UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended: April 30, 2008 | ||
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from: to | ||
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Commission file number: 000-20685 | ||
AMERICAN WAGERING, INC.
(Exact name of registrant as specified in its charter)
Nevada |
| 88-0344658 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
675 Grier Drive, Las Vegas, Nevada 89119
(Address of principal executive offices)
702-735-0101
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
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 x 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer o |
| Smaller reporting company x |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of June 6, 2008, there were 8,129,879 shares of common stock, par value $0.01, outstanding.
TABLE OF CONTENTS
2
AMERICAN WAGERING, INC. AND SUBSIDIARIES
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| April 30, |
| January 31, |
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| (Unaudited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and Cash Equivalents |
| $ | 2,128,506 |
| $ | 3,316,595 |
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Restricted Cash |
| 1,332,289 |
| 1,323,688 |
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Accounts Receivable, net of allowance for doubtful accounts of $2,578 and $2,835 |
| 329,848 |
| 345,145 |
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Inventories |
| 437,706 |
| 443,639 |
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Deferred Tax Assets, net of allowance |
| 440,481 |
| 440,481 |
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Prepaid Expenses and Other Current Assets |
| 387,278 |
| 497,056 |
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| 5,056,108 |
| 6,366,604 |
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Property and Equipment, net of accumulated depreciation and amortization |
| 4,595,780 |
| 4,783,451 |
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Goodwill |
| 103,725 |
| 103,725 |
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Other Assets |
| 296,720 |
| 289,192 |
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| $ | 10,052,333 |
| $ | 11,542,972 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Current Portion of Long-Term Debt |
| $ | 731,308 |
| $ | 1,280,161 |
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Accounts Payable |
| 935,171 |
| 1,055,547 |
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Accrued Expenses |
| 1,119,021 |
| 1,006,310 |
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Unpaid Winning Tickets |
| 1,022,493 |
| 1,401,382 |
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Customer Deposits and Other |
| 888,531 |
| 1,535,960 |
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| 4,696,524 |
| 6,279,360 |
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Long-Term Debt, less current portion |
| 3,254,179 |
| 3,046,655 |
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Other Long-Term Liabilities |
| 573,816 |
| 655,693 |
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| 3,827,995 |
| 3,702,348 |
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Redeemable Series A Preferred Stock (3,238 shares) |
| 323,800 |
| 323,800 |
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| 8,848,319 |
| 10,305,508 |
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STOCKHOLDERS’ EQUITY |
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Series A Preferred Stock — 10.00% cumulative; $100.00 par and liquidation value; 18,924 shares authorized; 10,924 shares outstanding |
| 1,092,400 |
| 1,092,400 |
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Common Stock - $0.01 par value; 25,000,000 shares authorized; 8,129,879 shares issued and outstanding |
| 81,299 |
| 81,299 |
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Additional Paid-In Capital |
| 12,263,847 |
| 12,246,651 |
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Deficit |
| (11,906,039 | ) | (11,855,393 | ) | ||
Treasury Stock, at cost (61,100 common shares) |
| (327,493 | ) | (327,493 | ) | ||
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| 1,204,014 |
| 1,237,464 |
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| $ | 10,052,333 |
| $ | 11,542,972 |
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See Notes to Consolidated Financial Statements
3
AMERICAN WAGERING, INC. AND SUBSIDIARIES
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| For the Three Months Ended |
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| 2008 |
| 2007 |
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REVENUES: |
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Wagering |
| $ | 2,701,821 |
| $ | 2,163,589 |
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Hotel/Casino |
| 627,531 |
| 662,894 |
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Systems |
| 930,108 |
| 1,347,715 |
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| 4,259,460 |
| 4,174,198 |
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OPERATING COSTS AND EXPENSES: |
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Direct Costs: |
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Wagering |
| 2,208,929 |
| 2,080,181 |
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Hotel/Casino |
| 504,603 |
| 549,584 |
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Systems |
| 299,781 |
| 400,491 |
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| 3,013,313 |
| 3,030,256 |
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Operating Expenses: |
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Research and Development |
| 166,850 |
| 274,980 |
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Selling, General and Administrative |
| 781,653 |
| 789,530 |
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Depreciation and Amortization |
| 257,504 |
| 216,913 |
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| 1,206,007 |
| 1,281,423 |
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| 4,219,320 |
| 4,311,679 |
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OPERATING INCOME (LOSS) |
| 40,140 |
| (137,481 | ) | ||
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OTHER INCOME (EXPENSES): |
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Interest Income |
| 13,610 |
| 32,653 |
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Interest Expense |
| (63,009 | ) | (66,612 | ) | ||
Litigation Expense |
| (36,165 | ) | (55,475 | ) | ||
Other |
| 29,598 |
| 27,507 |
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| (55,966 | ) | (61,927 | ) | ||
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NET LOSS |
