Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2014
[ ] 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)
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California
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95-3276269
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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2310 Cousteau Court
Vista, California
(Address of principal executive offices)
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92081-8346
(Zip Code)
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(760) 598-1655
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 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.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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ý
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Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares outstanding of the registrant’s Common Stock, no par value, as of March 13, 2014 was 12,962,999.
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PART I
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FINANCIAL INFORMATION
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PAGE
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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PART II
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OTHER INFORMATION
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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EXHIBIT 31
EXHIBIT 32
2
3
4
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Description of the Business
International Lottery & Totalizator Systems, Inc. (“ILTS” or the “Company,” together with its subsidiary) designs, manufactures, sells, manages, supports and services computerized wagering systems and terminals for the global lottery and pari-mutuel racing industries. The wagering system features include real-time, secure processing of data received from multiple locations, hardware redundancy and complete communications redundancy in order to provide the highest level of fault tolerant operation. In addition, although the Company is not presently doing so, ILTS has demonstrated capability to provide full facilities management services to customer organizations authorized to conduct lotteries. The Company is largely dependent upon significant contracts for its revenue, which typically include a deposit upon contract signing and up to six months lead time before delivery of hardware begins.
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:
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High level of security and vote encryption to ensure integrity and voter privacy;
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Electronic and paper audit trails that offer added security and redundancy for recounts;
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Reduce the cost of ballot printing while offering operational efficiencies;
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Minimal training required for poll workers to set-up and operate; and
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Minimal voter re-education required.
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Berjaya Lottery Management (H.K.) Ltd. (“BLM” or the “Parent”) owns 71.3% of the outstanding voting stock of ILTS.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of ILTS and its wholly-owned subsidiary, Unisyn. All significant intercompany accounts and transactions are eliminated in consolidation.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows have been included.
The results of operations for the interim periods shown in this report are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2013 filed with the SEC on July 9, 2013. The condensed consolidated balance sheet as of April 30, 2013 has been derived from the audited financial statements included in the Form 10-K for that year.
6
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. Actual results could differ from those estimates. Estimates may affect the reported amounts of assets and liabilities and revenues and expenses, and the disclosure of contingent assets and liabilities.
Deferred Revenues
Deferred revenues of approximately $785,000 as of January 31, 2014 represent prepayments for products and services related to the use of the OpenElect® and PBC voting systems, and other software and technical support services. The Company will recognize the revenues upon the fulfillment of the prescribed criteria for revenue recognition.
Warranty Reserves
Estimated warranty costs are accrued as revenues are recognized. Included in the warranty cost accruals are costs for basic warranties on products sold. A summary of product warranty reserve activity for the nine months ended January 31, 2014 is as follows:
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(Amounts in thousands)
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Balance at May 1, 2013
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$
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139
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Additional reserves
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355
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Warranty reserve expense adjustments
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(185
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)
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Charges incurred
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(91
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)
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Balance at January 31, 2014
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$
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218
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Income Taxes
The Company uses the asset and liability method for financial reporting of income taxes. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and the tax basis of assets and liabilities, and are measured by applying enacted rates and laws to taxable years in which such differences are expected to be recovered or settled. Any changes in tax rates or laws are recognized in the period when such changes are enacted. Valuation allowances have been established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty exists regarding the realizability of the deferred tax assets.
The provisions for income taxes were approximately $200,000 and $1.9 million for the three and nine months ended January 31, 2014, respectively. The effective rate was 34.73% for 2014, compared to a minimal effective rate for 2013. The increase in the effective rate for 2014 was due to the reversal of a portion of the valuation allowance and recording of a deferred tax asset at April 30, 2013. This deferred tax asset was fully recognized in the nine months ended January 31, 2014.
7
Segment Information
The Company reports segment information based on the “management” approach. Under this approach, operating segments are identified in substantially the same manner as they are reported internally and used by the Company’s chief operating decision maker for purposes of evaluating performance and allocating resources.
