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EXCEL - IDEA: XBRL DOCUMENT - GAMETECH INTERNATIONAL INCFinancial_Report.xls
EX-32.2 - EXHIBIT 32.2 - GAMETECH INTERNATIONAL INCex32-2.htm
EX-31.2 - EXHIBIT 31.2 - GAMETECH INTERNATIONAL INCex31-2.htm
EX-32.1 - EXHIBIT 32.1 - GAMETECH INTERNATIONAL INCex32-1.htm
EX-31.1 - EXHIBIT 31.1 - GAMETECH INTERNATIONAL INCex31-1.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the 13 weeks ended January 29, 2012

OR
 
o 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 001-34447

GameTech International, Inc.
(Exact name of registrant as specified in its charter)


DELAWARE
33-0612983
(State or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
   
   
8850 DOUBLE DIAMOND PKWY, RENO, NEVADA
89521
(Address of principal executive offices)
(Zip code)
 
Registrant’s telephone number, including area code: (775) 850-6000


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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 R No £

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. (Check one):
Large accelerated filer   £
Accelerated filer   £
Non-accelerated filer   £
Smaller reporting companyR

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

On March 9, 2012, the registrant had 11,874,634 outstanding shares of its Common Stock, par value $0.001 per share.
 
 
 

 
 
GAMETECH INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE 13-WEEK PERIOD ENDED JANUARY 29, 2012

INDEX
 
PART 1.
FINANCIAL INFORMATION:
1
ITEM 1.
FINANCIAL STATEMENTS
1
 
Consolidated Balance Sheets
1
 
Consolidated Statements of Operations
2
 
Statements of Stockholders’ Equity
3
 
Condensed Consolidated Statements of Cash Flows
4
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
10
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
15
ITEM 4.
CONTROLS AND PROCEDURES
15
PART II.
OTHER INFORMATION:
16
ITEM 1.
LEGAL PROCEEDINGS
16
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
16
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
16
ITEM 4.
MINE SAFETY DISCLOSURES
16
ITEM 5.
OTHER INFORMATION
16
ITEM 6.
EXHIBITS
17
SIGNATURES
19
 
 
 

 
 
PART 1.                      FINANCIAL INFORMATION:
 
ITEM 1.                      FINANCIAL STATEMENTS
 
GAMETECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 
   
January 29, 2012
   
October 30, 2011
 
ASSETS  
(Unaudited)
       
Current assets:
           
Cash and equivalents   $ 794     $ 1,357  
Restricted cash     -       177  
Accounts receivable, net of allowances of $1,381 and $1,478     2,690       2,946  
Income taxes receivable     339       362  
Inventories     2,179       2,188  
Prepaid expenses and other     932       881  
      6,934       7,911  
Assets held for sale     -       5,833  
Deposits     180       900  
Bingo equipment, furniture and other equipment, net     7,997       7,094  
Goodwill     10,184       10,184  
Other intangibles, less accumulated amortization of $10,255 and $9,985     1,541       1,683  
Debt acquisition costs, less accumulted amortization     388       328  
    $ 27,224     $ 33,933  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
               
Notes payable   $ 16,460     $ 23,355  
Interest rate swap     555       665  
Accounts payable     2,329       1,856  
Accrued payroll and related     792       988  
Income taxes payable     1,331       1,298  
Deferred revenue     298       649  
Other accrued liabilities     1,119       1,655  
      22,884       30,466  
                 
Stockholders’ equity:
               
Common stock, $0.001 par value: 40,000,000 shares authorized; 14,480,537 shares issued, 11,874,634 and 11,874,634 shares outstanding     14       14  
Additional paid in capital     52,168       52,153  
Deficit     (35,825 )     (36,683 )
Treasury stock, at cost, 2,605,903 and 2,605,903 shares     (12,017 )     (12,017 )
      4,340       3,467  
                 
    $ 27,224     $ 33,933  
 
See notes to unaudited consolidated financial statements.
Consolidated Statements of Operations
 
1

 
 
GAMETECH INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

   
13-week periods ended
 
   
January 29, 2012
   
January 30, 2011
 
Net revenues
  $ 8,251     $ 10,102  
                 
Cost of revenues, excluding depreciation & amortization
    2,413       3,838  
Depreciation and amortization
    635       1,094  
      3,048       4,932  
                 
Gross profit
    5,203       5,170  
                 
Operating expenses:
               
General and administrative     1,819       1,706  
Sales and marketing     1,309       1,816  
Research and development     876       915  
Depreciation and amortization     294       314  
Impairment loss, assets held for sale     -       445  
      4,298       5,196  
                 
Income (loss) from operations
    905       (26 )
                 
Other income (expense):
               
Interest expense     (488 )     (387 )
Other, net     504       172  
Income (loss), before income taxes
    921       (241 )
                 
Income taxes
    63       47  
                 
Net income (loss)
  $ 858     $ (288 )
                 
Basic and diluted net income (loss) per share
  $ 0.07     $ (0.02 )
                 
Weighted shares used in calculating basic and diluted net income (loss) per share
    11,875       11,815  
 
See notes to unaudited consolidated financial statements.
 Statements of Stockholders’ Equity
 
2

 
 
GAMETECH INTERNATIONAL, INC.
UNAUDITED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
 
    Common Stock    
Additional Paid in
          Treasury Stock        
   
Shares
   
Amount
   
Capital
   
Deficit
   
Shares
   
Amount
   
Total
 
Balances at October 31, 2011
    14,480,537     $ 14     $ 52,153     $ (36,683 )     2,605,903     $ (12,017 )   $ 3,467  
Stock based compensation
    -       -       15       -       -       -       15  
Net income
    -       -       -       858       -       -       858  
Balances at January 29, 2012
    14,480,537     $ 14     $ 52,168     $ (35,825 )     2,605,903     $ (12,017 )   $ 4,340  
                                                         
Balances at November 1, 2010
    14,480,537     $ 14     $ 52,154     $ (30,315 )     2,673,844     $ (12,330 )   $ 9,523  
Restricted stock issued
    -       -       (68 )     -       (14,834 )     68       -  
Stock based compensation
    -       -       151       -       -       -       151  
Net loss
    -       -       -       (288 )     -       -       (288 )
Balances at January 30, 2011
    14,480,537     $ 14     $ 52,237     $ (30,603 )     2,659,010     $ (12,262 )   $ 9,386  
 
See notes to unaudited consolidated financial statements.
 
 
3

 
Condensed Consolidated Statements of Cash Flows
GAMETECH INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
   
13 Weeks Ended
   
13 Weeks Ended
 
 
 
January 29, 2012
   
January 30, 2011
 
Operating activities:
           
Net cash provided by (used in) operating activities
  $ 1,453     $ (583 )
                 
Investing activities:
               
Proceeds from sale of assets held for sale
    5,859       -  
Acquisition of intangibles
    (128 )     (13 )
Deposits for purchase of bingo equipment
    720       -  
Purchases of bingo equipment, furniture and other equipment
    (1,535 )     (368 )
Net cash provided by (used in) investing activities
    4,916       (381 )
                 
Financing activities:
               
Repayment of borrowings
    (6,894 )     (2,168 )
Decrease in restricted cash
    1,757       2,353  
Increase in restricted cash
    (1,581 )     (153 )
Payment for debt acquisition costs
    (214 )     -  
Net cash provided by (used in) financing activities
    (6,932 )     32  
                 
Net decrease in cash and equivalents
    (563 )     (932 )
Cash and equivalents, beginning of period
    1,357       2,017  
                 
Cash and equivalents, end of period
  $ 794     $ 1,085  
 
See notes to unaudited consolidated financial statements.
 
