INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC	Financial_Report.xls
EX-32 - ILTS FORM 10-Q 2 FY12 EXHIBIT 32 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC	exhibit32.htm
EX-31 - ILTS FORM 10-Q 2 FY12 EXHIBIT 31 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC	exhibit31.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 October 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 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 December 14, 2011
Common Stock, no par value per share		12,962,999 shares

[Missing Graphic Reference]

INDEX

PART I	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements (Unaudited)		3-10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		11-13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		14
Item 4.	Controls and Procedures		14

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		15
Item 1A.	Risk Factors		15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		15
Item 3.	Defaults Upon Senior Securities		15
Item 4.	Reserved
Item 5.	Other Information		15
Item 6.	Exhibits		16
	Signatures

EXHIBIT 31

EXHIBIT 32

Table of Contents

PART I	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in thousands)

	October 31, 2011			April 30, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	2,536		$	3,881
Certificates of deposit		500			499
Accounts receivable, net of allowance for doubtful accounts of $75		1,024			203
Costs and estimated earnings in excess of billings on uncompleted contracts		-			32
Deferred cost of revenue		376			113
Inventories		1,722			436
Other current assets		317			132
Total current assets		6,475			5,296
Equipment, furniture and fixtures, net		430			432
Other noncurrent assets		65			65
Total assets	$	6,970		$	5,793

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	964		$	152
Billings in excess of costs and estimated earnings on uncompleted contracts		89			231
Accrued payroll and related taxes		369			326
Warranty reserves		26			31
Payable to Parent		252			251
Other current liabilities		60			67
Deferred revenues		1,995			615
Total current liabilities		3,755			1,673
Long-term liabilities		2			12
Total liabilities		3,757			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		(53,157	)		(52,262	)
Total shareholders' equity		3,213			4,108
Total liabilities and shareholders' equity	$	6,970		$	5,793

See notes to condensed consolidated financial statements

Table of Contents

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in thousands, except per share amounts)

	Three Months Ended					Six Months Ended
	October 31,					October 31,
	2011			2010		2011			2010
Revenues:
Sales of products	$	1,693		$	1,793	$	2,014		$	3,244
Services		251			189		539			450
		1,944			1,982		2,553			3,694
Cost of sales:
Cost of product sales		1,314			1,222		1,971			2,378
Cost of services		63			25		155			68
		1,377			1,247		2,126			2,446
Gross profit		567			735		427			1,248

Research and development expenses		24			-		24			-
Selling, general and administrative expenses		689			598		1,299			1,227
Income (loss) from operations		(146	)		137		(896	)		21

Other income (expense):
Interest and dividend income		1			2		2			3
Other		2			-		(1	)		12
Net income (loss)	$	(143	)	$	139	$	(895	)	$	36

Net income (loss) per share:
Basic and diluted	$	(0.01	)	$	0.01	$	(0.07	)	$	-
Weighted average shares used in computation of net income (loss) per share:
Basic and diluted		12,963			12,963		12,963			12,963

See notes to condensed consolidated financial statements

Table of Contents

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands)

	Six Months Ended October 31,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	(895	)	$	36
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization		66			56
Warranty reserve expense		7			7
Changes in operating assets and liabilities:
Accounts receivable		(821	)		(496	)
Costs and estimated earnings in excess of billings on uncompleted contracts		32			804
Deferred cost of revenue		(263	)		(64	)
Inventories		(1,286	)		224
Other current assets		(185	)		84
Accounts payable		812			(462	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(142	)		563
Accrued payroll and related taxes		43			13
Warranty reserves		(12	)		(32	)
Payable to Parent		1			-
Other current and long-term liabilities		(17	)		5
Deferred revenues		1,380			(384	)
Net cash provided by (used in) operating activities		(1,280	)		354

Cash flows from investing activities:
Purchases of certificates of deposit		(500	)		(997	)
Proceeds from redemption of certificates of deposit		499			1,495
Additions to equipment, furniture and fixtures		(64	)		(150	)
Net cash provided by (used in) investing activities		(65	)		348

Net increase (decrease) in cash and cash equivalents		(1,345	)		702
Cash and cash equivalents at beginning of period		3,881			2,363
Cash and cash equivalents at end of period	$	2,536		$	3,065

See notes to condensed consolidated financial statements

Table of Contents

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 industry 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 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.

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 $2 million as of October 31, 2011 represent prepayments for products and services which were related to the use of the OpenElect® and PBC voting systems, lottery terminals and other software and technical support services.

Deferred cost of revenues of approximately $376,000 as of October 31, 2011 consists of costs associated with the use of the OpenElect® voting systems and other software 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 estimated 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 October 31, 2010 have been reclassified to deferred cost of revenue and deferred revenue to conform to the current period’s presentation.