The Company divides its operations into two operating segments: the gaming business and the voting business. The gaming segment designs and develops computerized wagering systems and terminals for the lottery and pari-mutuel racing industries worldwide. Presently the voting segment generates revenues from the sales of the voting systems and hardware, software licensing, product servicing and software support services.
The Company’s segment information is presented below (in thousands):
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As of and for the Three Months Ended
January 31, 2014
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Gaming
Business
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Voting
Business
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Totals
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Total revenues
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$
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2,944
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$
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1,053
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$
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3,997
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Income from operations
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1,092
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58
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1,150
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Depreciation and amortization
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23
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21
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44
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Segment assets
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12,510
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2,177
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14,687
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As of and for the Three Months Ended
January 31, 2013
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Gaming
Business
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Voting
Business
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Totals
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Total revenues
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$
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1,724
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$
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282
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$
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2,006
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Income (loss) from operations
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185
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(277
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)
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(92
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)
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Depreciation and amortization
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27
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19
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46
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Segment assets
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8,214
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1,942
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10,156
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As of and for the Nine Months Ended
January 31, 2014
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Gaming
Business
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Voting
Business
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Totals
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Total revenues
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$
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18,475
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$
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2,262
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$
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20,737
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Income (loss) from operations
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5,810
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(328
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)
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5,482
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Depreciation and amortization
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78
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61
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139
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Segment assets
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12,510
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2,177
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14,687
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As of and for the Nine Months Ended
January 31, 2013
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Gaming
Business
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Voting
Business
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Totals
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Total revenues
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$
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5,356
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$
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2,337
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$
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7,693
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Income (loss) from operations
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1,350
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(31
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)
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1,319
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Depreciation and amortization
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83
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50
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133
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Segment assets
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8,214
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1,942
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10,156
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8
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:
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January 31,
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April 30,
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2014
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2013
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(Amounts in thousands)
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Raw materials and subassemblies
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$
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1,211
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$
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2,872
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Work-in-process
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5
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33
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Finished goods
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215
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760
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$
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1,431
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$
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3,665
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Equipment, Furniture and Fixtures
Net equipment, furniture and fixtures consisted of the following:
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January 31,
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April 30,
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2014
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2013
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(Amounts in thousands)
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Plant and machinery
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$
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661
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$
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757
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Computer equipment
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1,728
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1,662
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Leasehold improvement
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201
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201
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Furniture, fixtures and equipment
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96
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96
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Construction in progress
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-
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25
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2,686
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2,741
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Accumulated depreciation and amortization
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(2,145
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)
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(2,168
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)
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Net equipment, furniture and fixtures
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$
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541
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$
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573
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Net Income (Loss) per Share
Basic net income (loss) per share is based on the weighted average number of shares outstanding during the periods.
9
Major Customers
The following table summarizes major customers who individually accounted for more than 10% of revenues for the periods presented:
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Three Months Ended
January 31,
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Nine Months Ended
January 31,
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2014
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2013
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2014
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2013
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Revenue:
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From unrelated customers
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One customer from the voting segment accounted for 22% of total revenue
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One customer from the gaming segment accounted for 54% of total revenue
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One customer from the gaming segment accounted for 33% of total revenue
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One customer from the voting segment accounted for 22% of total revenue and one customer from the gaming segment accounted for 21% of total revenue
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From related customers
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One customer from the gaming segment accounted for 72% of total revenue
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One customer from the gaming segment accounted for 30% of total revenue
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One customer from the gaming segment accounted for 56% of total revenue
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Two customers from the gaming segment accounted for 47% of total revenue
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Related Party Transactions
During the three months ended January 31, 2014 and 2013, revenues from all related party transactions for the sales of products and services totaled approximately $2.9 million (73% of total revenue) and $646,000 (32% of total revenue), respectively. Related party revenues for the nine months ended January 31, 2014 and 2013 were approximately $11.7 million (56% of total revenue) and $3.7 million (48% of total revenue), respectively. Included in accounts receivable at January 31, 2014 was approximately $157,000 from these customers. Descriptions of the transactions with the Company’s related parties in the three and nine months ended January 31, 2014 and 2013 are presented below.
