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EXCEL - IDEA: XBRL DOCUMENT - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCFinancial_Report.xls
EX-32 - ILTS FORM 10-K FY12 EXHIBIT 32 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCexhibit32.htm
EX-21 - ILTS FORM 10-K FY12 EXHIBIT 21 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCexhibit21.htm
EX-31 - ILTS FORM 10-K FY12 EXHIBIT 31 - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INCexhibit31.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended April 30, 2012

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 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)

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Shares, no par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasonal issuer, as defined in Rule 405 of the Securities Act.     Yes  No ý
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.     Yes  No ý
 
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 No o

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 No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K.     ý

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  No ý
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of October 31, 2011 was approximately $1,078,128 (based on a closing price of $0.29 per share as reported on the OTC Bulletin Board on such date).  Shares of the registrant's common stock held by each officer and director of the registrant and by each person or entity who is known to own beneficially 5% or more of the registrant's outstanding common stock have been excluded for purposes of the foregoing calculation on the basis that such persons and entities may be deemed to be affiliates of the registrant.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s Common Stock, no par value, as of July 6, 2012 was 12,962,999.

DOCUMENTS INCORPORATED BY REFERENCE
 
None
 
TABLE OF CONTENTS

PART I
     
ITEM 1.
     
4
     
ITEM 1A.
     
8
     
ITEM 1B.
     
11
     
ITEM 2.
     
11
     
ITEM 3.
     
11
     
ITEM 4.
     
12
     
PART II
 
ITEM 5.
 
           
13
 
     
ITEM 6.
           
13
     
ITEM 7.
 
           
14
 
     
ITEM 7A.
           
18
     
ITEM 8.
           
19
     
ITEM 9.
 
           
33
 
     
ITEM 9A.
           
33
     
ITEM 9B.
           
33
     
PART III
 
ITEM 10.
           
34
     
ITEM 11.
           
36
     
ITEM 12.
 
           
38
 
     
ITEM 13.
           
38
     
ITEM 14.
           
39
     
PART IV
     
ITEM 15. 
   
   40
 
SIGNATURES
 
 
2   

 
NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
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.
 
 
3
 
PART I

ITEM 1.
BUSINESS

The terms “ILTS,” “the Company,” “we,” “our” and “us” refer to International Lottery & Totalizator Systems, Inc. and its consolidated wholly-owned subsidiary, Unisyn Voting Solutions, Inc. (“Unisyn”), unless otherwise specified.

Organizational History

We are a leading supplier of computerized wagering systems for the lottery and pari-mutuel racing industries.  In addition, in recent years, our company has developed 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.  
 
ILTS was founded in 1978 and completed an initial public offering in 1981.  Our subsidiary, Unisyn, was founded in 2003. Our operations and corporate headquarters are located in Vista, California.

Business Overview

We design, develop and provide secure, innovative and dependable gaming and voting processing systems for public and private organizations throughout the world.  We provide a complete range of customized and technologically innovative software, hardware, technical support and site management for our customers’ gaming or voting operations.  We believe our responsiveness to customer requirements in these mission critical operational areas is efficient, technologically superior, dependable and continuous over time. 

Lottery and Pari-Mutuel Segment

We generate revenue by designing, manufacturing, licensing, managing, supporting, and servicing computerized wagering systems and terminals for the lottery and pari-mutuel racing industries worldwide.

Voting Segment

We generate revenue by developing, manufacturing, licensing and supporting voting systems for the governmental and non-governmental election jurisdictions in the United States under the name of Unisyn Voting Solutions, Inc.

Products and Services

Wagering Systems

Our wagering systems include the following components:

·  
A central computer installation that is comprised of computer hardware and a commercially available operating system used in conjunction with our proprietary DataTrak application software;
·  
The Datamark and Intelimark families of point-of-sale terminals; and
·  
The communication network to interface the terminals to the central computer installation.

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.

Our DataTrak gaming system controls the overall lottery operation.  Although to date it has been sold only in conjunction with our terminals, DataTrak can also be sold as a stand-alone system that will interface to third-party terminals.  Likewise, the terminals can be, and have been, sold separately to interface to a third-party lottery/tote central systems.

The point-of-sale, proprietary components of our systems are the Datamark and Intelimark families of ticketing terminals.  These terminals are compact, reliable, microprocessor-based units, which scan marksense slips or interpret operator-input data in order to produce a ticket receipt to be retained by the customer.

We sell these terminals separately or as part of a turnkey wagering system, or we modify a terminal's features or configurations and central system software to meet specific customer requirements.

Using commercially available hardware and software, we design the communication network to interface the DataTrak central system with the wagering terminals to best fit each customer’s specific telecommunications environment.

Our technology can also be modified for use in secure transaction-processing applications outside the gaming industry.  For example, we previously provided a toll-road ticketing system utilizing automated ticket printers and readers.
 
 
4
 


Wagering Application Software

The principal component of our wagering system is the suite of applications that make up our DataTrak central system.  The central system controls the operation of the entire lottery installation, and it performs the following functions:

·  
Maintains communication with each point-of-sale terminal;
·  
Ensures complete end to end security;
·  
Logs all activity and wagers in multiple (redundant) locations;
·  
Populates a commercially available database in real time with high level security;
·  
Identifies tickets using the lottery game draw results;
·  
Calculates the pari-mutuel prize pool amounts that are used to determine the dividend of a given winning ticket;
·  
Allows the use of other third party software products to analyze and compile management data; and
·  
Provides mission critical fault tolerance.

Development of this software has been an evolutionary process.  We continually strive to incorporate new and improved technologies as they become available in the marketplace.  This allows us to take advantage of the latest technology trends to enhance existing features of our system, and also to provide new distribution channels and operational features so that our customers can reach new or expanding markets.  Since our software architecture is non-proprietary, it can be interfaced with our customers' choice of third party reporting and analysis software tools.  The DataTrak system employs a client-server architecture.  This gives customers the advantage of configuring the system economically to meet current requirements, while maintaining the ability to expand or contract the system as their operation demands.
 
Datamark and Intelimark Terminals

We have supplied in excess of 50,000 terminal products to the wagering industry since our first unit was sold in 1980.  We currently have two families of full feature terminals in production: the Datamark and the Intelimark, both of which are:
 
·  
Based on PC architecture and utilize commercially available software operating systems;
·  
Small, lightweight, and highly reliable; and
·  
Programmed using standard software languages.
 
We have developed many models of Datamark terminals throughout our company’s history.  One of the versions in the Datamark family is the XClaim terminal.  Its optical mark reader and thermal printer require little or no adjustments or maintenance.  It is economically priced and extremely easy to use with features that increase operator efficiency and reduce transaction time.  The XClaim can be programmed to meet the specific operating requirements of each individual customer.  A keyboard is provided for operator input and an LCD displays the wagering details.

The Intelimark family was introduced in 1999 and incorporates commercially available hardware and software from strategic partners.  Our current version, the Intelimark FLX terminal is a modular touch screen lottery terminal packaged to offer maximum flexibility for retailer convenience.  All components that make up the complete terminal are freestanding modules that can be arranged to meet the unique physical requirements of each retailer location.  Driven by the market demand for enhanced ticket reading capability, the Intelimark FLX is equipped with a high-speed contact image scanner that will accept up to A4 size slips and is capable of character recognition and signature capture.  Its modular design, open architecture and PC-based technology provide a flexible platform that is intended to quickly and economically respond to the dynamic needs of both players and retailers.

Spare Parts

In addition to sales of terminals and central system software and hardware systems, we also realize ongoing revenue from the sale of spare parts for use in the repairs and maintenance of the terminal population.
 
Software and Technical Support Agreements

We offer software maintenance agreements which feature:

·  
telephone hotline, onsite and e-mail support;
·  
standard upgrades and patches; and
·  
primary technical support for third party software products purchased through ILTS.

Additionally, we offer software modifications and enhancements to satisfy specific customer requirements.
 
 
5
 


Voting Systems

In recent years, Unisyn has devoted significant resources in developing certified end-to-end optical scan voting systems and a full-featured Election Management Software (“EMS”) 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”), our company received the 2005 Voluntary Voting System Guidelines (“VVSG”) certification from the Election Assistance Commission (“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, we provide the OpenElect® products’ source code for independent review.

Our OpenElect® voting systems consist of the following components:

·  
OpenElect® Central Suite is a Linux-based suite of software applications including the Ballot Layout Manager, Election Manager, Election Server, Tabulator Client, Tabulator and Tabulator Reports.  The applications work together to define and configure an election supporting traditional methods of vote tabulation and including ranked choice voting tabulation;
·  
OpenElect® Voting Optical Scan is a comprehensive and secure paper-based digital optical scan voting system that both validates and tabulates ballots at each precinct or vote center, providing integrity, confidence and high levels of physical and software security;
·  
OpenElect® Voting Interface is a multi-faceted and robust voting device which has features to accommodate voters with disabilities and facilitate precinct voting, early voting and vote center voting, along with other non-geographical use.  This device meets or exceeds all the requirements of the Help America Vote Act (“HAVA”); and
·  
OpenElect® Voting Central Scan is a high-speed digital scan voting unit designed to tabulate election day, early vote, vote center, absentee, provisional and recounted ballots at a jurisdiction’s central operation center.

The OpenElect® 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;
·  
Reduce the cost of ballot printing while offering operational efficiencies;
·  
Minimal training required for poll workers to set-up and operate; and
·  
Minimal voter re-education required.

Election Management Software
 
The EMS, consisting of the Ballot Data Generator and the Vote Tabulator software applications that work together to perform the following functions:

·  
Define and configure an election;
·  
Program the InkaVote Plus PBCs and the OpenElect products;
·  
Provide camera ready encrypted ballot pages in PDF format;
·  
Compile and tabulate vote results; and
·  
Generate required reports.

The EMS is intended to provide complete control of the election process from ballot layout to report generation.  It utilizes streamlined menus and prompts to provide maximum flexibility and customization while guiding the user through each step in the process.  The system supports numerous languages in both standard and audible ballots.  The EMS creates the election specific database from information that can be imported manually and/or from an XML file.  The system easily integrates with other systems in use by the customer.
 
Product Markets

Our revenue from the sale of lottery and horse racing systems is almost exclusively derived from contracts with international customers.  

Revenue for software support and onsite technical support services is derived from providing the services to customers in the voting segment and related parties in the gaming segment.  We also derive revenue from selling our products and services directly to county election jurisdictions and distributors.
 
 
6
 


Competitive Business Conditions

Lottery and Pari-Mutuel Segment

We compete primarily in the lottery and horse racing industries by providing high-quality wagering systems and terminals that are reliable, secure and fast. In addition, we believe that we offer our customers greater flexibility in design and custom options than do our competitors.  The market for lottery system contracts is highly competitive. In general, our competitors have significantly greater resources than we do.  Although our sales in the United States have been insignificant, we believe that our company has been a substantial factor in the international marketplace for lottery systems.