 
4

 
 
GAMETECH INTERNATIONAL, INC.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 
1.     BASIS OF PRESENTATION
 
The unaudited consolidated financial statements of GameTech International, Inc. and subsidiaries (individually and collectively the “Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information.  Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed and/or omitted.  For further information, please refer to the annual audited consolidated financial statements of the Company, and the related notes included within the Company’s Annual Report on Form 10-K for the year ended October 30, 2011, previously filed with the SEC, from which the balance sheet information as of that date is derived.

Management has evaluated the consolidated financial statements for subsequent events through the date this Quarterly Report on Form 10-Q was filed with the SEC.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  All significant intercompany accounts and balances have been eliminated in consolidation.  The results for the current interim period are not necessarily indicative of the results to be expected for the full year.

For reporting purposes, certain general and administrative expenses are reported as “corporate expenses” (Note 16) and are no longer allocated to the segments.  Other income (expense) items and income taxes (benefit) are also not allocated to the business segments.  In addition, certain minor reclassifications have also been made to the fiscal 2011 interim amounts to conform to the current period presentation with no effect on income (loss) from operations and net income (loss).

2.     FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURES

For the Company’s cash and equivalents, restricted cash, accounts receivable, accounts payable and debt, the carrying amounts approximate fair value because of the short duration of these financial instruments.  Assets held for sale consisting of real estate at October 30, 2011 was measured at estimated fair value (Note 6).

3.     CONCENTRATION OF CREDIT RISKS

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and equivalents and accounts receivable. The Company’s offshore foreign bank balances of $115 thousand as of January 29, 2012 are not covered by federal deposit insurance (FDIC), but domestic interest bearing accounts are insured for $250 thousand per taxpayer and domestic non-interest bearing accounts are insured without limit.  On January 29, 2012, the Company’s domestic interest bearing deposits exceeded the FDIC insurance limits by approximately $0.1 million.

One customer made up 12.1% and 26.8% of our revenue for the 2012 and 2011, 13-week periods presented.

The Company conducts a substantial amount of business through distributor relationships.  As part of these relationships, many distributors act as a collection agent.  As of January 29, 2012 and January 30, 2011, 32.5% and 40.5% of our consolidated accounts receivable balances relate to one non-agent distributor.  The Company’s allowance for doubtful collection as of January 29, 2012 and January 30, 2011 for this non-agent distributor was approximately 96.9% and 80.2%.  The reduction in our allowance for doubtful accounts during the most recent period presented results from the recovery of certain merchandise previously sold to this non-agent distributor.

4.     LACK OF LIQUIDITY AND MANAGEMENT’S PLANS

Historically, the Company has financed its operations primarily through cash from operations and debt financing activities.  However, except for the most recent period presented, the Company has suffered recurring losses from operations since the quarter ended April 30, 2008 and was in default under its loan agreement until its entry into an Amended and Restated Loan Agreement with its lenders on June 15, 2011 (the “Credit Facility”).  For additional information on the Credit Facility, see Note 9.

Cash balances may decrease as the Company continues to use existing cash and cash from operations to fund its ongoing operations, capital expenditures and debt obligations.  Unless the Company is able to generate increased cash from existing operations and/or raise additional capital, management does not believe that existing cash from operations and cash balances will be sufficient to meet the Company’s anticipated cash needs for the next 12 months.   Management is currently exploring strategic alternatives that are available to the Company in order to meet its operating and capital needs for the next 12 months, including business combinations, strategic partnerships and the sale of Company assets.  If the Company is unsuccessful in these efforts, the Company will not be able to satisfy its debt obligations, invest the resources necessary to obtain regulatory approvals in new markets, continue the development and deployment of current and new products, and/or respond to competitive market pressures and requirements.  Our failure to maintain profitable operations and to generate cash through operations and strategic alternatives would adversely affect our business and could ultimately lead to the financial and operating failure of the Company.
 
 
5

 
5.     INVENTORIES
 
Inventories consist of the following (in thousands):
 
 
 
January 29, 2012
   
October 30, 2011
 
Parts and raw materials
  $ 1,088     $ 1,157  
Finished goods
    1,091       1,031  
 
  $ 2,179     $ 2,188  
 
 
6.     ASSETS HELD FOR SALE
 
On December 28, 2011, the Company sold the real property housing its corporate headquarters and warehouse space for $6.125 million.  Net proceeds from the sale of the property were used to reduce the outstanding principal balance under our amended and restated credit facility.  Pursuant to the terms of the sale agreement, the Company expects to lease a significant portion of the property from the purchaser for a period of approximately sixteen months from the closing date.

7.     BINGO EQUIPMENT, FURNITURE AND OTHER EQUIPMENT

Bingo equipment includes portable and fixed-based player terminals, file servers, caller units, point-of-sale units, and other support equipment.  The Company accelerates depreciation (effectively providing reserves) for equipment that the Company does not expect to use based on demand forecasts.

8.     IMPAIRMENT CONSIDERATIONS

The Company reviews long-lived assets (consisting of bingo equipment, furniture, other equipment, and finite life intangibles) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Similarly, when circumstances indicate that goodwill associated with the Company’s bingo business and/or other indefinite life intangibles might not be recoverable, an impairment analysis is also performed.  Recoverability of long-lived assets are measured by a comparison of the carrying amount of an asset to estimated future undiscounted cash flows expected to be generated by the asset.  If such assets are considered impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  The Company performs an annual impairment analysis in the third quarter of every year.

9.     NOTES PAYABLE

We entered into a $40.0 million credit facility with U.S. Bank N.A. and Bank of the West on August 22, 2008 that provided for a senior secured revolving credit facility of $2.0 million and a senior secured term loan of $38.0 million.   The credit facility was originally established in order to purchase a corporate headquarters building in southeast Reno, Nevada and to finance improvements to address office space, manufacturing, and assembly needs. In connection with the term loan agreement, the Company also entered into an interest rate swap agreement with U.S. Bank N. A., which exchanged the variable one-month LIBOR rate of the term loan for a fixed LIBOR rate of 3.99% per annum through the maturity of the loan.  In consideration for their entry into the credit facility, the Company granted its lenders a first priority security interest in all of the Company's assets, including a first deed of trust on the corporate headquarters, and future cash flows.
 
During fiscal 2010, the Company fell out of compliance with its financial covenants contained in the loan agreement and failed to make scheduled payments of principal and interest in accordance with the terms of the loan agreement. Throughout fiscal 2010, the Company and the lenders entered into various forbearances and amendments to the loan agreement, wherein the lenders conditionally waived their remedies under the loan agreement and imposed certain new terms. These terms included (among others): reduction of the total commitment on the revolver from $2 million to $750 thousand; establishment of a Bank of the West line of credit or letters of credit up to $1.8 million in the aggregate, secured by funds on deposit in the control account; increase of the interest rate on all outstanding balances under the revolver and term loan to the default rate of 3% above the existing rates; requirement that the Company retain a consultant that is acceptable to the Company and the lenders; prohibition on the Company's acquisition of any other business or substantially all the assets of any other business; termination of the forbearance on the resignation or termination of the Chief Executive Officer or the consultant; deferral of accrued interest; limitation on capital expenditures; limitation of the amount of cash disbursements for investments in the Illinois VLT market; and requirement of bi-weekly reports from the Chief Executive Officer and consultant to the lenders.
 