| $ | (15,826 | ) | $ | (199,408 | ) |
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NET LOSS PER COMMON SHARE BASIC |
| $ | (.01 | ) | $ | (.03 | ) |
See Notes to Consolidated Financial Statements
4
AMERICAN WAGERING, INC. AND SUBSIDIARIES
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| For the Three Months Ended |
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| 2008 |
| 2007 |
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Operating Activities |
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Net cash used in operating activities |
| $ | (1,030,098 | ) | $ | (580,984 | ) |
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Investing Activities |
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Gross increases in restricted cash |
| (169,733 | ) | (36,687 | ) | ||
Withdrawal of restricted cash |
| 161,132 |
| 46,605 |
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Proceeds from the sale of property and equipment |
| 1,500 |
| — |
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Purchase of property and equipment |
| (69,739 | ) | (187,399 | ) | ||
Net cash used in investing activities |
| (76,840 | ) | (177,481 | ) | ||
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Financing Activities |
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Repayment of borrowings |
| (126,331 | ) | (98,661 | ) | ||
Proceeds from borrowings |
| 80,000 |
| — |
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Preferred stock dividends |
| (34,820 | ) | (34,531 | ) | ||
Net cash used in financing activities |
| (81,151 | ) | (133,192 | ) | ||
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
| (1,188,089 | ) | (891,657 | ) | ||
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 3,316,595 |
| 4,537,424 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 2,128,506 |
| $ | 3,645,767 |
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See Notes to Consolidated Financial Statements
5
AMERICAN WAGERING, INC. AND SUBSIDIARIES
The accompanying unaudited interim consolidated financial statements of American Wagering, Inc. and all of its subsidiaries (collectively referred to hereafter as the “Company” or “AWI”) have been prepared in accordance with the instructions to Form 10-Q as published by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. Due to seasonality and other factors, results of operations for the current interim periods are not necessarily indicative of results to be expected for the full year. For further information, please refer to the annual consolidated financial statements of the Company, and the related notes, included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2008, filed on May 13, 2008, with the SEC. All significant inter-company accounts and transactions have been eliminated in the consolidation.
Basic loss per common share is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted net income per common share is ordinarily calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period. However, diluted net loss per common share is not presented for loss periods, since the effect of including potentially dilutive common shares would be anti-dilutive because of the losses. The amounts of potentially anti-dilutive common shares that have been excluded from any calculation of basic net loss per share were 746,899 and 745,349 at April 30, 2008 and 2007, respectively.
6
Following is a reconciliation of the numerators and denominators of the net loss per common share computations for the periods presented.
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| Net |
| Weighted |
| Per |
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For the three months ended April 30, 2008 |
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Net loss |
| $ | (15,826 | ) |
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Less preferred stock dividends |
| (34,820 | ) |
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Basic net loss per common share: |
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Net loss available to common shares |
| (50,646 | ) | 8,070,110 |
| $ | (0.01 | ) | ||||
Effect of dilutive stock options |
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| * |
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Diluted net loss per common share: |
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Net loss available to common shares |
| $ |
| * |
| * | $ |
| * | |||
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For the three months ended April 30, 2007 |
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Net loss |
| $ | (199,408 | ) |
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Less preferred stock dividends |
| (34,531 | ) |
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Basic net loss per common share: |
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Net loss available to common shares |
| (233,939 | ) | 8,070,988 |
| $ | (0.03 | ) | ||||
Effect of dilutive stock options |
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| * |
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Diluted net loss per common share: |
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Net loss available to common shares |
| $ |
| * |
| * | $ |
| * | |||
* Diluted income (loss) per share is not applicable for loss periods.
7
Effective February 1, 2007, as required, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). The income tax years of 2007, 2006, 2005 and 2004 remain open to examination under the statute of limitations by the U.S. federal, state and local respective taxing jurisdictions. Accordingly, management has reviewed the Company’s previously filed tax returns and particularly its NOL carryforwards available to reduce current and future tax obligations for the possible effect of FIN 48 as of January 1, 2007, and subsequently. Based on its evaluation, management believes that adopting FIN 48 did not have a material effect on our opening deficit at the time of adoption, the Company’s federal tax net operating loss (“NOL”) carryforwards, or the related deferred tax assets or the valuation allowance.
At April 30, 2008, the Company had federal tax NOL carryforwards available to potentially reduce future tax obligations in the aggregate amount of approximately $5.7 million, of which approximately $1.8 million expires in 2019. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The determination of profitability in the future is partially based on the market penetration of our kiosks and potential volume of systems sales; implementation of cost reductions; our sports betting volumes and win percentages; and other factors. Therefore, no additional tax benefit or expense provision was recognized for the current period loss.