Our principal competitors in the market are as follows:

· GTech Corporation, a subsidiary of Lottomatica, SpA (an Italian company);
· Scientific Games Corporation (a U.S. company);
· IntraLot, S.A. (a Greek company);
· Wincor-Nixdorf (a German company);
· KEBA, AG (an Austrian company);
· Morpho (a French company); and
· Olivetti Tecnost (an Italian company).

Voting Segment

The market for our OpenElect® voting systems is highly competitive and saturated.  However, the early 2005 EAC certification has given us the advantage of securing various state certifications which our competitors have yet to achieve.  We were the first manufacturer to receive the 2005 EAC certification for a digital based optical scan system.  Our enhanced security system has the ability to be modified easily for additional features to the current system.  This sets our products apart from the older and less flexible products of our competitors.  Our competitors are more established and have solid user bases in the market.  Although we are operating in a highly competitive environment, we believe we are well positioned to capture a fair share of the sales of optical scan voting systems.

Our principal competitors in the market are as follows:
 
· Election Systems & Software, Inc.;
· Dominion Voting Systems Corporation; and
· Hart InterCivic.
 
Manufacturing Processes

We assemble terminals, voting systems, repair modules, and supply spare parts from our domestic facility located in Vista, California.  During recent years, the design of certain high-production units has been streamlined.  This cost saving measure allows us to easily outsource the assembly of these units to local manufacturers based on production volume, while maintaining control over the materials and quality. 

Materials and Suppliers

For terminal and voting system components, including spare parts, we generally have multiple sources, but a limited number of items are available only from a single supplier.  Accordingly, those items could from time to time, be in short supply or on allocation due to their limited availability.  For the year ended April 30, 2012, two vendors accounted for approximately 37% of the Company’s lottery and voting product purchases (or 26% and 11% individually).  For the year ended April 30, 2011, three vendors accounted for approximately 67% of the Company’s lottery component purchases (or 25%, 24% and 18% individually). 
 
Dependence upon a Few Customers
 
Our business to date has been dependent on major contracts from a specific pool of lottery operators and limited customer base in the voting segment.  Failure to obtain new contracts from existing and new customers would have a materially adverse effect on our financial performance.
 
  Years Ended
  
April 30, 2012
 
April 30, 2011
Revenue:
     
From unrelated customers
One customer from the voting segment accounted for 32% of total revenue.
 
Two customers from the gaiming segment accounted for more than 26% of total revenue or 15% and 11% individually.
       
From related customers
Two customers from the gaming segment accounted for 49% of total revenue or 32% and 17% individually.
 
Two customers from the gaming segment accounted for 56% of total revenue or 40% and 16% individually.
 
 
7

 
Patents, Trademarks and Licenses
 
We have three U.S. patents issued on our products.  Although our intellectual property rights are important to our business, we believe our technical expertise, trade secrets and the creative skills of our personnel are more important to our company’s success.  We typically require customers, employees, licensees, subcontractors, strategic partners, and joint venture partners who have access to proprietary information concerning our products to sign nondisclosure agreements.  We rely on such agreements, other security measures, and trade-secret law to protect our proprietary information.
 
International Lottery & Totalizator Systems, Inc.®, ILTS® and Unisyn Voting Solutions, Inc.® are registered trademarks of our company.  We have other products that have been trademarked, such as DataTrak®, Intelimark® and OpenElect®, all mentioned herein.
 
Regulations
 
The countries in which we market our products generally implement regulations to govern lottery or horseracing operations, and the appropriate governing body could restrict or ban operations in these countries.  Any such action could have a material adverse effect on our company.  Additionally, the purchaser of voting systems by governments and municipalities are typically conducted through procurement regulations with which we must comply.

Foreign countries often impose restrictions on corporations seeking to do business within their borders, including foreign exchange controls, and in some jurisdictions, requirements for domestic manufacturing content.  In addition, laws and legal procedures in these countries may differ from those generally existing in the United States.  Conducting business in these countries may involve additional risks in protecting our business and assets, including proprietary information.  Changes in foreign business restrictions or laws could have a significant impact on our operations.

Research and Development

We continue to examine new and emerging technologies based upon current industry developments with the intention to increase our customers’ market share, to stay competitive in our market and to explore new markets where our core competencies can be applied.  For example, we have in the past invested resources to expand specific applications to run on the Linux operating system.  These Linux based applications are targeted at products used in both wagering and voting markets.
 
We dedicate our efforts to applying cutting-edge technology and developing innovative and secure voting solutions.
 
For the year ended April 30, 2012, we incurred $31,000, which consists primarily of labor costs for the development of new product in the lottery segment.  None of the R&D expenses were borne by our customers.  There were no R&D expenses incurred for the year ended April 30, 2011.

Environment Effects

There are no significant capital expenditures required to comply with laws relating to the protection of the environment.

Employees

As of April 30, 2012, we had 36 employees employed on a full-time equivalent basis.  We have no employees that are members of labor unions.  We believe our relationship with our employees is satisfactory.

Additional Information
 
As a public company, we file annual, quarterly and special reports and other information with the Securities and Exchange Commission (“SEC”).  Our electronic filings with the SEC (including our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports) are available, free of charge, on the SEC’s website at http://www.sec.gov.  On the investor relations section of our corporate website, www.ilts.com, we also make available, free of charge, our Annual Reports on Form 10-K, as soon as reasonably practicable, after we electronically file them with the SEC.  The contents of and the information on or accessible through our corporate website and our investor relations website is not a part of, and is not incorporated into, this report or any other report or document we file with or furnish to the SEC.
 
 ITEM 1A.
RISK FACTORS

Our business faces risks and uncertainties, including but not limited to, those discussed below and elsewhere in this report.  These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition.  Additional risks and uncertainties not presently known to us or that we do not presently consider significant may also impair our business or the trading price of our securities.

If we do not execute on our strategic initiatives, there could be a material adverse effect on our results of operations and financial condition.
The future success of our business will depend significantly on our ability to execute effectively and implement the strategic initiatives.  These initiatives consist of executing our market strategy including designing products to meet market trends and ensuring that an appropriate infrastructure is in place to meet the needs of customers; continuing to reduce product costs; and further improving the efficiency of operations, including lowering operating costs and enabling higher value services.
 
 
8

 
Successful execution of these initiatives depends on a number of factors including:

·  
The ability to attract and retain sufficient number of key technical employees and senior management personnel;
·  
Retaining customers by providing the necessary levels of support and service our products require;
·  
Our ability to develop and introduce new products or programs because of the inherent risks and uncertainties associated with product development, particularly in response to government regulations;
·  
The identification and introduction of the proper mix or integration of products that will be embraced by the marketplace;
·  
Our business may be subject to changes in laws, regulations and certification requirements with respect to our voting products;
·  
Due to the political nature of our voting business, there is a risk that election jurisdictions may decertify our voting products that had previously been certified; and
·  
The ability of our products and services to differentiate us from our competitors and for us to demonstrate that our products and services result in enhanced product quality, functionality and reduced costs.

Further, our success will depend upon our ability to maintain proper internal control and to enhance the performance of the existing procedures and processes to adequately support our operations, strategies and business objectives.

We are dependent on a few customers, which include customers which are related parties to the Company.
Our business to date has been dependent on major contracts from a few different customers.  During the fiscal year ended April 30, 2012, only three customers accounted for 81% of our total revenue.  Additionally, during the fiscal year ended April 30, 2012, two customers that accounted for 49% of our total revenue are related parties to our company.  The loss of one or more of these customers or failure to replace completed contracts with new contracts from existing customers would have a material adverse effect on our business.

Should we fail to successfully manage our key vendors, our financial results could be burdened.
Our arrangements with key vendors may make our operations vulnerable if those third parties fail to satisfy their obligations to our company due to changes in their own operations, financial condition, or other matters outside of our control.

If we fail to achieve favorable pricing from our vendors, our profitability could be adversely impacted.
Our profitability is affected by our ability to achieve favorable pricing with our vendors.  Our inability to establish a cost and product advantage, or determine alternative means to deliver value to our customers, may adversely affect our revenues, and profitability.
 
We could experience manufacturing interruptions, delays, or inefficiencies if we are unable to procure in a timely and reliable manner components and products from single-source or limited-source suppliers.
We maintain several single-source or limited-source supplier relationships, either because multiple sources are not available or because the relationships are advantageous to us due to performance, quality, support, delivery, capacity, or price considerations.  If the supply of a critical single- or limited-source product or component is delayed or curtailed, we may not be able to ship the related product in desired quantities and in a timely manner.  Even where multiple sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of revenues, which could harm our operating results.
 
Significant supplier capacity constraints, supplier production disruptions, supplier quality issues or price increases could increase our operating costs and adversely impact the competitive positions of our products.
Our reliance on third-party suppliers for parts and components used in our products exposes us to volatility in the availability of these parts and components.  A disruption in deliveries from our third-party suppliers, capacity constraints, production disruptions, price increases, or decreased availability of raw materials or commodities, could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs.  Quality issues experienced by third-party providers can also adversely affect the quality and effectiveness of our products and services and result in liability and reputational harm.
 
If we are unable to develop and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our operating results and competitive position may be harmed.
Our future success will depend on our ability, in a timely and cost-effective manner, to develop and introduce new products and enhancements to our existing products.  We must also achieve market acceptance for these products and enhancements.  If we do not successfully develop and achieve market acceptance for new and enhanced products, our ability to maintain or increase revenues will suffer.  Even if new and enhanced products are introduced to the market, we may not be able to achieve market acceptance of them in a timely manner.  The loss of a key customer, a reduction in sales to any key customer or our inability to attract new significant customers could materially and adversely affect our business, financial condition and results of operations.

Our operating results may fluctuate significantly from period to period.
In the highly competitive industries in which we operate, operating results may fluctuate significantly from period to period.  Hence, comparative results between periods may not be indicative of trends in revenue.  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 April 30, 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.

Interpretations and applications of policies regarding revenue recognition could cause us to defer recognition of revenue or recognize lower revenue and profits.
Revenue associated with the sale and licensing of our company’s voting system products and services will be recognized in accordance with accounting principles generally accepted in the United States (U.S. GAAP). As our transactions increase in complexity with the sale of multi-element products and services, negotiation of mutually acceptable terms and conditions can extend the sales cycle and, in certain situations, may require us to defer recognition of revenue on such licenses.  We believe that we are in compliance with U.S. GAAP; however these future, more complex, multi-product, multi-year license transactions may require additional accounting analysis to account for them accurately could lead to unanticipated changes in our current revenue accounting practices and may contain terms affecting the timing of revenue recognition.
 
 


Insurance
We maintain third party insurance coverage against various liability risks and risks of property loss.  While we believe these arrangements are an effective way to insure against liability and property damage risks, the potential liabilities associated with those risks or other events could exceed the coverage provided by such arrangements.