As a result of the Company's continued non-compliance with the terms of the loan agreement and entry into subsequent forbearance agreements with the lenders, the Company classified the total balance outstanding under the credit facility and the interest rate swap premium liability to current liabilities as of May 2, 2010.
 
On June 15, 2011, the Company entered into an amended and restated loan agreement with its lenders to extend the maturity of the facility to June 30, 2012. Provided the Company remains in compliance with the terms of the new loan agreement as of June 30, 2012, the term of the facility would extend from June 30, 2012 to June 30, 2013. The amended and restated loan agreement does not impose any obligation on the part of our lenders to provide additional financing to the Company (at which time no amounts remained outstanding under the revolver portion of the credit facility). Substantially all of the assets of the Company, including its corporate headquarters, continue to collateralize the Company's borrowings.
 
As a result of its entry into the amended and restated loan agreement, the Company reclassified a portion of the outstanding principal balance under its credit facility to long-term as of May 1, 2011.

The amended and restated loan agreement amends and restates the terms for repayment by the Company of the outstanding balances under the facility.  Under the terms of the amended and restated loan agreement, the Company is required to make monthly payments of principal in the amount of $200 thousand from August 2011 through June 2012, and if extended, principal payments of $300 thousand from November 2012 until the facility matures on June 30, 2013.  The remaining unpaid principal balance (together with any accrued but unpaid interest) is due at maturity.
 
6

 
The amended and restated loan agreement provides that all outstanding balances under the facility bear interest at a base rate, which is equal to an applicable margin plus the daily Eurocurrency rate or an alternative base rate (as provided for in the agreement).  The initial applicable margin was 5.80%, increased to 7.50% on February 1, 2012 (through April 2012), and will increase further to 8.50% (May 2012 through October 2012) and 9.50% (November 2012 through June 30, 2013).  Upon an event of default, the interest rate under the facility will increase by 3%.  In addition to the applicable margin, a daily Eurocurrency base rate is applied which is the one-month LIBOR rate.  The LIBOR rate at October 30, 2011 was 0.24%.  The Company’s interest rate swap agreement continues to remain effective following the Company’s entry into the amended and restated loan agreement.  As of January 29, 2012, the outstanding principal balance and applicable interest rate under the Credit Facility were $16.5 million and 9.84% respectively.

The amended and restated loan agreement requires the Company to apply 75% of its excess cash flow (as defined in the agreement) as of the end of each fiscal quarter beginning with the quarter ending July 31, 2011 towards the satisfaction of its obligations under the facility.  Additionally, the Company is required to apply 100% of the proceeds from certain transactions and other sources to the prepayment of its obligations under the facility, including the net cash proceeds from any sale of assets (other than sales of inventory in the ordinary course of business), financings, excess insurance proceeds from casualty events, condemnation awards, the receipt of specific assets, and other events as specified in the agreement.  In addition, the amended and restated loan agreement prohibits capital expenditures for any use other than purchases of equipment for leasing to customers in the ordinary course of business, and limits the amount of capital expenditures that may be made by the Company for fiscal years 2011 and 2012.

The amended and restated loan agreement requires the Company to comply with various financial and non-financial covenants and includes customary events of default.  The financial covenants include requirements that the Company maintain minimum liquidity, quarterly profitability (as defined in the agreement), quarterly consolidated EBITDA, and cash flow leverage and fixed charge coverage ratios, which are measured monthly beginning October 31, 2011.

The non-financial covenants include restrictions on asset divestitures, liens, transactions with related parties, limitations on additional indebtedness, mergers, acquisitions and consolidations, cash dividends, issuance and redemptions of stock, investments, sale leaseback transactions, operations outside of the submitted strategic plan, a change of control, as well as a requirement to continue to retain a consultant that is acceptable to both the lenders and the Company.

In consideration for the lenders entry into the amended and restated loan agreement, the Company was required to pay a closing fee in the amount of $736 thousand, fifty percent of which was due at closing.  The remaining half was paid December 31, 2011.  The amended and restated loan agreement also required a payment of $1.0 million at closing, which was first applied to the portion of the closing fee due at closing and second to the outstanding principal balance of the term loan.  In accordance with the terms of the amended and restated loan agreement, $1.0 million of the remaining $2.8 million relating to certain tax refunds received by the Company and held by U.S. Bank in a control account was applied to the payment due at closing, with the remaining $1.8 million released to the Company for certain permitted capital expenditures.

As of September 4, 2011, the Company determined that it was not in compliance with certain covenants contained in the amended and restated loan agreement.  On December 22, 2011, the Company and the lenders entered into a first amendment to the amended and restated loan agreement and waiver of defaults.  The first amendment, among other things: (i) modifies certain financial covenants; (ii) incorporates the lender’s consent to the sale of the Company’s corporate headquarters (which occurred on December 28, 2011); (iii) requires the Company to maintain at least $350 thousand in liquidity through January 31, 2012 and at least $500 thousand in liquidity at all times thereafter; and (iv) waives any and all prior events of default.

Under the terms of the first amendment, the net cash proceeds of $6.125 million from the sale of the corporate headquarters were applied to pay: (i) an amendment fee equal to $214 thousand, representing one percent (1.00%) of the outstanding balance of the credit facility as of December 22, 2011; (ii) all fees and interest due and payable as of the sale date (including all current interest, all deferred interest accruing from June 15, 2011 through the sale date, and the remaining portion of a closing fee ($368 thousand), related to the Company’s entry into the amended and restated loan agreement); and (iii) the outstanding principal balance under the credit facility.

The first amendment also modified certain covenants contained in the amended and restated loan agreement, and (i) requires the Company to apply 75% of its excess cash flow as of the end of each fiscal quarter towards the satisfaction of its obligations under the credit facility; (ii) to the extent liquidity exceeds $1.5 million at any time, requires the Company to apply such excess towards the satisfaction of its obligations under the credit facility; and (iii) prohibits capital expenditures for any use other than purchases of equipment for leasing to customers in the ordinary course of business, and limits the amount of capital expenditures that may be made by the Company.

As of December 28, 2011, after giving effect to an unscheduled principal payment of $1.5 million on December 9, 2011, and the application of the net cash proceeds of $6.125 million from the sale of the corporate headquarters, the outstanding balance and interest rate under the credit facility was approximately $16.6 million and 9.79%.  If all of the covenants and payments have been met at June 30, 2012, the maturity date of the credit facility will be extended to June 30, 2013.
 
In order to extend the maturity date of the credit facility, the Company (i) must not be in default at the time of the extension, (ii) must be in compliance with each of the financial covenants set forth in the credit facility, (iii) must maintain consolidated operating profit (as defined in the agreement) for the twelve-month period immediately preceding and ending on April 30, 2012 of at least $3.7 million, (iv) must maintain an adjusted cash flow leverage ratio of less than 3 to 1 as of April 30, 2012, and (v) must pay the lenders an extension fee in an amount equal to one-percent of the aggregate outstanding balance owed under the credit facility as of June 30, 2012.  To the extent that the Company is unable to satisfy the requirements for extending the maturity date of the credit facility, the company will engage in discussions with its Lenders and seek to obtain an amendment to the credit facility, a waiver or forbearance.
 