Management has assessed the valuation allowance against the remainder of the deferred tax assets and continues to reevaluate this asset quarterly. The change in the deferred tax asset valuation allowance for the three months ended April 30, 2008, based on these estimates, created a deferred income tax expense provision of $34,017, which offset the current income tax benefit for the three-month period ended April 30, 2008. The change in the deferred tax asset valuation allowance for the three months ended April 30, 2007, based on these estimates, created a deferred income tax benefit of $(68,000), which offset the current income tax expense for the three month period ended April 30, 2007. Management believes that AWI will be sufficiently profitable for the short-term future, and it is therefore more likely than not that a portion, estimated to be approximately $440,000 of its net deferred tax asset, which resulted primarily from NOL carryforwards, will be realized. However, there can be no assurance that the Company will be profitable in the future.
The Company’s effective tax rate of zero for the interim periods presented differs from statutory tax rates primarily due to the utilization of NOL carryforwards and changes in deferred tax activity.
4. Litigation
For the three month periods ended April 30, 2008 and 2007, the Company recorded litigation judgment expense of $24,916 and $55,475, respectively, representing additional accrued interest on our previously recorded obligation due to Michael Racusin under a settlement agreement and, $11,249 in 2008 related to a settlement regarding an office space contract.
The Company is a party to proceedings that are ordinary in nature and incidental to the Company’s business. Management is unable to estimate any minimum losses from any of these proceedings. Accordingly, no losses have been accrued for the quarter ended April 30, 2008.
Activity related to both the employee and directors’ stock option plans for the three months ended April 30, 2008 and 2007 was as follows:
8
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| Option Shares |
| Weighted- |
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Balance at January 31, 2008 |
| 749,299 |
| $ | 1.75 |
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Granted |
| — |
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Exercised |
| — |
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Forfeited or canceled |
| — |
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Balance at April 30, 2008 |
| 749,299 |
| 1.75 |
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Balance at January 31, 2007 |
| 757,749 |
| $ | 1.80 |
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Granted |
| — |
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Exercised |
| — |
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Forfeited or canceled |
| (26,250 | ) | 2.00 |
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Balance at April 30, 2007 |
| 731,499 |
| 1.79 |
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Stock options exercisable and available for future grants for both current stock option plans as of April 30, 2008 are as follows:
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| Shares |
| Weighted- |
| Weighted- |
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Exercisable |
| 488,500 |
| $ | 1.86 |
| 5.23 years |
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Available for future grants |
| 208,767 |
| — |
| — |
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Non-cash stock-based compensation expense recorded in the line item “Selling, General and Administrative Expenses” on the consolidated income statements for the three months ended April 30, 2008 and 2007 was $17,196 and $50,839, respectively.
6. Business Segments
Wagering Segment. The following table indicates the primary components of revenue and operating costs resulting in this segment’s operating income (loss).
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| Three Months Ended April 30, |
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| 2008 |
| 2007 |
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Revenue |
| $ | 2,701,821 |
| $ | 2,163,589 |
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Direct Costs |
| 2,208,929 |
| 2,080,181 |
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Selling, General and Administrative |
| 301,166 |
| 222,450 |
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Depreciation and Amortization |
| 79,444 |
| 67,984 |
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| 2,589,539 |
| 2,370,615 |
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Operating Income (Loss) |
| $ | 112,282 |
| $ | (207,026 | ) |
9
Hotel/Casino Segment. The following table indicates the primary components of revenue and operating costs resulting in this segment’s operating loss.
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| Three Months Ended April 30, |
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| 2008 |
| 2007 |
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Revenue |
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Casino |
| $ | 375,094 |
| $ | 345,415 |
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Hotel |
| 113,266 |
| 134,283 |
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Food/Beverage |
| 170,420 |
| 212,208 |
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Less: Casino Cash Incentives and Other Promotional Allowance |
| (31,249 | ) | (29,012 | ) | ||
|
| 627,531 |
| 662,894 |
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Direct Costs and Expenses |
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Casino |
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| 149,931 |
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| 129,206 |
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Hotel |
| 47,543 |
| 52,863 |
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Food/Beverage |
| 202,623 |
| 227,871 |
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Unallocated |
| 104,506 |
| 139,644 |
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| 504,603 |
| 549,584 |
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Selling, General and Administrative |
| 90,420 |
| 176,783 |
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Depreciation and Amortization |
| 69,086 |
| 56,376 |
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|
| 664,109 |
| 782,743 |
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Operating Loss |
| $ | (36,578 | ) | $ | (119,849 | ) |
Systems Segment. The following table indicates the primary components of revenue and operating costs resulting in this segment’s operating income (loss).
