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| FNET > SEC Filings for FNET > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Quarterly Report
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words such as "anticipate," "contemplate," "expect," "intend," "plan," "believe," "seek," "estimate," "will," "will continue to be," or the negative of foregoing and similar expressions regarding beliefs, plans expectations or intentions regarding the future also identify forward-looking statements. Forward-looking statements in this Quarterly Report include, without limitation, the following:
(1) Our belief that the Company will have the ability to hold any remaining
auction rate securities for which auctions may fail until the market recovers;
(2) our belief that we do not anticipate a need to sell auction rate securities
in order to continue to operate its business; (3);our belief that in the absence
of observable market quotes, the Company's remaining investments in auction rate
securities should be classified as "level 3" ARS and be valued utilizing the
discounted cash flow model; (4) our continued efforts to monitor the market for
auction rate securities and consider the impact (if any) on the fair value of
the Company's investment; (5) our belief that we have expeditiously developed
software and hardware modifications adequately responding to the raised
questions; (6) our belief that our cash flow from operations combined with the
retained liquid and long-term investments will be adequate to meet our
anticipated future requirements for working capital and capital expenditures for
the next 12 months and for the foreseeable future; (7) our belief that, we
believe that the financial statements included in this Quarterly Report on Form
10-Q correctly present in all material respects our financial position, results
of operations and cash flows for the periods covered therein; (8) our
anticipation that at some point in time, we may begin selling our gaming
platforms for use in conducting traditional casino games, instead of entering
into lease contracts as we do now, or pursuant to purchase options contained in
lease contracts;;(9) our expectation that the negative trend in our
profitability will persist at least in the near future; (10) our expectation
that a total of $16,920 of unrecognized compensation costs related to nonvested
restricted stock is will be recognized over future periods; (11) our intent to
offer our customers equipment lease agreements under which we will lease our
wireless gaming terminals and the associated equipment; (12) our expectation
that in order to further develop our business and even simply to continue the
business as is, we may be now forced to seek additional capital, a daunting task
in the current luck of credit environment; (13) our belief that in order to
remain competitive in the bingo market, we may find it necessary to increase the
volume of consumable bingo products that we provide to our customers, which may
affect our overall profitability; (14) our belief that the failed auctions that
we have experienced are not a result of the deterioration of the underlying
credit quality of these securities; (15) our belief that any unrealized gain or
loss associated with these securities will be temporary and will be recorded in
accumulated other comprehensive income (loss) in our financial statements; (16)
our belief that, based on our cash and cash equivalents balances during 2009,
the current lack of liquidity in the credit and capital markets will not have a
material impact on our liquidity, cash flows or ability to fund our obligations;
(17) our belief that the acceptance of our wireless gaming terminals by gaming
establishments and their players will depend on our ability to demonstrate the
economic and other benefits of our products to gaming establishments, casino
players becoming comfortable with using our wireless gaming terminals, the
attractiveness of the casino games that players can play using our wireless
gaming terminals, ease of use, and the reliability of the hardware and software
that comprise our mobile gaming platforms;(17) our belief that as part of our
business strategy, we may seek to acquire businesses, services and technologies
that we believe could complement or expand our business, augment our market
coverage, enhance our technical capabilities, provide us with valuable customer
contacts or otherwise offer growth opportunities; (18) our anticipation that we
will delay our mobile gaming growth plans in order to concentrate our efforts
and resources on adapting our core bingo business to the recent economic decline
that we expect to continue at least in the near future; (19) statements
regarding our expectation that the competition in the market for gaming devices
will increase and intensify as the market for mobile gaming devices develops;
(20) our expectation to continue to make a significant investment in research
and development and our commitment to continue to introduce new products for the
gaming market; (21) our belief that our research and development efforts have
made our mobile gaming platform compliant with the wireless gaming regulations
promulgated by the Nevada Gaming Commission; (22)our concern that the NGCB
analysis of our new modifications may delay significantly the overall process of
reviewing of our mobile gaming platform; (23) our belief the addition of
traditional casino
games to our mobile platform will potentially increase these casino operators' revenues; (24) our belief that the market will not be ready to adapt mobile gaming of traditional casino games in the near future due to the worsening economic environment; (25) our belief that when and if the Nevada market does accept mobile gaming of traditional casino games, we expect to subsequently expand our marketing to additional Nevada casinos that may be attracted to our mobile gaming platform by the potential of new gaming revenues generated in the auxiliary gaming and peripheral public areas of casinos where playing of traditional casino games, such as poker, keno and slots, was previously not available; (26) our expectation to expand marketing efforts for our wireless gaming platform beyond Nevada; (27) our belief that we should adapt a conservative view on the near-term economic viability of traditional casino games, such as poker, slots and keno, to be played on our mobile gaming platform, even if it is approved for use in Nevada casinos; (28) our opinion that economic environment is not likely to quickly improve, at least in 2009 and possibly well beyond 2009; (29) our belief that in this recessionary economic environment, casinos have excessive capacity of slot machines and gaming tables on their main casino floors and are therefore not motivated to promote playing of traditional casino games in the auxiliary gaming areas, such as bingo halls, sports books and bars, since such gaming would involve additional costs to casinos; and (30) our belief that during the hard times of economic contraction, the casinos are unlikely to cannibalize the main casino floors for the sake of generating some additional revenues in the auxiliary areas; whereas in times of economic prosperity and expansion, when the main casino floors are more fully utilized, we believe that the extra revenues generated in the auxiliary gaming areas would be welcome.
