SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number O-21831
International Sports Wagering Inc.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 22-3375134
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 Lower Notch Road, Little Falls, NJ 07424
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (973) 256-8181
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(D) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such report) and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
There were 7,752,292 shares of Common Stock outstanding at
February 10, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
International Sports Wagering Inc.
December 31, 1997
Form 10-QSB
Index
Page
Part I: Financial Information
Item 1. Financial Statements
Balance Sheets at December 31, 1997 (Unaudited)
and September 30, 1997. 2
Statements of Operations for the Three Months
Ended December 31, 1997 and 1996 and May 22,
1995 (date of inception) to December 31, 1997
(Unaudited). 3
Statement of Changes in Stockholders' Equity for
the Three Months Ended December 31, 1997
(Unaudited). 4
Statements of Cash Flows for the Three Months
Ended December 31, 1997 and 1996 and May 22,
1995 (date of inception) to December 31, 1997
(Unaudited). 5
Notes to Financial Statements. 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations or Plan of
Operation. 9-12
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures 14
International Sports Wagering Inc.
(A Development Stage Company)
Balance Sheets
Assets
December 31, September 30,
1997 1997
(Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 371,415 $ 1,026,313
Accounts receivable, less
allowance for doubtful accounts
of $23,389 and $0, respectively -- 2,950
Investments 4,338,452 4,457,118
Current portion of notes
receivable, less reserve for
uncollectibility of $25,000
and $0, respectively 52,885 34,615
Prepaid expenses and other
current assets 316,578 184,315
Total current assets 5,079,330 5,705,311
Investments 249,004 618,120
Property and equipment, net 1,031,426 1,055,196
Notes receivable, less current
portion 27,884 34,615
Other assets 6,903 6,358
Total assets $ 6,394,547 $7,419,600
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 59,215 $ 143,197
Accrued expenses 255,388 222,345
Total current liabilities 314,603 365,542
Stockholders' Equity:
Preferred stock, par value $.001
per share; 2,000,000 shares
authorized, none issued or
outstanding -- --
Common stock, par value $.001 per
share; 20,000,000 shares
authorized, issued and out-
standing 7,752,292 and
7,749,269 shares, respectively 7,752 7,749
Additional paid-in capital 10,216,951 10,214,829
Deficit accumulated during the
development stage (4,144,759) (3,168,520)
Total stockholders' equity 6,079,944 7,054,058
Total liabilities and
stockholders' equity $ 6,394,547 $ 7,419,600
See notes to financial statements
2
International Sports Wagering Inc.
(A Development Stage Company)
Statements of Operations
May 22, 1995
Three Months Ended (Date of Inception)
December 31, to December 31,
1997 1996 1997
Revenues $ 24,695 $ -- $ 28,275
Costs and expenses
Research and development
expense 263,963 179,273 2,047,482
General and administrative
expense 802,493 181,581 2,243,439
1,066,456 360,854 4,290,921
Operating loss (1,041,761) (360,854) (4,262,646)
Other income (expense)
Interest income 65,522 18,870 416,985
Interest expense -- (299,098) (299,098)
65,522 (280,228) 117,887
Net loss $(976,239) $ (641,082) $(4,144,759)
Net loss per share $ (.13) $ (.10) $ (.62)
Weighted average common
shares outstanding 7,749,762 6,366,660 6,712,367
See notes to financial statements
3
International Sports Wagering Inc.
(A Development Stage Company)
Statement of Changes In Stockholders' Equity
For the Three Months Ended December 31, 1997
Deficit
Accumulated
Additional During The
Common Stock Paid-In Development
Shares Amount Capital Stage Total
Balance at
September 30,1997 7,749,269 $7,749 $10,214,829 $(3,168,520) $7,054,058
Net loss -- -- -- (976,239) (976,239)
Issuance of common
stock through
exercise of
options 3,023 3 2,122 -- 2,125
Balance at
December 31,1997 7,752,292 $7,752 $10,216,951 $(4,144,759) $6,079,944
See notes to financial statements
4
International Sports Wagering Inc.