If the maturity date is extended to June 30, 2013, the Company will be required to pay approximately $4.5 million of principal and interest payments during the year ended June 30, 2013 plus a final principal payment of $12.2 million on June 30, 2013.
 
10.   INTEREST RATE SWAP CONTRACT

The Company entered into an interest rate swap agreement to hedge its interest rate exposure on its credit facility described in Note 9.  In this agreement, the Company agrees to pay the counterparty a fixed rate payment in exchange for the counterparty agreeing to pay the Company a variable rate payment that is intended to approximate the Company’s variable rate payment obligation on the Credit Facility.  The payment obligation is based on the notional amount of the swap. Depending on the state of interest rates in general, the use of interest rate swaps could enhance or harm the overall performance of the common shares.  The estimated market value of interest rate swaps is based on pricing models that consider the time value of money, volatility, and the current market and contractual prices of the underlying financial instrument.  Unrealized gains are reported as an asset and unrealized losses are reported as a liability on the Company’s Consolidated Balance Sheet.  The change in value of interest rate swaps, including the accrual of periodic amounts of interest to be paid or received on swaps is reported as interest expense in the Company’s Consolidated Statements of Operations.  Swap agreements involve, to varying degrees, elements of market and counterparty risk, and exposures to loss in the related amounts are reflected in the Company’s Balance Sheet.
 
7

 
 
11.   RELATED PARTY TRANSACTIONS

The Company purchases equipment from a company which is controlled by one of our board members.  Purchases from the company were $42 thousand and $20 thousand for the 2012 and 2011 13-week periods presented.  Outstanding payables to the company as of January 29, 2012 and January 30, 2011 were $12 thousand and $15 thousand, respectively.

The Company has engaged a past Chairman of the Board of the Company as a consultant and paid him $34 thousand and $30 thousand in fees and expenses for the 2012 and 2011, 13-week periods presented.  As of February 14, 2012, this individual was beneficial owner of approximately 16.3% of the outstanding stock.

12.   LEGAL PROCEEDINGS

The Company is involved in various legal proceedings and potential claims arising in the ordinary course of our business. Management is unable to estimate a range of potential loss, if any, associated with most of these matters.  Management does not believe, based in part on the advice of counsel, that any of such proceedings will have a material adverse effect on the Company’s business, results of operations, or financial condition.  Accordingly, a non-material provision for loss has been recorded.
 
13.   STOCK BASED COMPENSATION
 
The Company grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair value of the shares on the date of the grant. The Company also grants restricted stock grants valued at the price equal to the fair value of the shares on the date of grant.

The Company recognized stock-based compensation expense of $15 thousand and $105 thousand for stock options for the 13-week period ended January 29, 2012 and January 30, 2011, respectively.

As of January 29, 2012, the total compensation cost related to unvested stock option awards granted to employees and directors under the Company’s stock option plans but not recognized was $69 thousand. The cost of each award will be amortized on a straight-line basis over its term, which ranges from two to four years, and will be adjusted for subsequent changes in estimated forfeitures.  As of January 29, 2012, the compensation related to unvested restricted stock awards granted to employees and directors under the stock option plans, but not yet recognized, was $4 thousand.  The cost will be adjusted for subsequent changes in estimated forfeitures.

During the periods presented, no stock options or restricted stock grants were granted.  For the 2012 and 2011, 13-week periods presented, there were zero and 14,834 shares issued upon vesting of restricted stock awards previously granted.

14.   INCOME TAXES

The effective tax rate for the 13-week periods presented is different from the expected federal rate of 34% due to foreign tax reporting, the effect of changes to the valuation allowance for deferred tax assets and miscellaneous permanent differences between financial and income tax reporting.

For the most recent 13-week period presented, the Company had a 100% valuation allowance ($14.5 million) against deferred tax assets primarily related to federal and state net operating loss carry forwards, foreign tax credits, depreciation and amortization methods and deferred revenue.  Significant management judgment is required in establishing a valuation.  In doing so, the Company considers available positive and negative evidence giving weight to recent cumulative losses, the ability to carry back losses to offset prior taxable income and verifiable forecasts of prospective financial results and taxable income, including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  Management’s decision to provide a 100% valuation allowance for the Company’s deferred tax assets was due to: (1) continuing operating losses except for the most recent period presented; (2) year-over-year market declines in revenues; and (3) uncertainty about the Company’s ability to fund the capital needs for future growth in new jurisdictions.  The 100% valuation allowance will continue until sufficient positive evidence exists to support the reversal.

The Company files numerous consolidated and separate income tax returns in the United States and in many state and foreign jurisdictions. With few exceptions, the Company is no longer subject to United States federal income tax examinations for years before 2006 and is no longer subject to state, local or foreign tax examinations for years before 2005.

As a result of the Internal Revenue Service’s (IRS) examination of the Company’s U.S. income tax returns for the fiscal year ended October 31, 2007 the IRS has proposed certain adjustments to the depreciable life used in calculating federal tax depreciation on the Company’s leased electronic bingo systems.  The Company has accrued tax, interest and penalties totaling $1.3 million and filed a petition with the IRS Tax Court challenging the IRS proposal.  The Company is seeking to remand the appeal back to the IRS appeals office.  If the IRS prevails, any required payment would be offset by the additional depreciation benefits on amended returns for subsequent years resulting in a cashless settlement, except for possible interest and penalties, if any.
 
 
8

 
 
15.   NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share (EPS) is computed by dividing reported net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding at the end of each period.  Diluted EPS in profitable years is computed using the weighted average number of common shares and other common stock equivalents outstanding during each period.  Diluted common shares are determined using the treasury stock method, which treats the proceeds from the exercise of all warrants and options as if used to reacquire stock at market value.  There are no adjustments to arrive at net income (loss) applicable to common shareholders (the numerator of the EPS calculation).  The following reflects the adjustments to the denominator assuming profitable years and the related number of anti-dilutive shares (in thousands):
 
    13-week period ended  
   
January 29, 2012
   
January 30, 2011
 
Basic weighted average shares outstanding
    11,875       11,815  
Effect of dilutive stock options
    -       67  
Diluted weighted average shares outstanding
    11,875       11,882  
 
For the most recent 13-week period presented, the effect of incremental shares related to dilutive stock options is anti-dilutive due to the market price of the shares being lower than the exercise price.  For the prior year period, the effect of incremental shares related to dilutive stock options is anti-dilutive due to net losses in the period.
 
16.   BUSINESS SEGMENT INFORMATION
 
Management has identified two operating segments.  Each operating segment is considered a reporting segment, which is described as follows:  Our Bingo segment is involved in the design, development, marketing, and leasing of interactive electronic bingo systems consisting of portable and fixed-based systems.  Our VLT segment is involved in the design, development, manufacture, and sale of gaming equipment consisting of video lottery terminals and other video gaming devices and the design, development and licensing of gaming content and software.
 