Our expectations, beliefs, objectives, anticipations, intentions and strategies regarding the future, including, without limitation, those concerning expected operating results, revenues and earnings are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by the forward-looking statements including, but not limited to unexpected difficulties in penetrating new markets as a result of regulatory, competitive or other barriers; inability to devote additional resources to our marketing efforts; inability to devote additional resources to our research and development initiatives to enhance product development; unexpected changes to zoning laws that effect our ability to continue to manufacture products in our current facility; inability to cut our costs that may result in a loss of our existing customers to our competitors; legality of our electronic bingo player units; our inability to create or introduce new products for the conventional bingo market; our failure to gain approval for our gaming platforms to play traditional casino games; unanticipated decreases in our manufacturing capabilities; unfavorable outcome of potential litigation matters; loss of existing distributors or our failure to further broaden our distribution channels; unanticipated substantial decrease or increase in our research and development expenses; unexpected changes to credit ratings of the auction rate securities instruments we hold; difficulty in evaluating the value of the auction rate securities; inability to accurately value the underlying assets supporting auction rate securities; changes in default rates applicable to the underlying assets, underlying collateral value, and the strength and quality of the market and its liquidity; inability to accurately predict the impact of the recordation of any unrealized gain or loss associated with auction rate securities in our financial statements; unexpected changes in our liquidity, cash flows due to unexpected changes in the credit and capital markets; inability to predict the impact of market changes with respect to our auction rate securities; unanticipated need to liquidate our auction rate securities; an unanticipated need for additional funds for operating expenses, new business opportunities, recession, decrease in consumer spending, or other events; inability to protect and defend our intellectual property rights; the failure of the overall gaming industry to sustain its revenues; unexpected need to expand our operations and inability to enter into a new manufacturing lease; unanticipated drop or increase in inventory levels; inability of our leasing revenue to meet our operating expenses in the short and long terms; inability to finance additional expenses related to the procurement of equipment and the manufacturing of equipment and component parts in order to expand our production efforts; unanticipated increase in expenditures during the next 12 months; lack of growth in the gaming industry; inability to procure additional customers and enter into new lease agreements; rapid technological changes in the gaming industry that render our technology obsolete; difficulties demonstrating the economic benefits of our products; inability to meet the evolving industry standards of casino and player demands; failure to achieve market acceptance of our products; lack of demand for our consumable bingo products; inability to predict the length of the economic decline; inability to predict the timing of expenses related to the development of our manufacturing infrastructure; inability to predict the amount of investment funds that will be consumed in order to develop our manufacturing infrastructure; inability to penetrate new jurisdictions and markets; and inability to improve our financial, accounting and operation systems and controls. We assume no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should also review the cautionary statements and discussion of the risks of our business set forth elsewhere herein under the heading "Risk Factors" under Part I, Item 1A and our other filings with the Securities and Exchange Commission ("SEC").
Overview
We are an established and profitable manufacturer of multi-game and multi-player server-based gaming platforms. Our gaming platforms include networks of both wireless and stationary player terminals, cashier-based point-of-sale terminals, self-service point-of-sale kiosks and game file servers that conduct and control bingo games. Our gaming platforms have been adapted (although not yet approved for sales in Nevada) to conduct traditional casino games, such as keno, poker and slots, in addition to, and optionally concurrently with, bingo. Our gaming platforms enable patrons to play bingo using either our wireless or our stationary player terminals. In addition, our gaming platforms have been adapted (although not yet approved for sales in Nevada) to enable patrons to play certain traditional casino games using our stationary player terminals.
