UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27226
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SPINTEK GAMING TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 33-0134823
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
901-B Grier Drive, Las Vegas, Nevada 89119
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(Address of principal executive offices) (Zip Code)
(702)263-3660
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer (1) filed all reports to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
18,673,055 shares of Common Stock, $0.002 par value as of October 31, 1998
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SPINTEK GAMING TECHNOLOGIES, INC.
FORM 10-QSB
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1998 and June 30, 1998 3
Consolidated Statements of Operations for the Three Months Ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE PAGE 14
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2
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SPINTEK GAMING TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, June 30,
1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................ $ 860 $ 500
Accounts receivable, net .................................... 277 229
Prepaid and other current assets ............................ 457 46
Inventories, net ............................................ 908 679
-------- --------
Total current assets ...................................... 2,502 1,454
Furniture, fixtures and equipment, net ........................ 162 144
Licenses and patents .......................................... 1,019 1,019
Other assets .................................................. 127 126
-------- --------
Total assets .................................................. $ 3,810 $ 2,743
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................ $ 599 $ 852
Demand notes payable to affiliates .......................... 20 190
Accrued liabilities ......................................... 591 640
Accrued interest ............................................ 108 53
Customer deposits ........................................... 300 247
Dividends payable ........................................... 568 485
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Total current liabilities ................................. 2,186 2,467
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Long-term debt ................................................ 4,450 2,350
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Stockholders' deficit:
Convertible preferred stock, no par value, 100,000 shares
authorized, 8,241 shares issued and outstanding ........... 5,355 5,355
Common stock, $.002 par value, 100,000,000 shares authorized,
19,990,384 shares issued and outstanding .................. 40 40
Additional paid-in capital .................................. 5,772 5,855
Accumulated deficit ......................................... (13,964) (13,295)
Treasury stock, 1,317,329 shares, at cost ................... (29) (29)
-------- --------
Total stockholders' deficit ............................... (2,826) (2,074)
-------- --------
Total liabilities and stockholders' deficit ................... $ 3,810 $ 2,743
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
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SPINTEK GAMING TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
September 30,
-----------------------
1998 1997
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<S> <C> <C>
Sales .............................................. $ 1,002 $ --
Cost of sales ...................................... 543 --
-------- --------
Gross profit ..................................... 459 --
Selling, general and administrative expenses ....... 980 683
Research and development expense ................... 85 166
-------- --------
Operating loss ................................... (606) (849)
Other income (expense):
Interest income .................................. 11 3
Depreciation and amortization .................... (11) (9)
Interest expense ................................. (63) (12)
-------- --------
Net loss ........................................... (669) (867)
Dividends on convertible preferred stock ........... (83) (73)
-------- --------
Net loss applicable to common shares ............... $ (752) $ (940)
======== ========
Loss per common share information:
Weighted average common shares:
Basic .......................................... 18,673 15,786
======== ========
Diluted ........................................ 18,673 15,786
======== ========
Net loss per common share:
Basic .......................................... $ (0.04) $ (0.06)
======== ========
Diluted ........................................ $ (0.04) $ (0.06)
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
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SPINTEK GAMING TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
September 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (669) $ (867)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ...................... 11 9
Non-cash interest expense .......................... 62 12
Allowance for inventory obsolescence ............... 5 (6)
Royalty expense used to reduce note receivable
from related company .............................. -- 25
(Increase) decrease in assets:
Accounts receivable ................................ (53) --
Inventory .......................................... (234) (101)
Prepaid expenses and other ......................... (407) 28
Increase (decrease) in liabilities:
Accounts payable ................................... (253) (74)
Accrued liabilities ................................ (49) 223
Accrued interest ................................... (7) 5
Customer deposits .................................. 53 --
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Net cash used in operating activities .................. (1,541) (746)
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Net cash used in investing activities:
Purchase of furniture, fixtures and equipment ........ (29) (55)
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Cash flows from financing activities:
Proceeds from issuance of convertible debentures ..... 2,100 --
Proceeds from (repayment of) demand notes
payable to affiliates and stockholders ............. (170) 516
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Net cash provided by financing activities .............. 1,930 516
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Net increase (decrease) in cash and cash equivalents ... 360 (285)
Cash and cash equivalents, beginning of period ......... 500 404
------- -------
Cash and cash equivalents, end of period ............... $ 860 $ 119
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
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SPINTEK GAMING TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
September 30,
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1998 1997
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<S> <C> <C>
Supplemental schedule of non-cash investing and
financing activities:
Dividends payable on preferred stock ................. $(83) $(73)
==== ====
Supplemental disclosure of cash flow information:
Cash paid for interest ............................... $ 7 $ 7
==== ====
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
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SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Spintek Gaming
Technologies, Inc. and its wholly owned subsidiary Spintek Gaming, Inc.