Table of Contents

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 six months ended October 31, 2011 is as follows:

(Amounts in thousands)
Balance at May 1, 2011	$	31
Additional reserves		18
Warranty reserve expense adjustments		(11	)
Charges incurred		(12	)
Balance at October 31, 2011	$	26

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 voting systems, software licensing, product servicing and software support services.

The Company’s segment information is presented below (in thousands):

	As of and for the Three Months Ended
	October 31, 2011
	Gaming Business				Voting Business				Totals
Total revenues		$	1,510			$	434			$	1,944
Income (loss) from operations			149				(295	)			(146	)
Depreciation and amortization			21				13				34
Deferred cost of revenue			16				360				376
Equipment, furniture and fixtures, net			108				322				430
Deferred revenues			550				1,445				1,995
Inventories			778				944				1,722
	As of and for the Three Months Ended
	October 31, 2010
	Gaming Business				Voting Business				Totals
Total revenues		$	1,875			$	107			$	1,982
Income (loss) from operations			448				(311	)			137
Depreciation and amortization			25				7				32
Deferred cost of revenue			10				54				64
Equipment, furniture and fixtures, net			130				371				501
Deferred revenues			9				391				400
Inventories			780				38				818

	As of and for the Six Months Ended
	October 31, 2011
	Gaming Business				Voting Business				Totals
Total revenues		$	1,848			$	705			$	2,553
Loss from operations			(360	)			(536	)			(896	)
Depreciation and amortization			41				25				66
Deferred cost of revenue			16				360				376
Equipment, furniture and fixtures, net			108				322				430
Deferred revenues			550				1,445				1,995
Inventories			778				944				1,722

	As of and for the Six Months Ended
	October 31, 2010
	Gaming Business				Voting Business				Totals
Total revenues		$	3,444			$	250			$	3,694
Income (loss) from operations			626				(605	)			21
Depreciation and amortization			43				13				56
Deferred cost of revenue			10				54				64
Equipment, furniture and fixtures, net			130				371				501
Deferred revenues			9				391				400
Inventories			780				38				818

Table of Contents

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:

	October 31,		April 30,
	2011		2011
(Amounts in thousands)
Raw materials and subassemblies	$	1,713	$	436
Work-in-process		9		-
	$	1,722	$	436

Equipment, Furniture and Fixtures

Net equipment, furniture and fixtures consisted of the following (in thousands):

	October 31,			April 30,
	2011			2011
(Amounts in thousands)
Plant and machinery	$	680		$	674
Computer equipment		1,408			1,308
Leasehold improvement		190			183
Furniture, fixtures and equipment		91			91
Construction in progress		1			50
		2,370			2,306
Accumulated depreciation and amortization		(1,940	)		(1,874	)
Net equipment, furniture and fixtures	$	430		$	432

Net Income (Loss) per Share

Basic and diluted net income (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.

	Three Months Ended October 31,		Six Months Ended October 31,

	2011	2010	2011	2010
Revenue:
From unrelated customers	No individual customer accounted for more than 10% of total revenue	Two customers accounted for 34% of total revenue	No individual customer accounted for more than 10% of total revenue	Two customers accounted for 22% of total revenue
From related customers	One customer accounted for 61% of total revenue	One customer accounted for 49% of total revenue	One customer accounted for 50% of total revenue	Two customers accounted for 65% of total revenue

Related Party Transactions

During the three months ended October 31, 2011 and 2010, revenues from all related party agreements for sales of products and services totaled approximately $1.3 million (66% of the total revenue) and $1.2 million (61% of the total revenue), respectively. Related party revenues for the six months ended October 31, 2011 and 2010 were approximately $1.5 million (59% of the total revenue) and $2.6 million (70% of the total revenue), respectively. Included in accounts receivable on October 31, 2011 was approximately $397,000 from these customers. Descriptions of the transactions with the Company’s related parties in the three and six months ended October 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 October 31, 2011.

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 resulted 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 six months ended October 31, 2011 and 2010;

•	There were no accounts receivable balances from BLM as of October 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 October 31, 2011 and April 30, 2011, respectively.

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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 were completed in the second quarter of fiscal 2012, and the related revenue was recognized.