Based on our belief that our research and development efforts have made our mobile gaming platform compliant with the wireless gaming regulations promulgated by the Nevada Gaming Commission on March 23, 2006 and Mobile Gaming System Policies published by Nevada Gaming Commission on July 21, 2006, we submitted our mobile gaming platform for review by the Nevada gaming authorities in 2006. At the very end of the third quarter of 2008, we have received a communication from the Nevada Gaming Control Board (the "NGCB") raising new additional questions regarding certain software and hardware aspects of our mobile gaming platform. Although we believe that we have expeditiously developed software and hardware modifications adequately responding to the raised questions, we can provide no assurances that the latest modifications may be acceptable to the NGCB. Even assuming that the modifications are acceptable to the NGCB, we are concerned that the NGCB analysis of the new modifications may delay significantly the overall process of reviewing of our mobile gaming platform. If our wireless gaming devices are eventually approved by the Nevada gaming authorities and the economy revives, Nevada casino patrons will be able to play traditional casino games using our wireless player terminals. However, there can be no assurance that we will obtain such approval in the foreseeable future or at all. See also, "Risk Factors" under Part I, Item 1A.
If we obtain the necessary approvals, we will continue to market our wireless gaming platform to Nevada casinos, most likely commencing with casinos with bingo halls where our mobile gaming platforms are already in use for playing bingo games. We believe the addition of traditional casino games to our mobile platform will potentially increase these casino operators' revenues. However, we do not believe the market will be ready to adapt mobile gaming of traditional casino games in the near future due to the adverse economic environment. When and if the Nevada market does accept mobile gaming of traditional casino games, we expect to subsequently expand our marketing to additional Nevada casinos that may be attracted to our mobile gaming platform by the potential of new gaming revenues generated in the auxiliary gaming and peripheral public areas of casinos where playing of traditional casino games, such as poker, keno and slots, was previously not available. In such a case, we expect to subsequently expand marketing efforts for our wireless gaming platform beyond Nevada.
Meanwhile, we believe that we should adapt a conservative view on the near-term economic viability of traditional casino games, such as poker, slots and keno, to be played on our mobile gaming platform, even if it is approved for use in Nevada casinos. As evidenced and widely publicized in numerous city, state and national publications, including the Las Vegas Review Journal, the New York Times, and the Wall Street Journal, the Center for Business and Economic Research at the University of Nevada, Las Vegas, as well as investment banking gaming industry analysts, including Deutsche Bank, the economic health of the Nevada gaming industry drastically worsened in 2008, and in our opinion, it is not likely to quickly improve, at least in 2009 and possibly well beyond 2009. In this recessionary economic environment, we believe that casinos have excessive capacity of slot machines and gaming tables on their main casino floors and are therefore not motivated to promote playing of traditional casino games in the auxiliary gaming areas, such as bingo halls, sports books and bars, since such gaming would likely divert revenues from main casino floors rather than generate extra revenue, and yet, would involve additional costs to casinos. During the hard times of economic contraction, we believe that casinos are unlikely to cannibalize the main casino floors for the sake of generating some additional revenues in the auxiliary areas; whereas in times of economic prosperity and expansion, when the main casino floors are more fully utilized, we believe that the extra revenues generated in the auxiliary gaming areas would be welcome. See also, "Risk Factors" under Part I, Item 1A.
Since our inception, we have been a technology innovator in the gaming equipment industry. We helped to define the core concepts of modern gaming technologies including server-based networks, concurrent multi-
gaming, cashless gaming, downloadable gaming and, notably, mobile gaming. We continue to focus on research and development and are continuously upgrading our wireless player terminals to serve as a multi-game platform that enables patrons to play traditional casino games in casino public areas in addition to playing bingo. We also introduced and started commercial deliveries of new advanced bingo flashboards that utilize long-life color light emitting diodes instead of conventional incandescent lamps. In addition, we also recently introduced and started commercial deliveries of advanced automatic ball blowers for bingo, keno and lottery applications working in conjunction with our flashboards and player terminals. In addition, we have recently started manufacturing and commercial deliveries of advanced barcoded bingo paper products supplementing our electronic bingo products. We print the barcoded bingo paper products on high-speed variable-data web presses in our recently expanded manufacturing facilities in Las Vegas, NV. Although our continuous development of new products and manufacturing infrastructure is capital extensive, we are committed to continue to introduce new products for the gaming market.
