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EXCEL - IDEA: XBRL DOCUMENT - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCFinancial_Report.xls
EX-32 - ILTS FORM 10-Q 3 FY12 EXHIBIT 32 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCexhibit32.htm
EX-31 - ILTS FORM 10-Q 3 FY12 EXHIBIT 31 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCexhibit31.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, 2012

[ ]           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 Noý
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 13, 2012
 
Common Stock, no par value per share
 
12,962,999 shares
 
 
 
 
 
 
 

 
 
1

 


[Missing Graphic Reference]
 
INDEX


PART I
FINANCIAL INFORMATION
 
PAGE
 
Item 1.
   
3-13
 
Item 2. 
   
14-18
 
Item 3.
   
19
 
Item 4.
   
19
 
           
PART II
OTHER INFORMATION
       
Item 1.
   
20
 
Item 1A.
   
20
 
Item 2.
   
20
 
Item 3.
   
20
 
Item 4.
   
 20
 
Item 5.
   
20
 
Item 6.
   
21
 
         
EXHIBIT 31
EXHIBIT 32

 
 
 
 

 




 
 
2

 



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

   
January 31, 2012
   
April 30, 2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
3,370
   
$
3,881
 
Certificates of deposit
   
500
     
499
 
Accounts receivable, net of allowance for doubtful accounts of $75
   
1,109
     
203
 
Costs and estimated earnings in excess of billings on uncompleted contracts
   
50
     
32
 
Deferred cost of revenue
   
3
     
113
 
Inventories
   
2,239
     
436
 
Other current assets
   
277
     
132
 
Total current assets
   
7,548
     
5,296
 
Equipment, furniture and fixtures, net
   
436
     
432
 
Other noncurrent assets
   
16
     
65
 
Total assets
 
$
8,000
   
$
5,793
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
 
$
995
   
$
152
 
Billings in excess of costs and estimated earnings on uncompleted contracts
   
883
     
231
 
Accrued payroll and related taxes
   
455
     
326
 
Warranty reserves
   
146
     
31
 
Payable to Parent
   
252
     
251
 
Other current liabilities
   
56
     
67
 
Deferred revenues
   
1,275
     
615
 
Total current liabilities
   
4,062
     
1,673
 
Long-term liabilities
   
-
     
12
 
Total liabilities
   
4,062
     
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
   
(52,432
)
   
(52,262
)
Total shareholders' equity
   
3,938
     
4,108
 
Total liabilities and shareholders' equity
 
$
8,000
   
$
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
   
Nine Months Ended
 
   
January 31,
   
January 31,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
Sales of products
 
$
4,034
   
$
1,146
   
$
6,048
   
$
4,390
 
Services
   
449
     
226
     
988
     
676
 
     
4,483
     
1,372
     
7,036
     
5,066
 
Cost of sales:
                               
Cost of product sales
   
2,960
     
1,023
     
4,931
     
3,401
 
Cost of services
   
195
     
26
     
350
     
94
 
     
3,155
     
1,049
     
5,281
     
3,495
 
Gross profit
   
1,328
     
323
     
1,755
     
1,571
 
                                 
Research and development expenses
   
7
     
-
     
31
     
-
 
Selling, general and administrative expenses
   
596
     
576
     
1,895
     
1,803
 
Income (loss) from operations
   
725
     
(253
)
   
(171
   
(232
)
                                 
Other income (expense):
                               
Interest and dividend income
   
-
     
2
     
2
     
5
 
Other
   
-
     
-
     
(1
)
   
12
 
Income (loss) before income taxes
   
725
     
(251
)
   
(170
)
   
(215
)
Provision for (benefit of) income taxes
   
-
     
(10
)
   
-
     
(10
)
Net income (loss)
 
$
725
   
$
(241
)
 
$
(170
 
$
(205
)
                                 
Net income (loss) per share:
                               
Basic and diluted
 
$
0.06
  
 
$
(0.02
)
 
$
(0.01
 
$
(0.02
)
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





 
4

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


   
Nine Months Ended
January 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
 
$
(170
)
 
$
(205
)
Adjustments to reconcile net loss to net cash provided by (used in)
               
operating activities:
               
