Table of Contents

 

 

 

**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

----

 

**FORM 10-Q**

 
| **(Mark  One)**                                                                                                                                                                                                                                                             |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                  |
| **For the quarterly period  ended:  April 30, 2009**                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                        |
| **o**                                                                                                                                                                                                                                                                       | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                  |
| **For the transition period from:                     to                   ** |
| ** **                                                                                                                                                                                                                                                                  |
| **Commission file number:  000-20685**                                                                                                                                                                                                                            |

 

**AMERICANWAGERING, INC.**

(Exact name of registrant asspecified 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)                       |       | (Zip Code)                            |

 

**702-735-0101**

(Registrant’stelephone number, including area code)

 

 

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.** **Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T §232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files) Yes  o    No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

**APPLICABLE ONLY TO ISSUERSINVOLVED IN BANKRUPTCY PROCEEDINGS DURING**

**THE PRECEDING FIVE YEARS**

 

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court. Yes x  No o

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock as of the latest practicable date:****Asof June 8, 2009, there were 8,129,879 shares of common stock, par value$0.01, outstanding.

 

 

 

----

Table ofContents

 

**TABLE OF CONTENTS**

 
| ** **                                   | ** **                                                                                  | **Page** |
|----------------------------------------------|---------------------------------------------------------------------------------------------|----------|
|                                         |                                                                                        |     |
| **PART I — FINANCIAL INFORMATION** |                                                                                        | 3        |
|                                         |                                                                                        |     |
| Item 1.                                      | Consolidated Financial Statements                                                           |     | 3 |
|                                         |                                                                                        |     |   |
|                                         | BALANCE SHEETS AS OF  APRIL 30, 2009 (UNAUDITED) AND JANUARY 31, 2009                       |     | 3 |
|                                         |                                                                                        |     |   |
|                                         | STATEMENTS OF  OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2009 AND 2008 (UNAUDITED)    |     | 4 |
|                                         |                                                                                        |     |   |
|                                         | STATEMENTS OF  CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 30, 2009 AND 2008 (UNAUDITED)    |     | 5 |
|                                         |                                                                                        |     |   |
|                                         | NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                     |     | 6 |
|                                         |                                                                                        |     |   |
| Item  2.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |     | 10 |
|                                         |                                                                                        |     |   |
| Item  3.                                     | Quantitative  and Qualitative Disclosures About Market Risk                                 |     | 16 |
|                                         |                                                                                        |     |   |
| Item  4T.                                    | Controls and  Procedures                                                                    |     | 17 |
|                                         |                                                                                        |     |
| **PART II — OTHER  INFORMATION**   |                                                                                        | 17       |
|                                         |                                                                                        |     |
| Item 1.                                      | Legal Proceedings                                                                           |     | 17 |
|                                         |                                                                                        |     |   |
| Item 1A.                                     | Risk Factors                                                                                |     | 19 |
|                                         |                                                                                        |     |   |
| Item  2.                                     | Unregistered  Sales of Equity Securities and Use of Proceeds                                |     | 19 |
|                                         |                                                                                        |     |   |
| Item  3.                                     | Defaults Upon  Senior Securities                                                            |     | 19 |
|                                         |                                                                                        |     |   |
| Item  4.                                     | Submission of  Matters to a Vote of Security Holders                                        |     | 19 |
|                                         |                                                                                        |     |   |
| Item 5.                                      | Other Information                                                                           |     | 19 |
|                                         |                                                                                        |     |   |
| Item 6.                                      | Exhibits                                                                                    |     | 19 |

 

2

----

Table of Contents

 

# **PART I —FINANCIAL INFORMATION**

#  

## **Item 1.  FinancialStatements.**

##  

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

### **CONSOLIDATED BALANCE SHEETS**

###  

| ** **                                                                                                                                       | ** ** | **April 30,   2009** | ** **    | **January 31,   2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|---------------|----------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(Unaudited)**                | ** **    | ** **                       | ** ** |
| **ASSETS**                                                                                                                                       | ** ** | ** **                     | ** **    | ** **                       | ** ** |
| CURRENT ASSETS                                                                                                                                   |       |                           |          |                             |       |
| Cash and Equivalents                                                                                                                             |       | $                              | 1,740,006     |                             | $          | 3,357,978 |   |
| Restricted Cash                                                                                                                                  |       | 1,356,770                      |          | 1,298,463                        |       |
| Accounts Receivable                                                                                                                              |       | 281,828                        |          | 219,264                          |       |
| Inventories                                                                                                                                      |       | 237,310                        |          | 219,601                          |       |
| Deferred Tax Assets, net  of allowance                                                                                                           |       | 369,000                        |          | 369,000                          |       |
| Prepaid Expenses                                                                                                                                 |       | 501,291                        |          | 379,910                          |       |
| ** **                                                                                                                                       | ** ** | **4,486,205**                  | ** **    | **5,844,216**                    | ** ** |
|                                                                                                                                             |       |                           |          |                             |       |
| Property and Equipment,  net of accumulated depreciation and amortization                                                                        |       | 3,936,335                      |          | 4,171,160                        |       |
| Goodwill                                                                                                                                         |       | 103,725                        |          | 103,725                          |       |
| Other                                                                                                                                            |       | 131,529                        |          | 321,222                          |       |
| ** **                                                                                                                                       | ** ** | **$**                          | **8,657,794** | ** **                       | **$**      | **10,440,323** | ** ** |
|                                                                                                                                             |       |                           |          |                             |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                   | ** ** | ** **                     | ** **    | ** **                       | ** ** |
| CURRENT LIABILITIES                                                                                                                              |       |                           |          |                             |       |
|                                                                                                                                             |       |                           |          |                             |       |
| Short-Term Debt                                                                                                                                  |       | $                              | 450,000       |                             | $          | 499,295 |   |
| Current Portion of  Long-Term Debt                                                                                                               |       | 613,937                        |          | 612,759                          |       |
| Accounts Payable                                                                                                                                 |       | 1,280,742                      |          | 1,191,649                        |       |
| Accrued Expenses                                                                                                                                 |       | 618,504                        |          | 652,439                          |       |
| Unpaid Winning Tickets                                                                                                                           |       | 968,788                        |          | 1,193,900                        |       |
| Customer Deposits and  Other                                                                                                                     |       | 786,740                        |          | 2,150,230                        |       |
| ** **                                                                                                                                       | ** ** | **4,718,711**                  | ** **    | **6,300,272**                    | ** ** |
|                                                                                                                                             |       |                           |          |                             |       |
| Long-Term Debt, less  current portion                                                                                                            |       | 2,893,665                      |          | 3,075,244                        |       |
| Redeemable Series A  Preferred Stock (3,238 shares)                                                                                         |       | 323,800                        |          | 323,800                          |       |
| Other                                                                                                                                            |       | 448,174                        |          | 530,071                          |       |
|                                                                                                                                             |       | 8,384,350                      |          | 10,229,387                       |       |
|                                                                                                                                             |       |                           |          |                             |       |
| STOCKHOLDERS’ EQUITY                                                                                                                        |       |                           |          |                             |       |
| 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                        |       |
| Common Stock - $0.01 par  value; 25,000,000 shares authorized; 8,129,879 shares issued and outstanding                                           |       | 81,299                         |          | 81,299                           |       |
| Additional Paid-In Capital                                                                                                                       |       | 12,421,742                     |          | 12,361,309                       |       |
| Deficit                                                                                                                                          |       | (12,994,504                    | )             | (12,996,579                      | )          |
| Treasury Stock, at cost  (61,100 common shares)                                                                                                  |       | (327,493                       | )             | (327,493                         | )          |
| ** **                                                                                                                                       | ** ** | **273,444**                    | ** **    | **210,936**                      | ** ** |
| ** **                                                                                                                                       | ** ** | **$**                          | **8,657,794** | ** **                       | **$**      | **10,440,323** | ** ** |