Berjaya Lottery Management (H.K.) Ltd.
In 1996, the Company entered into an agreement to purchase specific inventory on behalf of Berjaya Lottery Management (H.K.) Ltd. (“BLM”), the owner of 71.3% of ILTS’s outstanding voting stock as of January 31, 2014.
Over time, the Company has sold or used portions of the BLM inventory in unrelated third party transactions. The sale or use of the inventory resulted in a liability to BLM for the cost of the items utilized.
The financial activities and balances related to BLM were as follows:
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There were no related party sales to BLM in the three and nine months ended January 31, 2014 and 2013;
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There were no accounts receivable balances from BLM as of January 31, 2014 and April 30, 2013;
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Liabilities to BLM arising from the sale or use of the BLM inventory, recorded as “Payable to Parent,” were $202,000 as of both January 31, 2014 and April 30, 2013; and
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There were no inventory balances held for BLM as of January 31, 2014 and April 30, 2013.
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10
Sports Toto Malaysia Sdn. Bhd.
The Company provides lottery products, software development and software support services to Sports Toto Malaysia Sdn. Bhd. (“STM”), an affiliate of BLM and a related party.
In January 2013, the Company received from STM, an order valued at approximately $11 million for lottery products. Shipments of these products were completed in the third quarter of fiscal 2014, and the related revenue was recognized.
The financial activities and balances related to transactions with STM were as follows:
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Revenues of approximately $2.9 million and $11.5 million were recognized on the sale of lottery products and support services during the three and nine months ended January, 31, 2014, respectively. Revenues of $609,000 and $2.5 million were recognized on the performance of contract deliverables and support services during the three and nine months ended January 31, 2013, respectively;
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There was no cost of deferred revenues as of January 31, 2014. Cost of deferred revenues in connection with the lottery product order received in January 2013 mentioned above totaled $104,000 as of April 30, 2013;
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There was deferred revenue of $7,000 on lottery products and software support services as of January 31, 2014, compared to $3.3 million as of April 30, 2013; and
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Accounts receivable totaled $146,000 as of January 31, 2014, compared to $410,000 as of April 30, 2013.
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Philippine Gaming Management Corporation
The Company provides lottery products and software development to Philippine Gaming Management Corporation (“PGMC”), a related party and a subsidiary of BLM.
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:
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Revenues recognized on the sale of lottery products during the three and nine months ended January 31, 2014 totaled $7,000 and $72,000, respectively. Revenues of $2,000 and $1.1 million were recognized on the sale of lottery products during the three and nine months ended January 31, 2013, respectively;
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There were no deferred revenue balances as of January 31, 2014 and April 30, 2013; and
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·
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There were no accounts receivable balances as of January 31, 2014 and April 30, 2013.
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Natural Avenue Sdn. Bhd.
The Company provides Natural Avenue Sdn. Bhd. (“Natural Avenue”), an affiliate of BLM and a related party, with lottery products and support services.
The financial activities and balances related to transactions with Natural Avenue were as follows:
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Revenues of $36,000 and $107,000 were recognized on the sale of support services and licensing during the three and nine months ended January 31, 2014, respectively. Revenues of $35,000 and $105,000 were recognized on the sale of support services and licensing during the three and nine months ended January 31, 2013, respectively;
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·
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There was deferred revenue of $8,000 as of January 31, 2014. Deferred revenue balance on lottery product licensing totaled $4,000 as of April 30, 2013; and
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Accounts receivable was $11,000 as of January 31, 2014, compared to $1,000 as of April 30, 2013.
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11
Sports Toto Computers Sdn. Bhd.