Depreciation and amortization
   
102
     
87
 
Warranty reserve expense
   
131
     
21
 
Write-off of patent
   
-
     
12
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(906
)
   
(383
)
Costs and estimated earnings in excess of billings on uncompleted contracts
   
(18
   
804
 
Deferred cost of revenue
   
110
     
(63
)
Inventories
   
(1,803
)
   
222
 
Other current and noncurrent assets
   
     (96
)
   
62
 
Accounts payable
   
843
     
(323
)
Billings in excess of costs and estimated earnings on uncompleted contracts
   
652
     
(49
)
Accrued payroll and related taxes
   
129
     
89
 
Warranty reserves
   
(16
)
   
(34
)
Payable to Parent
   
1
     
-
 
Other current and long-term liabilities
   
(23
)
   
21
 
Deferred revenues
   
660
     
141
 
Net cash provided by (used in) operating activities
   
(404
)
   
402
 
                 
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
   
(106
)
   
(150
)
Additions to patent
   
-
     
     (2
)
Net cash provided by (used in) investing activities
   
(107
)
   
346
 
                 
Net increase (decrease) in cash and cash equivalents
   
(511
)
   
748
 
Cash and cash equivalents at beginning of period
   
3,881
     
2,363
 
Cash and cash equivalents at end of period
 
$
3,370
   
$
3,111
 
                 
                 

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 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
 

 

 
6

 
 

Revenue Recognition
 
Revenues are derived primarily from the sales of complete wagering systems, lottery terminals, the OpenElect® and PBC voting systems, other software and software support services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. Certain revenues continue to be recognized on the percentage-of-completion method for wagering and lottery systems. The Company recognizes revenue from the sale of hardware products and software bundled with hardware that is essential to the functionality of the hardware in accordance with general revenue recognition guidance.
 
Revenue Recognition for Arrangements with Multiple Deliverables
 
For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and VSOE is the price actually charged by the Company for that deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a standalone basis.
 
The Company identified up to three deliverables in arrangements involving the sale of hardware with software essential to the functionality of the hardware. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable in connection with the hardware is the onsite training and support. The third deliverable is the annual software license for ongoing software support services. The Company allocates revenue to these deliverables using the relative selling price method. Because the Company has not established VSOE or TPE for the hardware, the allocation of revenue has been based on the Company’s ESPs. For onsite training in connection with the hardware and software support services under the annual software license, the allocation of revenue has been based on the Company’s VSOE. Amounts allocated to the delivered hardware and the related essential software are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the onsite training and software support services are deferred and recognized at the time of delivery of the service. Amounts allocated to the annual software license and software support services are deferred and recognized on a straight-line basis over the service period, which is typically one year. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide onsite services and maintenance support under the annual software license are recognized as the costs of services are incurred.
 
The Company’s process for determining ESPs for deliverables without VSOE or TPE considers multiple factors that may vary depending on the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing the ESPs for the hardware include costs of manufacture and what a customer would reasonably pay based on the features being offered, trends in the market place, size of territory, and competitive prices. If the facts and circumstances underlying the factors change, including the estimated or actual costs incurred to provide the hardware with essential software, or should future facts and circumstances lead the Company to consider additional factors, the Company’s ESP for the hardware with essential software related to future sales could change.

Deferred Revenues and Deferred Cost of Revenues

Deferred revenues of approximately $1.3 million as of January 31, 2012 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. The Company will recognize the revenues and related cost of revenues upon its fulfillment of the prescribed criteria for revenue recognition. Deferred cost of revenue was immaterial for the current quarter.

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 have been reclassified to deferred cost of revenue and deferred revenue to conform to the current period’s presentation.




 
7

 
 

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, 2012 is as follows:

(Amounts in thousands)
     
Balance at May 1, 2011
 
$
31
 
Additional reserves
   
142
 
Warranty reserve expense adjustments
   
(11
)
Charges incurred
   
(16
)
Balance at January 31, 2012
 
$
146
 

Segment Information

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.