 

**See Notes to ConsolidatedFinancial Statements**

 

3

----

Table of Contents

 

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

### **CONSOLIDATED STATEMENTS OF OPERATIONS**

### **(Unaudited)**

** **
| ** **                              | ** ** | **For the Three Months Ended   April 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                                                 | ** ** | **2008** | ** ** |
| **REVENUES:**                           | ** ** | ** **                                                               | ** ** | ** ** | ** ** |
| Wagering                                |       | $                                                                        | 2,006,246  |   | $ | 2,701,821 |   |
| Hotel/Casino                            |       | 563,347                                                                  |       | 627,531 |   |
| Systems                                 |       | 763,196                                                                  |       | 930,108 |   |
| ** **                              | ** ** | **3,332,789**                                                            | ** ** | **4,259,460** | ** ** |
| **OPERATING COSTS AND EXPENSES:**       | ** ** | ** **                                                               | ** ** | ** ** | ** ** |
| **Direct Costs:**                       | ** ** | ** **                                                               | ** ** | ** ** | ** ** |
| Wagering                                |       | 1,613,791                                                                |       | 2,208,929 |   |
| Hotel/Casino                            |       | 444,791                                                                  |       | 504,603 |   |
| Systems                                 |       | 197,390                                                                  |       | 299,781 |   |
| ** **                              | ** ** | **2,255,972**                                                            | ** ** | **3,013,313** | ** ** |
| **Operating Expenses:**                 | ** ** | ** **                                                               | ** ** | ** ** | ** ** |
| Research and Development                |       | 138,845                                                                  |       | 166,850 |   |
| Selling, General and  Administrative    |       | 623,748                                                                  |       | 781,653 |   |
| Depreciation and  Amortization          |       | 251,491                                                                  |       | 257,504 |   |
| ** **                              | ** ** | **1,014,084**                                                            | ** ** | **1,206,007** | ** ** |
|                                    |       |                                                                     |       |   |   |
| ** **                              | ** ** | **3,270,056**                                                            | ** ** | **4,219,320** | ** ** |
|                                    |       |                                                                     |       |   |   |
| **OPERATING INCOME**                    | ** ** | **62,733**                                                               | ** ** | **40,140** | ** ** |
|                                    |       |                                                                     |       |   |   |
| **OTHER INCOME (EXPENSE):**             | ** ** | ** **                                                               | ** ** | ** ** | ** ** |
| Interest Income                         |       | 5,612                                                                    |       | 13,610 |   |
| Interest Expense                        |       | (69,760                                                                  | )          | (63,009 | ) |
| Litigation Expense                      |       | (9,601                                                                   | )          | (24,916 | ) |
| Other                                   |       | 47,525                                                                   |       | 18,349 |   |
| ** **                              | ** ** | ** **                                                               | ** ** | ** ** | ** ** |
| **NET INCOME (LOSS)**                   | ** ** | **$**                                                                    | **36,509** | ** ** | **$** | **(15,826** | **)** |
| ** **                              | ** ** | ** **                                                               | ** ** | ** ** | ** ** |
| **NET INCOME (LOSS) PER COMMON  SHARE** |       |                                                                     |       |   |   |
| **BASIC**                               | ** ** | **$**                                                                    | **—** | ** ** | **$** | **(.01** | **)** |
| **DILUTED**                             | ** ** | **$**                                                                    | **—** | ** ** | **$** | **N/A** | ** ** |

 

**See Notes to ConsolidatedFinancial Statements**

 

4

----

Table of Contents

 

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

### **(Unaudited)**

** **
| ** **                                                                           | ** ** | **For the Three Months Ended   April 30,** | ** **     |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|----------------|
| ** **                                                                           | ** ** | **2009**                                                                 | ** **     | **2008** | ** ** |
| ** **                                                                           | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| **Operating Activities**                                                             | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| **Net cash used in operating  activities**                                           | ** ** | **$**                                                                    | **(1,355,335** | **)** | **$** | **(1,030,098** | **)** |
| ** **                                                                           | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| **Investing Activities**                                                             | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| Gross increases in  restricted cash                                                  |       | (188,192                                                                 | )              | (169,733 | ) |
| Withdrawal of restricted  cash                                                       |       | 129,885                                                                  |           | 161,132 |   |
| Proceeds from the sale of  property and equipment                                    |       | —                                                                   |           | 1,500 |   |
| Purchase of property and  equipment                                                  |       | (15,201                                                                  | )              | (69,739 | ) |
| **Net cash used in investing  activities**                                           | ** ** | **(73,508**                                                              | **)**          | **(76,840** | **)** |
| ** **                                                                           | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| **Financing Activities**                                                             |       |                                                                     |           |   |   |
| Repayment of borrowings                                                              |       | (155,401                                                                 | )              | (126,331 | ) |
| Proceeds from borrowings                                                             |       | 705                                                                      |           | 80,000 |   |
| Dividends on preferred  stock                                                        |       | (34,433                                                                  | )              | (34,820 | ) |
| **Net cash used in financing  activities**                                           | ** ** | **(189,129**                                                             | **)**          | **(81,151** | **)** |
|                                                                                 |       |                                                                     |           |   |   |
| **NET DECREASE IN CASH AND  EQUIVALENTS**                                            | ** ** | **(1,617,972**                                                           | **)**          | **(1,188,089** | **)** |
| ** **                                                                           | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| **CASH AND EQUIVALENTS, BEGINNING  OF PERIOD**                                       | ** ** | **3,357,978**                                                            | ** **     | **3,316,595** | ** ** |
| ** **                                                                           | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| **CASH AND EQUIVALENTS, END OF  PERIOD**                                             | ** ** | **$**                                                                    | **1,740,006**  | ** ** | **$** | **2,128,506** | ** ** |
| ** **                                                                           | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| **SUPPLEMENTAL CASH FLOW  INFORMATION:**                                             | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| Cash paid for interest                                                               | ** ** | **$**                                                                    | **84,430**     | ** ** | **$** | **77,371** | ** ** |
| ** **                                                                           | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| **NON-CASH INVESTING ACTIVITY:**                                                     | ** ** | ** **                                                               | ** **     | ** ** | ** ** |
| Property and equipment  acquired directly with proceeds of bank and vendor financing | ** ** | **$**                                                                    | **—**     | ** ** | **$** | **9,282** | ** ** |

 

**See Notes to ConsolidatedFinancial Statements**

 

5

----

Table of Contents

 

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

### **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

### **(Unaudited)**

###  

### **Three Months Ended April 30, 2009**

###  

#### **1.  Basis of Presentation**

#### ** **

The accompanyingunaudited interim consolidated financial statements of American Wagering, Inc.and its subsidiaries (collectively “the Company” or “AWI”) have been preparedin accordance with the instructions to Form 10-Q as published by theSecurities and Exchange Commission (“SEC”). The financial statements do not include all of the information anddisclosures required by generally accepted accounting principles for annualfinancial statements.  All significantinter-company accounts and transactions have been eliminated inconsolidation.  In the opinion ofmanagement, all adjustments necessary for a fair presentation have beenincluded.  Due to seasonality and otherfactors, results of operations for any interim period are not necessarilyindicative of expected annual results. These unaudited interim consolidated financial statements should be readin conjunction with the audited annual consolidated financial statements of theCompany, and the related notes, included in the Company’s Annual Report on Form 10-Kfiled on May 4, 2009, with the SEC, from which the balance sheetinformation as of January 31, 2009 was derived.

 

#### **2.  Net Income (Loss) Per Common Share**

#### ** **

Basic net income (loss)per common share is calculated based on the weighted average number of sharesof common stock outstanding during the reporting period. Diluted net income percommon share is ordinarily calculated giving effect to all potentially dilutivecommon shares, assuming such shares were outstanding during the reportingperiod. However, there is no calculation made or presented for diluted net lossper common share for loss periods, since the effect of including potentiallydilutive common shares would be anti-dilutive because of the losses. The amountof potentially anti-dilutive common shares that have been excluded from basicnet income (loss) per share was 648,899 and 746,899 at April 30, 2009 and2008, respectively.