The Company engages Sports Toto Computers Sdn. Bhd. (“STC”), a related party, to provide consulting, programming and other related services to the Company.
During the three and nine months ended January 31, 2014, the Company incurred services of approximately $51,000 and $152,000, respectively, which are shown as part of cost of sales. During the three and nine months ended January 31, 2013, the Company incurred approximately $65,000 and $145,000, respectively, which are shown as part of cost of sales.
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 as of January 31, 2014 and April 30, 2013 due to the short-term maturity of the instruments.
Subsequent Events
On January 8, 2014, the Company’s board of directors approved (i) the Company’s reincorporation from California to Delaware by means of a merger with and into a wholly-owned Delaware subsidiary (the “Reincorporation”) and (ii) a subsequent amendment to the surviving company’s certificate of incorporation to effect a 9,245,317-for-1 reverse stock split (the “Reverse Stock Split”) on outstanding shares of common stock. On January 8, 2014 (January 9, 2014 Malaysia Time), Berjaya Lottery Management (H.K.) Limited (“BLM”), the holder of 9,245,317 shares of the Company’s common stock, representing 71.3% of the Company’s outstanding shares of common stock as of that date, approved the Reincorporation and Reverse Stock Split by written consent. Each shareholder holding less than one full share of common stock following the Reverse Stock Split, being every shareholder of the Company other than BLM, will receive a cash payment from the Company for their fractional share interests equal to $1.33 in cash, without interest, for each share of common stock held by such shareholder immediately prior to the Reverse Stock Split. The Reincorporation and the Reverse Stock Split will be effected on or about the date 20 calendar days following the date on which the Company’s Information Statement on Schedule 14C relating to the Reincorporation and Reverse Stock Split is mailed to the Company’s shareholders. Following consummation of the transactions, the Company will promptly terminate its registration and reporting obligations under the Securities Exchange Act of 1934, as amended.
12
NOTE REGARDING FORWARD-LOOKING STATEMENTS
SAFE HARBOR STATEMENT PURSUANT TO SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934
This report contains certain forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under the heading "Risk Factors" and elsewhere in, or incorporated by reference into, this report. In some cases, you can identify forward-looking statements by terms such as "may," "intend," "might," "will," "should," "could," "would," "expect," "believe," "anticipate," "estimate," "predict," "potential," or the negative of these terms. These terms and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. The forward-looking statements in this report are based upon management's current expectations and belief, which management believes are reasonable. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially from those contained in any forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements. These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including such factors, among others, as market acceptance and market demand for our products and services, pricing, the changing regulatory environment, the effect of our accounting policies, potential seasonality, industry trends, adequacy of our financial resources to execute our business plan, our ability to attract, retain and motivate key technical, marketing and management personnel, and other risks described from time to time in periodic and current reports we file with the United States Securities and Exchange Commission, or the "SEC." You should consider carefully the statements under "Item 1A. Risk Factors" and other sections of this report, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable. We base our estimates on historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Estimates affect the reported amounts and related disclosures. Actual results may differ from initial estimates. There have been no material changes to the critical accounting policies outlined in the Company’s annual report on form 10-K for the fiscal year ended April 30, 2013.
13
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, with essential software, 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 marketplace, 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 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:
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1.
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Contract performance extends over long periods of time;
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2.
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The software portion involves significant production, modification or customization;
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3.
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Reasonably dependable estimates can be made on the progress towards completion, contract revenues and contract costs; and
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4.
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Each element is essential to the functionality of the other elements of the contracts.