 
8

 


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

 
As of and for the Three Months Ended
 
 
January 31, 2012
 
 
Gaming
Business
 
Voting
Business
 
Totals
 
Total revenues
 
$
2,242
   
$
2,241
   
$
4,483
 
Income from operations
   
409
     
316
     
725
 
Depreciation and amortization
   
23
     
13
     
36
 
Equipment, furniture and fixtures, net
   
95
     
341
     
436
 
Warranty reserves
   
111
     
35
     
146
 
Deferred revenues
   
458
     
817
     
1,275
 
Inventories
   
855
     
1,384
     
2,239
 
     
 
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
 
Equipment, furniture and fixtures, net
   
112
     
358
     
470
 
Warranty reserves
   
29
     
-
     
29
 
Deferred revenues
   
20
     
465
     
485
 
Inventories
   
791
     
29
     
820
 
                         
 
As of and for the Nine Months Ended
 
 
January 31, 2012
 
 
Gaming
Business
 
Voting
Business
 
Totals
 
Total revenues
 
$
4,090
   
$
2,946
   
$
7,036
 
Income (loss) from operations
   
49
     
(220
)
   
(171
)
Depreciation and amortization
   
64
     
38
     
102
 
Equipment, furniture and fixtures, net
   
95
     
341
     
436
 
Warranty reserves
   
111
     
35
     
146
 
Deferred revenues
   
458
     
817
     
1,275
 
Inventories
   
855
     
1,384
     
2,239
 
                         
 
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
 
Equipment, furniture and fixtures, net
   
112
     
358
     
470
 
Warranty reserves
   
29
     
-
     
29
 
Deferred revenues
   
20
     
465
     
485
 
Inventories
   
791
     
29
     
820
 
 
 

 
9

 


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:
   
January 31,
   
April 30,
 
   
2012
   
2011
 
(Amounts in thousands)
           
Raw materials and subassemblies
 
$
1,186
   
$
436
 
Work-in-process
   
3
     
-
 
Finished Goods
   
1,050
     
-
 
   
$
2,239
   
$
436
 

Equipment, Furniture and Fixtures

Net equipment, furniture and fixtures consisted of the following:
   
January 31,
   
April 30,
 
   
2012
   
2011
 
(Amounts in thousands)
           
Plant and machinery
 
$
721
   
$
674
 
Computer equipment
   
1,398
     
1,308
 
Leasehold improvement
   
190
     
183
 
Furniture, fixtures and equipment
   
91
     
91
 
Construction in progress
   
-
     
50
 
     
2,400
     
2,306
 
Accumulated depreciation and amortization
   
(1,964
)
   
(1,874
)
Net equipment, furniture and fixtures 
 
$
436
   
$
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
January 31,
 
Nine Months Ended
January 31,
         
   
2012
 
2011
 
2012
 
2011
Revenue:
             
From unrelated customers
 
One customer accounted for 48% of total revenue.
 
 
 
Two customers accounted for 43% of total revenue
 
 
 
One customer accounted for 30% of total revenue
 
 
 
One customer accounted for 16% of total revenue
 
From related customers
One customer accounted for 38% of total revenue
 
Two customers accounted for 43% of total revenue
 
One customer accounted for 42% of total revenue
 
Two customers accounted for 59% of total revenue
 

 

 
10

 


Related Party Transactions

During the three months ended January 31, 2012 and 2011, revenues from all related party agreements for sales of products and services totaled approximately $2 million (44% of the total revenue) and $669,000 (49% of the total revenue), respectively. Related party revenues for the nine months ended January 31, 2012 and 2011 were approximately $3.5 million (50% of the total revenue) and $3.3 million (65% of the total revenue), respectively. Included in accounts receivable on January 31, 2012 was approximately $804,000 from these customers. Descriptions of the transactions with the Company’s related parties in the three and nine months ended January 31, 2012 and 2011 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, 2012.  

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 nine months ended January 31, 2012 and 2011;
 
•  
There were no accounts receivable balances from BLM as of January 31, 2012 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 January 31, 2012 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 $1.1million 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 were completed in the third quarter of fiscal 2012, and the related revenue was recognized.

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.

On December 20, 2011, the Company received from PGMC, an order valued at approximately $1.1 million for lottery products. Shipments of these products are expected to begin and be completed in the first quarter of fiscal 2013.