 

Following is areconciliation of the numerators and denominators of the net income (loss) percommon share computations for the three months ended April 30:

 
| ** **                                                       | ** ** | **Numerator** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                       | ** ** | **2009**      | ** ** | **2008** | ** ** |
| ** **                                                       |       |          |       |   |   |
| Net income (loss)                                                |       | $             | 36,509     |   | $ | (15,826 | ) |
| Less preferred stock  dividends                                  |       | (34,344       | )          | (34,820 | ) |
| Net income (loss)  available to common shares, basic and diluted |       | $             | 2,165      |   | $ | (50,646 | ) |

 
| ** **                                           | ** ** | **Denominator** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|
| ** **                                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
| Weighted average common  shares outstanding, basic   |       | 8,068,779       |       | 8,070,110 |   |
| Effect of dilutive stock  options                    |       | 80              |       | 0 |   |
| Weighted average common  shares outstanding, diluted |       | 8,068,859       |       | 8,070,110 |   |
|                                                 |       |            |       |   |   |
| Net income (loss) per common  share                  |       |            |       |   |   |
| Basic                                                |       | $               | 0.00       |   | $ | (0.01 | ) |
| Diluted                                              |       | $               | 0.00       |   | * |   |
|                                                      |            |                 |            |  |  |  |  |

 

----

* Diluted income(loss) per share is not applicable for loss periods.

 

6

----

Table of Contents

 

#### **3.  Income Taxes**

#### ** **

At April 30, 2009,the Company had federal tax net operating loss (“NOL”) carryforwards availableto potentially reduce future tax obligations in the aggregate amount ofapproximately $7.0 million, of which approximately $1.3 million expires in2019.  In assessing the realizability ofdeferred tax assets, which resulted primarily from the NOLs, the Companyconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible.

 

Management believes that, subject to the effect, ifany, of the Racusin uncertainty (Note 4), the Company will be profitable for atleast the short-term future and that it is therefore more likely than not thatthe Company’s deferred tax asset of $369,000, net of the valuation allowanceprovided, will be realized.

 

TheCompany’s estimated annual effective tax rate of zero for the interim periodspresented differs from statutory tax rates primarily due to the expectedutilization of NOL carryforwards or changes in the valuation allowance fordeferred tax assets.

 

**4.  Litigation and Contingencies**

 

Litigation expense of$9,602 and $24,916, respectively, included in other income (expense, consistsof judgment interest incurred) on our previously recorded obligation due toMichael Racusin.

 

As of April 30, 2009and 2008, respectively, the aggregate recorded provisions equal to the lowerend of the estimated probable loss range for the following matters inlitigation or other disputes, included in long-term debt, was $682,642 and$1,376,663, excluding future legal and related defense costs and judgmentinterest.

 

**Racusin**

 

The Company and Racusin entered into the Settlement Agreement on September 3,2004. On or about March 11, 2005, the Company consummated its Plan ofReorganization and emerged from Bankruptcy. On or about July 27, 2005, theBankruptcy Court approved an Interpleader Order, whereby pursuant to theSettlement Agreement, the Company agreed to place 250,000 shares of commonstock with the clerk of the court as payment of the Racusin Claim while Racusinpursued its appeal of the Bankruptcy Appellate Panel’s decision in our favor tothe 9th Circuit Court of Appeals. The Interpleader Order further statedthat the Company’s stock would be substituted with cash payment in the eventthat the 9th Circuit reversed the Bankruptcy Appellate Panel which decisionwas subsequently reversed, leading to the November 2, 2007 hearing with theBankruptcy Court.  On November 2,2007, the Bankruptcy Court heard an argument to determine whether the Companycould withdraw its 250,000 shares of common stock and whether it couldbegin depositing funds pursuant to a schedule attached to the Company’s motionwhich calculated estimated post-judgment simple interest at 8% per annum, from March 11,2005, without taking into consideration the Interpleader Order of July 27,2005, which was still in effect. That is, by calculating post-judgment interestduring the same time that our stock was held by the Court, we previouslyaccrued interest over a period of time for which interest we believed shouldnot be accrued pursuant to the Interpleader Order.

 

As previously reported, on March 17, 2008, the Company filed withthe Bankruptcy Court what it believed was an appropriately corrected amortizationschedule (“Corrected Amortization Schedule”) relating to the calculation ofpre-judgment interest occuring under the settlement agreement.  A hearing was held on May 8, 2009, regardinga Motion for Summary Judgment filed by Racusin related to the Company’s filingof the Corrected Amortization Schedule. At the hearing, the Court stated itsintention to rule in favor of Racusin.  Itis expected that the Court will enter its order in approximately 30 to 60 daysafter the hearing date.  The contemplatedorder would total approximately $1.7 million (all immediately due and payable),or approximately $1.0 million in excess of the recorded payable to Racusin;which consists of management’s best estimate of the minimum cost of theultimate disposition of the matter, and of which $300,000 is classified as acurrent liability, in accordance with management’s interpretation of thesettlement agreement and related proceedings. The Company is attempting to negotiate a settlement with Racusin and,based on legal arguments that management believes to have merit, is consideringits procedural alternatives, which may include, but not be limited to,requesting a rehearing/reconsideration and, if unsuccessful, filing an appealto the U.S. District Court of Nevada.  Inthe event the Company is unable to negotiate a settlement under acceptableterms and is also unsuccessful as to its other alternatives, it would likely beunable to satisfy its obligations as they become due and may, therefore, beunable to continue as a going concern depending on the course of action pursuedby Racusin in this matter, among other prospective developments.

 

7

----

Tableof Contents

 

**InternetSports International, Ltd.**

 

There have been no material legal changes for this matter during thequarter ended April 30, 2009 from the fiscal year ended January 31,2009.

 

EconomicConditions and related Risks and Uncertainties

 

The United States is currently experiencing a recession accompanied by,among other things, weakness in the commercial and investment banking systemsresulting in reduced credit and capital financing availability, and highlycurtailed gaming, other recreational activities and general discretionaryconsumer spending, and is also engaged in war, all of which are likely tocontinue to have far-reaching effects on economic conditions in the country foran indeterminate period.  The effects andduration of these developments and related risks and uncertainties on ourfuture operations and cash flows, including, our principal officer’s ability tocontinue to provide financial support to the Company, as in the past, and otheraccess to capital or credit financing, cannot be estimated at this time but maylikely be significant.

 

UninsuredCash Deposits

 

The Company often carries cash and cash equivalents on deposit withfinancial institutions substantially in excess of federally-insured limits, andthe risk of losses related to such concentrations may be increasing as a resultof recent economic developments and uncertainties discussed in the foregoingparagraph.  The extent of any loss thatmight be incurred as a result of uninsured deposits in the event of a futurefailure of a bank or other financial institutions, if any, is not subject toestimation at this time.