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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
RESULTS OF OPERATIONS
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Revenue Analysis
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Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||||||
|
(Amounts in thousands)
|
January 31,
|
January 31,
|
||||||||||||||||||||||
|
Revenues
|
2014
|
2013
|
Change
|
2014
|
2013
|
Change
|
||||||||||||||||||
|
Products:
|
||||||||||||||||||||||||
|
Contracts
|
$
|
3,547
|
$
|
1,567
|
$
|
1,980
|
$
|
19,095
|
$
|
5,924
|
$
|
13,171
|
||||||||||||
|
Spares
|
49
|
54
|
(5
|
)
|
248
|
530
|
(282
|
)
|
||||||||||||||||
|
Licensing
|
103
|
88
|
15
|
381
|
315
|
66
|
||||||||||||||||||
|
Total Products
|
3,699
|
1,709
|
1,990
|
19,724
|
6,769
|
12,955
|
||||||||||||||||||
|
Services:
|
||||||||||||||||||||||||
|
Software Support
|
266
|
195
|
71
|
706
|
594
|
112
|
||||||||||||||||||
|
Product Servicing and Support
|
32
|
102
|
(70
|
)
|
307
|
330
|
(23
|
)
|
||||||||||||||||
|
Total Services
|
298
|
297
|
1
|
1,013
|
924
|
89
|
||||||||||||||||||
|
$
|
3,997
|
$
|
2,006
|
$
|
1,991
|
$
|
20,737
|
$
|
7,693
|
$
|
13,044
|
|||||||||||||
Significant fluctuations in period-to-period contract revenue are expected in both gaming and voting industries since individual contracts are generally considerable in value, and the timing of contracts does not occur in a predictable trend. Contracts from the same customer generally may not recur or generally do not recur in the short-term. Accordingly, comparative results between quarters may not be indicative of trends in contract revenue.
The current domestic and global economic slowdown and tightening of the credit markets may adversely affect our business and financial condition in ways that we cannot reasonably predict. For the gaming business, due to the tightening of the credit markets, our potential and existing customers may not be able to secure financing for lottery projects which could effectively impact our revenue potential. For the voting business, various government entities and jurisdictions have experienced severe budget constraints which could compel them to delay or cancel their purchasing decisions, and hence, impact our ability to generate revenue.
Contract revenue for the three months ended January 31, 2014 was approximately $3.5 million, compared to $1.6 million for the corresponding period in 2013. Higher contract revenue was primarily due to increased sales related to both the gaming and voting segments. For the nine months ended January 31, 2014, contract revenue was approximately $19.1 million, compared to $5.9 million for the corresponding period in 2013. Significantly higher contract revenue was primarily due to lottery product and hardware component sales related to the gaming and totalizator industries. The increase was partially offset by completion of a lottery contract and the absence of turnkey lottery system sales.
Spares revenue for the three months ended January 31, 2014 remained relatively flat at $49,000, compared to $54,000 for the same period in 2013. Spares revenue for the nine months ended January 31, 2014 was $248,000, compared to $530,000 for the corresponding period in 2013. The decrease was primarily due to lower demand for spare parts from an unrelated customer in the gaming segment. Customers' demand for spare parts fluctuates from period to period.
Licensing revenue for the three months ended January 31, 2014 was $103,000, compared to $88,000 in 2013. For the nine months ended January 31, 2014, licensing revenue was $381,000, compared to $315,000 for the corresponding period in 2013. The increases in licensing revenues were primarily due to additional executed licensing agreements related to the voting segment. We derive licensing revenue from both voting and lottery contracts.
Software support revenue for the three months ended January 31, 2014 was $266,000, compared to $195,000 for the same period in 2013. For the nine months ended January 31, 2014, software support revenue was $706,000, compared to $594,000 in the same period in 2013. Higher software support revenues were primarily due to increased fees to support a customer in the gaming segment.
15
Product servicing and support revenue for the three months ended January 31, 2014 was $32,000, compared to $102,000 for the same period in 2013. For the nine months ended January 31, 2014, product servicing and support revenue was $307,000, compared to $330,000 for the same period in the prior year. The decreases were primarily due to lower demand for support services in the voting segment, partially offset by increased support services from an unrelated customer in the gaming segment.