The requirements of complying with Section 404 of the Sarbanes-Oxley Act of 2002 may strain our resources and distract management.
Our company is not an accelerated filer as defined under the relevant SEC regulations; thus, we are only required to maintain and periodically certify that we have effective disclosure controls and procedures and internal control over financial reporting.

In order to continuously maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting and comply with Section 404 of the Sarbanes-Oxley Act, significant resources and management oversight may be required as we may need to devote additional time and personnel to legal, financial and accounting activities to ensure ongoing compliance.  The costs associated therewith could be significant.  In addition, the effort to prepare for these obligations and maintain effective internal controls may divert management’s attention from other business concerns, which could adversely affect our business, financial condition and results of operations.  

The voting segment of our business is critically dependent on our ability to obtain federal and state certification for our newly developed voting system products.
The markets for our voting products and services are affected by changing technology and regulatory industry standards.  Our ability to anticipate or respond to such changes and to develop and introduce new and enhanced products that meet all federal and state certifications on a timely basis will be a significant factor in our ability to expand, remain competitive and attract new customers.  We can give no assurance that we will achieve the necessary technological advances or have the financial resources needed to introduce new products or services on a timely basis or that we will otherwise have the ability to compete effectively in the markets we serve.

Our cash and cash equivalents could be adversely affected if the financial institution in which we hold our cash and cash equivalents fail.
Our cash and cash equivalents consist of highly liquid investments and certificates of deposits with original maturities of three months or less at the time of purchase.  However, our investments in money market funds are not insured. In addition, our cash balances in financial institutions may exceed the Federal Deposit Insurance Corporation (“FDIC”) limitation for coverage of $250,000.  We also reduce our exposure to credit risk by maintaining all of our cash balances with highly rated financial institutions.  While we strive to monitor our cash and cash equivalent balances regularly, these balances could be impacted if the financial institution in which we deposit fails or is subject to other adverse conditions in the financial or credit markets.  To date we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial and credit markets.

We may not receive significant revenues from our research and development efforts for several years, if at all.
Developing new products is costly, and the investment in product development often involves a long payback cycle.  We have and expect to continue investing in research and development and related product opportunities.  Enhancing our products and pursuing new product developments require high levels of expenditures for research and development that could adversely affect our operating results if not offset by revenue increases.  We believe that we must continue to dedicate resources to our research and development efforts to maintain our competitive position.  However, we might not expect to receive significant revenues from these investments for several years, if at all.

Our business competes on the basis of the security and integrity of our systems and products.
We believe that our success depends, in part, on providing secure products and systems to our customers.  Attempts to penetrate security measures may come from various combinations of customers, retailers, vendors, employees and others.  There can be no assurance that our business will not be affected by a security breach or lapse, which could have a material adverse impact on our results of operations, business or prospects.

Problems with product quality or product performance may cause us to incur substantial warranty expenses and may damage our market reputation and prevent us from achieving increased sales and market share.
Consistent with customary practice in our industry, we warrant our products and/or services to be free from defects in material and workmanship under normal use and service.  The possibility of future product failures could cause us to incur substantial expenses to repair or replace defective products. Furthermore, widespread product failures may damage our market reputation and reduce our market share and cause sales to decline.

Changes in domestic and foreign business restrictions or laws could have a significant impact on our operations.
The countries in which we market our products generally have regulations governing lottery or horseracing operations, and the appropriate governing body could restrict or ban operations in these countries.  Any such action could have a material adverse effect on our company and our customers’ operations.  Foreign countries often impose restrictions on corporations seeking to do business within their borders, including foreign exchange controls, and in some jurisdictions, requirements for domestic manufacturing content.  In addition, laws and legal procedures in these countries may differ from those generally existing in the United States.  Conducting business in these countries may involve additional risks in protecting our business and assets, including proprietary information.  Changes in foreign business restrictions or laws could have a significant impact on our operations.
 
Competitive pressures we face could harm our revenues and profits.
We compete for business opportunities against many domestic and foreign businesses.  In many cases, our competition has greater financial resources which may affect the outcome of a bid, regardless of the products and/or services that we have the capability of providing.  Also, in order to be competitive, we may price our products and services to a point where it could translate to lower revenues and profitability for our company.

Our business transactions may be subject to foreign currency fluctuation.
Our reporting currency is the U.S. dollar.  Sales are denominated almost exclusively in U.S. dollars.  Occasionally, sales have been effected in foreign currencies.  Fluctuations in exchange rates from reporting period to reporting period between various foreign currencies and the U.S. dollar may have an impact on revenue and expense.  Such effect may be material in any individual reporting period.
 
 
10 


We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.
Although we have not been the subject of any such actions, third parties may in the future assert against us infringement claims or claims that we have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them.  Third parties may in the future assert claims against our suppliers that such suppliers have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them.  If such infringement by our suppliers or us were found to exist, a party could seek an injunction preventing the use of their intellectual property or require us to take a license for the use of their intellectual property, either of which would have an adverse impact on our revenues.
 
Our voting systems might face adverse publicity including legal and political challenges which may negatively impact our operating results.
Due to the sensitivity of the general public to the reliability and security of voting systems, our company might be vulnerable to adverse publicity posed by certain advocacy groups challenging our products’ integrity and dependability.  These actions may negatively affect our financial results and customer relations.

Volatility of stock price
Our common stock is currently quoted on the OTC Bulletin Board.  Stocks quoted on the OTC Bulletin Board generally have limited trading volume and exhibit a wide spread between the bid/ask quotation.  Our stock price is affected by a number of factors, including quarterly variations in financial results, the competitive landscape, general economic and market conditions, and estimates and projections by the investment community.

The current global economic slowdown and credit crunch may adversely affect our business and financial condition in ways that we cannot predict.
The current global economic slowdown may have a negative effect on our business and financial condition.  We cannot predict the effect that the economic slowdown will have on us as it also impacts our customers, vendors and business partners.  We believe that the global credit crunch may negatively impact our potential and existing customers’ ability to obtain financing for lottery and voting projects which in turn may affect our ability to secure new contracts to generate revenue.   

Our strategic alliances may not result in the materialization of the anticipated benefits.
Part of our corporate strategy is to pursue growth through strategic alliances to gain access to new and tactically important geographies, and business opportunities and to capitalize on existing business relationships.  We may not realize the anticipated benefits of these alliances that we may enter into, or may not realize them in the timeframe expected.  These arrangements pose significant risks that could have a negative effect on our operations, including the potential failure to realize anticipated synergies, unanticipated costs and other unanticipated events or circumstances; and our possible inability to achieve the intended objectives of the arrangements.

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
In order to protect our proprietary technology, we rely in part on confidentiality agreements with our corporate partners, employees, contractors, and consultants.  These agreements may not effectively prevent the disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information.  In addition, others may independently discover our trade secrets and proprietary information.  Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Our common stock is subject to penny stock rules.
Our common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 (or $300,000 together with their spouse)).  For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale.  This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of such common stock.  Additionally, our common stock is subject to the SEC regulations for "penny stock."  Penny stock includes any non-NASDAQ equity security that has a market price of less than $5.00 per share, subject to certain exceptions.  The regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule set forth by the SEC relating to the penny stock market must be delivered to the purchaser of such penny stock.  This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the common stock.  The regulations also require that monthly statements be sent to holders of penny stock which disclose recent price information for the penny stock and information of the limited market for penny stocks.  These requirements adversely affect the market liquidity of our common stock.

We have never paid dividends on our common stock, and we do not anticipate paying any dividends in the foreseeable future.
We have not paid cash dividends on our common stock to date.  We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt or credit facility, if any, may preclude us from paying dividends.  As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None
 
ITEM 2.
PROPERTIES

Our headquarter facilities in Vista, California consist of approximately 18,514 square feet of leased office, warehouse and manufacturing space. In April 2012, we executed an amendment agreement to extend the lease for the facility in Vista, California to November 2015.

ITEM 3.
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 4.
MINE SAFETY DISCLOSURES
 
Not applicable
 
 
 
12
 


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded under the symbol ITSI on the Over-the-Counter Bulletin Board. As of April 30, 2012, there were 12,962,999 common shares outstanding and approximately 925 shareholders of record. As of April 30, 2012, Berjaya Lottery Management (H.K.) Ltd. (“BLM”) owned 71.3% of the total outstanding shares while ILTS’s management and directors owned approximately 1% of the outstanding shares.
 
Solely for the purpose of calculating the aggregate market value of the voting stock held by non-affiliates of ILTS, as set forth on the cover of this report, it has been assumed that all executive officers and directors of ILTS and BLM are affiliated persons.  All of ILTS’s common shares, the only voting stock outstanding, beneficially owned by each such person (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) have been assumed to be held by that person for this calculation.  

The following table sets forth the quarterly high and low closing sale prices per share of our company’s common stock for fiscal years 2012 and 2011:

   
Market Price of ILTS Common Stock
 
   
High
   
Low
 
Fiscal Year Ended April 30, 2012
           
First Quarter
 
$
0.34
   
$
0.18
 
Second Quarter
   
0.29
     
0.17
 
Third Quarter
   
0.70
     
0.20
 
Fourth Quarter
   
0.65
     
0.31
 
                 
Fiscal Year Ended April 30, 2011
               
First Quarter
 
$
0.29
   
$
0.13
 
Second Quarter
   
0.30
     
0.15
 
Third Quarter
   
0.30
     
0.18
 
Fourth Quarter
   
0.37
     
0.18
 
                 
 
Dividends
 
Our company paid no dividends during the last two fiscal years.  We currently intend to retain any earnings for use in the business and therefore do not anticipate paying any dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

Presently our company does not maintain any stock option plan.

Sales of Unregistered Securities

Our company had no sales of unregistered securities during the past two fiscal years.
 
ITEM 6.
SELECTED FINANCIAL DATA

Not applicable
 
 
13 


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The discussion in this filing contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by forward-looking statements.  These risks and uncertainties include dependence on business from foreign customers sometimes in politically unstable regions, political and governmental decisions as to the establishment of lotteries and other wagering industries in which our products are marketed, fluctuations in period-to-period operating results, the absence of significant contract backlog, and other factors described in section 1A. Risk Factors in this Form 10-K.

Critical Accounting Policies

Use of Estimates

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States.  Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable.  We base our estimates on historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources.  Estimates affect the reported amounts and related disclosures.  Actual results may differ from initial estimates.  The areas most sensitive to estimation are revenue recognition, warranty reserves, inventory valuation, the allowance for doubtful accounts and the deferred tax valuation allowance.

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 the title and risk of loss have been transferred.  Service revenues are recognized as the services are rendered, and the related costs of services are recognized on a time and materials basis.
 