 

#### **5.  Stock Options**

#### ** **

Activity related to boththe employee and directors’ stock option plans for the three months ended April 30,2009 and 2008 was as follows:

 
| ** **                        | ** ** | **Option Shares** | ** ** | **Weighted-  Average   Exercise Price** | ** ** |
|-----------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|
| Balance at February 1,  2009 |       | 709,299                |       | $                                                 | 1.78       |   |
| Granted                           |       | —                 |       |                                              |       |
| Exercised                         |       | —                 |       |                                              |       |
| Forfeited or canceled             |       | (60,000                | )          | (1.25                                             | )          |
|                              |       |                   |       |                                              |       |
| Balance at April 30,  2009   |       | 649,299                |       | $                                                 | 1.83       |   |
|                              |       |                   |       |                                              |       |
| Balance at  February 1, 2008 |       | 749,299                |       | $                                                 | 1.75       |   |
| Granted                           |       | —                 |       |                                              |       |
| Exercised                         |       | —                 |       |                                              |       |
| Forfeited or canceled             |       | —                 |       |                                              |       |
|                              |       |                   |       |                                              |       |
| Balance at April 30,  2008   |       | 749,299                |       | $                                                 | 1.75       |   |

 

Stock options exercisableand available for future grants for both current stock option plans as of April 30,2009 are as follows:

 
| ** **                   | ** ** | **Shares** | ** ** | **Weighted-  Average   Exercise   Price** | ** ** | **Weighted-  Average  Remaining   Life** | ** **      |
|------------------------------|------------|------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|-----------------|
| Exercisable                  |       | 519,299    |       | $                                                   | 1.87       |                                          | 4.17 years |   |
| Available for future  grants |       | 308,767    |       | —                                              |       | —                                        |            |
|                              |            |            |            |                                                     |            |                                               |                 |  |

 

Non-cash stock-basedcompensation expense recorded in the line item “Selling, General andAdministrative Expenses” on the consolidated income statements for the threemonths ended April 30, 2009 and 2008 was $8,809 and $17,196, respectively.

 

8

----

Table of Contents

 

**6.  Business Segments**

 

#### **TheCompany reports the results of operations through three operating segments asfollows:**

 
| ** **                  | ** ** | **Three Months Ended April 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| **Revenues**                |       |                                                 |       |   |   |
| Wagering                    |       | $                                                    | 2,006,246  |   | $ | 2,701,821 |   |
| Hotel/Casino                |       | 563,347                                              |       | 627,531 |   |
| Systems                     |       | 763,196                                              |       | 930,108 |   |
| ** **                  | ** ** | **$**                                                | 3,332,789  |   | $ | 4,259,460 |   |
| **Operating income (loss)** |       |                                                 |       |   |   |
| Wagering                    |       | $                                                    | 69,581     |   | $ | 112,282 |   |
| Hotel/Casino                |       | (20,376                                              | )          | (36,578 | ) |
| Systems                     |       | 13,528                                               |       | (35,564 | ) |
|                        |       | 62,733                                               |       | 40,140 |   |
| **Other expense, net**      |       | (26,224                                              | )          | (55,966 | ) |
| **Net Income (Loss)**       | ** ** | **$**                                                | 36,509     |   | $ | (15,826 | ) |

 

Additional informationfor the Hotel/Casino segment follows:

 
| ** **                           | ** ** | **Three Months Ended April 30,** | ** **  |
|--------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                           | ** ** | **2009**                                             | ** **  | **2008** | ** ** |
| **Revenue**                          |       |                                                 |        |   |   |
| Casino                               |       | $                                                    | 306,779     |   | $ | 343,845 |   |
| Hotel                                |       | 101,787                                              |        | 113,266 |   |
| Food/Beverage                        |       | 154,781                                              |        | 170,420 |   |
|                                 |       | 563,347                                              |        | 627,531 |   |
| **Direct Costs and Expenses**        |       |                                                 |        |   |   |
| Casino                               |       | 125,531                                              |        | 149,931 |   |
| Hotel                                |       | 37,346                                               |        | 47,543 |   |
| Food/Beverage                        |       | 178,497                                              |        | 202,623 |   |
| Unallocated                          |       | 103,417                                              |        | 104,506 |   |
|                                 |       | 444,791                                              |        | 504,603 |   |
|                                 |       |                                                 |        |   |   |
| Selling, General and  Administrative |       | 73,522                                               |        | 90,420 |   |
| Depreciation and  Amortization       |       | 65,410                                               |        | 69,086 |   |
|                                 |       | 583,723                                              |        | 664,109 |   |
| **Operating Loss**                   | ** ** | **$**                                                | **(20,376** | **)** | **$** | **(36,578** | **)** |

 

9

----

Table of Contents

 

## **Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

##  

Thefollowing discussion and analysis should be read together with our unauditedconsolidated financial statements and the accompanying notes.  This discussion contains forward-lookingstatements, within the meaning of Section 27A of the Securities Act of1933, as amended, Section 21E of the Securities Exchange Act of 1934, asamended, and the Private Securities Litigation Reform Act of 1995, includingstatements regarding our expected financial position, business and financingplans.  Some of the forward-lookingstatements can be identified by the use of forward-looking terms such as “believes,”“expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,”“anticipates,” or other comparable terms. Forward-looking statements involve inherent risks and uncertaintieswhich could cause actual results to differ materially from those in theforward-looking statement including those discussed herein and elsewhere in ourForm 10-K for the year ended January 31, 2009, particularly under theheading “Risk Factors.”  We cautionreaders not to place undue reliance upon any such forward-looking statements,which speak only as of the date made.  Wedo not intend, and undertake no obligation to update our forward-lookingstatements to reflect future events or circumstances.

 

**Definitions. **For the purposes of this report, the following termshave the following meanings:

 

“Company” means AmericanWagering, Inc. and its subsidiaries collectively.

 

“AWI” means AmericanWagering, Inc.

 

“AWIG” means AWI Gaming, Inc.,a wholly-owned subsidiary of AWI.

 

“AWIM” means AWIManufacturing, Inc., a wholly-owned subsidiary of AWI.

 

“CBS” means ComputerizedBookmaking Systems, Inc., a wholly-owned subsidiary of AWI.

 

“Leroy’s” means Leroy’sHorse & Sports Place, Inc., a wholly-owned subsidiary of AWI.

 

“Sturgeons, LLC” meansSturgeons, LLC, a wholly-owned subsidiary of AWIG.

 

“Sturgeon’s” meansSturgeon’s Inn & Casino (which, as of March 1, 2006, is owned bySturgeons, LLC).

 

**Overview. **Our primary operating strategies for the foreseeablefuture are to focus on our core businesses relating to the race and sportsindustry, and the operation of Sturgeon’s. Our intentions regarding thefollowing subsidiaries are to continue:

 

·                  Leroy’s - operating existing sports books,generating revenue from customer wagers less pay outs, adding new books whereand when appropriate, and continuing to become more efficient in order toreduce expenses. We periodically review our existing Leroy’s locations in orderto close those locations that are not operating efficiently.  Based on ourstrategy, the number of race and sports books operated by Leroy’s may increaseor decrease in the future, due to the closure of unprofitable locations or hostproperties, closures due to other factors beyond our control and/or thepossible opening of new locations with greater potential forprofitability.  There is no assurance that Leroy’s will be able to add newlocations and/or that any new locations so added will be profitable.

 

·                  CBS — developing, selling and maintaining computerizedrace and sports wagering systems for the gaming industry and seeking strategicinternational alliances with third party gaming suppliers and/or gaming operatorsthat desire to utilize our expertise in the race and sports industry. These strategies should enable us to gain a competitive advantage by offeringthe gaming operator and/or the betting patron a well-rounded gaming experience,both in the United States and abroad. There is no assurance that CBS will besuccessful in obtaining any strategic alliances.

 

·                  AWIM — developing the self-service wagering kiosk,installing kiosks in Leroy’s locations to assist in controlling personnelcosts, and marketing the kiosks to non-Leroy’s locations.

 

·                  Sturgeon’s — effectively operating the hotel/casino whileperiodically reviewing and modifying existing procedures and personnelalignment to increase efficiency and reduce expenses.

