current liabilities
   
(13
)    
(3
)
Deferred revenues
   
862
     
154
 
Net cash provided by (used in) operating activities
   
119
     
(64
)
                 
Cash flows from investing activities:
               
Purchases of certificates of deposit
   
(250
)    
(747
)
Proceeds from redemption of certificates of deposit
   
499
     
995
 
Additions to equipment, furniture and fixtures
   
(24
)    
(13
)
Net cash provided by investing activities
   
225
     
235
 
                 
Net increase in cash and cash equivalents
   
344
     
171
 
Cash and cash equivalents at beginning of period
   
3,881
     
2,363
 
Cash and cash equivalents at end of period
 
$
4,225
   
$
2,534
 
                 

See notes to condensed consolidated financial statements









 
 
 
 
 
 
 
5




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 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 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, through its wholly-owned subsidiary Unisyn Voting Solutions, Inc. (“Unisyn”), has devoted significant resources to developing federally 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 recently received the 2005 Voluntary Voting System Guidelines (“VVSG”) certification from the United States Election Assistance Commissions (“EAC”) for its OpenElect® digital optical scan election system – a digital scan voting system built with Java on a streamlined and hardened Linux platform.  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 required 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, 2011 filed with the SEC on July 7, 2011.  The condensed consolidated balance sheet as of April 30, 2011 has been derived from the audited financial statements included in the Form 10-K for that year.



 
 
 
 
 
6



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 and Deferred Cost of Revenues

Deferred revenues of approximately $1.5 million as of July 31, 2011 represent prepayments for products and services which were related to the use of the OpenElect® and PBC voting systems, and other software and technical support services.  
 
Deferred cost of revenues of approximately $75,000 as of July 31, 2011 consists of costs associated with the use of the OpenElect® voting systems, and other software and technical support services for which revenues have been deferred.  The Company will recognize the revenues and related cost of revenues upon its fulfillment of the prescribed criteria for revenue recognition.
 
Certain amounts included in the costs and earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts as of April 30, 2011 and July 31, 2010 have been reclassified to deferred cost of revenue to conform with the current presentation.
 
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 three months ended July 31, 2011 is as follows:

(Amounts in thousands)
     
Balance at May 1, 2011
 
$
31
 
Additional reserves
   
4
 
Warranty reserve expense adjustments
   
(2)
 
Charges incurred
   
(9)
 
Balance at July 31, 2011
 
$
24
 

Segment Information

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280 “Segment Reporting” requires companies to report certain information about operating segments in their consolidated financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers.  FASB ASC 280 defines operating segments 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 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
 
 
July 31, 2011
 
 
Gaming
Business
 
Voting
Business
 
Totals
 
Total revenues
 
$
338
   
$
271
   
$
609
 
Loss from operations
   
(509)
     
(241)
     
(750)
 
Depreciation and amortization
   
20
     
12
     
32
 
Equipment, furniture and fixtures, net
   
105
     
319
     
424
 
Deferred revenues
   
273
     
1,204
     
1,477
 
Inventories, net
   
684
     
223
     
907
 
     
 
 
 
As of and for the Three Months Ended
 
 
July 31, 2010
 
 
Gaming
Business
 
Voting
Business
 
Totals
 
Total revenues
 
$
1,569
   
$
143
   
$
1,712
 
Income (loss) from operations
   
178
     
(294)
     
(116)
 
Depreciation and amortization
   
18
     
6
     
24
 
Equipment, furniture and fixtures, net
   
149
     
246
     
395
 
Deferred revenues
   
229
     
269
     
498
 
Inventories, net
   
1,116
     
94
     
1,210
 
                         
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.  

Inventories consisted of the following:
   
July 31,
   
April 30,
 
   
2011
   
2011
 
(Amounts in thousands)
           
Raw materials and subassemblies
 
$
906
   
$
436
 
Work-in-process
   
1
     
-
 
   
$
907
   
$
436
 

Equipment, Furniture and Fixtures

Net equipment, furniture and fixtures consisted of the following (in thousands):
   
July 31,
   
April 30,
 
   
2011
   
2011
 
(Amounts in thousands)
           
Plant and machinery
 
$
680
   
$
674
 
Computer equipment
   
1,375
     
1,308
 
Leasehold improvement
   
183
     
183
 
Furniture, fixtures and equipment
   
91
     
91
 
Construction in progress
   
1
     
50
 
     
2,330
     
2,306
 
Accumulated depreciation and amortization
   
(1,906
)
   
(1,874
)
Net equipment, furniture and fixtures 
 
$
424
   
$
432
 

Net Loss per Share

Basic and diluted net loss per share is based on the weighted average number of shares outstanding during the periods.  

Major Customers

The following table summarizes major customers who individually accounted for more than 10% of revenues for the periods presented.

 
July 31, 2011
July 31, 2010
Revenue:
   
From unrelated customers
Three customers accounted for 55% of total revenue or 32%, 12% and 11% individually.
No individual customer accounted for more than 10% of total revenue.
     
From related customers
Two customers accounted for 29% of total revenue or 16% and 13% individually.
Two customers accounted for 79% of total revenue or 54% and 25% individually.