The Company records identifiable assets and costs for the Bingo and VLT segments within the respective segment.  General overhead costs of the Company are not allocated to the segments and are instead reflected as “Corporate” (see “Results of Operations”).  Corporate assets consist primarily of prepaid expenses, taxes receivable, and property and equipment.  Measurements of segment profit and loss as determined by management do not include items classified as other income (expense) or income taxes and therefore, these items are not allocated to the segments.  Information about the segments’ operations and assets (in thousands) follows:
 
   
January 29, 2012
   
January 30, 2011
 
             
Net revenues
       
 
 
Bingo
  $ 4,997     $ 6,534  
VLT
    3,254       3,568  
    $ 8,251     $ 10,102  
Cost of revenues
               
Bingo
  $ 1,802     $ 2,612  
VLT
    1,246       2,320  
    $ 3,048     $ 4,932  
Income (loss) from operations
               
Bingo
  $ 1,411     $ 1,966  
VLT
    1,427       685  
Corporate
    (1,933 )     (2,677 )
    $ 905     $ (26 )
Depreciation and amortization
               
Bingo
  $ 618     $ 1,107  
VLT
    266       245  
Corporate
    45       56  
    $ 929     $ 1,408  
                 
                 
   
January 29, 2012
   
October 30, 2011
 
Identifiable assets
               
Bingo
  $ 21,509     $ 21,684  
VLT
    4,382       4,856  
Corporate
    1,333       7,393  
    $ 27,224     $ 33,933  
 
17.   SUBSEQUENT EVENTS
 
The Company evaluates all subsequent events and transactions for potential recognition or disclosure in its financial statements and determined there are no matters requiring disclosure.
 
 
9

 
 
ITEM 2.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included elsewhere in this report, as well as our audited consolidated financial statements for the 52 weeks ended October 30, 2011, contained in our Annual Report on Form 10-K.

This document includes various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events. Statements containing expressions such as “believes,” “anticipates,” or “expects,” used in our press releases and periodic reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission (“SEC”), are intended to identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Although we believe our expectations are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurances that actual results will not differ materially from expected results. We caution that these and similar statements included in this report are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date hereof.

OVERVIEW
 
We design, develop, and market bingo gaming devices and bingo operation management systems, VLT’s, slot machines and related software. VLT’s, slot machines and related software are collectively referred to as “VLT business”. We report on a 52/53 week fiscal year. Fiscal years ended October 28, 2012 and October 30, 2011 both include 52 weeks. The next 53 week year will be the fiscal year ending November 1, 2015.
 
We are a domestic and international gaming technology company dedicated to the development and manufacturing of gaming entertainment products and systems. We hold a significant position in the North American bingo market with our interactive electronic bingo systems, portable and fixed-based gaming units, and complete hall management modules (our Bingo Segment).  We also hold a significant position in select North American VLT markets, primarily Montana, Louisiana, and South Dakota, where we offer video lottery terminals and related gaming equipment and software (our VLT Segment).  Historically, we have generated over 90% of our revenues domestically.  For the 2012 and 2011 13-week periods presented, 60.6% and 64.7% respectively, of our net revenue came from our Bingo segment.

We generate revenue by placing electronic bingo systems in bingo halls under contracts based on (1) a fixed fee per use per session; (2) a fixed weekly fee per terminal; or (3) infrequently a percentage of the revenue generated by each terminal. Revenue growth for our Bingo systems is affected by player acceptance of electronic bingo as an addition or an alternative to paper bingo.  Additionally, our revenue growth is dependent on our ability to expand operations into new markets and our ability to increase our market share in our current markets. Fixed-based bingo terminals generate greater revenue per terminal than portable bingo terminals, but also require a greater initial capital investment.  For the 2012 13-week period presented, approximately 76.5% of our bingo revenues were generated from our portable bingo systems as opposed to fixed-based bingo units, compared to 78.2% in the comparable prior year period.  Based on historical seasonality, fiscal first quarter bingo revenue is the second highest quarter.
 
We typically install our electronic bingo systems at no charge to our customers. We capitalize and amortize the installation costs, which have not been material, over the expected contract term. The cost of the bingo equipment is depreciated over its estimated useful life of three to five years using the straight-line method.
 
Our VLT business generates revenue from the sale of VLT's (new and used), software conversion kits, content fees, license fees, participation fees, parts, and services. For the 2012 and 2011 13-week periods presented, 67.9% and 98.5%, respectively, of our VLT business sales were derived from the sale of new and used equipment, conversion kits, and parts.  Increasing market share, replacement of outdated equipment in existing markets and expanding product placement into new markets drive revenue growth.

Our bingo and VLT expenses consist primarily of service costs associated with our bingo segment and product costs associated with the VLT segment (cost of revenue), general and administrative expense, sales and marketing expense, and research and development expense. Service costs associated with our bingo segment consist primarily of payroll and related expense, depreciation and maintenance of equipment placed, and regulatory fees. Product costs associated with the VLT segment includes primarily parts, payroll and related assembly costs associated with the manufactured products, including the write-off of excess and obsolete inventory. General and administrative costs consist of expenses associated with management of our company and the related support; including finance and accounting, legal, compliance, information systems, human resources, allowance for doubtful accounts receivable, and amortization of intangible assets acquired from the Summit acquisition. Sales and marketing expenses consist primarily of commissions paid to distributors for promoting and supporting our products, and compensation paid to our internal sales force to manage existing customers, to generate new customers, and to sell additional and upgraded equipment. Research and development costs consist primarily of payroll and related expense and component parts related to the design, development, and testing of new or materially enhanced games or game themes for our VLT and slot machines, and to develop and test new or materially enhanced wireless server-based bingo systems and improved bingo terminals.
 
For the 2012 13-week period presented, we attainted a pre-tax net income of $0.9 million, or $0.08 per share.  The pre-tax income of $0.9 million represents a $1.2 million improvement over the comparable prior year period.  G&A expenses for the most recent period presented increased from the 2011 period due to increases in legal fees and adjustments made to estimated distributor commissions in 2011 offset in part by reductions in management fees and employee costs.  Sales and marketing expenses for the 2012 period presented decreased compared to 2011 due to reduced distributor commissions and reductions in promotional costs.  Research and development expenses for the most recent period presented decreased compared to 2011 due to lower salaries and wages resulting from staff reductions.  There were no impairments of assets held for sale in the first quarter of the current year as compared to $0.4 million in the prior year period.

As a result of the Internal Revenue Service’s (IRS) examination of the Company’s U.S. income tax returns for the fiscal year ended October 31, 2007 the IRS has proposed certain adjustments to the depreciable life used in calculating federal tax depreciation on the Company’s leased electronic bingo systems.  The Company has accrued tax, interest and penalties totaling $1.3 million and filed a petition with the IRS Tax Court challenging the IRS proposal.  The Company is seeking to remand the appeal back to the IRS appeals office.  If the IRS prevails, any required payment would be offset by the additional depreciation benefits on amended returns for subsequent years resulting in a cashless settlement, except for possible interest and penalties, if any.

For the status of the Company’s borrowing arrangements, see Note 9 to the Unaudited Consolidated Financial Statements.
 
 
10

 
Business Segments

Bingo - As of January 29, 2012, we had bingo devices, games, and systems in service in 38 states, various Native American locations, the Philippines, and Canada.  We market portable, handheld and stationary, fixed-base bingo player devices; unique electronic and paper bingo games, such as Big Bad Bingo™ (“B3”™) and Crystal Ball Bingo®; other related for-fun games, such as solitaire; and bingo management systems.  Our devices display electronic bingo card images for each game and assist the players in managing and marking their bingo cards in physical bingo facilities operated in charitable, Native American, commercial, and military locations.  These devices enable players to purchase and play substantially more bingo cards compared to paper cards, typically leading to more fun and greater spend for the player and increased profits for the operator.  Our bingo management systems, such as Diamond Plus®, AllTrak 2®, and our newest system, the GameTech Edge Bingo System®, provide bingo operators with important information regarding the profitability of their bingo hall(s), inventory systems, and player tracking demographics, among other modules.  We generally enter into one to three year contracts with bingo operators for the use of the bingo devices and management systems.
 