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, 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 provide various hardware components containing software essential to the hardware product’s functionality, and other components depending on the customers’ needs.  We allocate revenue to these deliverables using the relative selling price method.  Because we have not established VSOE or TPE for the hardware, revenue is allocated based on ESPs.  Determining ESPs requires management’s judgment.  Revenue is recognized upon shipment of the hardware and the related essential software, provided the other conditions for revenue recognition have been met.  We also provide software support and product support services on a standalone basis from the sales of the hardware.  Amounts allocated to software support and product support services are based on VSOE using hourly or 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.

We consider multiple factors depending on the unique facts and circumstances related to each deliverable when determining ESPs for deliverables without VSOE or TPE.  Key factors considered by the management in developing the ESPs for the hardware include the costs of manufacture and what a customer would reasonably pay based on the features being offered, trends in the market place, size of the 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 the essential software, or should future facts and circumstances lead the management to consider additional factors, our ESP for the hardware with essential software related to future sales could change.

Revenue Recognition for Percentage-of-Completion Method

For our complete wagering and lottery systems, we recognize revenue by using the percentage-of-completion method when the contracts for complete systems fulfill the following criteria:

1.
Contract performance extends over long periods of time;
2.
The software portion involves significant production, modification or customization;
3.
Reasonably dependable estimates can be made on the progress towards completion, contract revenues and contract costs; and
4.
Each element is essential to the functionality of the other elements of the contracts.

Under the percentage-of-completion method, sales and estimated gross profits are recognized as work progresses.  Progress toward completion is measured by the ratio of costs incurred to total estimated costs.  Revenue and gross profit may be adjusted prospectively for revisions in estimated total contract costs.  If the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is recorded in the period in which it becomes evident.  The total estimated loss includes all costs allocable to the specific contract.
 
 
14

In addition to the software portion of a complete system, we develop software for our customers in accordance with the specifications stipulated in a software supply contract.  Generally, these contracts are related to additional features or modules to be added to the application software that we have previously developed for our customers.  Each software contract is reviewed individually to determine the appropriate basis of recognizing revenue.
 
Deferred Revenues and Deferred Cost of Revenues
 
Deferred revenues of approximately $687,000 and $615,000 as of April 30, 2012 and 2011, respectively, represent prepayments for products and services related to the use of the OpenElect® and PBC voting systems, lottery terminals and other software and technical support services.  Deferred cost of revenues of approximately $6,000 and $113,000 as of April 30, 2012 and 2011, respectively, consist of the direct costs associated with the software support and manufacture of voting systems.  We will recognize the revenues and related cost of revenues upon fulfillment of the prescribed criteria for revenue recognition.

Allowance for Doubtful Accounts
 
The estimate for the allowance for doubtful accounts is based primarily upon our company’s historical bad debt experience with individual customers and any known specific issues or disputes that exist as of the balance sheet date.

Warranty Reserves

Estimated warranty costs are accrued as revenues are recognized.  Warranty reserves are based on historical trends and are adjusted periodically to reflect actual experience.  Customers do not have a right to return, except for defective products.  The most recent inventory cost is used to determine the value of potential warranty costs.  Estimated reserves for warranty obligations are accrued as follows:

1.  
Contracts - Contract warranties are specific to the individual contracts. Estimated reserves for warranty obligations are accrued as revenue is recognized. Hardware and software components may be warranted separately:
a.  
Hardware – The warranty phase for terminals or terminal kits commences upon shipment and can extend from six months to 12 months depending on the specific contract terms.
b.  
Software – The warranty phase typically represents a six to twelve-month period of time after delivery, as defined by the specific contract terms.  
2.  
Spares – Terminal replacement parts are warranted to be free from defects for 90 days from the date of shipment. Based on historical experience, warranty costs for spares have been immaterial.
3.  
Other – Specific provisions have been made to cover a small number of particular replacement parts for specific customers.

Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts

Billings on uncompleted long-term contracts may be greater than or less than incurred costs and estimated earnings.  Accordingly, these differences are recorded as an asset or liability on the balance sheet.  As our revenue recognized on these long-term contracts includes management’s estimates of total anticipated costs, the amounts in costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts also include these estimates.

Inventory Valuation
 
We periodically review the inventory quantities on hand and record a provision for excess and obsolete inventories based on the following factors:

·  
Terminal models still currently in the field;
·  
The average life of the models;
·  
The requirement for replacement parts on older models; and
·  
The future sales projections.

Valuation of Deferred Tax Assets
 
We regularly evaluate our ability to recover the reported amount of our net deferred tax assets.  We consider several factors, including our estimate of the likelihood that we will generate sufficient taxable income in future years in which temporary differences will reverse.  Due to the uncertainties related to, among other things, the extent and timing of future taxable income, we offset our deferred tax assets by an equivalent valuation allowance as of April 30, 2012 and 2011.
 
 
15
 
Results of Operations

Revenue Analysis

 
Years Ended
 
(Amounts in thousands)
April 30,
 
Revenues
 
2012
   
2011
   
Change
 
Products:
                 
Contracts
 
 $
 9,313
   
 $
 3,750
   
 $
5,563
 
Spares
   
1,011
 
   
1,147
     
(136
)
Licensing
   
412
     
-
     
412
 
Total Products
   
10,736
     
4,897
     
5,839
 
Services:
                       
Software Support
   
787
     
732
     
55
 
Product Servicing and Support
   
561
     
257
     
304
 
Total Services
   
1,348
     
989
     
359
 
   
$
12,084
   
$
5,886
   
$
6,198
 
                         

Significant fluctuations in year-to-year revenue are expected in both gaming and voting industries.  Individual contracts are generally of considerable value, and the timing of contracts or sales of spare parts does not occur in a predictable trend.  Contracts from the same customer may not recur or generally do not recur in the short-term.  Accordingly, comparative results between periods 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 segment, due to the tightening of the credit markets, our potential and existing customers may not be able to secure financing for lottery projects which may effectively impact our revenue potential.  For the voting segment, 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 year ended April 30, 2012 was $9.3 million, compared to $3.8 million for fiscal 2011.  The substantial increase is primarily due to the increased contract activities in the voting segment and the higher turnkey lottery system sales, compared to those in fiscal 2011.
 
Spares revenue for the year ended April 30, 2012 was $1 million, compared to $1.1 million for fiscal 2011, reflecting slightly lower customer demand for spare parts in fiscal 2012.  We derived spares revenue from various customers on the shipment of spares orders during the years ended April 30, 2012 and 2011.  Customer demand for spare parts fluctuates from period to period and may not be indicative of trends in spares revenue.

Licensing revenue for the year ended April 30, 2012 was $412,000.  We derived licensing revenue from the executed voting and lottery contracts.  There was no licensing revenue generated for fiscal 2011. 
 
Software support revenue for fiscal 2012 increased modestly by $55,000 compared to that of fiscal 2011.  We attribute the slight increase in 2012 primarily due to the higher software support fees with related customers.

Product servicing and support revenue for fiscal 2012 increased $304,000 compared to that of fiscal 2011.  The increase in 2012 is primarily due to higher demand for support services from an unrelated customer in the lottery segment and higher demand for onsite support services by voting customers, partially offset by lower demand of onsite support services from a related customer.

Related party revenue of approximately $6.1 million accounted for 51% of total revenue in the year ended April 30, 2012, compared to $3.7 million or 63% of total revenue in fiscal 2011.  

Cost of Sales and Gross Profit Analysis
   
Years Ended
 
   
April 30,
   
April 30,
 
(Amounts in thousands)
 
2012
   
2011
 
Revenues:
                       
Products
 
$
10,736
     
89
%
 
$
4,897
     
83
%
Services
   
1,348
     
11
%
   
989
     
17
%
    Total revenues
 
$
12,084
     
100
%
 
$
5,886
     
100
%
                                 
Cost of sales:
                               
Products
 
$
7,792
     
65
%
 
$
4,348
     
74
%
Services
   
511
     
4
%
   
159
     
3
%
   Total costs of sales
 
$
8,303
     
69
%
 
$
4,507
     
77
%
                                 
Gross profit:
                               
Products
 
$
2,944
     
24
%
 
$
549
     
9
%
Services
   
837
     
7
%
   
830
     
14
%
   Total gross profit
 
$
3,781
     
31
%
 
$
1,379
     
23
%
 
 
16
 
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 periods may not be indicative of trends in gross profit margin.

The overall gross profit margin was 31% for fiscal 2012, compared to 23% for fiscal 2011.  The increase in gross profit margin was largely driven by favorable profit margins achieved on certain lottery contracts and the licensing revenue having substantially lower cost of sales, partially offset by the higher unabsorbed overhead costs reflecting limited product development contract activities.  In addition, cost of sales for the year ended April 30, 2012 reflects an impairment charge of approximately $334,000 associated with the kit inventory.  Previously, we have reported approximately $1.9 million in kit inventory related to previous orders from an unrelated international customer, which we will not ship to the customer until we receive substantially all of the payments due and the required deposits are made.  Based on our assessment of the marketing opportunities and the uncertainty relating to customer’s financial ability to purchase additional kit inventory, we recorded an impairment charge of approximately $1.1 million during the quarter ended April 30, 2008.  A portion of this inventory was sold prior to fiscal 2011.  As part of management’s periodic review and assessment of the marketability of this inventory and our current marketing efforts with active prospects, we recorded impairment charges of approximately $334,000 and $340,000 during the years ended April 30, 2012 and 2011, respectively, for the remaining balance of the kit inventory.

Other Operating Expenses Analysis
   
Years Ended
 
   
April 30, 2012
   
April 30, 2011
 
(Amounts in thousands)
         
% of Revenue
           
% of Revenue
 
Research and Development
 
$
31
     
-
%
 
$
-
     
-
%
Selling, General and Administrative
   
2,498
     
21
%
   
2,357
     
40
%
Other Operating Expenses
 
$
2,529
     
21
%
 
$
2,357
     
40
%
 
Research and Development Expenses (“R&D”)

For the year ended April 30, 2012, R&D expense was approximately $31,000. R&D expense consists primarily of labor costs for the development of new product in the gaming segment.  We did not incur any R&D expenses for the fiscal 2011.  While we continue to enhance our products, we anticipate R&D expenses will be minimal in the coming fiscal year as we dedicate our efforts to the marketing and sale of the new voting systems.
 
Selling, General and Administrative (“SG&A”)

SG&A expenses for the year ended April 30, 2012 increased modestly by $141,000 compared to those of the prior fiscal 2011, reflecting additional expenses associated with increase in the marketing and proposal efforts.  We anticipate SG&A expenses will increase moderately in fiscal 2013 as we continue to increase our sales and marketing efforts.

Other Income (Expense)
 
Other income in the years ended April 30, 2012 and 2011 consisting primarily of interest and dividend income remained relatively insignificant.  We derived interest and dividend income from certificates of deposit and cash and cash equivalent balances during the years ended April 30, 2012 and 2011.  