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 nine months ended January 31, 2012 totaled approximately $1.7 million and $3 million, respectively. Revenues recognized on the sale of lottery products and software support services during the three and nine months ended January 31, 2011 totaled approximately $302,000 and $2.2 million, respectively; 
•  
There was no billings in excess of costs and estimated earnings balance as of January 31, 2012. 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 December 20, 2011 and September 9, 2011 mentioned above, there were deferred revenues of approximately $441,000 as of January 31, 2012. There was no deferred revenue balance as of April 30, 2011; and    
•  
Accounts receivable from the sale of lottery products totaled $804,000 as of January 31, 2012, compared to $47,000 as of April 30, 2011.
 







 
11

 


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.  

On December 21, 2011, the Company signed a contract with STM for a complete DataTrakII lottery system valued at approximately $4.2 million. The contract is scheduled to be completed by the fourth quarter of fiscal 2013.
 
The financial activities and balances related to transactions with STM were as follows:
 
•  
Revenues of $245,000 and $399,000 were recognized on the performance of contract deliverables and sale of support services during the three and nine months ended January 31, 2012, respectively. 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, respectively;
•  
Net billings in excess of costs and estimated earnings relating to the abovementioned contract dated December 21, 2011 totaled approximately $794,000 as of January 31, 2012. There was no net billings in excess of costs and estimated earnings balance as of April 30, 2011;
•  
There were deferred revenues of $9,000 on software support services as of January 31, 2012 and April 30, 2011; and
•  
There was no accounts receivable balance from STM as of January 31, 2012, 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 $36,000 and $119,000 were recognized on the performance of contract deliverables, sale of support services and licensing during the three and nine months ended January 31, 2012, respectively. 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;
•  
Net billings in excess of costs and estimated earnings relating to the abovementioned contract dated December 16, 2009 totaled approximately $89,000 as of January 31, 2012, compared to $105,000 as of April 30, 2011;
•  
Deferred revenue on lottery product licensing totaled $8,000 as of January 31, 2012, compared to $10,000 on software support services as of April 30, 2011; and
•  
There was no accounts receivable balance from Natural Avenue as of January 31, 2012, 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 nine months ended January 31, 2012, the Company incurred services of approximately $51,000 and $152,000, respectively, which are shown as part of cost of sales. 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.  
 
 
 
 
12

 
 
 
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 nine months ended January 31, 2012.  Revenue of $66,000 was recognized on the software product development during the three and nine months ended January 31, 2011; and
•  
There were no accounts receivable balances as of January 31, 2012 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 January 31, 2012 and April 30, 2011 due to the short-term maturity of the instruments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13

 
 
 
 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.
         

Revenue Recognition
 
Our revenues are derived primarily from the sales of complete wagering systems, lottery terminals, the OpenElect® and PBC voting systems, other software and software support services. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of our product sales, these criteria are met at the time the product is shipped. Certain revenues continue to be recognized on the percentage-of-completion method for wagering and lottery systems. We recognize revenue from the sale of hardware products, including software bundled with hardware that is essential to the functionality of the hardware, in accordance with general revenue recognition guidance.
 

 
 
14

 

 
For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when we sell the deliverable separately and VSOE is the price actually charged for that deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a standalone basis.
 
For sales of hardware products, we may provide various hardware components containing software essential to the hardware product’s functionality, and other components depending on the customers’ needs. Because we have not established VSOE or TPE for these systems, revenue is allocated based on ESPs. Determining ESPs requires management’s judgment. We consider multiple factors that may vary over time depending on the facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors change, including the estimated or actual costs incurred to provide the hardware with essential software, or should future facts and circumstances lead us to consider additional factors, our ESP for the hardware related to future sales could change. Revenue is recognized upon shipment of the hardware. We also provide software support services on a standalone basis from sales of the hardware. Amounts allocated to software support services are based on VSOE using daily billing rates. Revenue is deferred until the services are performed. For annual software licenses, we use VSOE. Amounts allocated to annual software licenses are deferred and recognized on a straight-line basis over the service period, which is typically one year.