During fiscal 2011 and through the first quarter of fiscal 2012, deployment of the GameTech Edge Bingo System™ grew to nine states and one province in Canada and the Philippines.  Further enhancements to the GameTech Edge Bingo System™ were released during the final quarter of fiscal 2011, which were coupled with the release of our newest hand held bingo device, the Explorer II™.  The Explorer II™ provides the advanced functionality of the Explorer at a substantially lower production cost, making this product available to a wider variety of customers.  The Explorer II™ received Gaming Laboratories, Inc. (GLI) National Indian Gaming Commission (NIGC) certification in the first quarter of fiscal 2012 and a successful field trial was completed in Clovis California in November 2011.  The new Explorer II™ was installed in Newkirk, Oklahoma on the GameTech EDGE Bingo System™ in late January on the GameTech Edge Bingo System™.

During fiscal 2011, the Company’s management also developed and implemented certain strategic plans focused on the introduction of new bingo products and systems, including (1) a new stand-alone bingo verification system, known as the “Bingo Boss™”, which was introduced in December 2011 on a limited basis, (2) the development of our next generation bingo management system, “GameTech Phoenix™”, and (3) development of a new low production cost portable bingo device.  The GameTech Phoenix™ system, which is expected to be introduced during fiscal 2012, is being designed to perform all the functions of previous operating systems as well as the capabilities needed to satisfy the needs of larger tribal casinos and commercial bingo halls and casinos.  These operators demand a higher level of security and accountability as well as an enhanced set of functional features, which the GameTech Phoenix™ system will support.  The GameTech Phoenix™ system also addresses a number of customer entertainment needs and allows GameTech to focus on different variations of the game of bingo and offer unique bingo game content. The system was redesigned from the ground up based on the experience of past products as well as emerging technologies not available during the design of previous products.  The new low production cost portable bingo device has also been designed from the ground up and is expected to offer a unique form-factor and more engaging user interface.
 
VLT – We also manufacture and sell video lottery terminals (VLT’s), associated gaming equipment, related software, and game content, collectively called the “VLT business.”  We entered the VLT business on March 28, 2007 with our acquisition of substantially all of the assets of Summit Amusement & Distributing, Ltd.  Our VLTs are typically sold to route operators, bar or tavern gaming operators, and distributors.

During fiscal 2011, our VLT product development efforts remained focused on products specifically designed for several new markets as well as providing new and improved platforms and game content to our existing markets.  During fiscal 2011, we also increased our efforts in pursuing game content licensing opportunities through other manufacturers and distributors of gaming products.  We continue to develop market specific products and games.  However, our ability to continue to develop these VLT products, and our ability to continue to develop new bingo products, in order to penetrate new markets and maintain and grow existing markets will largely depend on our ability to generate increased cash and/or raise additional capital as may be restricted by capital expenditure limits imposed by our lenders under our existing credit facility.  For additional information, see discussion within this Item under “Liquidity and Capital Resources.”

On October 31, 2011, the Company entered into a License Agreement with AGS, LLC (d/b/a American Gaming Systems) (“AGS”), pursuant to which the Company granted AGS the exclusive right to utilize five (5) game titles from the Company’s library of poker, keno, line-up, and blackjack VLT games (the “VLT Game Titles”), in connection with video gaming machines sold, leased, or otherwise placed by AGS in the state of Illinois.  The license includes the intellectual property rights associated with each of the five individual VLT Game Titles selected by AGS, including the game themes, graphical artwork, video images, audio features, math models, methodologies, and all patents, trademarks, logos and other intellectual property associated therewith.  The Company retains all right, title and interest to the VLT Game Titles (including the right to sell, lease or license such titles outside Illinois), except as expressly granted to AGS under the License Agreement.

In consideration for the license, AGS agreed to pay the Company a non-refundable license fee of $1.0 million which was paid on November 8, 2011.  The License Agreement also includes an option for AGS to license additional games for use in Illinois from the Company and a right of first refusal and option to license newly developed games for the Illinois market, in exchange for $200,000 per game selected.  This option and right of first refusal will be available to AGS for a period of three years.

Q1 2012 Highlights

During the 13 weeks ended January 29, 2012, we produced a net income of $0.9 million, compared to a net loss of $0.3 million for the 13 weeks ended January 30, 2011.  Significant factors attributing to the improvement include:

·
$1.0 million in licensing revenue received for five VLT game titles in Illinois.
·
$0.9 million reduction in operating expenses.
·
$0.5 million settlement received from Lehman Brothers.
·
$0.3 million reduction in employee costs.

Other significant events with no income statement impact during the 13-week period ended January 29, 2012 include:
·
$6.125 million for the sale of the Company’s headquarters building at no gain or loss, $0.445 million impairment was recognized in the 2011 13-week period.

Significant subsequent events (see Note 17), occurring after the 13 weeks ended January 29, 2012 include:
·
None.
 
 
11

 
 
COMPARATIVE RESULTS OF OPERATIONS ~ 13-WEEK PERIODS ENDED JULY 31, 2011 AND AUGUST 1, 2010

Summary Table

The following table sets forth certain selected unaudited condensed consolidated financial data for the 13-week periods indicated: 
 
13 Week Periods Ended January 29, 2012 and January 30, 2011
(In Thousands)
  Consolidated     Bingo     VLT     Corporate  
 
13 Week
   
13 Week
   
$ Change
   
$ Change
   
% Change
   
$ Change
   
% Change
   
$ Change
   
% Change
 
 
Period Ended
   
Period Ended
   
Favorable/
   
Favorable/
   
Favorable/
   
Favorable/
   
Favorable/
   
Favorable/
   
Favorable/
 
 
1/29/2012
   
1/30/2011
   
(Unfavorable)
   
(Unfavorable)
   
(Unfavorable)
   
(Unfavorable)
   
(Unfavorable)
   
(Unfavorable)
   
(Unfavorable)
 
Net Revenue
$ 8,251     $ 10,102     $ (1,851 )   $ (1,537 )     (23.5 %)   $ (314 )     (8.8 %)   $ -       - %
                                                                       
Cost of revenues, excluding depreciation & amortization
  2,413       3,838       1,425       330       21.6 %     1,095       47.4 %     -       - %
Depreciation and amortization
  635       1,094       459       480       44.4 %     (21 )     (175.0 %)     -       - %
    3,048       4,932       1,884       810       31.0 %     1,074       46.3 %     -       - %
                                                                       
Gross Profit
  5,203       5,170       33       (727 )     (18.5 %)     760       60.9 %     -       - %
Operating Expenses:
                                                                     
General and administrative
  1,819       1,706       (113 )     (29 )     - %     (271 )     (101.9 %)     187       9.5 %
Sales and marketing
  1,309       1,816       507       298       19.8 %     111       62.7 %     98       72.6 %
Research and development
  876       915       39       (106 )     (24.8 %)     142       33.9 %     3       4.3 %
Depreciation and amortization
  294       314       20       9       36.0 %     -       - %     11       19.6 %
Impairment loss, assets held for sale
  -       445       445       -       - %     -       - %     445       100.0 %
    4,298       5,196       898       172       8.8 %     (18 )     (3.2 %)     744       27.8 %
                                                                       
Income (loss) from operations
  905       (26 )     931     $ (555 )     (28.2 %)   $ 742       108.3 %   $ 744       27.8 %
                                                                       
Other income (expense) (1):
                                                                     
Interest expense
  (488 )     (387 )     (101 )                                                
Other, net
  504       172       332                                                  
Income (loss) before income taxes (benefit)
  921       (241 )     1,162                                                  
                                                                       
Income taxes
  63       47       (16 )                                                
                                                                       
Net income (loss)
$ 858     $ (288 )   $ 1,146                                                  
 
 (1) Measurement of segment profit and loss as reviewed by management do not include other income (expense) items and income taxes as these items are not allocated to the segments.
 