Liquidity and Capital Resources
 
Liquidity

Our net working capital at April 30, 2012 was $4.8 million.

Contract backlog at April 30, 2012 was $4 million. Of this amount, approximately $3.7 million is attributable to lottery product orders from related customers.  The remaining contract backlog amount of approximately $340,000 is related to voting contracts with unrelated customers.

Additional sources of cash through April 2013 are expected to be derived from spares revenue, software support and election support service revenues.  Uses of cash are expected to be for normal operating expenses and costs associated with contract execution.

While we anticipate that we will be successful in obtaining additional product or service contracts to enable us to continue normal operations through April 30, 2013, there can be no assurance 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 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 April 30, 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.
 
 
17

The following table summarizes our cash flow activities:
     Years Ended  
   
April 30, 2012
   
April 30, 2011
   
(Decrease)
 
(Amounts in thousands)
                 
Cash flow comparative:
                 
Operating activities
 
$
(1,156
)
 
$
422
   
$
(1,578
)
Investing activities
   
58
     
1,096
     
(1,038
)
Net increase (decrease) in cash and cash equivalents
 
$
(1,098
 )
 
$
1,518
   
$
(2,616
)
 
Cash Flow Analysis
 
Significant fluctuations in cash flows from operating, investing and financing activities are expected in the gaming and voting industries because factors such as working capital needs, value of contracts, and timing of contracts and payments do not occur in a predictable trend.  Accordingly, comparative results between periods are not indicative of trends in cash flow activities.

Operating Activities

Net cash used in operating activities was approximately $1.1 million in fiscal 2012, compared to net cash provided by operating activities of $422,000 in fiscal 2011.  The primary factors contributing to the change in the reported cash flow amounts reflects higher inventory purchases to fulfill customer orders, and the timing of contract delivery and related invoicing which impacted the accounts receivable.  These were partially offset by net income of approximately $1.2 million and an increase in accounts payable for inventory related purchases.
 
Investing and Financing Activities

Net cash provided by investing activities was $58,000 in fiscal 2012, compared to $1.1 million in fiscal 2011.  During fiscal 2011, the redemption of certificates of deposits exceeded the purchase of certificates of deposit compared to fiscal 2012.

Capital expenditures amounted to $191,000 in fiscal 2012, compared to $157,000 in fiscal 2011.  Expenditures in fiscal 2012 were primarily related to computers and manufacturing equipment. Capital expenditures in fiscal 2011consist of equipment intended for marketing purposes in the voting segment.

There were no financing activities for the years ended April 30, 2012 and 2011.

Capital Resources

As of April 30, 2012, we did not have outstanding credit facilities.

Foreign Currency Fluctuation

Our reporting currency is the U.S. dollar.  Sales are denominated almost exclusively in U.S. dollars. Occasionally, sales have been effected in foreign currencies.  Fluctuations in exchange rates from reporting period to reporting period between various foreign currencies and the U.S. dollar may have an impact on our revenue and expense.  Such effect may be material in any individual reporting period.  No material foreign currency transactions occurred during the years ended April 30, 2012 and 2011.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our balance sheet, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") had issued certain other accounting pronouncements as of April 30, 2012 that will become effective in subsequent periods; however, we do not believe any of those pronouncements are relevant to our business or would have significantly affected our financial accounting measurements or disclosures had they been in effect during fiscal 2012.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable
 
 
18

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   
Form 10-K
 
   
(Page)
 
       
       
Report of Independent Registered Public Accounting Firm
   
20
 
         
Consolidated Financial Statements:
       
         
   
21
 
         
   
22
 
         
   
23
 
         
   
24
 
         
   
25
 
 
 
19




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Shareholders and Board of Directors
International Lottery & Totalizator Systems, Inc.


We have audited the accompanying consolidated balance sheets of International Lottery & Totalizator Systems, Inc. (a 71.3%-owned subsidiary of Berjaya Lottery Management (H.K.) Ltd.) and Subsidiary as of April 30, 2012 and 2011, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Lottery & Totalizator Systems, Inc. and Subsidiary as of April 30, 2012 and 2011, and their results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ J.H. Cohn LLP

San Diego, California
July 6, 2012
 
 
20


INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
 
(Amounts in thousands)
 
   
April 30, 2012
   
April 30, 2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
2,783
   
$
3,881
 
Certificates of deposit
   
250
     
499
 
Accounts receivable, net of allowance for doubtful accounts of $75
   
789
     
203
 
Costs and estimated earnings in excess of billings on uncompleted contracts
   
726
     
32
 
Deferred cost of revenue
   
6
     
113
 
Inventories
   
2,659
     
436
 
Other current assets
   
238
     
132
 
Total current assets
   
7,451
     
5,296
 
Equipment, furniture and fixtures, net
   
482
     
432
 
Other noncurrent assets
   
49
     
65
 
Total assets
 
$
7,982
   
$
5,793
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
 
$
1,070
   
$
152
 
Billings in excess of costs and estimated earnings on uncompleted contracts
   
-
     
231
 
Accrued payroll and related taxes
   
388
     
326
 
Warranty reserves
   
169
     
31
 
Payable to Parent
   
252
     
251
 
Other current liabilities
   
63
     
67
 
Deferred revenues
   
687
     
615
 
Total current liabilities
   
2,629
     
1,673
 
Long-term liabilities
   
12
     
12
 
Total liabilities
   
2,641
     
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
   
(51,029
)
   
(52,262
)
Total shareholders' equity
   
5,341
     
4,108
 
Total liabilities and shareholders' equity
 
$
7,982
   
$
5,793
 

The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
21
 

 
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Amounts in thousands, except per share amounts)
 
   
Years Ended
 
   
April 30,
 
 
2012
   
2011
 
Revenues:
           
Sales of products
 
$
10,736
   
$
4,897
 
Services
   
1,348
     
989
 
     
12,084
     
5,886
 
Cost of sales:
               
Cost of product sales
   
7,792
     
4,348
 
Cost of services
   
511
     
159
 
     
8,303
     
4,507
 
Gross profit
   
3,781
     
1,379
 
                 
Research and development expenses
   
31
     
-
 
Selling, general and administrative expenses
   
2,498
     
2,357
 
Income (loss) from operations
   
1,252
     
(978
                 
Other income:
               
Interest and dividend income
   
2
     
5
 
Other
   
4
     
12
 
Income (loss) before provision for (benefit of) income taxes
   
1,258
     
(961
Provision for (benefit of) income taxes
   
         25
     
(10
Net income (loss)
 
$
1,233
   
$
(951
Net income (loss) per share:
               
Basic
 
$
0.10
   
$
(0.07
Weighted average shares used in computation of net income (loss) per share:
               
Basic
   
12,963
     
12,963
 
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
22
 

 
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
(Amounts in thousands)
 
                     
 
Common Stock
             
 
Shares
 
Amount
 
Accumulated Deficit
   
Total
 
                 
Balance at April 30, 2010
   
12,963
   
$
56,370
   
$
(51,311
)
 
$
5,059
 
Net loss
                   
(951
)
   
(951
)
Balance at April 30, 2011
   
12,963
     
56,370
     
(52,262
)
   
4,108
 
Net income
                   
1,233
     
1,233
 
Balance at April 30, 2012
   
12,963
   
$
56,370
   
$
(51,029
)
 
$
5,341
 
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
23
 

 
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Amounts in thousands)
 
   
Years Ended
 
   
April 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
     Net income (loss)
 
$
1,233
   
$
(951
)
     Adjustments to reconcile net income (loss) to net cash provided
               
     by (used in) operating activities:
               
     Depreciation and amortization
   
141
     
119
 
     Inventory obsolescence reserve
   
334
     
340
 
     Warranty reserve expense
   
159
     
37
 
     Impairment charge for patent write-off
   
16
     
12
 
     Changes in operating assets and liabilities:
               
          Accounts receivable
   
(586
   
297
 
          Costs and estimated earnings in excess of billings on
          uncompleted contracts
   
(694
   
772
 
          Deferred cost of revenue
   
107
     
(113
)
          Inventories
   
(2,557
   
266
 
          Other current assets
   
(106
)
   
92
 
          Accounts payable
   
918
     
(470
          Billings in excess of costs and estimated earnings on uncompleted contracts
   
(231
)
   
(209
          Accrued payroll and related taxes
   
62
     
(23
          Warranty reserves
   
(21
   
(48
          Payable to Parent
   
1
     
1
 
          Other liabilities
   
(4
   
29
 
          Deferred revenue
   
72
     
271
 
    Net cash provided by (used in) operating activities
   
(1,156
)
 
 
422
 
                 
Cash flows from investing activities:
               
          Purchases of certificates of deposit
   
(500
   
(997
          Proceeds from redemption of certificates of deposit
   
749
     
2,243
 
          Additions to equipment, furniture and fixtures
   
(191
   
(157
          Additions to intangible assets
   
-
     
(7
       Proceeds from sale of equipment
   
-
     
14
 
Net cash provided by investing activities
   
58
     
1,096
 
                 
Net increase (decrease) in cash and cash equivalents
   
(1,098
   
1,518
 
Cash and cash equivalents at beginning of year
   
3,881
     
2,363
 
Cash and cash equivalents at end of year
 
$
2,783
   
$
3,881
 
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
24
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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 received the 2005 Voluntary Voting System Guidelines (“VVSG”) certification from the United States Election Assistance Commission (“EAC”) for its OpenElect® digital optical scan election system – a digital scan voting system built with Java on a streamlined and hardened Linux platform.  As part of a jurisdiction’s procurement process, the Company will provide the OpenElect® products’ source code for independent review.

These efforts leverage the Company’s extensive experience to develop highly secure, mission-critical solutions that meet the NASED 2002 VSS and the EAC 2005 VVSG standards.  In addition, the Company’s voting systems offer the following features:
 
·  
High level of security and vote encryption to ensure integrity and voter privacy;
·  
Electronic and paper audit trails that offer added security and redundancy for recounts;
·  
Reduce the cost of ballot printing while offering operational efficiencies;
·  
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 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.

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.

Revenue Recognition
 
The Company derives its revenues 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 the title and risk of loss have been transferred.  Service revenues are recognized as the services are rendered, and the related costs of services are recognized on a time and materials basis.

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 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.

For sales of hardware products, the Company provides various hardware components containing software essential to the hardware product’s functionality, and other components depending on the customers’ needs.  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, revenue is allocated based on ESPs.  Revenue is recognized upon shipment of the hardware and the related essential software, provided the other conditions for revenue recognition have been met.  The Company also provides software support and product support services on a standalone basis from the sales of the hardware.  Amounts allocated to software support and product support services are based on VSOE using hourly or daily billing rates.  Revenue is deferred until the services are performed.  For annual software licenses, the Company uses 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.
 