(A Development Stage Company)
Statements of Cash Flows
May 22, 1995
Three Months Ended (Date of Inception)
December 31, to December 31,
1997 1996 1997
Cash Flows from
Operating Activities:
Net loss $(976,239) $ (641,082) $ (4,144,759)
Adjustment to reconcile
net loss to net cash
(Used in)operating
activities:
Depreciation and
amortization 101,935 31,296 376,915
Provision for doubtful
accounts 23,389 -- 23,389
Reserve for uncollect-
ibility 25,000 -- 25,000
Issuance of options
to consultants -- -- 14,500
Changes in assets
and liabilities:
Accounts receivable (20,439) -- (23,389)
Prepaid expenses and
other current assets (132,263) (178,858) (316,578)
Other assets (741) -- (8,931)
Accounts payable (83,982) (24,032) 59,215
Accrued expenses 33,043 240,974 255,388
Net Cash (Used In)
Operating Activities (1,030,297) (571,702) (3,739,250)
Cash Flows from Investing
Activities:
Proceeds from sales of
investments 1,987,625 -- 29,087,922
Purchase of investments (1,499,843) -- (33,675,378)
Purchase of property
and equipment (77,969) (9,803) (1,406,313)
Proceeds from repayments
of notes receivable 13,461 -- 44,231
Issuance of notes receivable (50,000) -- (150,000)
Net Cash Provided By (Used
In) Investing Activities 373,274 (9,803) (6,099,538)
Cash Flows from Financing
Activities:
Net proceeds from issuance
of common stock 2,125 7,401,837 10,210,203
Net (Decrease) Increase in
Cash and Cash Equivalents (654,898) 6,820,332 371,415
Cash and Cash Equivalents,
Beginning of Period 1,026,313 537,546 --
Cash and Cash Equivalents,
End of Period $ 371,415 $7,357,878 $ 371,415
See notes to financial statements
5
International Sports Wagering Inc.
Notes To Financial Statements
Note 1 - Basis of Presentation:
The balance sheet at the end of the preceding fiscal year
has been derived from the audited balance sheet contained in
the Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission and is presented for comparative
purposes. All other financial statements presented are
unaudited. In the opinion of Management, all adjustments
which include only normal recurring adjustments necessary to
present fairly the financial position for all periods
presented have been made. The results of operations for the
quarter ended December 31,1997 are not necessarily
indicative of the results expected for the entire year.
Footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted in accordance with
the published rules and regulations of the Securities and
Exchange Commission. These financial statements should be
read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-
KSB.
Note 2 - Net Loss Per Share of Common Stock:
During March 1997, the Financial Accounting Standards Board
("FASB") released Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 establishes standards for computing and presenting
earnings per share and is effective for financial statements
for both interim and annual periods ending after December
15, 1997. Accordingly, effective December 31, 1997, the
accompanying net loss per share information has been
calculated and presented in accordance with the provisions
of SFAS 128 and as further prescribed by the relevant Staff
Accounting Bulletins of the Securities and Exchange
Commission.
Basic net loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding
during the applicable reporting periods. The computation of
diluted net loss per share is similar to the computation of
basic net loss per share except that the denominator is
increased to include the number of additional common shares
that would have been outstanding if the dilutive potential
common shares had been issued. However, the Company's
computations of dilutive net loss per share does not assume
any conversion or exercise of securities as their effect is
antidilutive for all periods presented.
6
International Sports Wagering Inc.
Notes To Financial Statements
The weighted average shares used in the net loss per share
computations for the three month periods ended December 31,
1997 and 1996, and the period from May 22, 1995 (date of
inception) to December 31,1997, were 7,749,762, 6,366,660
and 6,712,367, respectively.
Common equivalent shares that could potentially dilute basic
earnings per share in the future and that were not included
in the computation of diluted loss per share because of
anitdilution were 2,913,875 and 2,395,398 for the three
month periods ended December 31, 1997 and 1996,
respectively.
In accordance with the provisions of SFAS 128, net loss per
share for the years ended September 30, 1997 and 1996 were
also restated. The weighted average shares used in the net
loss per share computations for each of the years ended
September 30, 1997 and 1996, and the period from May 22,
1995 (date of inception) to September 30, 1997, are included
in the table below:
May 22, 1995
Year ended Year ended (date of inception)
September 30, September 30, to September 30,
1997 1996 1997
Net loss $(2,191,321) (868,188) (3,168,520)
Net loss
per share $(0.30) (0.14) (0.48)
Weighted
average
shares 7,387,831 6,024,269 6,601,647
Common equivalent shares that could potentially dilute basic
earnings per share in the future and that were not included
in the computation of diluted loss per share because of
antidilution were 2,916,898 and 642,398 for the years ended
September 30, 1997 and 1996, respectively.
