BUTLER NATIONAL CORP - Quarter Report: 2014 October (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
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FORM 10-Q

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For the quarterly period ended October 31, 2014

For the transition period from ____________ to _____________

Commission File Number 0-1678

(Exact name of registrant as specified in its charter)

(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (913) 780-9595

Former name, former address and former fiscal year if changed since last report:

Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes T No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes T No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.:

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o No T

The number of shares outstanding of the Registrant's Common Stock, $0.01 par value, as of December 5, 2014 was 61,493,092 shares.

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BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

PART II. OTHER INFORMATION

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of October 31, 2014 and April 30, 2014

The accompanying notes are an integral part of these financial statements

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BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of these financial statements

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BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED OCTOBER 31, 2014 AND 2013

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of these financial statements

 

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BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

The accompanying notes are an integral part of these financial statements

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BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the annual report on Form 10-K for the fiscal year ended April 30, 2014. In our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and six months ended October 31, 2014 are not indicative of the results of operations that may be expected for the fiscal year ended April 30, 2015.

Certain reclassifications within the condensed financial statement captions have been made to maintain consistency in presentation between years. Financial amounts are in thousands of dollars except per share amounts.

2. Net Income (Loss) Per Share: The Company follows ASC 260 that requires the reporting of both basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In accordance with ASC 260, any anti-dilutive effects on net earnings (loss) per share are excluded. The number of potential common shares as of October 31, 2014 is 66,281,237.

3. Research and Development: We invested in research and development activities. The amount invested in the six months ended October 31, 2014 and 2013 was $759 and $1,043 respectively.

4. Debt: At October 31, 2014, the Company was utilizing three lines of credit totaling $4.0 million. The unused line at October 31, 2014 was $2.5 million. These funds were primarily used for the purchase of inventory and aircraft modification STC development costs for modifications and avionics.

Our $1.0 million line of credit has been extended to August 2015. Our $2.5 million line of credit matures April 2015. Our $0.5 million line of credit matures June 2015.  The lines of credit are collateralized by the first and second positions on all assets of the Company.

At October 31, 2014, there were several notes collateralized by aircraft security agreements totaling $987. These notes were used for the purchase and modifications of these collateralized aircraft and Butler Avionics, Inc.

There are three notes at a bank totaling $1,284 for real estate located in Olathe, Kansas and Tempe, Arizona. The due date for these notes is March 2019 and August 2019.

One note totaling $313 remains for real estate purchased in Dodge City, Kansas.

One note collateralized by automobiles and equipment totals an additional $62 and matures in June 2016.

The Kansas Lottery acquired additional gaming machines.  BHCMC, as manager under the management contract with the State of Kansas, was required to remit payment for the gaming equipment. The balance of this financed payable is $481.

BHCMC, LLC ("BHCMC") entered into an agreement dated May 1, 2011, and amended via an addendum dated January 1, 2012, with BHC Investment Company, L.C. ("BHCI") for a total obligation of $7,423.  BHCI provided funds to BHCMC for the purchase of certain intangible items and gaming items related to the Boot Hill Casino.  Commencing on January 1, 2012, BHCMC is obligated to make a minimum payment to BHCI of $177 per month until September 30, 2017.  The remaining balance on the obligation is $3,900.

On August 24, 2012 BHCMC and BHCI entered into a second agreement of $2,500 for tenant improvements related to expansion of the Boot Hill Casino.  Commencing on November 1, 2012. BHCMC is obligated to make a minimum payment to BHCI of approximately $55 per month until November 30, 2017.  The remaining obligation is $1,674.

We are not in default of any of our notes as of October 31, 2014.

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We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in 2015 and beyond.