("Gaming"), and Gaming's wholly owned subsidiary, Spinteknology, Inc.
(collectively the "Company"). All significant intercompany transactions have
been eliminated.
The consolidated balance sheet as of September 30, 1998 and the related
consolidated statements of operations for the three months ended September 30,
1998 and 1997 and consolidated statements of cash flows for the three months
ended September 30, 1998 and 1997 are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of results
for those periods. The results of operations for an interim period are not
necessarily indicative of the results for the full year. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's annual report
on Form 10-KSB for the year ended June 30, 1998.
From inception in March 1995 through the third quarter of the Company's fiscal
year ended June 30, 1998, the Company and its subsidiaries reported operating
activities as a development stage enterprise. Since early 1996, the Company has
devoted its efforts to the development of proprietary technology for determining
the contents of a slot machine hopper and an on-line data collection system that
allows a casino to utilize the financial and security information. During the
third and fourth quarters of fiscal 1998, the Company began to actively market
and sell products to the casino industry utilizing this proprietary technology.
Therefore, commencing with the Form 10-KSB for the year ended June 30, 1998,
management determined that the Company should no longer be a development stage
enterprise for financial reporting purposes. Hence, cumulative from inception
financial information has been eliminated from the Consolidated Statements of
Operations and Consolidated Statements of Cash Flows.
NOTE 2 - LICENSES AND PATENTS
In October 1998, the Company was awarded a patent by the U.S. Patent and
Trademark Office ("USPTO"). This patent encompasses hopper weighing technology
used by the Company to thwart technician fraud as well as providing for drop box
counting and weighing of coins. It also enumerates other possible uses of the
weighing technology and allows for the expansion of claims in further filings
with USPTO. Similar patents have previously been awarded to the Company by the
Department of Trade and Industry, Republic of South Africa in July 1997, and the
European Patent Organization ("E.P.O.") in June and October, 1998. Patents
issued by the E.P.O. are applicable for eighteen contracting European states and
four designated extension European states. The E.P.O. patent is applicable for
the five European states in which Azkoyen, a Spanish company, has pending patent
applications that may be deemed similar to the Company's E.P.O. patents. Though
the granting of a patent to the Company in the E.P.O. states is considered a
mandate of intellectual property rights, and management believes the Company's
claims are valid and intends to vigorously assert its rights, it is unable to
estimate the possible outcome or the ultimate financial effect of any potential
proceedings regarding this matter.
7
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NOTE 3 - LONG-TERM DEBT
In July 1998, the Malcolm C. Davenport Family Trust (the "Trust") purchased an
additional $2,100,000 of the Company's 6% Secured Convertible Notes (the
"Notes"), increasing the Trust's holdings of the Notes to $4,000,000.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information included herein contains statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as
terms expressing future expectations, enthusiasm about future potential and
anticipated growth in sales, revenues and earnings. All forward-looking
statements, although made in good faith, are subject to important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, results may differ from those expressed in any forward-looking
statements made herein. Such statements are necessarily speculative, and factors
including, but not limited to, unusual production or supply problems, unusual
risks attending foreign transactions, year 2000 problems, competitive pressures,
unanticipated problems in obtaining approvals and/or licenses from governmental
authorities as to products or the ability to sell products in any jurisdiction,
a general deterioration in domestic or global economic conditions, and changes
in federal or state tax laws or laws permitting legalized gaming in any
jurisdiction within which gaming is currently conducted or the administration of
such laws could cause results to differ materially from those projected.
Year 2000 Considerations
The Company's hopper weighing technology is date sensitive and both the hardware
and software are Year 2000 compliant. The Company's primary customers are
casinos with slot machines into which the Company's product is installed. In
addition, many casinos utilize slot machine accounting systems to which the
Company's product must interface. Although the Company has not received
assurances from the primary slot machine manufacturers or the slot machine
accounting system manufacturers as to the Year 2000 issue, the Company expects
that at least a majority of these manufacturers will be Year 2000 compliant.
The Company has initiated a program of contacting its primary suppliers of key
components of its hopper weighing system to receive assurance that the Year 2000
issue will not directly impact their ability to supply the Company with product.
The Company is requesting that such assurances be received by the end of
calendar year 1998 so there will be adequate time to locate alternative sources.
The Company has contracted with a software supplier for the installation of a
manufacturing, inventory control and accounting system that is Year 2000
compliant.