Note 3 - Subsequent Events:
In June 1997, the Company retained Yarlow, Inc. d/b/a Tom's
Sunset Casino ("Yarlow") to operate the Company's
SportXctionTM sports wagering system ("the System") until
the later of June 1998 or such time as the Company received
a Nevada gaming license as an operator of an inter-casino
linked system ("OILS license"), permitting it to operate the
System. On January 13, 1998, the Company announced that
Yarlow had suspended operation of Tom's Sunset Casino,
including operation of the SportXctionTM System, as a result
of financial difficulties unrelated to the System. The
System has not been in use since then.
7
International Sports Wagering Inc.
Notes To Financial Statements
The Company applied for an OILS license in July 1997 and the
investigation by the Nevada gaming authorities has been
proceeding since early fall of 1997. The process of
obtaining an OILS license by the Company is expected to be
completed during the third quarter of the fiscal year ended
September 30, 1998. There can be no assurance that the
Company will receive such a license or that it will be
issued in the time frame anticipated. Should licensing be
delayed or denied, this could have a material adverse affect
on the Company and its prospects. Until such time as the
Company obtains the OILS license, it is not expected that
the System will be operated.
Revenues of $24,695 were reported for the three months ended
December 31, 1997. These revenues represented the Company's
fees for use of the System during the quarter, in accordance
with agreements between the Company, Yarlow, as hub
operator, and the sports wagering establishments at which
the System was in operation. The Company is restricted to
charging fixed fees for the use of the System until it
obtains an OILS license which, among other things, will
permit the Company to provide the System to sports wagering
establishments in consideration for either a portion of the
revenue received by the establishment or on a transaction
fee basis. $20,459 of the revenues for the three months
ended December 31, 1997, as well as $2,930 of the $3,580 in
revenues reported for the year ended September 30,1997,
reflecting operation of the System from September 21 through
September 30, represented accounts receivable from Yarlow.
In view of Yarlow's financial difficulties and the
suspension of operation of Tom's Sunset Casino, the Company
has established a reserve to cover the full amount of these
accounts receivable at December 31,1997.
As of December 31, 1997, the Company has also reserved an
additional $25,000, representing one half of the principal
amount of a $50,000 loan made on October 20, 1997 to T & D,
a Nevada general partnership that is an affiliate of Yarlow.
This loan is guaranteed by Yarlow, and by two principals of
T & D.
8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations or Plan of
Operation.
Live operation of the Company's SportXctionTM sports wagering system
(the "System") commenced on September 21, 1997. As of December 31, 1997,
the System was in operation at eight inter-linked casinos and gaming
establishments in Nevada, with simultaneous wagering conducted through
approximately 220 player betting stations installed at those eight
establishments. During the quarter ended December 31, 1997, the System was
used for wagering on approximately ten sporting events each week, including
baseball, football, and basketball games. For the period from September 21
through December 31, 1997, the total amount wagered through the System was
approximately $1,274,000.
In June 1997, the Company retained Yarlow, Inc. d/b/a Tom's Sunset
Casino ("Yarlow") to operate the System until the later of June 1998 or
such time as the Company received a Nevada gaming license as an operator of
an inter-casino linked system ("OILS license"), permitting it to operate
the System. On January 13, 1998, the Company announced that Yarlow had
suspended operation of Tom's Sunset Casino, including operation of the
SportXctionTM System, as a result of financial difficulties unrelated to
the System. The System has not been in use since then.
The Company applied for an OILS license in July 1997 and the
investigation by the Nevada gaming authorities has been proceeding since
early fall of 1997. The process of obtaining an OILS license by the
Company is expected to be completed during the third quarter of the fiscal
year ended September 30, 1998. There can be no assurance that the Company
will receive such a license or that it will be issued in the time frame
anticipated. Should licensing be delayed or denied, this could have a
material adverse affect on the Company and its prospects. Until such time
as the Company obtains the OILS license, it is not expected that the System
will be operated.