 
25
 

The Company considers multiple factors depending on the unique facts and circumstances related to each deliverable when determining ESPs for deliverables without VSOE or TPE.  Key factors considered by the Company in developing the ESPs for the hardware include the costs of manufacture and what a customer would reasonably pay based on the features being offered, trends in the market place, size of the 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 the essential software, or should future facts and circumstances lead the management to consider additional factors, the Company’s ESP for the hardware with essential software related to future sales could change.

Revenue Recognition for Percentage-of-Completion Method

For the complete wagering and lottery systems, the Company recognizes revenue by using the percentage-of-completion method when the contracts for complete systems fulfill the following criteria:

1.
Contract performance extends over long periods of time;
2.
The software portion involves significant production, modification or customization;
3.
Reasonably dependable estimates can be made on the progress towards completion, contract revenues and contract costs; and
4.
Each element is essential to the functionality of the other elements of the contracts.

Under the percentage-of-completion method, sales and estimated gross profits are recognized as work progresses.  Progress toward completion is measured by the ratio of costs incurred to total estimated costs.  Revenue and gross profit may be adjusted prospectively for revisions in the estimated total contract costs.  If the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is recorded in the period in which it becomes evident.  The total estimated loss includes all costs allocable to the specific contract.

In addition to the software portion of a complete system, the Company develops software for its customers in accordance with the specifications stipulated in a software supply contract.  Generally, these contracts are related to additional features or modules to be added to the application software that the Company has previously developed for its customers.  Each software contract is reviewed individually to determine the appropriate basis of recognizing revenue.
 
Deferred Revenues and Deferred Cost of Revenues
 
Deferred revenues of approximately $687,000 and $615,000 as of April 30, 2012 and 2011, respectively, represent prepayments for products and services related to the use of the OpenElect® and PBC voting systems, lottery terminals and other software and technical support services.  Deferred cost of revenues of approximately $6,000 and $113,000 as of April 30, 2012 and 2011, respectively, consist of direct costs associated with the software support and manufacture of voting systems.  The Company will recognize the revenues and related cost of revenues upon the fulfillment of the prescribed criteria for revenue recognition.
 
Allowance for Doubtful Accounts

The Company determines its allowance for doubtful accounts by considering a number of factors:

 
1.
Length of time trade accounts receivable are past due;
 
2.
The Company’s previous loss history;
 
3.
The customer’s current ability to pay its obligations;
 
4.
Known specific issues or disputes which exist as of the balance sheet date; and
 
5.
The condition of the general economy and the industry as a whole.

Based on its evaluation, the Company determined that no additional allowance was required as of April 30, 2012.  The Company maintained an allowance for doubtful accounts of $75,000 as of April 30, 2012 and 2011.  

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 fiscal years ended April 30, 2012 and 2011 is as follows:
    
(Amounts in thousands)
Balance at April 30, 2010
 
$
42
 
Additional reserves
   
37
 
Charges incurred
   
(48
Balance at April 30, 2011
   
31
 
Additional reserves
   
159
 
Charges incurred
   
(21
Balance at April 30, 2012
 
$
169
 
 
 
26
 
 
Warranty reserves are based on historical trends and are adjusted periodically to reflect actual experience.  Customers do not have a right to return, except for defective products.  The most recent inventory cost is used to determine the value of potential warranty costs.  Estimated reserves for warranty obligations are accrued as follows:

1.  
Contracts - Contract warranties are specific to the individual contracts. Estimated reserves for warranty obligations are accrued as revenue is recognized. Hardware and software components may be warranted separately:
a.  
Hardware – The warranty phase for terminals or terminal kits commences upon shipment and can extend from six months to twelve months depending on the specific contract terms.
b.  
Software – The warranty phase typically represents a six to twelve-month period of time after delivery, as defined by the specific contract terms.  
2.  
Spares – Terminal replacement parts are warranted to be free from defects for 90 days from the date of shipment. Based on historical experience, warranty costs for spares have been immaterial.
3.  
Other – Specific provisions have been made to cover a small number of particular replacement parts for specific customers.
 
Income Taxes and Valuation Allowance

The Company recognizes tax benefits associated with uncertain tax positions when, in management’s assessment, it is more likely than not that the positions will be sustained upon examination by a taxing authority.  For tax positions that meet the more likely than not recognition threshold, the Company measures the tax benefits as the largest amount that the Company evaluates to have a greater than 50% likelihood of being realized upon ultimate settlement.  The Company reviewed its tax positions and determined that an adjustment to the tax provision is not considered necessary nor is a reserve for income taxes required.

The Company accounts for income taxes pursuant to the asset and liability method.  This requires deferred income tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.  The Company has provided a valuation allowance against the entire balance of its net deferred tax assets at April 30, 2012 and 2011 as it is deemed that the recovery of the deferred tax assets is less than probable.
 
Foreign Currency Fluctuation

The Company’s reporting currency is the U.S. dollar. Sales are denominated almost exclusively in U.S. dollars.  Occasionally, sales have been effected in foreign currencies.  Fluctuations in exchange rates from reporting period to reporting period between various foreign currencies and the U.S. dollar may have an impact on revenue and expense.  Such effect may be material in any individual reporting period.  No material foreign currency transactions occurred during the years ended April 30, 2012 and 2011.

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:  
   
April 30,
   
April 30,
 
   
2012
   
2011
 
(Amounts in thousands)
           
Raw materials and subassemblies
 
$
1,775
   
$
436
 
Work-in-process
   
63
     
-
 
Finished goods
   
821
     
-
 
   
$
2,659
   
$
436
 
                 

Previously, the Company has reported approximately $1.9 million in kit inventory related to previous orders from an unrelated international customer, which the Company will not ship to the customer until it receives substantially all of the payments due and the required deposits are made.  Based on the Company’s assessment of the marketing opportunities and the uncertainty relating to customer’s financial ability to purchase additional kit inventory, the Company recorded an impairment charge of approximately $1.1 million during the quarter ended April 30, 2008.  A portion of this inventory was sold prior to fiscal 2011.  As part of management’s periodic review and assessment of the marketability of this inventory and the Company’s current marketing efforts with active prospects, the Company recorded impairment charges of approximately $334,000 and $340,000 during the years ended April 30, 2012 and 2011, respectively, for the remaining balance of the kit inventory.
 
Equipment, Furniture and Fixtures

Equipment, furniture and fixtures are carried at cost.  Depreciation is provided using the straight-line method over the estimated useful lives of the related assets which approximate three to seven years.  Leasehold improvements are amortized over the shorter of the useful lives of the assets or the lease term.  The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, or when the net book value of such assets exceeds the future undiscounted cash flow attributed to such assets.  At April 30, 2012 and 2011, and during the years ended April 30, 2012 and 2011, no indicators of impairment were identified.
 
 
27
 
 
Net equipment, furniture and fixtures consisted of the following:
   
April 30,
   
April 30,
 
   
2012
   
2011
 
(Amounts in thousands)
           
Plant and machinery
 
$
724
   
$
674
 
Computer equipment
   
1,482
     
1,308
 
Leasehold improvement
   
190
     
183
 
Furniture, fixtures and equipment
   
91
     
91
 
Construction in progress
   
-
     
50
 
     
2,487
     
2,306
 
Accumulated depreciation
   
(2,005
)
   
(1,874
)
Net equipment, furniture and fixtures 
 
$
482
   
$
432
 

Research and Development Costs

Research and development costs are expensed as incurred. Substantially, all research and development expenses are related to new product development and designing significant improvements.

Net Income (Loss) per Share

Basic net income (loss) per share is based on the weighted average number of shares outstanding during the periods.  

There were no outstanding options or other dilutive securities at April 30, 2012 and 2011.  

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the purchase date to be cash equivalents.

2. BUSINESS SEGMENTS, GEOGRAPHIC REVENUES, MAJOR CUSTOMERS AND MAJOR VENDORS

Segment Information
 
Operating segments are defined in accounting standards as components of an enterprise about which separate financial information is available and is regularly evaluated by management in deciding how to allocate resources and in assessing performance.  The Company divides its operations into two operating segments: the gaming business and the voting business.  The gaming segment designs, manufactures and manages computerized wagering systems and terminals for the lottery and pari-mutuel racing industries worldwide.  Presently the voting segment generates revenues from the sales of voting systems and hardware, software licensing, product servicing and software support services.
 
The Company’s segment information is presented below (in thousands):
 
As of and for the Year Ended April 30, 2012
 
 
Gaming
Business
 
Voting
Business
 
Totals
 
Total revenues
  $ 7,052     $ 5,032     $ 12,084  
Income from operations
    973       279       1,252  
Depreciation and amortization
    89       52       141  
Accounts receivable, net
    191       598       789  
Equipment, furniture and fixtures, net
    153       329       482  
Inventories
    537       2,122       2,659  
Warranty reserves
    113       56       169  
Deferred revenues
    277       410       687  
     
 
As of and for the Year Ended April 30, 2011
 
 
Gaming
Business
 
Voting
Business
 
Totals
 
Total revenues
  $ 5,426     $ 460     $ 5,886  
Income (loss) from operations
    167       (1,145 )     (978 )
Depreciation and amortization
    90       29       119  
Accounts receivable, net
    173       30       203  
Equipment, furniture and fixtures, net
    99       333       432  
Inventories
    396       40       436  
Warranty reserves
    31       -       31  
Deferred revenues
    20       595       615  
 
 
28
 
 
Geographic Revenues
 
Revenues by geographic area are as follows (in thousands):
   
Years Ended
 
   
April 30,
 
Customer Location
 
2012
   
2011
 
             
Asia
 
$
6,117
   
$
3,691
 
North America
   
5,320
     
1,531
 
Europe
   
647
     
664
 
   
$
12,084
   
$
5,886
 

 As of April 30, 2012 and 2011, all of the Company's assets were held in the United States.  During the fiscal years ended April 30, 2012 and 2011, a significant portion of the Company’s revenues was derived from exports from the United States to foreign countries.  
 
Major Customers

  Years Ended
  
April 30, 2012
 
April 30, 2011
Revenue:
     
From unrelated customers
One customer from the voting segment accounted for 32% of total revenue.
 
Two customers from the gaming segment accounted for more than 26% of total revenue or 15% and 11% individually.
       
From related customers
Two customers from the gaming segment accounted for 49% of total revenue or 32% and 17% individually.
 
Two customers from the gaming segment accounted for 56% of total revenue or 40% and 16% individually.
 
Major Vendors
 
For the year ended April 30, 2012, two vendors accounted for approximately 37%, or 26% and 11% individually, of the Company’s product purchases.  For the year ended April 30, 2011, three vendors accounted for approximately 67%, or 25%, 24% and 18% individually, of the Company’s purchases.  

3. CREDIT RISK

Of the cash and cash equivalents amount of $2.8 million at April 30, 2012, approximately $2.1 million represents highly liquid money market funds which are not Federal Deposit Insurance Corporation (“FDIC”) insured.  The Company maintains its other cash balances primarily in two financial institutions.  The Company reduces its exposure to credit risk by maintaining all of its cash balances with highly rated financial institutions.