 

10

----

Table ofContents

 

We have implemented, andare continuing to initiate cost cutting measures throughout the Company. In the first quarter of fiscal 2009, the Company reduced its workforce by meansof a lay-off of several employees in each of our subsidiaries and began tofocus more on cost controls. During the remainder of fiscal 2009 and continuingthough the first quarter of fiscal 2010, AWI’s corporate expenses that areallocated to Leroy’s and CBS have been reduced primarily due to reductions inadministrative salaries and benefits, including accounting, decreased auditfees and outside services; which were partially offset by increases in interestexpense, contributed services expense for certain executives, legal expense andinsurance expenses. We will continue to evaluate and closely monitor costs,looking for additional efficiencies and improvements during at least theremainder of fiscal 2010. Subject to our cost constraints, where appropriate,we will continue to explore possible new locations for our products, includingforeign jurisdictions.

 

During the latter part offiscal 2008, and continuing throughout fiscal 2009 and into 2010, our local,regional and national economy has been negatively impacted due to a number offactors, including the nationwide economic recession and the subprime mortgagecrisis.  Confidence in the credit markethas also eroded, which resulted in a tightening of credit availability. During fiscal 2009 and continuing through the first quarter of fiscal 2010, LasVegas has experienced higher foreclosure and unemployment rates and reducedpassenger traffic at McCarran airport.  We face the risk that the effects of higherunemployment rates, foreclosures and continued pressure on housing prices, aswell as business failures and stock market volatility will place added strainon consumers’ ability to make purchases, repay their loans and thus, leave lessfunds available for travel and leisure activities. Consumer demand forgambling, due to decreased disposable income, has declined as a result of thecurrent economic recession.  We have also experienced a change in gamblingpatterns of our patrons, including a trend toward more conservative bets, whichtend to be less profitable to the Company.  In addition, because Sturgeon’sHotel and Casino is heavily dependent on the drive-through market, thesefactors have and will continue to have an adverse affect on our business. Accordingly, if the economic recession in the United States continues, it willlikely continue to hurt our financial performance, due to, among other things,decreased wagering activity and a change in the types of wagers made.

 

#### **Liquidity and CapitalResources.**

#### ** **

TheUnited States iscurrently experiencing a recession accompanied by, among other things, weaknessin the commercial and investment banking systems resulting in reduced creditand capital financing availability, and highly curtailed gaming, otherrecreational activities and general discretionary consumer spending, and isalso engaged in war, all of which are likely to continue to have far-reachingeffects on economic conditions in the country for an indeterminate period. Theeffects and duration of these developments and related risks and uncertaintieson our future operations and cash flows, including, our principal officer’sability to continue to provide financial support to the Company, as in thepast, and other access to capital or credit financing, cannot be estimated atthis time but may likely be significant.

 

Asof April 30, 2009, we had a working capital deficit of ($232,506) comparedto working capital of $359,584 at April 30, 2008. (Also see RestrictedCash Requirements (Regulation 22.040.)) The decrease in working capital is primarily due to the one-timeadjustment to increase our valuation allowance against our deferred income taxasset for $71,481 recorded in the fourth quarter of fiscal 2009; the decreasein hold amounts due to a decreased wagers and mix of wagers influenced by thepoor economic environment; the result of the ongoing pay-down of the Racusinobligation; and the timing of and increases in future bets and unpaid winningtickets.

 

Inaddition, as discussed below, on May 8, 2009, the court in the Racusinmatter stated its intention to enter a judgment that would have the effect ofincreasing the Company’s obligation to Racusin by approximately $1.0 million,increasing the Company’s working capital deficit by approximately $1.4 million,and causing the then entire obligation to Racusin of approximately $1.7 millionto be immediately due and payable.  If arequest for rehearing is not granted and an acceptable settlement with Racusincannot be negotiated and the court enters the judgment in favor of Racusin, theCompany, despite the measures discussed below to increase cash flow, would beunable to satisfy its obligations as they become due and might be unable tocontinue as a going concern depending on the course of action pursued byRacusin, among other developments.

 

Inlight of the contemplated Racusin judgment and due to the current negative economicenvironment, the Company has taken the following additional measures in orderto increase cash flow.  Effective January 1,2009, the Company no longer matches the employees’ 401(k) contributions.The salaries of the President of AWIG and the controller of Sturgeon’s Hoteland Casino were reduced by 20%, effective October 3, 2008. On December 2,2008, the CEO and the in-house general counsel each agreed to reduce theirannual base salaries to the amount sufficient to cover payroll deductions forbenefits, effective November 24, 2008. Pursuant to the original terms of Mr. Salerno’semployment agreement, Mr. Salerno was entitled to an annual base salary of$240,000. Melody J. Sullivan, the Company’s Chief Financial Officer andTreasurer, agreed to reduce her annual base salary by 20% effective January 3,2009. Pursuant to the original terms of her employment agreement, Ms. Sullivanwas entitled to an annual base salary of $180,000. Additionally, several otherhigh salaried 

 

11

----

Table ofContents

 

employeesagreed to reduce their salaries by 20% effective January 3, 2009. Certainhigh paid hourly employees agreed to a 32 hour work week, effective January 4,2009, resulting in a 20% pay reduction. Additionally, the Company’s outsidedirectors elected not to receive their directors’ fees, effective for the lastthree calendar months of 2008, continuing through the first three calendarmonths of 2009, and renounced their stock option grants for fiscal 2009effective January 31, 2009. The salary reductions and discontinued 401(k) matchare intended to be temporary pending an improvement in the Company’scash flow but were in place as of April 30, 2009.

 

VictorSalerno, the Company’s President, Chief Executive Officer and Chief OperatingOfficer, loaned the Company an additional $500,000 on December 1, 2008 dueto the cash flow needs of the Company. Due to the urgency, the funds wereadvanced on an expedited basis without formal board approval, as reported inthe Company’s Form 10-Q for the quarter ended October 31, 2008. Mr. Salernohad previously loaned the Company $500,000 pursuant to a loan agreement dated April 21,2008. The independent directors of the Company evaluated and approved thefairness of the loan agreement to cover the total $1,000,000, at the same termsof the April 21, 2008 loan agreement.

 

OnDecember 11, 2008, U.S. Bank gave the Company oral approval to extendthe maturity date of the Company’s $500,000 revolving line of credit for90 days after the original maturity date of December 31, 2008, andfurther negotiated the terms of the line of credit, converting it to a termloan, maturing in January 2010.

 

Aspreviously reported, on March 17, 2008, the Company filed with theBankruptcy Court what it believed was an appropriately corrected amortization schedule(“Corrected Amortization Schedule”) relating to the calculation ofpre-judgement interest occuring under the settlement agreement.  A hearing was held on May 8, 2009, regardinga Motion for Summary Judgment filed by Racusin related to the Company’s filingof the Corrected Amortization Schedule. At the hearing, the Court stated itsintention to rule in favor of Racusin.  Itis expected that the Court will enter its order in approximately 30 to 60 daysafter the hearing date.  The contemplatedorder would total approximately $1.7 million (all immediately due and payable),or approximately $1.0 million in excess of the recorded payable to Racusin;which consists of management’s best estimate of the minimum cost of theultimate disposition of the matter, and of which $300,000 is classified as acurrent liability, in accordance with management’s interpretation of thesettlement agreement and related proceedings. The Company is attempting to negotiate a settlement with Racusin and,based on legal arguments that management believes to have merit, is consideringits procedural alternatives, which may include, but not be limited to, requestinga rehearing/reconsideration and, if unsuccessful, filing an appeal to the U.S.District Court of Nevada.  In the eventthe Company is unable to negotiate a settlement under acceptable terms and isalso unsuccessful as to its other alternatives, it would likely be unable tosatisfy its obligations as they become due and may, therefore, be unable tocontinue as a going concern depending on the course of action pursued byRacusin in this matter, among other prospective developments.

 

Ourprincipal cash requirements consist of cash used in operations for the firstquarter of fiscal 2010 of approximately $1.4 million as compared to cashused in operations of $1.0 million for the same quarter of fiscal 2009,primarily due to decreased systems sales and installations, customer deposits,and unpaid winning tickets, as a result of the timing of bets placed on thelast big football game of the year, which occurred on February 1, 2009.