Related party revenue of approximately $2.9 million accounted for 73% of total revenue in the three months ended January 31, 2014, compared to $646,000 or 32% of total revenue in the corresponding period in 2013. For the nine months ended January 31, 2014, related party revenue of approximately $11.7 million accounted for 56% of total revenue, compared to $3.7 million or 48% of total revenue in the corresponding period in 2013.
Cost of Sales and Gross Profit Analysis
The following table summarizes the cost of sales and gross profit margins as a percentage of total revenues for each of the periods shown:
|
|
Three Months Ended
January 31,
|
Nine Months Ended
January 31,
|
||||||||||||||||||||||||||||||
|
(Amounts in thousands)
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||||||||||
|
Products
|
$
|
3,699
|
93
|
%
|
$
|
1,709
|
85
|
%
|
$
|
19,724
|
95
|
%
|
$
|
6,769
|
88
|
%
|
||||||||||||||||
|
Services
|
298
|
7
|
%
|
297
|
15
|
%
|
1,013
|
5
|
%
|
924
|
12
|
%
|
||||||||||||||||||||
|
Total revenues
|
$
|
3,997
|
100
|
%
|
$
|
2,006
|
100
|
%
|
$
|
20,737
|
100
|
%
|
$
|
7,693
|
100
|
%
|
||||||||||||||||
|
Cost of sales:
|
||||||||||||||||||||||||||||||||
|
Products
|
$
|
2,083
|
52
|
%
|
$
|
1,372
|
68
|
%
|
$
|
12,829
|
62
|
%
|
$
|
4,222
|
55
|
%
|
||||||||||||||||
|
Services
|
76
|
2
|
%
|
146
|
7
|
%
|
314
|
2
|
%
|
349
|
5
|
%
|
||||||||||||||||||||
|
Total costs of sales
|
$
|
2,159
|
54
|
%
|
$
|
1,518
|
75
|
%
|
$
|
13,143
|
64
|
%
|
$
|
4,571
|
60
|
%
|
||||||||||||||||
|
Gross profit:
|
||||||||||||||||||||||||||||||||
|
Products
|
$
|
1,616
|
40
|
%
|
$
|
337
|
17
|
%
|
$
|
6,895
|
33
|
%
|
$
|
2,547
|
33
|
%
|
||||||||||||||||
|
Services
|
222
|
6
|
%
|
151
|
8
|
%
|
699
|
3
|
%
|
575
|
7
|
%
|
||||||||||||||||||||
|
Total gross profit
|
$
|
1,838
|
46
|
%
|
$
|
488
|
25
|
%
|
$
|
7,594
|
36
|
%
|
$
|
3,122
|
40
|
%
|
||||||||||||||||
In general, individual contracts are significant in value and certain contracts are awarded in a highly competitive bidding process. The gross profit margin varies from one contract to another, depending on the size of the contract and the competitiveness of market conditions. Accordingly, comparative results between quarters and fiscal years may not be indicative of trends in gross profit margin.
Overall gross profit margin was 46% for the three months ended January 31, 2014, compared to 25% for the corresponding period in 2013. Significantly higher gross profit margin in the third quarter of 2014 was primarily due to increased contract sales activities and low cost structures. For the nine months ended January 31, 2014, overall gross profit margin was 36% compared to 40% for the corresponding period in 2013. Decreased gross profit in 2014 was primarily due to increased production overhead costs related to the voting segment.
16
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the three months ended January 31, 2014 were $688,000, compared to $580,000 in the same period in 2013. For the nine months ended January 31, 2014, SG&A expenses were $2.1 million, compared to $1.8 million for the corresponding period in 2013. Higher SG&A expenses in 2014 were primarily due to increased legal and professional fees, and higher expenses incurred for marketing activities related to the voting segment, partially offset by lower employee related and trade show expenses.