 
12

 
 
Net revenues

The decrease in Bingo net revenue is due to competitive pressures that resulted in the loss of locations and price reductions and hall closures caused by adverse economic conditions, particularly in the charitable bingo market.  The decrease in VLT net revenues is from a reduction in the sale of new equipment versus replacement parts.
 
Cost of revenues

The decrease in Bingo cost of revenue was primarily driven by lower contract labor in Florida, Louisiana and Colorado at the bingo halls and lower equipment refurbishment costs.  The decrease in VLT cost of revenues is related to a decrease in cost of components.

Gross profit

Although Bingo gross profit declined, gross margin improved 3.9 percentage points due to reductions in contract labor and decreases in depreciation and amortization.  VLT gross profit increased, with VLT gross margin improving 26.7 percentage points from the prior year period due to the reduction in cost of component parts.

Operating expenses

General and administrative.  The increase in Bingo general and administrative operating expenses was due to recording a small bad debt expense in the current period compared to none in the prior period.  The increase in VLT general and administrative operating expenses was from receivable reserve credits made to bad debt in the prior period.  Corporate general and administrative operating expenses improved from decreases in management fees, employee costs and bad debt, partially offset by increases in legal fees.

Sales and marketing.  Bingo sales and marketing expenses improved primarily due to lower distributor commissions based on lower revenues and reductions in promotional costs.  The decrease in VLT sales and marketing expenses was related to reductions in promotional expenses and decreases in employee costs.

Research and development.  Bingo research and development expenses increased as a result of higher employee costs.  VLT research and development expenses decreased as a result of reductions in employee costs.

Depreciation and amortization.  Depreciation and amortization decreased as a result of other minor assets included with the sale of our corporate headquarters no longer being depreciated.
 
 
13

 
 
Impairment of asset held for sale.  During the quarter ended January 29, 2012, the real estate housing the Company’s headquarters was sold for $6.125 million.  The property was not impaired prior to being sold in the most recent period presented.  During the quarter ended January 30, 2011, management recorded $0.4 million in impairments.

Other income (expense)

Interest expense.  Interest expense was impacted unfavorably by the swap adjustment and debt amortization costs and by a favorable change in interest costs resulting from market factors.

Other, net.  Increases in other, net are related to the settlement from Lehman Brothers as discussed in the 2011 Form 10-K.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet dates and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts receivable, obsolescence, impairment of goodwill and long-lived assets, impairment of investments, loss contingencies, provision for income taxes, and stock based compensation. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, and complex judgment. These critical accounting policies are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2011 Form 10-K. There have been no changes to our critical accounting policies since the filing of our 2011 Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

As of January 29, 2012, our principal sources of liquidity included cash and equivalents of $0.8 million, and net accounts receivable of $2.7 million.  As of January 29, 2012, we had negative working capital of $15.6 million compared to a negative working capital of $22.6 million as of October 30, 2011, a positive change of $7.0 million.  The negative working capital is the direct result of classifying our Credit Facility as currently payable because it is due within less than one year (June 30, 2012), assuming we are unable to meet the prerequisites for an automatic extension through June 30, 2013.  The increase in working capital of $7.0 million is primarily due to $7.0 million related to pay downs on our Credit Facility and a change in the estimated value of our interest rate swap.

Operating Activities:

Operating activities provided $1.5 million of cash for the 2012 13-week period presented, compared to using $0.6 million for the comparable period in 2011.  The improvement of over $2.0 million resulted primarily from a single licensing transaction for five VLT game titles in Illinois of $1.0 million, a $0.5 million settlement received from Lehman Brothers and other improved operating margins.

During the 2011 13-week period, cash used in operating activities resulted primarily from a net loss of $0.3 million, including certain non-cash changes in our operating assets and liabilities.  Both the partially offsetting decreases in deferred revenue and inventory was the result of the substantial completion of the 2008 Purchase, Sale and Software Development Agreement with Rocky Mountain Industries, LLC in our VLT segment.

Investing Activities:

Investing activities provided approximately $4.9 million of cash during the most recent 13-week period presented compared to $0.4 million used for the comparable period in 2011.  The $4.9 million of cash provided primarily consisted of the purchase of bingo equipment for $1.5 million, purchase of intangibles of $0.1 million offset by $5.9 million from the sale of the Company’s corporate headquarters, and reductions in deposits of $0.7 million on purchases of bingo equipment.

During the 2011 13-week period, investing activities used approximately $0.4 million of cash, primarily consisting of $0.4 million of capital expenditures for bingo equipment, furniture, and other equipment.

The Company’s approved capital expenditures are $2.5 million for fiscal 2012, and is anticipated to be funded out of operations.

Financing Activities:

Financing activities used $6.9 million during the 2012, 13-week period consisting of $6.9 million to pay down a portion of the outstanding balance under our Credit Facility and $0.2 million in closing fees incurred as a result of amending our Credit Facility, offset by a net $0.2 million provided by restricted cash and proceeds from borrowings.  Financing activities provided less than $0.1 million during the 2011 period consisting of a $2.2 million reduction in restricted cash offset by debt repayments.

As of September 4, 2011, the Company determined that it was not in compliance with certain covenants contained in the amended and restated loan agreement.  On December 22, 2011, the Company and the lenders entered into a first amendment to the amended and restated loan agreement and waiver of defaults.  The first amendment, among other things: (i) modifies certain financial covenants; (ii) incorporates the lender’s consent to the sale of the Company’s corporate headquarters (which occurred on December 28, 2011); (iii) requires the Company to maintain at least $350 thousand in liquidity through January 31, 2012 and at least $500 thousand in liquidity at all times thereafter; and (iv) waives any and all prior events of default.
 
 
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Under the terms of the first amendment, the net cash proceeds of $6.125 million from the sale of the corporate headquarters were applied to pay: (i) an amendment fee equal to $214 thousand, representing one percent (1.00%) of the outstanding balance of the credit facility as of December 22, 2011; (ii) all fees and interest due and payable as of the sale date (including all current interest, all deferred interest accruing from June 15, 2011 through the sale date, and the remaining portion of a closing fee ($368 thousand), related to the Company’s entry into the amended and restated loan agreement); and (iii) the outstanding principal balance under the credit facility.