4. INCOME TAXES

The following is a reconciliation of the expected income tax provision or benefit at the statutory federal income tax rate to the actual provision or benefit:
   
Years Ended April 30,
 
   
2012
   
2011
 
(Amounts in thousands)
           
Expected federal income tax provision (benefit)
  $ 428     $ (326 )
State taxes, net of federal benefit
    2       (54
Permanent differences
    10       12  
Change in valuation allowance
    (6,218 )     (5,264 )
Research and development credits
    -       22  
Net operating loss carryover expiration
    5,804       5,615  
Refundable alternative minimum tax credits
    -       (10 )
Other
    (1 )     (5 )
    $ 25     $ (10 )
                 
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts used for income tax purposes.  As of April 30, 2012 and 2011, the Company had net deferred tax assets of $8.6 million and $14.9 million, respectively, primarily attributable to its net operating loss carryforwards as further described below.  The Company has provided a valuation allowance against the entire balance of its net deferred tax assets at April 30, 2012 and 2011 due to the uncertainty regarding realization.  The $6.3 million decrease in the deferred tax assets in 2012 was due primarily to the effects of the expiration of federal net operating loss carryforwards.
 
 
29
 

Significant components of the Company’s deferred tax assets are as follows:
 
(Amounts in thousands)
 
April 30, 2012
   
April 30, 2011
 
Deferred tax assets:
           
   Net operating loss, general business credit and AMT carryforwards
 
$
7,054
   
$
13,466
 
   Deferred revenue
   
84
     
84
 
   Reserves and accruals
   
1,445
     
1,269
 
   Other
   
-
     
42
 
     
8,583
     
14,861
 
Deferred tax liabilities:
               
  Other
   
(24
)
   
-
 
  Net deferred tax assets before valuation allowance
   
8,559
     
14,861
 
  Valuation allowance
   
(8,559
)
   
(14,861
)
  Net deferred taxes
 
$
-
   
$
-
 
 
As of April 30, 2012, the Company has approximately $18.8 million in Federal net operating loss carryforwards that will expire from 2012 through 2031, unless previously utilized.  Additionally, as of April 30, 2012, the Company has approximately $2.4 million in California net operating loss carryforwards that will expire from 2031 through 2033, unless previously utilized.  In addition, as of April 30, 2012, the Company has approximately $284,000 in Federal research and development credit carryforwards that begin to expire in 2020, and $172,000 of California research and development credit carryforwards that can be carried forward indefinitely.  The Company also has approximately $132,000 in Federal alternative minimum tax credits that can be carried forward indefinitely.

Pursuant to the Tax Reform Act of 1986, Internal Revenue Code Section 382, utilization of the Company’s Federal credit and net operating loss carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three-year period.

The Company and its subsidiaries are subject to Federal income tax as well as income tax of state jurisdictions.  With few exceptions, the Company is no longer subject to income tax examination by tax authorities in major jurisdictions for years prior to April 30, 2008.  However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs were generated and carried forward, and make adjustments up to the amount of the carryforwards.  The Company is not currently under examination by the IRS or state taxing authorities.

The Company recognizes interest and penalties as a component of income tax expense.  There were no interest and penalties for the years ended April 30, 2012 and 2011.

5. RELATED PARTY TRANSACTIONS

During the years ended April 30, 2012 and 2011, revenues from all related party agreements for sales of products and services totaled approximately $6.1 million (51% of total revenue) and $3.7 million (63% of total revenue), respectively.  Included in accounts receivable at April 30, 2012 and 2011 was $189,000 and $145,000, respectively, from these customers.  Descriptions of the transactions with the Company’s related parties in the years ended April 30, 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 April 30, 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 results in a liability to BLM for the cost of the items utilized.

The financial activities and balances related to BLM were as follows:

·  
There were no related party sales to BLM in the years ended April 30, 2012 and 2011;
·  
There were no accounts receivable balances from BLM at April 30, 2012 and 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 April 30, 2012 and 2011, respectively.
 
 
30

 
Philippine Gaming Management Corporation
 
During fiscal 2012, the Company received from Philippine Gaming Management Corporation (“PGMC”), a related party and a subsidiary of BLM, orders valued at approximately $3.2 million for lottery products.  Shipments of these products were completed and the related revenue was recognized accordingly.

On December 20, 2011, the Company received from PGMC, an additional 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 totaled approximately $3.8 million during the year ended April 30, 2012.  For the year ended April 30, 2011, revenue recognized on the sale of lottery products and software support services totaled approximately $2.3 million; 
·  
There was no billings in excess of costs and estimated earnings balance as of April 30, 2012.  Net cost and estimated earnings in excess of billings relating to support services totaled approximately $32,000 as of April 30, 2011;
·  
There was a deferred revenue balance of approximately $264,000 as of April 30, 2012 in connection with the lottery product order dated December 20, 2011 mentioned above.  There was no deferred revenue balance as of April 30, 2011; and    
·  
Accounts receivable totaled $189,000 as of April 30, 2012, compared to $47,000 as of April 30, 2011. 

Sports Toto Malaysia Sdn. Bhd.

The Company provides lottery products, software development and software support services to Sports Toto Malaysia (“STM”), an affiliate of BLM and a related party.  

On December 21, 2011, the Company signed a contract with STM for a complete DataTrakII lottery system valued at approximately $4.3 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:

·  
Revenue recognized on the performance of contract deliverables and sale of support services totaled approximately $2 million during the year ended April 30, 2012.  Revenue of $326,000 was recognized on the sale of support services and lottery products during the year ended April 30, 2011;
·  
Net cost and estimated earnings in excess of billings relating to the abovementioned contract dated December 21, 2011 totaled approximately $726,000 as of April 30, 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 both April 30, 2012 and 2011; and
·  
There was no accounts receivable balance from STM as of April 30, 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 and software products, support services and spare parts.  

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

The financial activities and balances related to transactions with Natural Avenue were as follows:

·  
During the year ended April 30, 2012, revenue of $243,000 was recognized on the performance of contract deliverables and sale of support services.  Revenue of $969,000 was recognized on the performance of contract deliverables and sale of support services during the year ended April 30, 2011;  
·  
There was no net billings in excess of costs and estimated earnings balance as of April 30, 2012, compared to $105,000 as of April 30, 2011;
·  
Deferred revenue on lottery product licensing totaled $4,000 as of April 30, 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 April 30, 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 years ended April 30, 2012 and 2011, the Company incurred approximately $196,000 and $200,000, respectively.  
 
 
31
 

Ascot Sports Sdn. Bhd.

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

·  
There was no revenue recognized during the year ended April 30, 2012.  For the year ended April 30, 2011, the Company recognized revenue of $66,000 for software product development.  
·  
There was no accounts receivable balance as of April 30, 2012, compared to $66,000 as of April 30, 2011.

6. CONTRACTS IN PROCESS

The amounts by which total costs exceeded or were less than billings on uncompleted contracts are as follows (in thousands):
 
April 30,
 
April 30,
 
 
2012
 
2011
 
Costs incurred and estimated earnings recognized on
uncompleted contracts
 
$
6,340
   
$
6,687
 
Billings on uncompleted contracts
   
(5,614
)
   
(6,886
)
   
$
726
   
$
(199

The amounts shown in the table above are included in the associated balance sheet as follows:
 
April 30,
 
April 30,
 
 
2012
 
2011
 
Costs and estimated earnings in excess of billings on uncompleted contracts
 
$
726
   
$
32
 
Billings in excess of costs and estimated earnings on uncompleted contracts
   
-
     
(231
)
   
$
726
   
$
(199
 
7. LEASES

On April 12, 2012, the Company entered into an amendment agreement to extend the term of its building lease to November 30, 2015.  Commencing December 1, 2012, the monthly base rent payments will be $13,900 for the first year of the lease and $14,400 and $15,000 for years two and three, respectively.  The agreement also provides for one month of free rent.

Future minimum lease payments for all operating leases are as follows (in thousands):
For Fiscal Year Ending April 30,
 
Minimum Lease Payments
 
2013
 
$
194
 
2014
 
 
159
 
2015
 
 
180
 
2016
 
 
107
 
     $  640  

Rent expense for all operating leases for the years ended April 30, 2012 and 2011 was $202,000 and $190,000, respectively.

 8. EMPLOYEE 401(k) PLANS

The Company maintains a 401(k) plan (the “Plan”), qualified under the Internal Revenue Code, in which all eligible employees, as defined in the Internal Revenue Code, may elect to participate.  Under the Plan, employees may voluntarily make tax-deferred contributions of up to 15% of their compensation to a trust, which provides the participant with various investment alternatives.  In addition, for each fiscal year, the Company, at the discretion of the Board of Directors, may contribute an amount of Company stock with a fair market value that does not exceed 5% of the annual compensation of all participants in the Plan.  The Company made no contributions during the years ended April 30, 2012 or 2011.  The Company also maintains another 401(k) plan in which long-tenured employees maintain accounts; however, the Company and its employees are no longer contributing to this plan.
 
9. 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 April 30, 2012 and 2011 due to the short-term maturity of the instruments.
 
 
32
 

10. RECENT ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements

The FASB had issued certain other accounting pronouncements as of April 30, 2012 that will become effective in subsequent periods; however, the Company does not believe any of those pronouncements are relevant to its business or would have significantly affected its financial accounting measurements or disclosures had they been in effect during fiscal 2012.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None

ITEM 9A.
CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act  is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer, who is also Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Principal Executive Officer, who is also our Principal 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 Principal Executive Officer (and Principal 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 Principal Executive Officer (and Principal Financial Officer), as appropriate, to allow timely decisions regarding required disclosure.
 
MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining an adequate system of internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, 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 (“GAAP”).

Our internal controls over financial reporting include those policies and procedures that:

·  
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
·  
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of our business are being made only in accordance with authorizations of our management and directors; and
·  
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Management has conducted, with the involvement of our Principal Executive Officer (and Principal Financial Officer), and our Director of Corporate Affairs, an assessment, including testing of the effectiveness of our internal controls over financial reporting as of April 30, 2012.  Management’s assessment of internal controls over financial reporting was based on the framework in  Internal Control over Financial Reporting – Guidance for Smaller Public Companies (2006) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that our system of internal controls over financial reporting was effective as of April 30, 2012.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

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 April 30, 2012 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

ITEM 9B.
OTHER INFORMATION

None.
 
 
 
33

 
PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors of the Registrant

The Board presently consists of the following six directors: Theodore A. Johnson, Chan Kien Sing, Martin J. O’Meara, Jr., Alain K. Lee, Ooi Lee Meng and Rayvin Yeong Sheik Tan.  There is one vacant board seat as of the date of this report.  The current directors will serve until their respective successors have been duly elected and qualified.