5. Other Assets: Our other asset account includes assets of $5,500 related to the Kansas Expanded Lottery Act Management Contract privilege fee, $2,252 of gaming equipment we were required to pay for ownership by the State of Kansas Lottery, and JET autopilot intellectual property of $1,417.  BHCMC expects the $5,500 privilege fee to have a value over the remaining life of the Management Contract with the State of Kansas which will end in December 2024.  There is no assurance of the Management Contract renewal.  The Managers Certificate asset for use of gaming equipment is being amortized over a period of three years based on the estimated useful life of gaming equipment.  The JET intellectual property is being amortized over a period of 15 years.

6. Stock Options: At October 31, 2014 we had 7,262,064 outstanding stock options that were issued on December 31, 2010 all of which expire on December 31, 2015.

The exercise price for the incentive stock options is $0.49. The Board of Directors approved the issuance of incentive stock options on December 31, 2010 with the goals of increasing shareholder value, expanding the number of managers participating in the program, and increasing the percentage of compensation tied to share price performance.

The incentive stock options are allocated in three groups with two conditions for vesting. The first condition is stock price and the second condition is time. There are 2,420,688 options at $0.49 that may be exercised if and when the share price reaches $0.92, and 2,420,688 options at $0.49 that may be exercised if and when the share price reaches $1.41, and 2,420,688 options at $0.49 that may be exercised on or after December 31, 2013 if and when the share price reaches $1.90.

Butler National Corporation, its management, or subsidiaries have no ownership interest in BHCI or BHCD.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THROUGHOUT THIS ITEM 2 ALL NON TABULAR FINANCIAL RESULTS ARE PRESENTED IN THOUSANDS OF U.S. DOLLARS EXCEPT WHERE MILLIONS OF DOLLARS IS INDICATED.

Forward Looking Statements

Statements made in this report, filed with the Securities and Exchange Commission, communications to stockholders, press releases, and oral statements made by representatives of the Company that are not historical in nature, or that state the Company or management intentions, hopes, beliefs, expectations or predictions of the future, may constitute "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," "guidance" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties, and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A. (Risk Factors) of this Quarterly Report on Form 10-Q, and Item 1A. (Risk Factors) to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2014 and reference to the Cautionary Statements filed by us as Exhibit 99 to the most recent Annual Report on Form 10-K, as well as the following factors:

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·	the impact of general economic trends on the Company's business;

·	the deferral or termination of programs or contracts for convenience by customers;

·	market acceptance of the Company's Aerospace Products and or other planned products or product enhancements;

·	increased fuel and energy costs and the downward pressure on demand for our aircraft business;

·	the ability to gain and maintain regulatory approval of existing products and services and receive regulatory approval of new businesses and products;

·	the actions of regulatory, legislative, executive or judicial decisions of the federal, state or local level with regard to our business and the impact of any such actions;

·	failure to retain/recruit key personnel;

·	the availability of government funding;

·	any delays in receiving components from third party suppliers;

·	the competitive environment;

·	the bankruptcy or insolvency of one or more key customers;

·	new product offerings from competitors;

·	protection of intellectual property rights;

·	the ability to service the international market;

·	acts of terrorism and war and other uncontrollable events;

·	joint ventures and other arrangements;

·	low priced penny-stock regulations;

·	general governance features;

·	United States and other country defense spending cuts;

·	our estimated effective income tax rates; estimated tax benefits; and merits of our tax position;

·	potential future acquisitions;

·	changes in laws, including increased tax rates, smoking bans, regulations or accounting standards, third-party relations and approvals, and decisions, disciplines and fines of courts, regulators and governmental bodies;

·	the ability to timely and cost-effectively integrate companies that we acquire into our operations;

·	construction factors, including delays, increased costs of labor and materials, availability of labor and materials, zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters and building permit issues;

·	litigation outcomes and judicial and governmental body actions, including gaming legislative action, referenda, regulatory disciplinary actions and fines and taxation;

·	access to insurance on reasonable terms for our assets;

·	cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations;

·	as a supplier of military and other equipment to the U.S. Government, we are subject to unusual risks, such as the right of the U.S. Government contractor to terminate contracts for convenience and to conduct audits and investigations of our operations and performance;