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| Three Months Ended April 30, |
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| 2008 |
| 2007 |
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Revenue |
| $ | 930,108 |
| $ | 1,347,715 |
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Direct Costs |
| 299,781 |
| 400,491 |
| ||
Research and Development |
| 166,850 |
| 274,980 |
| ||
Selling, General and Administrative |
| 390,067 |
| 390,297 |
| ||
Depreciation and Amortization |
| 108,974 |
| 92,553 |
| ||
|
| 965,672 |
| 1,158,321 |
| ||
Operating Income (Loss) |
| $ | (35,564 | ) | $ | 189,394 |
|
Operating Income (Loss) to Net Loss. The following table reconciles the operating income (loss) from each segment to net loss.
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| Three Months Ended April 30, |
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|
| 2008 |
| 2007 |
| ||
Operating Income (Loss) |
|
|
|
|
| ||
Wagering |
| $ | 112,282 |
| $ | (207,026 | ) |
Hotel/Casino |
| (36,578 | ) | (119,849 | ) | ||
Systems |
| (35,564 | ) | 189,394 |
| ||
|
| 40,140 |
| (137,481 | ) | ||
Other Income (Expenses) |
|
|
|
|
| ||
Interest Income |
| 13,610 |
| 32,653 |
| ||
Interest Expense |
| (63,009 | ) | (66,612 | ) | ||
Litigation Expense |
| (36,165 | ) | (55,475 | ) | ||
Other |
| 29,598 |
| 27,507 |
| ||
|
| (55,966 | ) | (61,927 | ) | ||
Net Loss |
| $ | (15,826 | ) | $ | (199,408 | ) |
10
Definitions. For the purposes of this report, the following terms have the following meanings:
“Company” means American Wagering, Inc. and its subsidiaries collectively.
“AWI” means American Wagering, Inc.
“AWIG” means AWI Gaming, Inc., a wholly-owned subsidiary of AWI.
“AWIM” means AWI Manufacturing, Inc., a wholly-owned subsidiary of AWI.
“CBS” means Computerized Bookmaking Systems, Inc., a wholly-owned subsidiary of AWI.
“Leroy’s” means Leroy’s Horse & Sports Place, Inc., a wholly-owned subsidiary of AWI.
“Sturgeons, LLC” means Sturgeons, LLC, a wholly-owned subsidiary of AWIG.
“Sturgeon’s” means Sturgeon’s Inn & Casino (which, as of March 1, 2006, is owned by Sturgeons, LLC).
Overview. Our primary operating strategies for the foreseeable future are to focus on our core businesses relating to the race and sports industry, and the operation of Sturgeon’s. Our intentions regarding the following subsidiaries are to continue:
· Leroy’s - operating existing sports books, adding new books where and when appropriate, and continuing to become more efficient in order to reduce expenses. We will also continue our review of existing Leroy’s locations in order to close those locations that are not operating efficiently. Based on our strategy, the number of race and sports books operated by Leroy’s may increase or decrease in the future, due to the closure of unprofitable locations or host properties, closures due to other factors beyond our control and/or the possible opening of new locations with greater potential for profitability. There is no assurance that Leroy’s will be able to add new locations and/or that any new locations so added will be profitable.
· CBS - developing, selling and maintaining computerized race and sports wagering systems for the gaming industry and seeking strategic international alliances with third party gaming suppliers and/or gaming operators that desire to utilize our expertise in the race and sports industry. These strategies should enable us to gain a competitive advantage by offering the gaming operator and/or the betting patron a well-rounded gaming experience, both in the United States and abroad.
· AWIM - developing the self-service wagering kiosk, installing kiosks in Leroy’s locations to assist in controlling personnel costs, and marketing the kiosks to non-Leroy’s locations.
· Sturgeon’s - - evaluating and changing the slot mix, where and when appropriate, and modify existing procedures to increase efficiency and reduce expenses.
Where appropriate, we will continue to explore possible new locations for our products, including foreign jurisdictions. We have implemented, and are continuing to initiate, other cost cutting measures throughout the Company. In the first quarter of fiscal 2009, the Company reduced its workforce by means of a lay-off of several employees in all subsidiaries and began to focus more on cost controls. We will continue to evaluate and closely monitor costs, looking for efficiencies and improvements during at least the remainder of fiscal 2009.
During fiscal 2008, and continuing through the first quarter of fiscal 2009, our local, regional and national economy has been negatively impacted due to a number of factors, including the subprime mortgage crisis and
11
higher gasoline and transportation costs. Confidence in the credit market has also eroded, which resulted in a tightening of credit availability. Consumer demand for gambling, due to decreased disposable income, may further decline during an economic downturn or recession. We face the risk that the effects of higher interest rates, continued higher energy costs and pressure on housing prices may place added strain on consumers’ ability to make purchases, repay their loans and thus, leave less funds available for travel and leisure activities. Accordingly, this economic downturn in the United States could hurt our financial performance if wagering activity decreases. We may undergo additional cost reductions due to a decline in the demand for wagering, depending on the economic conditions.