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 begin and be completed in 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 begin and be completed in the fourth 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 services during the three and six months ended October 31, 2011 totaled approximately $1.2 million and $1.3 million, respectively. Revenues recognized on the sale of lottery products and software support services during the three and six months ended October 31, 2010 totaled approximately $965,000 and $1.9 million, respectively;

•	There was no billings in excess of costs and estimated earnings balance as of October 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 orders dated September 9, 2011 and August 12, 2011 mentioned above, there were deferred revenues of approximately $529,000 as of October 31, 2011. There was no deferred revenue balance as of April 30, 2011; and

•	Accounts receivable from the sale of lottery products totaled $385,000 as of October 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 $77,000 and $155,000 were recognized on the sale of support services during the three and six months ended October 31, 2011, respectively. Revenues of $78,000 and $155,000 were recognized on the sale of support services during the three and six months ended October 31, 2010, respectively;

•	There were deferred revenues of $10,000 on software support services as of October 31, 2011, compared to $9,000 as of April 30, 2011; and

•	There was no accounts receivable balance from STM as of October 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 $32,000 and $83,000 were recognized on the performance of contract deliverables, sale of support services and licensing during the three and six months ended October 31, 2011, respectively. Revenues of $91,000 and $511,000 were recognized on the performance of contract deliverables and sale of support services during the three and six months ended October 31, 2010, respectively;

•	Net billings in excess of costs and estimated earnings relating to the abovementioned contract dated December 16, 2009 totaled approximately $89,000 as of October 31, 2011, compared to $105,000 as of April 30, 2011;

•	There were deferred revenues of $11,000 for lottery product licensing as of October 31, 2011, compared to $10,000 on software support services as of April 30, 2011; and

•	Accounts receivable totaled approximately $11,000 as of October 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 and six months ended October 31, 2011, the Company incurred services of approximately $50,000 and $101,000, respectively, which are shown as part of cost of sales. During the three and six months ended October 31, 2010, the Company incurred approximately $55,000 and $113,000, respectively, which are shown as part of cost of sales.

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Ascot Sports Sdn. Bhd.

The Company provided Ascot Sports Sdn. Bhd. an affiliate of BLM and a related party, with software products.

•	There was no revenue recognized during the three and six months ended October 31, 2011. Revenue of $66,000 was recognized on the software product development during the three and six months ended October 31, 2010; and

•

There were no account receivable balances as of October 31, 2011 and April 30, 2011.

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 October 31, 2011 and April 30, 2011 due to the short-term maturity of the instruments.

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ITEM 2.

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 accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. 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							Six Months Ended
(Amounts in thousands)	October 31,							October 31,
Revenues	2011		2010		Change			2011		2010		Change
Products:
Contracts	$	1,524	$	1,290	$	234		$	1,731	$	2,581	$	(850	)
Spares		169		503		(334	)		283		663		(380	)
Total Products		1,693		1,793		(100	)		2,014		3,244		(1,230	)
Services:
Software Support		191		166		25			383		348		35
Product Servicing and Support		60		23		37			156		102		54
Total Services		251		189		62			539		450		89
	$	1,944	$	1,982	$	(38	)	$	2,553	$	3,694	$	(1,141	)

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 and fiscal years 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 October 31, 2011 was approximately $1.5 million, compared to $1.3 million in the same period in 2010. The increase is primarily due to the increased contract activities in the voting segment compared to the corresponding period in 2010. For the six months ended October 31, 2011, contract revenue was $1.7 million, compared to $2.6 million for the corresponding period in 2010. The substantial decrease is due to limited contract activities in the fiscal 2012.

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Spares revenue for the three months ended October 31, 2011 was $169,000, compared to $503,000 for the corresponding period in 2010. Spares revenue for the six months ended October 31, 2011 was $283,000, compared to $663,000 for the corresponding period in 2010. Substantially lower spares revenues in 2011 were primarily due to decreased demand for spare parts from the same pool of customers. Customer demand for spare parts fluctuates from period to period.

Software support revenue for the three months ended October 31, 2011 was $191,000, compared to $166,000 for the same period in 2010. For the six months ended October 31, 2011, software support revenue was $383,000, compared to $348,000 in the same period in 2010. The increase is 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 revenue for the three months ended October 31, 2011 was $60,000, compared to $23,000 for the corresponding period in 2010. For the six months ended October 31, 2011, product servicing and support revenue was $156,000, compared to $102,000 for the same period in the prior year. The increase is due to service arrangements with a related customer and higher demand for onsite support services from unrelated customers.

Related party revenue of approximately $1.3 million accounted for 66% of total revenue in the three months ended October 31, 2011, compared to $1.2 million or 61% of total revenue in the corresponding period in 2010. For the six months ended October 31, 2011, related party revenue of approximately $1.5 million accounted for 59% of total revenue, compared to $2.6 million or 70% of total revenue in the corresponding period in 2010.