Maintenance or modification costs associated with the Year 2000 issue will be
expensed as incurred, while the costs of any new software will be capitalized
and amortized over the software's useful life. The Company does not expect to
incur costs in connection with the Year 2000 issue that would have a material
impact on operations.
Material Changes in Results of Operations
Background Information
From inception in March 1995 through the third quarter of the Company's fiscal
year ended June 30, 1998, the Company realized minimal revenues from the sale of
its products, with its first sale in the amount of $180,000 having occurred in
March 1998. As a result, the Company filed its quarterly and annual financial
reports as a development stage enterprise through the quarter ended March 31,
1998. With the commencement of active sales and marketing activity in the latter
stages of fiscal 1998, management determined that the Company should no longer
report as a development stage enterprise. Commencing with
9
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the annual report on Form 10-KSB for the year ended June 30, 1998, the
cumulative from inception financial information was deleted from the
Consolidated Statements of Operations, Cash Flows and Changes in Stockholders'
Equity (Deficit).
Since early 1996, the Company has devoted its efforts to the development of
proprietary technology for determining the contents of a slot machine hopper and
an on-line data collection system that allows a casino to utilize the financial
and security information ("Accu System" or "AccuHopper"(TM)). During fiscal
1998, the Company, after various field trials, received approval of its stand
alone AccuSystem from Gaming Laboratories International, from the states of
Nevada, Mississippi and New Jersey, and from Native American tribal authorities
in the states of Connecticut and Minnesota. In addition, two of the primary
developers and vendors of slot machine accounting systems, Bally Systems
("Bally") and Casino Data Systems ("CDS"), have completed the interface process
which allows for the data received from the AccuSystem or AccuHopper to be
incorporated into their accounting reports. Both Bally and CDS are testing the
interfaces at beta sites. In addition, the Company is working with other
manufacturers of slot machine accounting systems on the interface of AccuSystem
with their products. The Company is currently engaged in field trials in various
domestic gaming jurisdictions and has received commitments to begin additional
field trials in other jurisdictions in the near future. Many of these field
trials are, or will be, monitored by the gaming authorities in those
jurisdictions to allow for the interface of the AccuSystem with the Bally and
CDS accounting systems. In addition, the Company is assisting some casinos in
various domestic gaming jurisdictions in their requests to amend their internal
control procedures to allow them to utilize certain features of the AccuSystem
designed to enhance revenues and reduce operating costs. No assurance can be
given that the interface field trials and/or the requests to amend the internal
control procedures will ultimately be approved by any of the gaming authorities
in the jurisdictions wherein they are pending.
The accompanying financial statements for the prior period reflect certain
reclassifications, which have no effect on net losses or cash flow in that
period, to conform with classifications in the current period.
Three Months Ended September 30, 1998 and 1997
During the first quarter of fiscal 1999, the Company reported sales of
approximately $1,002,000, which included sales in Minnesota, Iowa and Nevada.
The gross margin was approximately 46% and reflects discounts from the listed
sales price to introduce product in the various domestic markets and to
establish a customer base. At September 30, 1998, the Company reported as a
current liability $300,000 in deposits received from customers for future sales,
and as of November 10, 1998, the Company's sales backlog was approximately
$1,738,000.
Selling, general and administrative expenses increased $297,000, or
approximately 43%, to $980,000 for the quarter ended September 30, 1998 from
$683,000 in the same period in the prior year. An increase of $203,000 in
payroll and payroll related expenses, primarily related to selling activities
and additional administrative, product support and field test personnel, were
the primary contributors to the increase in labor expenses. An increase in
marketing expense of approximately $36,000 to $55,000 for the quarter ended
September 30, 1998 compared to $19,000 in the prior year period, was also a
significant contributor to the increase in selling, general and administrative
expenses.
Research and development expenses decreased by approximately $81,000, or 49%, to
$85,000 in the current quarter from $166,000 in the three month period ended
September 30, 1997. Research and development expenses for the quarter ended
September 30, 1998 are associated with new product development, whereas expenses
associated with further development of the AccuSystem product, including
interfacing with the various slot accounting system manufacturers, are expensed
elsewhere in the financial statements.
10
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Interest expense increased by $52,000 to $64,000 in the current year period from
$12,000 in the three month period ended September 30, 1997 as a result of the
issuance of the 6% Secured Convertible Notes (the "Notes").
Liquidity and Capital Resources
The Company's current assets at September 30, 1998 totaled $2,502,000, including
$860,000 in cash and cash equivalents and $400,000 in prepayments for future
inventory deliveries. The Company's current liabilities were $2,186,000,
including $568,000 in dividends payable to preferred stockholders. The Company's
working capital at September 30, 1998 was approximately $316,000. Net cash used
in operating activities was approximately $1,541,000.