As of April 30, 2008, we had working capital of $359,584, compared to working capital of $87,244 at January 31, 2008. The increase in working capital is primarily due to a decrease in current liabilities, as a result of the pay-down of the Racusin obligation; and reductions in future bets and unpaid tickets as a result of paying out these tickets after the end of football season and the last big game. The decrease in current liabilities was greater than the decrease in current assets during the three months ended April 30, 2008. The decrease in current assets was partially reduced by cash inflows generated by increased wagering revenues for the first quarter of fiscal 2009.
On April 21, 2008, U.S. Bank approved a revolving credit note for $500,000 for the Company. The purpose of this credit note is to provide overdraft protection on our checking accounts. Any negative balances on our checking accounts will sweep into this overdraft protection credit note and then will be automatically repaid when the funds in the checking accounts return to a positive balance. The maturity date of this credit note is December 31, 2008, but may be renewed at that time, if agreed to by the Company and the bank. The unpaid principal balance will bear interest at the prime rate. Interest is payable monthly commencing on May 1, 2008 and the loan matures on December 31, 2008. On April 30, 2008, the Company had drawn down approximately $209,000 under the revolving credit note.
Our principal cash requirements consist of payroll and benefits, business insurance, real estate and equipment leases, legal expenses, telecommunications, debt service, interest expense, and costs related to inventory, including those costs to assemble race/sports systems for our CBS customers.
As of April 30, 2008, net cash used in operations increased by $449,114 over the comparable period of last year, primarily due to decreased systems sales and installations, and increased payouts due to the payout on the last big football game wagers, partially offset by increased wagering revenue for other sports. In the three months ended April 30, 2008, one-time or infrequent systems and software sales were approximately $270,000 less than in the three months ended April 30, 2007.
Net cash used in investing activities for the three months ended April 30, 2008 decreased by $100,641, as compared to $177,481 in the same period last year, primarily as a result of decreased purchases of furniture and equipment.
Net cash used in financing activities for the three months ended April 30, 2008 decreased by $52,041, as compared to $133,192 for the three months ended April 30, 2007, primarily due an $80,000 advance on a loan from our president to the Company in the current period, partially offset by an increase in repayment of borrowings compared to fiscal 2008.
Regulation: Nevada Gaming Commission Regulation 22.040 (“Regulation 22.040”) requires us to maintain reserves (cash, surety bonds, irrevocable standby letter of credit, etc.) sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and telephone account deposits. We maintained a Regulation 22.040 reserve in the amount of $3.0 million in the form of a surety bond issued by Fidelity and Deposit Company of Maryland (a subsidiary of Zurich American Insurance). On November 16, 2007, due to increased
12
handle, we increased the bond to $3.4 million along with a cash deposit of $1.2 million which secures this bond. The cash deposits, in the form of certificates of deposit, are held at Great Basin Bank of Nevada along with an irrevocable letter of credit, also with Great Basin Bank of Nevada, that was originally $1.0 million, which also increased to $1.2 million on November 16, 2007.
If we are required to increase the Regulation 22.040 reserve and are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy’s, an elimination or reduction of telephone wagering accounts, and a reduction in net income.
We do not have any off-balance sheet financing arrangements or liabilities. We may, from time to time, seek additional capital to fund our operations, reduce our liabilities, or fund our expansion plans (including acquisitions). To raise capital, we may seek to sell additional equity securities (common or preferred), issue debt or convertible securities, or obtain credit facilities through financial institutions. The sale of additional equity or convertible securities would result in dilution to our shareholders.
We believe that we will be able to satisfy our operating cash requirements for at least the next 12 months from existing cash balances and anticipated cash flows. We plan to accumulate cash liquidity during the current fiscal year (ending January 31, 2009) to help us fund the following: litigation expenses and judgments; potential purchase of kiosks; volatility and seasonality effects of sports betting; volatility and timing of system sales; compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002.