 

Netcash used in investing activities for the first quarter of fiscal 2010 wasapproximately $74,000 as compared to approximately $77,000 for the same quarterof fiscal 2009, primarily as a result of the decrease in purchases of upgradedcomputers and networks, leasehold improvements, new kiosk locations and otherfurniture and equipment from the prior fiscal year, due to cost controls.

 

Netcash used in financing activities for the first quarter of fiscal 2010 wasapproximately $189,000 compared to approximately $81,000 in cash used infinancing activities for the same quarter of fiscal 2009 primarily due toincreased repayments on our line of credit with U.S. Bank.

 

**Restricted Cash Requirements (Regulation 22.040)**

 

NevadaGaming Commission Regulation 22.040 (“Regulation 22.040”) requires usto maintain reserves (cash, surety bonds, irrevocable standby letter of credit,etc.) sufficient to cover any outstanding wagering liability including unpaidwinning tickets, future tickets and telephone account deposits. From November 16,2007 to May 8, 2009, we maintained a Regulation 22.040 reserve in theform of a surety bond issued by Fidelity and Deposit Company of Maryland(a subsidiary of Zurich American Insurance) (“Fidelity”) secured by$1.2 million in cash deposits. The cash deposits, in the form of twocertificates of deposit, are held at Great Basin Bank of Nevada(now Nevada State Bank) along with an irrevocable letter of credit, alsowith Great Basin Bank of Nevada (now Nevada State Bank).

 

12

----

Table ofContents

 

InMarch 2009, the Company was notified that Fidelity would cancel its suretybond effective May 8, 2009. While we are searching for a replacement bondcompany, we have been unable to secure a replacement bond with acceptable termsat this time. Therefore, the Company formalized a request to the Nevada GamingCommission, requesting a lower reserve amount of $1.2 million with anadditional $600,000 float, which was granted in April 2009. This makes ourreserve amount $1.8 million until August 15, 2009, which iscollateralized by the $1.2 million in restricted deposit accounts held atGreat Basin Bank (now Nevada State Bank). We believe that such amount willprovide an adequate reserve until football season, at which time, we may needto increase the reserve amount. If the Company is unable to locate an alternatebond with acceptable terms or if we are required to increase theRegulation 22.040 reserve and are unable to do so, it would have anadverse impact on us including, but not limited to, requiring a significantreduction in the number of race/sports locations operated by Leroy’s, or anelimination or reduction of telephone wagering accounts, resulting in anadverse change in our operating results.

 

#### **Other**

#### ** **

We do not have anyoff-balance sheet financing arrangements or liabilities.  Occasionally, we may seek additional capitalto fund our operations, reduce our liabilities, or fund our expansion plans(including acquisitions).  To raisecapital, we may seek to sell additional equity securities (common orpreferred), issue debt or convertible securities, or obtain credit facilitiesthrough financial institutions.  The saleof additional equity or convertible securities would result in dilution to ourshareholders.

 

Subject to uncertaintiesresulting from the current economic conditions and the contemplated Racusinjudgment, we plan to accumulate cash liquidity during the current fiscal year(ending January 31, 2010) to help us fund the following:  payroll and benefits; sports book suppliesand improvements; required cash reserves; business insurance; real estate andequipment leases; the Racusin obligations; legal expenses; telecommunications;costs related to inventory and to assemble race/sports systems for our CBScustomers; compliance costs associated with gaming regulations and Section 404of the Sarbanes-Oxley Act of 2002; and debt service.

 

#### **Results of Operations**

#### ** **

We report our results of operations through three operatingsegments:  Wagering, Hotel/Casino andSystems.  Although numerous factors aretaken into consideration, the operating income (loss) of the segment representsa significant profitability measure used by us in allocating resources andassessing performance of each segment.

 
| ** **                         | ** ** | **Three Months Ended April 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| **Summary**                        | ** ** | **2009**                                             | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Revenues                           |       | $                                                    | 3,332,789  |   | $ | 4,259,460 |   | $ | (926,671 | ) | (21.76 | ) |
|                               |       |                                                 |       |   |   |   |   |   |   |
| Costs  and Expenses                |       | 3,270,056                                            |       | 4,219,320 |   | (949,264 | ) | (22.50 | ) |
| Other  (Income) and Expense        |       | 26,224                                               |       | 55,966 |   | (29,742 | ) | (53.14 | ) |
|                               |       |                                                 |       |   |   |   |   |   |   |
| Income  (Loss) Before Income Taxes |       | $                                                    | 36,509     |   | $ | (15,826 | ) | $ | 52,335 |   | 330.69 |   |

#### ** **

Please refer to the discussions below (“Wagering Segment,” “Hotel/CasinoSegment,” “Systems Segment,” and “Other Income and Expense”) for additionalinformation, discussion and analysis.

 

#### **For the Three Months Ended April 30,2009 Compared to the Three Months Ended April 30, 2008.**

#### ** **

#### **Wagering Segment.**

#### ** **

The Wagering Segmentincludes the operating results of the sports gaming wagers, net of payouts andexpenses.

 

**Wagering Segment revenues for the three monthsended April 30, 2009 decreased $695,575 (-25.74%) over the three monthsended April 30, 2008. **Thisdecrease is attributed to the following factors:

 

During the three months ended April 30, 2009, our basketball andbaseball handle decreased, compared to the same period in the prior year, whichwas unusually high. The decreased handle was also due to the economicrecession. We also experienced lower than normal hold percentages during thelast month of the second quarter which were primarily baseball

 

13

----

Table of Contents

 

wagers.We have experienced a change in gambling patterns of our patrons, including atrend toward more conservative bets, which tend to be less profitable to the Company.

 

**Wagering Segment total costs and expenses for thethree months ended April 30, 2009 decreased $652,874 (-25.21%) over thethree months ended April 30, 2008. **Thisdecrease is attributed to the following factors:

 

Direct costs decreased primarily due to decreasedexpenses related to reduced personnel, advertising and telephone expensesrelated to our overall cost reduction strategies.

 

Selling, general andadministrative costsdecreased primarily due to decreases in various administrative costs allocatedfrom the AWI parent in the three months ending April 30, 2009 compared tothe three months ending April 30, 2008. The decreases in management fees allocated to the segments werepartially offset by contributed services from certain executives for thisquarter compared to no contributed services for the same period the prior year.

 

Depreciation andamortization expenseincreased over the prior year’s three month period primarily due to an increasein capitalized acquisitions compared to the same three month period ending April 30,2008.

 

It is noted that anincrease or decrease in handle is not necessarily indicative of an increase ordecrease in revenues or profits, due to the volatility of the winpercentages.  Elimination of unprofitablelocations, closure of host properties, changes in state and/or federalregulations, and other factors beyond our control may result in declines inhandle.

 

As the opportunity mayarise, we intend to continue to open new locations and to continue our periodicreview of existing locations in order to close those locations that are notoperating efficiently.  There is noassurance that the number of race and sports books operated by us will notdecrease in the future due to elimination of unprofitable locations, closure ofhost properties, changes in state and/or federal regulations and other factorsbeyond our control, that we will be able to add new locations, or that any newlocations so added will be profitable.

 

#### **Hotel/Casino Segment.**

#### ** **

The Hotel/Casino Segmentincludes the operating results of Sturgeon’s.

 

**Hotel/Casino Segment revenues forthe three months ended April 30, 2009 decreased $64,184 (-10.23%) over thethree months ended April 30, 2008. **This decrease is attributed to thefollowing factors:

 

Casino revenues decreased primarily due to decreasedhandle and wagering activities for the quarter ending April 30, 2009compared to the same period ending April 30, 2008 primarily due to thecurrent economic recession.

 

Hotel revenues decreased in the first quarter of fiscal2010 compared to the first quarter of fiscal 2009 due to a lower occupancyrate, primarily due to weather issues and decreased travel.