For the three months ended December 31, 1997, the Company had a net
loss of $976,239, or $0.13 loss per share on 7,749,762 weighted average
common shares outstanding, compared with a net loss of $641,082, or $0.10
loss per share on 6,366,660 weighted average common shares outstanding for
the three months ended December 31, 1996. The loss during the three months
ended December 31, 1996 included $299,098 representing interest expense and
debt discount ascribed to warrants issued as part of a bridge financing
prior to the Company's initial public offering. Revenues of $24,695 were
reported for the three months ended December 31, 1997, compared with no
revenues reported in the comparable prior year period. These revenues
represented the Company's fees for use of the System during the quarter, in
accordance with agreements between the Company, Yarlow, as hub operator,
and the sports wagering establishments at which the System was in
operation. The Company is restricted to charging fixed fees for the use of
the System until it obtains an OILS license which, among other things, will
permit the Company to provide the System to sports wagering establishments
in consideration for either a portion of the revenue received by the
establishment or on a transaction fee basis. $20,459 of the revenues for
the three months ended December 31, 1997, as well as $2,930 of the $3,580
9
in revenues reported for the year ended September 30,1997, reflecting
operation of the System from September 21 through September 30, represented
accounts receivable from Yarlow. In view of Yarlow's financial
difficulties and the suspension of operation of Tom's Sunset Casino, the
Company has established a reserve to cover the full amount of these
accounts receivable.
The Company has also reserved an additional $25,000, representing one
half of the principal amount of a $50,000 loan made on October 20, 1997 to
T & D, a Nevada general partnership that is an affiliate of Yarlow. This
loan is guaranteed by Yarlow, and by two principals of T & D.
In addition to the bad debt expense which totaled $48,389, the
increased loss for the three months ended December 31, 1997 when compared
with the loss for the three months ended December 31, 1996 resulted
primarily from: marketing expenses, which increased by $223,361 from the
comparable prior year period to $276,534, primarily reflecting advertising
to promote awareness of the SportXctionTM game; expenses of $140,631,
associated with the Company's application for an OILS license; salary
expense, which increased by $90,772 to $260,863, attributable to increased
administrative, marketing, and technical support activities; depreciation
expense, which increased by $70,639 to $101,739, reflecting the purchase of
additional computer equipment used in the operation of the System;
professional fees, which increased by $55,943 to $91,414; insurance
expense, which increased by $33,898 to $42,690; consulting fees of $18,915,
associated with product development; and rent expense, which increased by
$10,023 to $13,206, reflecting the new sales, support, and operations
office in Las Vegas, Nevada, which was opened in June 1997.
The Company incurred approximately $263,963 in research and
development costs for the three months ended December 31, 1997, compared
with approximately $179,273 for the comparable prior year period. This
increase is largely attributable to increased salary expenses, consulting
expenses, and patent application and maintenance costs.
The Company continues to be in the development stage, with limited
revenues generated from the System. As of December 31, 1997, the Company
had cumulative net losses since inception of $4,144,759. It expects to
continue to incur substantial losses and negative cash flow at least
through calendar 1998. Contributing to this are the fact that no revenues
are currently being generated, pending the resumption of the operation of
the System, and the Company's expectation that it will continue to incur
substantial research and development expenses for further product
enhancement and development activities.
As of December 31, 1997, the Company had liquid resources totaling
$4,709,867. These included cash and cash equivalents in the amount of
$371,415 and short-term investments in the amount of $4,338,452.
Investments are limited to investment grade marketable securities with
maturities of 18 months or less. Based upon its current proposed plans and
assumptions relating to its operations, the Company anticipates that
existing resources will be sufficient to satisfy its contemplated cash
requirements for approximately 18 months. Capital expenditures are
expected to be limited to purchases of additional computer equipment as
needed. These will be funded by existing resources.
10
The Company believes that the response from players of the
SportXctionTM game while it was in operation was generally favorable,
although the number of players participating in wagering on each sporting
event did not meet the Company's expectations. The Company believes that
this resulted from the fact that the game was entirely new, since wagering
during the course of a sporting event had not been tried previously, either
in Las Vegas or elsewhere, and because more promotion of the System is
required in order to have the wagering public become familiar with the
game.