We report our results of operations through three operating segments: Wagering, Hotel/Casino and Systems. Although numerous factors are taken into consideration, the operating income (loss) of the segment represents a significant profitability measure used by us in allocating resources and assessing performance of the segments.
|
| Three Months Ended April 30, |
| |||||||||
Summary |
| 2008 |
| 2007 |
| $ Change |
| % Change |
| |||
Revenues |
| $ | 4,259,460 |
| $ | 4,174,198 |
| $ | 85,262 |
| 2.04 |
|
|
|
|
|
|
|
|
|
|
| |||
Less: Costs and Expenses |
| 4,219,320 |
| 4,311,679 |
| (92,359 | ) | (2.14 | ) | |||
Less: Other (Income) and Expenses |
| 55,966 |
| 61,927 |
| (5,961 | ) | (9.63 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
Net (Loss) |
| $ | (15,826 | ) | $ | (199,408 | ) | $ | 183,582 |
| (92.06 | ) |
Please refer to the discussions below (“Wagering Segment,” “Hotel/Casino Segment,” “Systems Segment,” and “Other Income and Expense”) for additional information, discussion and analysis.
The Wagering Segment includes the operating results of the sports gaming wagers, net of payouts and expenses.
Wagering Segment revenues for the three months ended April 30, 2008 increased $538,232 (+24.88%) over the three months ended April 30, 2007. This increase is attributed to the following factors:
We experienced increased basketball and baseball handle during the three months ended April 30, 2008 compared to the same period in the prior year due to having more locations and the improvements and expansion of
13
some of our previously existing locations. These increases in handle resulted in increased revenues for this period. Despite a $650,000 negative change in the results of the last big game of football season, held on February 3, 2008, for the first quarter of fiscal 2009 compared to the same quarter in fiscal 2008, handle and win increased for other sports, resulting in a net increase in revenues for the quarter ending April 30, 2008.
Wagering Segment total costs and expenses for the three months ended April 30, 2008 increased $218,924 (+9.23%) over the three months ended April 30, 2007. This increase is attributed to the following factors:
Direct costs increased primarily due to increased expenses related to establishing new locations, advertising expenses, wages due to additional locations, increased communication costs and increases in rent paid to our Leroy’s sports book locations. These increases were partially offset by cost reductions in personnel expense.
Selling, general and administrative costs decreased primarily due to decreases in various administrative costs in the three months ending April 30, 2008 compared to the three months ending April 30, 2007. Management fees allocated to the segments increased due to increased insurance, legal, and other public company costs.
Depreciation and amortization expense increased over the prior year’s three month period primarily due to an increase in capitalized acquisitions compared to the same three month period ending April 30, 2007.
Note that an increase or decrease in handle is not necessarily indicative of an increase or decrease in revenues or profits. Elimination of unprofitable locations, closure of host properties, changes in state and/or federal regulations, and other factors beyond our control may result in declines in handle.
We intend to continue to open new locations that we expect to operate profitably and to continue our review of existing locations in order to close those locations that are not operating efficiently. There is no assurance that the number of race and sports books operated by us will not decrease in the future due to elimination of unprofitable locations, closure of host properties, and other factors beyond our control, that we will be able to add new locations, and/or that any new locations so added will be profitable.
The Hotel/Casino Segment includes the operating results of Sturgeon’s. Sturgeon’s commenced operations on March 1, 2006.
Hotel/Casino Segment revenues for the three months ended April 30, 2008 decreased $35,363 (-5.33%) over the three months ended April 30, 2007. This decrease is attributed to the following factors:
Casino revenues increased primarily due to increased handle and wagering activities for the quarter ending April 30, 2008 compared to the same period ending April 30, 2007.
Hotel revenues decreased in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 due to a lower occupancy rate, primarily due to weather issues and decreased travel.
Food and beverage revenues decreased primarily due to the decline in occupancy for the three months ended April 30, 2008 compared to the three months ended April 30, 2007. Casino cash incentives and other promotional allowances remained approximately the same for both periods.
Hotel/Casino Segment total costs and expenses for the three months ended April 30, 2008 decreased $118,634 (-15.16%) over the three months ended April 30, 2007. This decrease is attributed to the following factors:
14
Direct costs for the casino operations increased for the three months ended April 30, 2008 compared to the three months ended April 30, 2007 due to increased handle at the casino.
Direct costs for the hotel operations decreased primarily due to lower occupancies for the three months ended April 30, 2008 compared to the three months ended April 30, 2007.
Direct costs for food and beverage operations decreased primarily due to lower occupancies in the hotel for the three months ended April 30, 2008 compared to the three months ended April 30, 2007.
Selling, general and administrative costs for Sturgeon’s decreased primarily because there was no bonus payment made in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, due to the prior year-to-date loss; and decreased casino personnel costs over the first quarter of the prior year.
The Systems Segment includes the operating results of our systems sales, installations and maintenance, less the related expenses.