 

Food and beveragerevenuesdecreased primarily due to the decline in occupancy for the three months ended April 30,2009 compared to the three months ended April 30, 2008.

 

Casino cash incentivesand other promotional allowances decreased for the first quarter of 2010 compared tothe same quarter of 2009, primarily due to closer scrutiny of these costs bymanagement, combined with a decline in hotel occupancy.

 

**Hotel/Casino Segment total costsand expenses for the three months ended April 30, 2009 decreased $80,386 (-12.10%)over the three months ended April 30, 2008. **This decrease is attributed to the following factors:

 

Direct costs for thecasino operationsdecreased for the three months ended April 30, 2009 compared to the threemonths ended April 30, 2008 due to decreased handle at the casino.

 

Direct costs for thehotel operationsdecreased primarily due to lower occupancies for the three months ended April 30,2009 compared to the three months ended April 30, 2008.

 

Direct costs for food andbeverage operationsdecreased primarily due to lower occupancies in the hotel for the three monthsended April 30, 2009 compared to the three months ended April 30,2008.

 

Selling, general and administrative costsfor Sturgeon’s decreased compared to the first quarter of fiscal 2009, due to 

 

14

----

Table of Contents

 

decreasedpersonnel costs and other expenses.

 

#### **Systems Segment.**

#### ** **

The Systems Segmentincludes the operating results of our systems sales, installations andmaintenance, less the related expenses.

 

**Systems Segment revenues for thethree months ended April 30, 2009 decreased $166,912 (-17.95%) over thethree months ended April 30, 2008. **This decrease is attributed to thefollowing factors:

 

Systems revenuesdecreased over the prior fiscal year due to a decreased number of infrequentsales.  During the first quarter offiscal 2010, equipment sales declined, which was partially offset by increasedmaintenance revenue, due to additional locations compared to the first quarterof fiscal 2009.

 

**Systems Segment total costs andexpenses for the three months ended April 30, 2009 decreased $216,004 (-22.37%)over the three months ended April 30, 2008. **This decrease is attributed to the following factors:

 

Direct costs for systems decreased over the prior three monthsended April 30, 2008 primarily due to decreased equipment sales anddecreased wages and benefits resulting from a reduction and realignment ofpersonnel, improving our operational efficiencies.

 

Research and development costs decreased from the prior threemonths ended April 30, 2008 primarily due to decreased wages and benefitsdue to decreased personnel expense and greater efficiencies.

 

Depreciation andamortizationdecreased from the prior three months ended April 30, 2008 due to decreasedproperty acquisitions.

 

**Other income and (expense). **The other income and (expense) categories areprimarily administrative in nature and, as such, are not directly attributableto any operating segment.  Accordingly,these items are generally not taken into consideration by us when we allocateresources to the segments or assess the performance of the segments.

 

Interest Income:  The majorityof interest income is attributable to interest earned on restricted cashdeposits required for the Regulation 22.040 reserve.  The decrease in interest income of $5,612 isdue primarily to decreased interest rates paid on our cash deposits and loweramounts held in cash deposits.  Interest expenseincreased $6,751 due to increased debt to Victor Salerno and the US Bank lineof credit/term loan.

 

Litigation expense includes $9,601 of settlement interest for the firstthree months of fiscal 2010 and $24,916 for the same three month period of theprior fiscal year related to the Racusin matter.  This is considered a non-operating expensebecause this settlement related to a capital raising activity.

 

Income tax expense (benefit).  The Company’s effective tax rate of zero forthe interim periods presented differs from statutory tax rates primarily due tothe utilization of NOL carryforwards and changes in deferred tax activity.

 

**Critical accounting estimates and policies.**

 

Although our financial statements necessarily make useof certain accounting estimates by our management, we believe that, except asdiscussed below, we do not employ any critical accounting policies or estimatesthat are either selected from among available alternatives, or require theexercise of significant management judgment to apply, or that if changed arelikely to affect future periods except with regard to the estimated effects ifany on estimated costs associated with the Racusin litigation discussedelsewhere herein.  The followingsummarizes our critical estimates and policies.

 

**Wagering**

** **

We record wagering revenues in compliance with Nevadalaw and the regulations of the Nevada gaming regulators.  For sports and non-pari-mutuel race, we usean accrual method wherein the handle (total amount wagered) is recognized onthe day the event occurs (rather than the day the wager is accepted) decreasedby 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 notredeemed (cashed) within the specified time period.  For pari-mutuel race, commission and breakagerevenues are 

 

15

----

Table of Contents

 

recorded when the wagersare settled, typically the same day as the wager.  Other sources of revenue are relativelyinsignificant.

 

**Hotel/Casino Revenue**

** **

Casino revenue is the aggregate net difference betweengaming wins and losses, with liabilities recognized for funds deposited bycustomers before gaming play occurs. Hotel, food and beverage revenues are recognized as services areperformed.  Revenue also does not includethe retail value of hotel accommodations, food and beverages gratuitouslyfurnished to customers.

 

**System — Software**

** **

We recognize software revenue in accordance with theprovisions of Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as amended by SOP 98-9, *Software Revenue Recognition, With Respect to CertainTransactions*.  Softwarelicense fees represent revenues related to licenses for race/sports softwaredelivered to customers for in-house use. Revenues from software license agreements (including any relatedtraining revenue) are recognized upon installation of the software.

 

**System — Hardware**

** **

We recognize hardware revenue (including any relatedinstallation revenue) upon installation of the hardware.

 

**System — Maintenance**

** **

We negotiate maintenance agreements with each of ourcustomers to provide for the long-term care of the software and hardware.  Pursuant to the terms of the various maintenanceagreements, a fixed sum is due at the beginning of each month regardless ofwhether the customer requires service during that month.  We recognize maintenance revenue on the firstday of each month for which the maintenance agreement is in place; we maintainan allowance for doubtful accounts in the event that any such revenue recordedis not realized.

 

**Long-Lived Assets**

** **

Owned property and equipment are recorded at cost anddepreciated to residual values over the estimated useful lives using the straight-linemethod.  Leasehold improvements onoperating leases are amortized over the life of the lease or the life of theasset, whichever is shorter.  The usefullife, currently estimated, of our equipment generally ranges from 3 to 10years.  We test for impairment losses onlong-lived assets used in operations when events and circumstances indicatethat the assets might be impaired, under the standards of Statement ofFinancial Accounting Standard (“SFAS”) No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.  An impairment loss is recognized if thecarrying amount of the asset is not recoverable from its undiscounted cashflows and is measured as the difference between the carrying amount and fairvalue of the asset.

 

**Accounting for IncomeTaxes**

** **

Wehave reviewed our previously filed tax returns and particularly our netoperating loss (“NOL”) carryforwards available to reduce current and future taxobligations and assessed the valuation allowance we established against ourdeferred tax assets to estimate the extent to which it remains needed as of January 31,2009. We additionally believe that, subject to the uncertainty involving the contemplatedRacusin judgment and related request for rehearing, we will be sufficientlyprofitable for the short-term future, and it is therefore more likely than notthat $369,000 of our net deferred tax asset, which resulted primarily from NOLcarryforwards, will be realized.

 

#### **Recent Accounting Pronouncements**

#### ** **

Therehave been no recent accounting pronouncements that are not yet effective thatmanagement believes are likely to have a significant effect on our futurefinancial statements.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk.**

 

Notapplicable.

 

16

----

Table of Contents

 

## **Item 4T.  Controls and Procedures.**

##  

**Evaluation of Disclosure Controlsand Procedures**

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) asof April 30, 2009. As part of our evaluation, management took into accountthe material weakness in our disclosure controls and procedures identified bymanagement in our Form 10-K for the fiscal year ended January 31,2009. We determined that our disclosure controls and procedures, specificallywith respect to a late Form 8-K filed on February 29, 2008, whichshould have been filed on or before February 13, 2008 and a late Form 8-Kfiled on April 29, 2009 (which should have been filed on or before April 2,2009,) were not effective. Management has implemented a procedure requiringthat any material agreement or amendment thereto be submitted to and reviewedby our Chief Financial Officer and in-house counsel prior to execution thereof.