RESULTS OF OPERATIONS
Revenue Analysis
   
Three Months Ended
   
Nine Months Ended
 
(Amounts in thousands)
 
January 31,
   
January 31,
 
Revenues
 
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
Products:
                                   
Contracts
 
$
3,720
   
$
976
   
$
2,744
   
$
5,451
   
$
3,557
   
$
1,894
 
Spares
   
314
     
170
     
144
     
597
     
833
     
(236
Total Products
   
4,034
     
1,146
     
2,888
     
6,048
     
4,390
     
1,658
 
Services:
                                               
Software Support
   
198
     
192
     
6
     
581
     
540
     
41
 
            Product Servicing        and Support
   
251
     
34
     
217
     
407
     
136
     
271
 
Total Services
   
449
     
226
     
223
     
988
     
676
     
312
 
   
$
4,483
   
$
1,372
   
$
3,111
   
$
7,036
   
$
5,066
   
$
1,970
 
 
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 January 31, 2012 was approximately $3.7 million, compared to $976,000 in the same period in 2011. The substantial increase is primarily due to the increased contract activities in the voting segment compared to the corresponding period in 2011. For the nine months ended January 31, 2012, contract revenue was $5.5 million, compared to $3.6 million for the corresponding period in 2011. The increase in 2012 is primarily due to the increased contract activities in the voting segment, partially offset by lower contract activities in the lottery segment.



 
15

 


Spares revenue for the three months ended January 31, 2012 was $314,000, compared to $170,000 for the corresponding period in 2011. Higher spares revenue in 2012 was attributable to increased demand for spare parts in the current quarter compared to the same period in 2011. Spares revenue for the nine months ended January 31, 2012 was $597,000, compared to $833,000 for the corresponding period in 2011. Decreased spares revenue in 2012 was primarily due to significantly lower demand of spare parts from two unrelated customers in the lottery segment, partially offset by higher demand of spare parts in the voting segment.  Customer demand for spare parts fluctuates from period to period.
 
Software support revenue for the three months ended January 31, 2012 was $198,000, compared to $192,000 for the same period in 2011. The slight increase in software support revenue in 2012 is due to one additional software support agreement with an unrelated customer. For the nine months ended January 31, 2012, software support revenue was $581,000, compared to $540,000 in the same period in 2011. The increase is due to higher fees charged to a related customer.

Product servicing and support revenue for the three months ended January 31, 2012 was $251,000, compared to $34,000 for the corresponding period in 2011. For the nine months ended January 31, 2012 product servicing and support revenue was $407,000, compared to $136,000 for the same period in the prior year. The increases in 2012 are primarily due to higher demand for support services from an unrelated customer.

Related party revenue of approximately $2 million accounted for 44% of total revenue in the three months ended January 31, 2012, compared to $669,000 or 49% of total revenue in the corresponding period in 2011. For the nine months ended January 31, 2012, related party revenue of approximately $3.5 million accounted for 50% of total revenue, compared to $3.3 million or 65% of total revenue in the corresponding period in 2011.

Cost of Sales and Gross Profit Analysis
   
Three Months Ended
   
Nine Months Ended
   
January 31,
   
January 31,
   
January 31,
   
January 31,
 
(Amounts in thousands)
 
2012
   
2011
   
2012
   
2011
 
Revenues:
                                                       
Products
 
$
4,034
     
90
%
 
$
1,146
     
84
%
 
$
6,048
     
86
%
 
$
4,390
     
87
%
Services
   
449
     
10
%
   
226
     
16
%
   
988
     
14
%
   
676
     
13
%
    Total revenues
 
$
4,483
     
100
%
 
$
1,372
     
100
%
 
$
7,036
     
100
%
 
$
5,066
     
100
%
                                                                 
Cost of sales:
                                                               
Products
 
$
2,960
     
66
%
 
$
1,023
     
75
%
 
$
4,931
     
70
%
 
$
3,401
     
67
%
Services
   
195
     
4
%
   
26
     
2
%
   
350
     
5
%
   
94
     
2
%
   Total costs of sales
 
$
3,155
     
70
%
 
$
1,049
     
77
%
 
$
5,281
     
75
%
 
$
3,495
     
69
%
                                                                 
Gross profit:
                                                               