Related Party Transactions

During the three months ended July 31, 2011 and 2010, revenues from all related party agreements for sales of products and services totaled approximately $225,000 (37% of total revenue) and $1.4 million (82% of total revenue), respectively.  Included in accounts receivable at July 31, 2011 was approximately $15,000 from these customers.  Descriptions of the transactions with the Company’s related parties in the three months ended July 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 July 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 months ended July 31, 2011 and 2010;
•  
There were no accounts receivable balances from BLM as of July 31, 2011 and April 30, 2011; and
•  
Liabilities to BLM arising from the sale or use of the BLM inventory, recorded as “Payable to Parent,” were $252,000 and $251,000 as of July 31, 2011 and April 30, 2011, respectively.
  
  
 
Philippine Gaming Management Corporation

On May 3, 2011, the Company received from Philippine Gaming Management Corporation (“PGMC”), a related party and a subsidiary of BLM, an order valued at approximately $1.1 million for lottery products.  Shipments of these products are expected to begin in the second quarter of fiscal 2012 and be complete in the third quarter of fiscal 2012.

In addition, the Company provides PGMC with terminal spare parts on an ongoing basis and support services on an as-needed 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 months ended July 31, 2011 and 2010 totaled approximately $96,000 and $924,000, respectively; 
•  
There was no billing in excess of costs and estimated earnings balance as of July 31, 2011. Net cost and estimated earnings in excess of billings relating to support services totaled approximately $32,000 as of April 30, 2011;
•  
In connection with the lottery product order dated May 3, 2011 mentioned above, there was a deferred revenue balance of approximately $264,000 as of July 31, 2011. There was no deferred revenue balance as of April 30, 2011; and    
•  
Accounts receivable from the sale of lottery products totaled $4,000 as of July 31, 2011, compared to $47,000 as of April 30, 2011.
 
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 were recognized on the sale of support services during each of the three months ended July 31, 2011 and 2010;
•  
There were deferred revenues of $9,000 on software support services as of July 31, 2011 and April 30, 2011; and
•  
There was no accounts receivable balance from STM as of July 31, 2011, compared to $16,000 as of April 30, 2011.

Natural Avenue Sdn. Bhd.

The Company provides Natural Avenue Sdn. Bhd. (“Natural Avenue”), an affiliate of BLM and a related party, with lottery products and support services.  

On December 16, 2009, the Company signed a contract with Natural Avenue for a complete DataTrak lottery system valued at approximately $3.6 million.  The contract is scheduled to be completed by the fourth quarter of fiscal 2012.

The financial activities and balances related to transactions with Natural Avenue were as follows:
 
•  
Revenues of $51,000 and $420,000 were recognized on the performance of contract deliverables and sale of support services during the three months ended July 31, 2011 and 2010, respectively;
•  
Net billings in excess of costs and estimated earnings relating to the abovementioned contract dated December 16, 2009 totaled approximately $85,000 as of July 31, 2011, compared to $105,000 as of April 30, 2011; and
•  
Accounts receivable totaled approximately $11,000 as of July 31, 2011, compared to $16,000 as of April 30, 2011.
 
 
 
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 months ended July 31, 2011 and 2010, the Company incurred services of approximately $51,000 and $58,000, respectively.  
 
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 July 31, 2011 and April 30, 2011 due to the short-term maturity of the instruments.
 
Subsequent Events
 
On August 12, 2011, the Company received from PGMC an order valued at approximately $1.4 million for lottery products.  Shipments of these products are expected to be complete by the third quarter of fiscal 2012.
 
On September 9, 2011, the Company received from PGMC an order valued at approximately $705,000 for lottery products.  Shipments of these products are expected to be complete by the fourth quarter of fiscal 2012.


 
 
 
 
 
11




 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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" and other sections of this report, 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, 2011.

 
RESULTS OF OPERATIONS
Revenue Analysis
                   
 
Three Months Ended
 
(Amounts in thousands)
July 31,
 
Revenues
 
2011
   
2010
   
Change
 
Products:
                 
Contracts
 
 $
207
   
 $
1,291
   
$
(1,084)
 
Spares
   
114
     
160
     
      (46)
 
Total Products
   
321
     
1,451
     
(1,130)
 
Services:
                       
Software Support
   
192
     
182
     
10
 
Product Servicing and Support
   
96
     
79
     
17
 
Total Services
   
288
     
261
     
27
 
   
$
609
   
$
1,712
   
$
(1,103)
 
                         
 
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 July 31, 2011 was $207,000, compared to $1.3 million in the same period in 2010.  The substantial decrease is due to limited contract activities in the first quarter of fiscal 2012.
 
Spares revenue for the three months ended July 31, 2011 was $114,000, compared to $160,000 for the corresponding period in 2010.  The decrease is due to lower demand.  Customer demand for spare parts fluctuates from period to period.
 
Software support revenue for the three months ended July 31, 2011 was $192,000, compared to $182,000 for the same period in 2010.   The increase in 2011 is primarily due to higher fees charged to one customer, partially offset by the termination of a software support agreement with a related customer.
 