Income Tax Provision
The provisions for income taxes were approximately $200,000 and $1.9 million for the three and nine months ended January 31, 2014, respectively. The effective rate was 34.73% for 2014, compared to a minimal effective rate for 2013. The increase in the effective rate for 2014 was due to the reversal of a portion of the valuation allowance and recording of a deferred tax asset at April 30, 2013. This deferred tax asset was fully recognized in the nine months ended January 31, 2014.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our net working capital as of January 31, 2014 was approximately $11.4 million.
Contract backlog as of January 31, 2014 was approximately $2.9 million. Contract backlog is primarily related to voting contracts with unrelated customers. As of January 31, 2014, $536,000 of the contract backlog has been paid by customers.
Additional sources of cash through January 31, 2015 are expected to be derived from spares, software and technical support and licensing revenues. Uses of cash are expected to be for normal operating expenses and costs associated with contract deliverables.
While we anticipate that we will be successful in obtaining additional product or service contracts to enable us to continue normal operations through January 31, 2015, there can be no assurance that we will be able to acquire new contracts.
In the highly competitive industries in which we operate, operating results may fluctuate significantly from period to period. We anticipate that our cash flows from operations, expected contract payments and available cash will be sufficient to enable us to meet our liquidity needs through at least January 31, 2015. Although we are not aware of any particular trends, in the event that we are unable to secure new business, we may experience reduced liquidity or insufficient cash flows.
The following table summarizes our cash flow activities:
|
Nine Months Ended
|
||||||||||||
|
January 31,
|
January 31,
|
Increase
|
||||||||||
|
2014
|
2013
|
(Decrease)
|
||||||||||
|
(Amounts in thousands)
|
||||||||||||
|
Condensed cash flow comparative:
|
||||||||||||
|
Operating activities
|
$
|
3,486
|
$
|
3,734
|
$
|
(248
|
)
|
|||||
|
Investing activities
|
864
|
33
|
831
|
|||||||||
|
Net increase in cash and cash equivalents
|
$
|
4,350
|
$
|
3,767
|
$
|
583
|
||||||
17
Cash Flow Analysis
Net cash provided by operating activities was approximately $3.5 million for the nine months ended January 31, 2014, compared to $3.7 million in 2013. The principal components of the net decrease in cash flow from operations were the decreased deferred revenues and accounts payable. These were partially offset by net income of approximately $3.6 million, a decrease in inventory reflecting shipments, a decrease in deferred income taxes, and a decrease in accounts receivable.
Net cash provided by investing activities was $864,000 for the nine months ended January 31, 2014, compared to $33,000 in 2013. The increase in net cash flow from investments was due to the redemption of the matured certificates of deposit. Lower capital expenditures incurred in 2014 also attributed to the increase in new cash flow from investments.
There were no financing activities during the nine months ended January 31, 2014 or 2013.
Capital Resources
As of January 31, 2014, we did not have outstanding credit facilities.
18
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our 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.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have not been any changes in the Company’s internal control over financial reporting during the quarter ended January 31, 2014 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
|
PART II
|
OTHER INFORMATION
|
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
|
The Company is currently not a party to any pending legal proceedings, and no such action by or, to the best of its knowledge, against the Company has been threatened as of the date of this report.
|
ITEM 1A.
|
RISK FACTORS
|
There have been no material changes to the risk factors relating to our business as disclosed in our Form 10-K for the fiscal year ended April 30, 2013 filed with the SEC on July 9, 2013.
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Not applicable
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable
|
ITEM 5.
|
OTHER INFORMATION
|
Not applicable
19
|
ITEM 6.
|
EXHIBITS
|
A. Exhibits
|
Exhibit Number
|
Document Description
|
||
|
31
|
Certification of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
|
32
|
Certification Pursuant to 18 United States Code Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
|
101.INS
|
XBRL Instance Document
|
||
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
||
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
||
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
||
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
||
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
||
20
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Dated: March 13, 2014
|
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
|
||
|
/s/
|
Jeffrey M. Johnson
Jeffrey M. Johnson
President (Principal Executive Officer) and Acting Chief Financial Officer (Principal Financial Officer)
|