Theodore A. Johnson, 72, has been Chairman of the Board since 1994.  He is also Chairman of the Executive Committee, Audit Committee and a member of the Executive Compensation Committee, Nominating Committee and Affiliations Committee.  Mr. Johnson served as Director from 1979 to 1993.  He has been President and Chief Executive Officer of TJ Ventures, Inc., a venture capital consulting company since 1992.  Mr. Johnson also holds directorships in other private corporations, including an applied research organization which is run by the University of Minnesota.

Chan Kien Sing, 56, has been Director since 1993.  He is Chairman of the Executive Compensation Committee and Nominating Committee.   In addition, Mr. Chan is a member of the Executive Committee.  He also serves as Executive Director of Berjaya Group Berhad, a Malaysian holding company since July 1993.  In addition, he is an Executive Director of Berjaya Corporation Berhad and Berjaya Sports Toto Berhad, a Director of Berjaya Lottery Management H.K. Limited (“BLM”) and holds directorships in several other subsidiaries in the Berjaya Corporation group of companies.

Martin J. O’Meara, Jr., 83, has been Director since 1979.  He is Chairman of the Affiliations Committee and a member of the Audit Committee.  Mr. O’Meara, Jr. is presently a retired businessman.  Previously he served as President of The Budget Plan, Inc., a privately owned company engaged in the consumer loan business for over five years. 

Alain K. Lee, 55, has been Director since 1999.  He is a member of the Executive Committee, Executive Compensation Committee and Audit Committee.  Presently, Mr. Lee serves as a business consultant since 2007.  He served as Executive Vice President and Director of Roadhouse Grill, Inc. from 1998 to 2007. 

Ooi Lee Meng, 51, has been Director since January 2006.  He is a member of the Executive Committee and Nominating Committee.  Mr. Ooi holds directorship in Berjaya-ILTS Ltd.  He serves as Senior General Manager (Business Development) of Sports Toto Malaysia Sdn Bhd, a related company of ILTS, since October 2005.  Previously he served as Executive Vice President of ILTS from September 2002 to April 2005.

Rayvin Yeong Sheik Tan, 32, became Director of the Company on July 15, 2008.  He serves as an Executive Director of the Board of Berjaya Corporation Berhad, a diversified business entity based in Kuala Lumpur, Malaysia, since September 2005.  Mr. Tan joined the Berjaya Group of Companies in May 2001 as Senior Manager (Corporate Affairs) of Kota Raya Development Sdn Bhd and Noble Circle Management Sdn Bhd.  He is also a Director of Berjaya Lottery Management (HK) Limited and an Executive Director of Berjaya Sports Toto Berhad.  In addition, Mr. Tan serves as Executive Director of Cosway Corporation Limited, a subsidiary company in the Berjaya Corporation group of companies.
 
Director Nomination Process
 
In evaluating director nominees, our nominating and governance committee considers, among others, the following factors: integrity, independence, diversity of viewpoints and backgrounds, extent of experience, length of service, number of other board and committee memberships, leadership qualities and ability to exercise sound judgment. 
 
Director Qualifications
 
In addition to the information above regarding each director’s business experience and service on the boards of directors of other companies, our board of directors considered the following experience, qualifications or skills of each of the directors in concluding that each director is qualified to serve on our board.  The information below is not intended to be an exhaustive list of the qualifications that the board of directors considered with respect to the directors.
 
Mr. Johnson has a broad background in managing and serving on the boards of directors of small companies.  He has served as Chairman and CEO of another public company in the past and has served on the boards of directors of over 20 companies and venture capital funds.  In addition, when he ran a venture capital operation, he was involved in the structuring, managing and financing of over 46 companies during a 20-year period.  He is currently CEO and President of TJ Ventures, Inc. which provides consulting services to a variety of early stage companies.  Presently, he is on the board of directors of two private companies and an applied research organization run by the University of Minnesota.
 
Mr. Chan has significant business experience with leadership of strategic business groups as senior executive of various public companies in Malaysia.  He also has in-depth knowledge of accounting and financial issues related to public companies due to his previous experience as an auditor of public companies.  He brings his specialized knowledge of merchant banking and corporate finance to our board and has outside board experience at several subsidiary companies related to ILTS’s parent company.  He also has affiliation with the Risk Management Committee of Berjaya Corporation Berhad, a diversified public corporation based in Kuala Lumpur, Malaysia.
 
Mr. O’Meara, Jr. brings to our board his profound business experience in serving as President of The Budget Plan and Owner and Director of Connecticut Yankee Greyhound Park and New England Harness Raceway.  In addition, he has specialized and extensive knowledge and experience in the consumer loan business and automobile dealerships.  During his 50-year career in financing business, Mr. O'Meara, Jr. has dealt extensively with purchase agreements, commercial and residential real estate mortgages, unsecured and secured loans. 
 
 
34
 

Mr. Lee  has extensive business and leadership experience in an executive and management capacity in both private and public companies including most recently serving as Executive Vice President and Director of Roadhouse Grill, Inc.  He is a certified and chartered accountant from the United Kingdom.  He brings financial and accounting expertise to our board due to his previous training and experience with the big 4 public accounting practice and as a financial executive in both private and public companies.
 
Mr. Ooi has significant business development and leadership experience in the lottery and related gaming industries in serving as senior executive of ILTS and other related companies.  In addition to the in-depth knowledge of finance and accounting due to his educational training and previous experience as an auditor of public companies in the United Kingdom, Mr. Ooi has outside board experience at several subsidiary companies related to ILTS’s parent company.
 
Mr. Tan has extensive experience in the field of research covering the various sectors of property, commodities, telecommunications and transport.  He brings finance and accounting expertise to our board due to his education at the London School of Economics, United Kingdom.  In addition to his outside board experience and global business experience in other public and private corporations in Malaysia, Hong Kong, Canada and the U.S., Mr. Tan served as a member of the Risk Management Committee of Berjaya Corporation Berhad, a diversified public corporation based in Kuala Lumpur, Malaysia.
 
Leadership Structure
 
The chairman of our board of directors and the president of our company serve different functions.  Our board of directors has determined that its leadership structure is appropriate and effective for the size of our company.  Our board of directors believes that having the chairman and president serve separate functions provides clear leadership, accountability and promotes strategic development and execution as our company executes our strategy and objectives.  Our board of directors and the nominating committee also believe that there is a high degree of transparency among directors and company management.  Three of the six members of our board are independent directors and all of those individuals serve on the committees of our board of directors.
 
Risk Oversight
 
Our board of directors is responsible for consideration and oversight of the risks facing the Company and its subsidiary.  Our board of directors regularly reviews information provided by management in order to ensure that material risks are identified and managed appropriately.  Our board considers, as appropriate, risks among other factors in reviewing our strategy, business plan, budgets and major transactions.  Our board committees assist the full board of directors’ oversight of our material risks by focusing on risks related to the particular area of concentration of the relevant committee.  For example, the compensation committee oversees risks related to our executive compensation plans and arrangements, the audit committee oversees the financial reporting and control risks and the nominating committee oversees risks associated with the independence of our board of directors and potential conflicts of interest, the affiliations committee oversees the related party activities to ensure fair and equitable pricing strategies. The full board of directors incorporates the insight provided by these reports into its overall risk oversight analysis.
 
Board Diversity
 
Although the nominating committee may consider whether nominees assist in achieving a mix of board members that represents a diversity of background and experience, which is not only limited to race, gender or national origin, we have no formal policy regarding board diversity.

Executive Officer of the Registrant

Jeffrey M. Johnson, 51, was appointed as President effective January 2007 and has been the Acting Chief Financial Officer since October 2011.  He served as Director of Technical Operations and held various positions in the Technical Operations capacity at ILTS for over 20 years.

There are no family relationships among members of our executive officers or our Board of Directors.
 
Audit Committee and Audit Committee Financial Expert

The Board of Directors has an Audit Committee consisting of Messrs. Johnson, O’Meara, Jr. and Lee.  The Audit Committee held four meetings during the year.  

The responsibilities of the Audit Committee include the appointment, compensation, retention and oversight of any independent registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services.  The Committee reviews with such auditors the periodic SEC filings, the scope and result of their audit and the result of the auditors’ evaluation of internal controls.  During fiscal years 2012 and 2011, all services were pre-approved by the Audit Committee.  The Chairman of the Audit Committee reviews and approves all engagement services provided by the Company’s Independent Registered Public Accounting Firm.

The Board of Directors has determined that the Audit Committee does not have an “audit committee financial expert” as defined under the applicable SEC rules and regulations because none of the current members of the Audit Committee meet the criteria required for an audit committee financial expert.  

Other Committees

The Board of Directors has an Executive Compensation Committee, Executive Committee, Nominating Committee and Affiliations Committee.

Shareholder Communications

The Company has a procedure by which shareholders can communicate with the Board members.  Shareholders may communicate with the Board by writing to the Chairman of the Board or individual Board members as follows: International Lottery & Totalizator Systems, Inc., Attention: Corporate Secretary, 2310 Cousteau Court, Vista, CA 92081. The Corporate Secretary will forward any shareholder communications as requested by the shareholder.
 
 
35
 

Code of Ethics

The Company has adopted an amended and restated Code of Conduct and Ethics that applies to all of its employees, officers, directors and consultants.    

Shareholders may obtain a copy of the Code of Conduct and Ethics by writing to the Company: International Lottery & Totalizator Systems, Inc., Attention: Corporate Secretary, 2310 Cousteau Court, Vista, CA 92081.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership of our equity securities with the SEC.  Officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish us with copies of all Section 16(a) filings.  Based solely on our review of the Section 16(a) filings, we believe that all required Section 16(a) reports were timely filed during our most recent fiscal year.
 
ITEM 11.
EXECUTIVE COMPENSATION

The following table sets forth, for the fiscal years ended April 30, 2012 and 2011, the compensation earned by the principal executive officer, the principal financial officer of the Company, and one other individual earning in excess of $100,000 during such years (the “Named Executive Officers”).

Summary Compensation Table

                           
Non-Equity
 
Non-Qualified
           
                           
Incentive
 
Deferred
           
               
Stock Awards
 
Option Awards
 
Plan
 
Compensation
 
All Other
       
Name And
 
Salary
 
Bonus
         
Compensation
 
Earnings
 
Compensation
   
Total
   
Principal Position
Year
($)
 
($)
 
($)
 
($)
 
($)
 
($)
 
($)
   
($)
   
                                                   
Jeffrey M. Johnson
 
2012
 
$
160,000
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
8,405
(1
)
   
$
168,405
President/Acting Chief Financial Officer
 
 
2011
 
$
160,000
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
8,405
(1
)
   
$
168,405
Barry Herron
 
2012
 
$
150,000
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
43,000
(2
)
   
$
193,000
Director of Sales
2011
 
$
137,500
  (3)
 
$
-
   
$
-
   
$