Almost all of our revenues are currently generated by placing electronic bingo systems in bingo halls under contracts based on (a) a fixed fee per use per session, (b) a fixed weekly fee per terminal, or (c) a percentage of the revenue generated by each terminal. Our revenue is affected by player acceptance of electronic and paper bingo products in our existing customer establishments, our ability to potentially expand operations into new markets and most importantly, our ability to retain our market share in the existing markets. Our stationary bingo player terminals generate greater revenue per player terminal than our wireless bingo player terminals, but also require a greater initial capital investment and greater maintenance costs. As our customer base changes from period to period through the addition of new customers or the loss of existing customers, we experience an increase in rental revenue due to the addition of customers and a decrease in rental revenue due to the loss of customers. Our rental revenue is also affected from period to period by changes in operations at our existing customer locations that result from numerous factors over which we have little or no control.
We typically install our electronic bingo systems at no charge to our customers and we capitalize all direct costs. We record depreciation of bingo equipment over a five-year estimated useful life using the straight-line method of depreciation.
We anticipate that at some point in time, we may begin selling our gaming platforms for use in conducting traditional casino games, instead of entering into lease contracts as we do now, or pursuant to purchase options contained in lease contracts. At that time, our revenue may include product revenue from sales of equipment, in addition to our leasing revenue. At such time, our product revenue will be determined by the then current price for our products and our unit-volume sales.
We envision that if we develop electronic product sales revenue, we will also see a recurring revenue component generated from software upgrades and/or maintenance of the software components of our sold products.
Our expenses primarily consist of:
(a) cost of revenue, depreciation of bingo terminals and other capitalized equipment under lease to customers, maintenance, repair and refurbishment of bingo terminals and related support equipment, and cost of shipping. Installation costs and initial shipment expenses associated with new customer lease contracts are expensed as cost of revenue in the period in which the equipment is deployed. Expenses related to maintenance, repair and refurbishment of our existing equipment that has been deployed at customer locations are expensed as cost of revenue in the period in which the maintenance, repair or refurbishment is performed. These expenses are incurred to, among other things, maintain our existing equipment in working order, provide our customers with updated equipment, fix software bugs, if any, provide new functionality and minimize the number of different installation configurations that we must support. We are not obligated to perform maintenance, repair or refurbishment under the terms of our rental agreements with our customers, but we do so in order to improve the quality and reliability of our products;
(b) general and administrative expenses, including the costs of activities associated with the management of our company and related support, which includes all payroll and benefits other than payroll in connection with research and development activities, travel costs, professional fees, facility lease expenses and bad debt expense reserves;
(c) sales and marketing expenses, consisting primarily of commissions paid to distributors for promoting and supporting our products and related marketing costs;
(d) costs of research and development activities geared to the further development of our gaming platform, including labor costs and costs of hardware and software testing, prototyping and development tools; and
(e) cost of maintaining, upgrading and expanding our manufacturing infrastructure including electronic assembly lines and web printing presses.
We envision that the development of our product revenue in the bingo consumables market, will require us to record costs of products sold (rather than leased) that include materials, labor, and direct and indirect manufacturing costs and associated warranty costs, if any.
Millennium, our wholly owned subsidiary, distributes our bingo products in selected territories in the United States. All of our other operations, including the operation and maintenance of our bingo products in all territories and the exclusive distribution of our bingo products in Nevada, Texas and Washington, are conducted by FortuNet.
During the three months ended June 30, 2009, we incurred $60,413 and during the six months ended June 30, 2009, we incurred $204,145 in legal expenses incurred in a routine course of business.
Deferred taxes are primarily the result of differences in tax and financial amortization lives of other assets and differences in property and equipment depreciation.
Application of Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the reporting date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, bad debts, player terminal depreciation and litigation. We base our estimates and judgments on historical experience and on various other factors that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
There has been no material change in the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements from the critical accounting policies described in our Annual Report on Form 10-K and amended Form 10-K for fiscal year ended December 31, 2008.
Legal Contingencies
We are currently not involved in any legal claims and legal proceedings. We have not accrued any liability for estimated losses related to legal contingencies that may arise in the future.
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