Systems Segment revenues for the three months ended April 30, 2008 decreased $417,607 (-30.99%) over the three months ended April 30, 2007. This decrease is attributed to the following factors:
Systems revenues decreased over the prior fiscal year due to a decreased number of infrequent sales. The following table shows the approximate system sales revenue comparison for both fiscal years’ first quarters:
|
| Three Months Ended April 30, |
| ||||
Systems Revenues |
| 2008 |
| 2007 |
| ||
Software sales |
| $ | 0 |
| $ | 112,000 |
|
Equipment installations |
| 183,000 |
| 372,000 |
| ||
Kiosk sales |
| 170,000 |
| 136,000 |
| ||
|
|
|
|
|
| ||
Total |
| $ | 353,000 |
| $ | 620,000 |
|
Revenues from maintenance contracts increased slightly over the prior fiscal year. This increase is attributable to the addition of the number of new customers and the higher fees charged to customers.
Systems Segment total costs and expenses for the three months ended April 30, 2008 decreased $192,649 (-16.63%) over the three months ended April 30, 2007. This decrease is attributed to the following factors:
Direct costs for systems decreased over the prior three months ended April 30, 2007 primarily due to decreased wages and benefits resulting from a reduction and realignment of personnel, improving our operational efficiencies and a decline in the number of sales installations.
Research and development costs decreased from the prior three months ended April 30, 2007 primarily due to decreased personnel expense and greater efficiencies.
Depreciation and amortization increased from the prior three months ended April 30, 2007 due to increased property acquisitions, primarily due to the equipment and software upgrades to our networks.
Other income and (expenses). The other income and (expenses) categories are primarily administrative in nature and, as such, are not directly attributable to any operating segment. Accordingly, these items are generally not taken into consideration by us when we allocate resources to the segments or assess the performance of the segments.
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Interest Income: The majority of interest income is attributable to interest earned on restricted cash deposits required for the Regulation 22.040 reserve. The decrease in interest income of $19,043 is due primarily to decreased interest rates paid on our cash deposits and less held in cash deposits.
Litigation expense of $36,165 was recorded in the first three months of fiscal 2009; of which $24,916 was related to the Racusin litigation settlement, compared to Racusin litigation expense of $55,475 for the same three month period of the prior fiscal year. The decreased interest is due to a decline in the principal amount owed to Racusin, due to our payments. The remainder of $11,249 is due to a settlement paid related to an office space contract.
Income tax expense (benefit). The Company’s effective tax rate of zero for the interim periods presented differs from statutory tax rates primarily due to the utilization of NOL carryforwards and changes in deferred tax activity.
Critical accounting estimates and policies.
Although our financial statements necessarily make use of certain accounting estimates by our management, we believe that, except as discussed below, we do not employ any critical accounting policies or estimates that are either selected from among available alternatives, or require the exercise of significant management judgment to apply, or that if changed are likely to affect future periods. The following summarizes our critical estimates and policies.
Wagering
We record wagering revenues in compliance with Nevada law and the regulations of the Nevada gaming regulators. For sports and non-pari-mutuel race, we use an accrual method wherein the handle (total amount wagered) is recognized on the day the event occurs (rather than the day the wager is accepted) decreased by the total amount owed to patrons with winning wagers. This gross calculation (handle less payouts) is then adjusted upward to account for any winning wagers that were not redeemed (cashed) within the specified time period. For pari-mutuel race, commission and breakage revenues are recorded when the wagers are settled, typically the same day as the wager. Other sources of revenue are relatively insignificant.
Hotel/Casino Revenue
We report the wagering revenues of Sturgeon’s, which is primarily comprised of slot revenue, hotel room revenue and food and beverage revenue, in compliance with Nevada law and the regulations of the Nevada gaming regulators. These revenues are generally in the form of cash, personal checks, credit cards, or gaming chips and tokens, which do not require estimates. We do estimate certain liabilities with payment periods that extend for longer than several months. We believe these estimates are reasonable based on our assumptions related to possible outcomes in the future. Future actual results might differ materially from these estimates. Slot revenue is the drop (the total amount removed from the machine) less the fills and the payouts. Bingo revenue is calculated as the total handle (the amount wagered) less the payouts. For non-gaming revenues, such as food and beverage, hotel, etc., we record revenues in compliance with generally accepted accounting principles, recognizing revenue when it is earned. The Sturgeon’s acquisition was completed on March 1, 2006 and wagering revenues for the Sturgeon’s operation were reported for the first time in the fiscal year ended January 31, 2007.
System — Software
We recognize software revenue in accordance with the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Software Revenue Recognition, With Respect to Certain Transactions. Software license fees represent revenues related to licenses for race/sports software delivered to customers for in-house use. Revenues from software license agreements (including any related training revenue) are recognized upon installation of the software.
16
System — Hardware
We recognize hardware revenue (including any related installation revenue) upon installation of the hardware.
System — Maintenance
We negotiate maintenance agreements with each of our customers to provide for the long-term care of the software and hardware. Pursuant to the terms of the various maintenance agreements, a fixed sum is due at the beginning of each month regardless of whether the customer requires service during that month. We recognize maintenance revenue on the first day of each month for which the maintenance agreement is in place; we maintain an allowance for doubtful accounts in the event that any such revenue recorded is not realized.