Products
 
$
1,074
     
24
%
 
$
123
     
9
%
 
$
1,117
     
16
%
 
$
989
     
20
%
Services
   
254
     
6
%
   
200
     
14
%
   
638
     
9
%
   
582
     
11
%
   Total gross profit
 
$
1,328
     
30
%
 
$
323
     
23
%
 
$
1,755
     
25
%
 
$
1,571
     
31
%

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 30% for the three months ended January 31, 2012, compared to 23% for the corresponding period in 2011. The increase in gross profit margin was largely driven by more favorable profit margins achieved on certain lottery products. For the nine months ended January 31, 2012, overall gross profit margins were at 25%, compared to 31% in the same period in 2011. The decreases in 2012 are largely due to higher unabsorbed 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.



 
16

 
 

Research and Development Expenses (“R&D”)

For the three and nine months ended January 31, 2012, R&D expenses were $7,000 and $31,000, respectively. There were no R&D expenses incurred for the three and nine months ended January 31, 2011. R&D expenses for the quarter ended January 31, 2012 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 quarter 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 January 31, 2012 were $596,000, compared to $576,000 in the same period in 2011. For the nine months ended January 31, 2012, SG&A expenses were $1.9 million, compared to $1.8 million in 2011. 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 and lower employee related expenses. We anticipate SG&A expenses will remain relatively constant in the remaining quarter of fiscal 2012.
 
Other Income
 
Other income in the three and nine months ended January 31, 2012 and 2011 remained relatively insignificant.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity
 
Our net working capital at January 31, 2012 was approximately $3.5 million.

Contract backlog at January 31, 2012 was approximately $7.8 million. Of this amount, approximately $5.9 million will be derived from gaming orders received from three related customers. Of the $5.9 million amount, approximately $1.5 million has been paid by our related customers as of March 13, 2012. The remaining contract backlog amount of approximately $1.9 million relates to voting and gaming contracts with unrelated customers. Of the $1.9 million amount, approximately $993,000 has been paid by our unrelated customers as of March 13, 2012. Additional sources of cash through January 31, 2013 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, 2013, 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, 2013. 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,
       
   
2012
   
2011
   
Decrease
 
(Amounts in thousands)
                 
Condensed cash flow comparative:
                 
Operating activities
 
$
(404
)
 
$
402
   
$
(806
)
Investing activities
   
(107
)
   
346
     
(453
)
Net increase (decrease) in cash and cash equivalents
 
$
(511
)
 
$
748
   
$
(1,259
)
 


 
17

 


Cash Flow Analysis

Net cash used in operating activities was approximately $404,000 for the nine months ended January 31, 2012, compared to the net cash provided by operating activities of $402,000 for the same period in 2011. The change was primarily attributable to higher inventory purchases to fulfill customer orders, and the timing of the customer contract delivery and the related invoicing which effectively impacted the accounts receivable. These were partially offset by an increase in accounts payable for inventory related purchases, an increase in deferred revenues and an increase in billings in excess of costs and estimated earnings on the uncompleted contacts.

Net cash used in investing activities was $107,000 for the nine months ended January 31, 2012, compared to net cash provided by investing activities of $346,000 in 2011.  The net cash used in investing activities in 2012 was primarily attributable to capital expenditures related to computer and tooling equipment, which amounted to $106,000. The net cash provided in 2011 was primarily related to the redemption of certificates of deposits which exceeded the purchase of certificates of deposits, partially offset by the capital expenditures of $150,000 for marketing demonstration purposes in the voting segment.

There were no financing activities during the nine months ended in January 31, 2012 or 2011.

Capital Resources

As of January 31, 2012, there were no credit facilities.




















 
18

 
 
 
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 January 31, 2012 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.








 
 
 
 
 















 
19

 

 
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.
MINE SAFETY DISCLOSURES
 
Not applicable
 
ITEM 5.
OTHER INFORMATION

Not applicable









 
 
 







 
20

 

 
ITEM 2.
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
       





 
 
 
21

 
 




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:      March 13, 2012
 
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
 
 
/s/
 
 
Jeffrey M. Johnson
Jeffrey M. Johnson
 
President/Acting Chief Financial Officer