The first amendment also modified certain covenants contained in the amended and restated loan agreement, and (i) requires the Company to apply 75% of its excess cash flow as of the end of each fiscal quarter towards the satisfaction of its obligations under the credit facility; (ii) to the extent liquidity exceeds $1.5 million at any time, requires the Company to apply such excess towards the satisfaction of its obligations under the credit facility; and (iii) prohibits capital expenditures for any use other than purchases of equipment for leasing to customers in the ordinary course of business, and limits the amount of capital expenditures that may be made by the Company.

As of December 28, 2011, after giving effect to an unscheduled principal payment of $1.5 million on December 9, 2011, and the application of the net cash proceeds of $6.125 million from the sale of the corporate headquarters, the outstanding balance and interest rate under the credit facility was approximately $16.6 million and 9.79%. Principal and interest of approximately $9.7 million under the credit facility from June 30, 2011 to June 30, 2012, (inclusive of approximately $8.8 million of principal and interest already paid) is required for us to remain compliant with the covenants of the credit facility.  We expect to make the required additional principal payments of $0.9 million under the credit facility through June 30, 2012. In addition, in order to extend the maturity date of the credit facility, the Company must also have (i) an adjusted cash flow leverage ratio of less that 3 to 1 as of April 30, 2012 and (ii) consolidated operating profit (as defined in the agreement) for the twelve-month period ending April 30, 2012 of at least $3.7 million.  Should the Company not meet these requirements for extending the maturity date of the credit facility, it will seek a modification of the terms and/or other remedies that are available to it.  Assuming the maturity date is extended to June 30, 2013, the Company will be required to pay approximately $4.5 million of principal and interest during the year ending June 30, 2013 plus a final principal payment of $12.2 million on June 30, 2013.
 
Historically, the Company has financed its operations primarily through cash from operations and debt financing activities.  However, until the most recent period presented, the Company has suffered reoccurring losses from operations since the quarter ended April 30, 2008 and has been in and out of compliance with its loan agreement.  For additional information regarding our amended and restated loan agreement, see Note 9 to the Consolidated Financial Statements.

Unless the Company is able to continue to generate and sustain sufficient cash from existing operations and/or raise additional capital, the Company may not be able to meet its anticipated cash needs for the next 12 months.  Management is currently exploring strategic alternatives that are available to the Company in order to meet its operating and capital needs, including debt extension and refinancing alternatives, business combinations, and strategic partnerships and the possible sale of Company assets.  If the Company is unsuccessful in these efforts, the Company may not be able to satisfy its debt obligations, invest in the resources necessary to obtain regulatory approvals in new markets, continue the development and deployment of current and new products, and/or respond to competitive market pressures and requirements.  Our failure to generate sufficient cash through operations and strategic alternatives would adversely affect our business and, ultimately, lead to the financial and operating failure of the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, FASB issued an update (ASU No. 2011-04) to ASC 820, Fair Value Measurements and Disclosures, to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS.  This update is effective for interim and fiscal years beginning after December 15, 2011.  This pronouncement was adopted during the most recent period presented and did not have a material impact on the consolidated financial statements.  There were no other new accounting pronouncements that had a material impact on our financial statements during the most recent period presented.

No recently issued accounting pronouncements not yet adopted are expected to have a material impact on our financial position, results of operations, or cash flows.

ITEM 3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

ITEM 4.                      CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of January 29, 2012. Based on that evaluation, our management has concluded that our disclosure controls and procedures were effective as of that date.
 
 
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Internal Control over Financial Reporting

Management’s Report on Internal Control over Financial Reporting

Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Management is responsible for establishing and maintaining adequate internal control over our financial reporting.

We have evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting as of January 29, 2012.  This evaluation was performed using the Internal Control – Integrated Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) was effective as of that date.

Changes in Internal Control over Financial Reporting
 
 
There have been no changes in the Company's internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

PART II.        OTHER INFORMATION:

ITEM 1.          LEGAL PROCEEDINGS

For a discussion of our current litigation, see Note 12 (Legal Proceedings) to our unaudited consolidated financial statements included herein.

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
 
 
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ITEM 6.          EXHIBITS

Exhibit
 
Number
Description of Exhibit

3.1
Certificate of Incorporation of the Registrant, as amended (1)
3.2
Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant (6)
3.3
Fourth Amended and Restated Bylaws of the Registrant (7)
4.1
GameTech International, Inc. Registration Rights Agreement (2)
4.2
Rights Agreement, dated as of March 7, 2003, between GameTech International, Inc. and Mellon Investor Services, LLC, as rights agent. (4)
4.3
Amendment No. 1 to Rights Agreement dated as of July 16, 2009, between GameTech International, Inc. and Mellon Investor Services, L.L.C., as rights agent. (5)
4.4
Specimen Common Stock Certificate (6)
10.9
Purchase and Sale Agreement and Joint Escrow Instructions between GameTech International, Inc. and Kassbohrer All Terrain Vehicles, Inc., dated as of November 2, 2011 (11)
10.10
First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions between GameTech International, Inc. and Kassbohrer All Terrain Vehicles, Inc., dated as of December 13, 2011 (11)
10.12
First Amendment to Amended and Restated Loan Agreement and Waiver of Defaults between the Registrant and the lenders named herein, and U.S. Bank N.A., as collateral and administrative agent, dated as of December 22, 2011 (10)
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated by the Securities Exchange Act of 1934, as amended
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
101.INS** XBRL Instance
 
101.SCH** XBRL Taxonomy Extension Schema
 
101.CAL** XBRL Taxonomy Extension Calculation
 
101.DEF** XBRL Taxonomy Extension Definition
 
101.LAB** XBRL Taxonomy Extension Labels
 
101.PRE** XBRL Taxonomy Extension Presentation
** XBRL
Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
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EXHIBIT INDEX


(1)
Incorporated by reference to Exhibits 2.1 and 10.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-34967) as filed with the Commission on or about September 4, 1997.
(2)
Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-34967) as filed with the Commission on or about October 17, 1997.
(3)
Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-72886) as filed with the Commission on or about November 7, 2001.
(4)
Incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 7, 2003 as filed with the Commission on or about March 10, 2003, Commission File No. 000-23401.
(5)
Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated July 16, 2009 as filed with the Commission on or about July 20, 2009, Commission File No. 000-23401.
(6)
Incorporated by reference to Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2003 as filed with the Commission on or about March 17, 2003, Commission File No. 000-23401.
(7)
Incorporated by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2004 as filed with the Commission on or about March 16, 2004, Commission File No. 000-23401.
(8)
Incorporated by reference to Exhibits 10.34(a), (b), (c) and (d) to the Registrant's Current Report on Form 8-K dated March 28, 2006 as filed with the Commission on or about April 3, 2006.
(9)
Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on June 20, 2011.
(10)
Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated December 22, 2011 as filed with the Commission on or about December 29, 2011.
(11)
Incorporated by reference to Exhibits 10.9, 10.10 and 10.12 to the Registrant’s Annual Report on Form 10-K for the period ended October 30, 2011 as filed with the Commission on or about February 2, 2012, Commission File No. 005-52969.
 
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SIGNATURES

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
GameTech International, Inc.
 
 
Signature   Title   Date
         
/S/ Kevin Painter   Chief Executive Officer    
    (Principal Executive Officer)   March 14, 2012
         
/S/ Andrew Robinson   Chief Financial Officer    
    (Principal Financial and Accounting Officer)   March 14, 2012
 
 
 
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