Cost of Sales and Gross Profit Analysis

	Three Months Ended								Six Months Ended
	October 31,				October 31,				October 31,				October 31,
(Amounts in thousands)	2011				2010				2011				2010
Revenues:
Products	$	1,693	87	%	$	1,793	90	%	$	2,014	79	%	$	3,244	88	%
Services		251	13	%		189	10	%		539	21	%		450	12	%
Total revenues	$	1,944	100	%	$	1,982	100	%	$	2,553	100	%	$	3,694	100	%

Cost of sales:
Products	$	1,314	68	%	$	1,222	62	%	$	1,971	77	%	$	2,378	64	%
Services		63	3	%		25	1	%		155	6	%		68	2	%
Total costs of sales	$	1,377	71	%	$	1,247	63	%	$	2,126	83	%	$	2,446	66	%

Gross profit:
Products	$	379	19	%	$	571	29	%	$	43	2	%	$	866	24	%
Services		188	10	%		164	8	%		384	15	%		382	10	%
Total gross profit	$	567	29	%	$	735	37	%	$	427	17	%	$	1,248	34	%

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 and fiscal years may not be indicative of trends in gross profit margin.

Overall gross profit margins were at 29% for the three months ended October 31, 2011, compared to 37% for the corresponding period in 2010. For the six months ended October 31, 2011, overall gross profit margins were at 17%, compared to 34% in the same period in 2010. The decreases in 2011 are largely due to higher unabsorbed production overhead costs reflecting limited contract activities. In addition, lower gross profit margin on the sales of custom spare parts and onsite support services attributed to the decreases.

Research and Development Expenses (“R&D”)

For the three and six months ended October 31, 2011, R&D expenses were $24,000. There were no R&D expenses incurred for the three and six months ended October 31, 2010. R&D expenses for the quarter ended October 31, 2011 consist primarily of labor costs for the development of new product in the gaming segment. While we continue to enhance our products, we anticipate R&D expenses will be minimal in the remaining quarters of fiscal 2012 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 October 31, 2011 were $689,000, compared to $598,000 in the same period in 2010. For the six months ended October 31, 2011, SG&A expenses were $1.3 million, compared to $1.2 million in 2010. The increases in SG&A expenses are primarily related to higher proposal and marketing activities and trade show expenses in the voting segment, partially offset by lower consulting fees related to the voting segment. We anticipate SG&A expenses will remain relatively constant in the remaining quarters of fiscal 2012.

Other Income

Other income in the three and six months ended October 31, 2011 and 2010 remained relatively insignificant.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our net working capital at October 31, 2011 was approximately $2.7 million.

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Contract backlog at October 31, 2011 was approximately $6.2 million. Of this amount, approximately $2.2 million will be derived from gaming orders received from two related customers. Of the $2.2 million amount, approximately $618,000 has been paid by our related customers as of December 14, 2011. The remaining contract backlog amount of approximately $4 million relates to voting and gaming contracts with unrelated customers. Of the $4 million amount, approximately $2.3 million has been paid by our unrelated customers as of December 14, 2011.Additional sources of cash through October 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 October 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 October 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:

	Six Months Ended
	October 31,		October 31,		Increase
	2011		2010		(Decrease)
(Amounts in thousands)
Condensed cash flow comparative:
Operating activities	$	(1,280)	$	354	$	(1,634)
Investing activities		(65)		348		(413)
Net increase (decrease) in cash and cash equivalents	$	(1,345)	$	702	$	(2,047)

Cash Flow Analysis

Net cash used in operating activities was approximately $1.3 million for the six months ended October 31, 2011, compared to the net cash provided by operating activities of $354,000 for the same period in 2010. The change was primarily attributable to higher inventory purchases to fulfill customer orders and related vendor deposits. In addition, we attribute the variability in the reported cash flow amounts to the net loss of $895,000 in 2011, compared to the net income of $36,000 in 2010, which resulted from the limited revenue generated. Furthermore, the change was attributable to the timing of the customer contract delivery and the related invoicing which effectively impacted the accounts receivable, deferred cost of revenue, cost and earnings in excess of billings and billings in excess of costs and an estimated earnings on the uncompleted contacts. These were partially offset by an increase in deferred revenue and an increase in accounts payable for inventory related purchases.

Net cash used in investing activities was $65,000 for the six months ended October 31, 2011, compared to net cash provided by investing activities of $348,000 in 2010. The change was primarily attributable to capital expenditures related to computer and tooling equipment which amounted to $64,000 in the six months ended October 31, 2011, compared to $150,000 in 2010.

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

Capital Resources

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

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

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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

ITEM 5.

OTHER INFORMATION

Not applicable

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ITEM 6.

EXHIBITS

A. Exhibits

Exhibit Number		Document Description
	31	Certification of the Chief Executive Officer and Acting 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

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SIGNATURES

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: December 14, 2011		INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
	/s/	Jeffrey M. Johnson Jeffrey M. Johnson
		President/Acting Chief Financial Officer

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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC Reports