Product servicing and support revenues for the three months ended July 31, 2011 and 2010 were $96,000 and $79,000, respectively.  The slight increase in 2011 was driven by a one-off arrangement with a related customer, partially offset by lower demand for onsite support services.
 
Related party revenue of approximately $225,000 accounted for 37% of total revenue in the three months ended July 31, 2011, compared to $1.4 million or 82% of total revenue in the corresponding period in 2010.  



Cost of Sales and Gross Profit Analysis
   
Three Months Ended
 
   
July 31,
   
July 31,
 
(Amounts in thousands)
 
2011
   
2010
 
Revenues:
                       
Products
 
$
321
     
53
%
 
$
1,451
     
85
%
Services
   
288
     
47
%
   
261
     
15
%
    Total revenues
 
$
609
     
100
%
 
$
1,712
     
100
%
                                 
Cost of sales:
                               
Products
 
$
657
     
108
%
 
$
1,156
     
68
%
Services
   
92
     
15
%
   
43
     
3
%
   Total costs of sales
 
$
749
     
123
%
 
$
1,199
     
71
%
                                 
Gross profit (loss):
                               
Products
 
$
(336)
     
(55
%)
 
$
295
     
17
%
Services
   
196
     
32
%
   
218
     
12
%
   Total gross profit (loss)
 
$
(140)
     
(23
%)
 
$
513
     
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.
 
We incurred a loss of $140,000 during the three months ended July 31, 2011, compared to a gross profit of $513,000 or gross profit margins of 29% for the corresponding period in 2010.  The loss incurred in 2011 was due to insufficient revenue generated which resulted in higher unabsorbed production labor costs.  In addition, slightly higher labor cost incurred on gaming contracts, partially offset by slightly more favorable cost of sales on spare parts, contributed to the loss.
 
Selling, General and Administrative (“SG&A”)
 
SG&A expenses for the three months ended July 31, 2011 were $610,000, compared to $629,000 in the corresponding period in 2010.  The net decrease is primarily related to slightly lower employee related expenses resulting from lower headcount, lower consulting fees related to the voting segment, partially offset by higher trade show expenses and increased proposal and marketing activities related to the voting segment.  We anticipate that SG&A expense will remain relatively constant in the remaining quarters of fiscal 2012.
 
Other Income
 
Other income in the three months ended July 31, 2011 and 2010 remained relatively insignificant.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity
 
Our net working capital at July 31, 2011 was $2.9 million.
 
Contract backlog at July 31, 2011 was approximately $5.8 million.  Of this amount, approximately $3.3 million will be derived from gaming orders received from a related customer.  Of the $3.3 million amount, approximately $702,000 has been paid by our related customers as of September 14, 2011.  The remaining contract backlog amount of approximately $2.5 million relates to voting and gaming contracts with unrelated customers.  Of the $2.5 million amount, approximately $1.3 million has been paid by our unrelated customers as of September 14, 2011.

Additional sources of cash through July 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 July 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 July 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.


 
 
 
15


The following table summarizes our cash flow activities:
 
   
Three Months Ended
 
   
July 31,
   
July 31,
   
Increase
 
   
2011
   
2010
   
(Decrease)
 
(Amounts in thousands)
                 
Condensed cash flow comparative:
                 
Operating activities
 
$
119
   
$
(64)
   
$
183
 
Investing activities
   
225
     
235
     
(10)
 
Net increase in cash and cash equivalents
 
$
344
   
$
171
   
$
173
 
 
Cash Flow Analysis

Net cash provided by operating activities was $119,000 for the three months ended July 31, 2011, compared to net cash used in operating activities of $64,000 for the same period in 2010.  The primary factors contributing to the variability in the reported cash flow amounts relate to the timing of customer contract performance and delivery and the related 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.  In addition, we attribute the variability in the reported cash flow amounts to the down payment received on a voting equipment order in 2011 and the net loss of $752,000 in 2011, compared to the net loss of $103,000 in 2010, which resulted from limited revenue generated.  Furthermore, higher inventory purchase and related increase in vendor deposits in 2011 contributed to the variability in the reported cash flow amounts.

Net cash provided by investing activities was $225,000 for the three months ended July 31, 2011, compared to $235,000 in 2010.  The lower net cash provided by investing activities in the three months ended July 31, 2011 resulted from the increase in capital expenditures related to computer and tooling equipment which amounted to $24,000 in the three months ended July 31, 2011, compared to $13,000 in 2010.

There were no financing activities during the three months ended in July 31, 2011 or 2010.

Capital Resources

As of July 31, 2011, there were no credit facilities.




 
 
 
 
 
 
 
16





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 July 31, 2011 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.







 
 
 
 
 
 
 
17





 
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, 2011 filed with the SEC on July 7, 2011.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Not applicable  
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.
RESERVED
 
Not applicable

 
ITEM 5.
OTHER INFORMATION

Not applicable








 
 
 
 
 
 
 
18





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.
 
101.INS
 
XBRL Instance Document
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 




 
 
 
 
 
 
 
19







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:      September 14, 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