 

**Changes in Internal Control overFinancial Reporting**

 

There were no changes in our internal controls over financialreporting that occurred during our last fiscal quarter, i.e. the quarter ended April 30,2009, that have materially affected or are reasonably likely to materially affectour internal controls over financial reporting except that management hasimplemented a procedure requiring that any material agreement or amendmentthereto be submitted to and reviewed by our Chief Financial Officer andin-house counsel prior to execution thereof. 

 

# **PART II — OTHER INFORMATION**

#  

## **Item 1.  Legal Proceedings**

##  

Currently, except as noted below, the Company is not aparty in any litigation and has no knowledge of any pending material legalproceedings in any court or agency of government or governmentalauthority.  In accordance with aninterpretation of SFAS No. 5, *Accountingfor Contingencies*, the Company has recorded provisions for probablelosses equal to the lower end of the estimated probable loss range for thelitigation matters. As of April 30, 2009 and 2008, respectively, theaggregate recorded provision for the following matters, included in long-termdebt, was $682,642 and $1,376,663.

 

**Racusin**

 

The Company and Racusin entered into the Settlement Agreement on September 3,2004. On or about March 11, 2005, the Company consummated its Plan ofReorganization and emerged from Bankruptcy. On or about July 27, 2005, theBankruptcy Court approved an Interpleader Order, whereby pursuant to theSettlement Agreement, the Company agreed to place 250,000 shares of commonstock with the clerk of the court as payment of the Racusin Claim while Racusinpursued its appeal of the Bankruptcy Appellate Panel’s decision in our favor tothe 9th Circuit Court of Appeals. The Interpleader Order further statedthat the Company’s stock would be substituted with cash payment in the eventthat the 9th Circuit reversed the Bankruptcy Appellate Panel whichdecision was subsequently reversed, leading to the November 2, 2007 hearingwith the Bankruptcy Court.  On November 2,2007, the Bankruptcy Court heard an argument to determine whether the Companycould withdraw its 250,000 shares of common stock and whether it couldbegin depositing funds pursuant to a schedule attached to the Company’s motionwhich calculated estimated post-judgment simple interest at 8% per annum, from March 11,2005, without taking into consideration the Interpleader Order of July 27,2005, which was still in effect. That is, by calculating post-judgment interestduring the same time that our stock was held by the Court, we previouslyaccrued interest over a period of time for which interest we believed shouldnot be accrued pursuant to the Interpleader Order.

 

As previously reported, on March 17,2008, the Company filed with the Bankruptcy Court what it believed was anappropriately corrected amortization schedule (“Corrected AmortizationSchedule”) relating to the calculation of pre-judgement interest occuring underthe settlement agreement.  A hearing washeld on May 8, 2009, regarding a Motion for Summary Judgment filed by Racusinrelated to the Company’s filing of the Corrected Amortization Schedule. At thehearing, the Court stated its intention to rule in favor of Racusin.  It is expected that the Court will enter itsorder in approximately 30 to 60 days after the hearing date.  The contemplated order would totalapproximately $1.7 million (all immediately due and payable), or approximately$1.0 million in excess of the recorded payable to Racusin; which consists ofmanagement’s best estimate of the minimum cost of the ultimate disposition ofthe matter, and of which $300,000 is classified as a current liability, inaccordance with management’s interpretation of the settlement agreement andrelated proceedings.  The Company isattempting to negotiate a settlement with Racusin and, based on legal argumentsthat management believes to have merit, is considering its proceduralalternatives, which may include, but not be limited to, requesting arehearing/reconsideration and, if unsuccessful, filing an appeal to the U.S.District Court of Nevada.  In the eventthe Company is unable to negotiate a settlement under acceptable terms and isalso unsuccessful as to its other alternatives, it would likely be unable tosatisfy its obligations as they become due and may, therefore, be unable tocontinue as a going concern depending on the course of action pursued byRacusin in this matter, among other prospective developments.

 

17

----

Table ofContents

 

**InternetSports International, Ltd.**

 

There have been no material legal changes for thismatter during the quarter ended April 30, 2009 from the fiscal year ended January 31,2009.

 

18

----

Table of Contents

 

## **Item 1A.  Risk Factors**

##  

A description of our riskfactors can be found in Item 1A of our Annual Report on Form 10-K for the yearended January 31, 2009. The following information represents material changesto those risk factors during the three months ended April 30, 2009. Aspreviously reported, on March 17, 2008, the Company filed with theBankruptcy Court what it believed was an appropriately corrected amortization schedule(“Corrected Amortization Schedule”) relating to the calculation ofpre-judgement interest occuring under the settlement agreement.  A hearing was held on May 8, 2009, regardinga Motion for Summary Judgment filed by Racusin related to the Company’s filingof the Corrected Amortization Schedule. At the hearing, the Court stated itsintention to rule in favor of Racusin.  Itis expected that the Court will enter its order in approximately 30 to 60 daysafter the hearing date.  The contemplatedorder would total approximately $1.7 million (all immediately due and payable),or approximately $1.0 million in excess of the recorded payable to Racusin;which consists of management’s best estimate of the minimum cost of theultimate disposition of the matter, and of which $300,000 is classified as acurrent liability, in accordance with management’s interpretation of thesettlement agreement and related proceedings. The Company is attempting to negotiate a settlement with Racusin and,based on legal arguments that management believes to have merit, is consideringits procedural alternatives, which may include, but not be limited to,requesting a rehearing/reconsideration and, if unsuccessful, filing an appealto the U.S. District Court of Nevada.  Inthe event the Company is unable to negotiate a settlement under acceptableterms and is also unsuccessful as to its other alternatives, it would likely beunable to satisfy its obligations as they become due and may, therefore, beunable to continue as a going concern depending on the course of action pursuedby Racusin in this matter, among other prospective developments.

 

## **Item 2.  UnregisteredSales of Equity Securities and Use of Proceeds.**

##  

Not applicable.

 

## **Item 3.  Defaults UponSenior Securities.**

##  

Not applicable.

 

## **Item 4.  Submission ofMatters to a Vote of Security Holders.**

##  

Not applicable.

 

## **Item 5.  OtherInformation.**

##  

Not applicable.

 

## **Item 6.  Exhibits.**

 
| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                         |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                    |       | Term Loan Agreement  executed April 24, 2009 (to be effective as of March 30, 2009)  between American Wagering, Inc. and U.S. Bank, N.A., incorporated by  reference to registrant’s Current Report on Form 8-K, as filed with the  Securities and Exchange Commission on April 29, 2009. |
|                    |       |                                                                                                                                                                                                                                                                                                                    |
| 10.2                    |       | Term Note executed April 24,  2009 (to be effective as of March 30, 2009) between American  Wagering, Inc. and U. S. Bank, N. A. incorporated by reference to  registrant’s Current Report on Form 8-K, as filed with the Security and  Exchange Commission on April 29, 2009.            |
|                    |       |                                                                                                                                                                                                                                                                                                                    |
| 10.3                    |       | Continuing Guaranty dated  March 30, 2009 by Victor J. and Terina M. Salerno, as guarantors for the  benefit of U. S. Bank, N. A., incorporated by reference to the registrant’s  Current Report on Form 8-K as filed with the Security and Exchange  Commission on April 29, 2009.                 |
|                    |       |                                                                                                                                                                                                                                                                                                                    |
| 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                                                                                              |

 

19

----

Table of Contents

 

**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

**AMERICANWAGERING, INC.**

 

 
| Dated:     June 12,  2009 |   |
|---------------------------------------------------------|--------|
|                                                    |   |
| /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                  |   |

 

20

----