In order to encourage more potential players to wager through the
System, the Company adapted the System to permit limited time periods of
free play and practice betting during the course of a sporting event. It
also introduced other new features and enhancements to the System to
attract additional players and increase wagering. These features included
a form of parlay wager resulting in a larger potential payoff, smaller
minimum wagers, and new betting proposition features. In January 1998, the
Company hired a Director of Marketing to develop and implement a new
marketing plan in order to attempt to increase public awareness and
participation in the SportXctionTM game.
The Company is in the process of adapting the System for use in legal
wagering and non-wagering applications, including games and contests, over
the Internet. The Company also intends to explore alternative applications
of its proprietary technology, including adaptation of the System for
activities conducted over cable television and other communications media.
The Company's plan of operation during the next 12 months focuses
primarily on (i) obtaining an OILS license in Nevada which will enable the
Company to operate the System through the Hub and provide the System to
sports wagering establishments in exchange for a portion of the revenue
received by the establishment or on the basis of a transaction fee, (ii)
attracting additional players of the game, and increasing wagering through
the System, (iii) continued sales and marketing to casinos and other
sportsbook operators in Nevada, (iv) hiring additional personnel in the
areas of sales and marketing, product development, equipment installation,
maintenance and training, (v) continued research and further product
enhancement and development, including adapting the System for new betting
propositions, (vi) securing further intellectual property protection,
including additional patent, trademark and copyright protections, and (vii)
exploring opportunities in foreign markets and alternative applications of
the Company's proprietary technology, including adaption of the System for
use in non-wagering activities.
Except for the historical information contained herein, this quarterly
report on Form 10-QSB contains forward-looking statements, within the
meaning of Section 27A of the Securities Exchange Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include, but are not limited to, the likelihood
that the Company will receive any needed gaming licenses and be able to
resume operation of the System, the ability of the Company to attract
adequate numbers of players to its SportXctionTM game, the ability of the
Company to develop and market other opportunities for its product, and the
length of time that the Company's liquid resources will last. Investors
11
are cautioned that forward-looking statements are inherently uncertain.
Actual performance and results of operations may differ materially from
those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, without limitation, inability
of the Company to obtain required licenses from the Nevada gaming
authorities, inability of the company to resume operation of the System or
to attract adequate numbers of players to the SportXctionTM game when
operation of the System is resumed, and inability of the Company to develop
and market other opportunities for its product. Additional information
concerning certain risks or uncertainties that would cause actual results
to differ materially from those projected or suggested in the forward-
looking statements is contained in the Company's filings with the
Securities and Exchange Commission, including those risks and uncertainties
discussed in its Prospectus dated December 11, 1996 and its Form 10-KSB for
the fiscal year ended September 30, 1997. The forward-looking statements
contained herein represent the Company's judgment as of the date of this
report, and the Company cautions reader not to place undue reliance on such
matters.
12
II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended December 31, 1997.
13
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
International Sports Wagering Inc.
Dated: February 14, 1998 By: S/ BARRY MINDES
Barry Mindes, Chairman of the
Board of Directors
(Principal Executive Officer)
Dated: February 14, 1998 S/BERNARD ALBANESE
Bernard Albanese, President
Treasurer and Director
Dated: February 14, 1998 S/JENEENE NORMAN
Jeneene Norman, Chief
Financial and Accounting Officer
14
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<ARTICLE> 5
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 371,415
<SECURITIES> 4,338,452
<RECEIVABLES> 23,388
<ALLOWANCES> 23,389
<INVENTORY> 0
<CURRENT-ASSETS> 5,079,330
<PP&E> 1,406,313
<DEPRECIATION> 374,887
<TOTAL-ASSETS> 6,394,547
<CURRENT-LIABILITIES> 314,603
<BONDS> 0
<COMMON> 7,752
0
0
<OTHER-SE> 6,072,192
<TOTAL-LIABILITY-AND-EQUITY> 6,394,547
<SALES> 24,695
<TOTAL-REVENUES> 90,217
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,018,067
<LOSS-PROVISION> 48,389
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (976,239)
<INCOME-TAX> 0
<INCOME-CONTINUING> (976,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (976,239)
<EPS-PRIMARY> (.13)
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