As previously noted, the Company's initial sales and marketing activities
commenced in the latter stages of the fiscal year ended June 30,1998. Absent
significant revenues from operations, the Company has funded itself primarily
through equity and debt financing.
On February 27, 1998, the Company initiated the private placement of the Notes
in two separate offerings with identical terms due February 28, 2008 in the
aggregate principal amount of $5,000,000 to a limited number of investors with
interest payable annually commencing February 28, 1999. The Notes are secured by
a security interest and collateral assignment of all of the Company's patents,
patent applications, trade secrets and all other intellectual rights of the
Company existing or developed prior to the repayment or other settlement of the
Notes. The Notes are convertible by holders of the Notes at any time through
February 28, 2001 into shares of the Company's $0.002 common stock in a number
equal to 0.8% of the then outstanding shares of the Company's common stock for
each $100,000 in principal amount of the Notes. In addition, the Company may
require conversion at certain times through February 28, 2001 under certain
circumstances.
During the quarter ended September 30, 1998, the Malcolm C. Davenport V Family
Trust (the "Trust") purchased $2,100,000 of the Notes from the Company, giving
the Trust a total of $4,000,000 of the $4,450,000 in Notes outstanding on
September 30, 1998. During October 1998, the Trust purchased an additional
$300,000 of the Notes. A member of the Board of Directors also purchased an
additional $250,000 of the Notes, bringing that director's holdings in the Notes
to $350,000. As of October 31, 1998, the Company closed the offering of the
Notes.
In addition to the Notes, there were 8,241 issued and outstanding shares of 4%
Convertible Preferred Stock at September 30, 1998. These preferred shares were
held by RBB Bank Aktiengesellschaft (the "Holder"), an offshore bank
representing investors pursuant to Regulation S promulgated under the Securities
Act of 1933. All such preferred stock plus any accrued and unpaid dividends
thereon can be converted into common stock of the Company at any time at the
discretion of the Holder and any preferred stock not converted prior to December
31, 1999 will automatically be converted on that date based on an average of the
closing bid prices of the common stock for the five trading days ended
immediately prior to that date, but not to exceed $3 per share.
If both the Notes and the preferred stock had been converted into additional
shares of the Company's common stock on September 30, 1998, the holders of the
Notes would have received approximately 31.8 million common shares, including
28.6 million to the Trust, and the Holder of the preferred stock would have
received approximately 23.7 million shares.
11
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As previously noted, the Company is currently undergoing field trials and/or
applications for the amendment of certain internal control procedures related to
slot machines in various domestic jurisdictions. Management feels that if these
field trials and/or applications for the amendment of certain internal control
procedures are successful, an increase in sales will result. No assurance can be
given that the field trials or the applications for amendment of certain
internal control procedures will be successful in any jurisdictions, or if
obtained, will result in increased sales to the Company.
Should the Company fail to generate sufficient revenues to support operations,
the Company would have to secure additional debt or equity financing. If this
additional debt or equity financing should not be available, and no assurance
can be given that such additional debt or equity financing can be located, and
if the Company can not generate sufficient revenues to support operations, the
Company will be unable to continue as a going concern.
12
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
13
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SPINTEK GAMING TECHNOLOGIES, INC.
Date: November 12, 1998 By: /s/ GARY L. COULTER
-------------------------------
Gary L. Coulter
Chairman of the Board, Chief
Executive Officer
Date: November 12, 1998 By:/s/ GEORGE P. MILLER
-------------------------------
George P. Miller
Chief Financial Officer
(Principal Financial
and Accounting Officer)
14
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EXHIBIT INDEX
Exhibit Index Description Page Number
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27.1 Financial Data Schedule 16
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPINTEX
GAMING TECHNOLOGIES, INC. FINANCIAL STATEMENTS FOR THE QUARTER ENDED
SEPTEMBER 30 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 860
<SECURITIES> 0
<RECEIVABLES> 277
<ALLOWANCES> 0
<INVENTORY> 908
<CURRENT-ASSETS> 2,502
<PP&E> 233
<DEPRECIATION> 71
<TOTAL-ASSETS> 3,810
<CURRENT-LIABILITIES> 2,186
<BONDS> 4,450
5,355
0
<COMMON> 40
<OTHER-SE> (8,221)
<TOTAL-LIABILITY-AND-EQUITY> 3,810
<SALES> 1,002
<TOTAL-REVENUES> 1,002
<CGS> 543
<TOTAL-COSTS> 543
<OTHER-EXPENSES> 1,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (669)
<INCOME-TAX> 0
<INCOME-CONTINUING> (669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (752)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