Long-Lived Assets
Owned property and equipment are recorded at cost and depreciated to residual values over the estimated useful lives using the straight-line method. Leasehold improvements on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. The useful life, currently estimated, of our equipment generally ranges from 3 to 10 years. We test for impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired, under the standards of Statement of Financial Accounting Standard (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss is recognized if the carrying amount of the asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset.
Accounting for Income Taxes
Effective February 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). Accordingly, we have reviewed our previously filed tax returns and particularly our NOL carryforwards available to reduce current and future tax obligations for the possible effect of FIN 48 and to estimate the extent to which it remains needed as of April 30, 2008. Based on our evaluation, we believe that adopting FIN 48 did not have a material effect on our opening deficit at the time of adoption, our NOL carryforwards, or the related deferred tax assets or valuation allowance. We also believe that we will be sufficiently profitable for the short-term future, and it is therefore more likely than not that an estimate of approximately $440,000 of our net deferred tax asset, which resulted primarily from NOL carryforwards, will be realized.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of SFAS No 115, which will permit the option of choosing to measure certain eligible items at fair value at specified election dates and report unrealized gains and losses in earnings. SFAS No. 157 will become effective for us for financial statements issued for the fiscal year ending January 31, 2009, except that for nonfinancial assets and liabilities, it will not become effective for us until the following year unless SFAS No. 159 is adopted earlier. Since we have no assets or liabilities carried at estimated fair values, and we do not presently intend to take the fair value option offered by SFAS No. 159, there will likely be no affect of SFAS No. 157 on our future consolidated financial statements.
In December 2007, the FASB issued SFAS 141R, Business Combinations, which will significantly change the accounting for business combinations and certain other transactions. SFAS 141R will apply prospectively to business combinations and certain other transactions for which the acquisition date is on or after the start of the first annual reporting period beginning on or after December 15, 2008, and early adoption is prohibited. Since we are not
17
now contemplating any covered transactions after its effective date, we currently expect that SFAS 141R will not have an impact on our future financial position, results of operations and operating cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company currently has and presently contemplates obtaining no noncontrolling interests in any subsidiaries, and we do not expect any effect of SFAS 160 in the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of April 30, 2008. As part of our evaluation, management took into account the material weakness in our disclosure controls and procedures identified by management in our Form 10-K for the fiscal year ended January 31, 2008. We determined that our disclosure controls and procedures, specifically with respect to a late Form 8-K filed on February 29, 2008 (which should have been filed on or before February 13, 2008) were not effective. Management has implemented a procedure requiring that any material agreement or amendment thereto be submitted to and reviewed by our Chief Financial Officer and in-house counsel prior to execution thereof.
Changes in Internal Control over Financial Reporting
There has not been any changes in the Company’s internal controls over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three months ended April 30, 2008 that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
Racusin
There have been no material legal changes for this matter during the quarter ended April 30, 2008 from the fiscal year ended January 31, 2008. Payments from February 1, 2008 through April 30, 2008 totaled $331,165. At April 30, 2008, approximately $1.38 million remained outstanding to Racusin.
Other
The Company is a party to proceedings that are ordinary in nature and incidental to the Company’s business. Management is unable to estimate any minimum losses from any of these proceedings. Accordingly, no losses have been accrued for the quarter ended April 30, 2008.
18
A description of our risk factors can be found in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2008. There were no material changes to those risk factors during the three months ended April 30, 2008.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
19
EXHIBIT NUMBER |
| DESCRIPTION |
10.1 |
| Change in Terms Agreement, dated May 5, 2008, between AWI Gaming, Inc., and Great Basin Bank of Nevada; |
|
|
|
10.2 |
| Commercial Guaranty, dated May 5, 2008, by American Wagering, Inc. in favor of Great Basin Bank of Nevada; |
|
|
|
10.3 |
| Commercial Guaranty, dated May 5, 2008, by Sturgeon’s, LLC in favor of Great Basin Bank of Nevada |
|
|
|
31.1 |
| Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)-Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
| Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)-Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
| Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and Title 18 U.S.C. Section 1350-Section 906 of the Sarbanes-Oxley Act of 2002 |
20
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN WAGERING, INC.
Dated: June 13, 2008 |
|
|
|
/s/ Victor J. Salerno |
|
Victor J. Salerno |
|
President, Chief Executive Officer, Chief Operating |
|
Officer, and Chairman of the Board of Directors |
|
|
|
/s/ Melody J. Sullivan |
|
Melody J. Sullivan |
|
Chief Financial Officer and Treasurer |
|
21