·	our reputation and ability to do business may be impacted by the improper conduct of employees, vendors, agents or business partners;

·	changes in legislation or government regulations or policies can have a significant impact on our results of operations; and

·	other factors disclosed from time to time in the Company's filings with the Securities and Exchange Commission.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the Cautionary Statements and Risk Factors, filed as Exhibit 99 and Item 1A. Risk Factors to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2014 are incorporated herein by reference. Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

Management Overview

Management is focused on increasing long-term shareholder value from increased cash generation, earnings growth, and prudently managing capital expenditures. We plan to do this by continuing to drive increased revenues from product and service innovations, strategic acquisitions, and targeted marketing programs.

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Our revenues are primarily derived from two very different business segments; Aerospace Products and Professional Services. These segments operate through various Butler National subsidiaries and affiliates listed in the Company's fiscal year 2014 annual report on Form 10-K.

Aerospace Products derives its revenue by designing system integration, engineering, manufacturing, installing, servicing, and repairing products for classic and current production aircraft. These products include JET autopilot service and repairs, Avcon provisions and system integration for special mission equipment installations, Butler Avionics equipment sales and installation, and Butler National electronic controls and safety equipment manufacture and sales. Aerospace customers range in size from owners and operators of small single engine airplanes to owners and operators of large commercial and military aircraft. Aerospace Products are sold to and serviced for customers located in many countries of the world.

Aerospace is the legacy part of the Butler National business. Organized over 50 years ago, this business is based upon design engineering and installation innovations to enhance and support products related to airplanes and ground support equipment. These new products included: in the 1960's, aircraft electronic load sharing and system switching equipment, a number of airplane electronic navigation instruments, radios and transponders; in the 1970's, ground based VOR navigation equipment sold worldwide and GPS equipment as we know it today in civilian use; in the 1980's, special mission modifications to business jets for aerial surveillance and conversion of passenger configurations to cargo; in the 1990's, classic aviation support of aging airplanes with enhanced protection of electrical systems through transient suppression devices (TSD), control electronics for military weapon systems and improved aerodynamic control products (Avcon Fins) allowing stability at higher gross weights for additional special mission applications; in the 2000's, improved accuracy of the airspeed and altimeter systems to allow less vertical separation between flying airplanes (RVSM) and acquisition of the JET autopilot product line to support and replace aged electronic equipment in the classic fleet of Learjet airplanes; and in the 2010's, the acquisition of Butler Avionics to provide additional classic airplane support by retrofit of avionics from the past 40 years to modern state of the art equipment for sale worldwide using FAA supplemental type certification to make the installations (STC) acceptable to foreign governments for installation abroad.

Aerospace continues to be a focus for new product design and development.  Our recent approval is noise suppression for Learjet 20 series aircraft. We expect this segment will continue to grow in the future. To address the three to five year business cycles related to the Aerospace industry, in the 1990's, we began providing Professional Services to markets outside the Aerospace industry.

Professional Services derives its revenue from (a) professional management services in the gaming industry through Butler National Service Corporation ("BNSC") and BHCMC, LLC ("BHCMC"), and (b) professional architectural, engineering and management support services through BCS Design ("BCS").

In the early 1990's, management determined that more revenue stable business units were needed to sustain the Company. Members of the Board of Directors had contacts with several American Indian tribes and other members of the Board were associated with gaming operators in Las Vegas.  After enactment of the 1988 Indian Gaming Regulatory Act (IGRA) we reached out to various Indian tribes with land in the area to explore the opportunities for operations under IGRA. This resulted in the "Stables" an Indian owned casino on Modoc Indian land opened in September 1998 developed and managed by BNSC. The Stables Management Agreement has been available on the website maintained by the National Indian Gaming Commission ("NIGC"). The Stables Management Agreement was subsequently amended by various amendments dated April 30, 2003 (the "First Amendment"), November 30, 2006 (the "Second Amendment"), October 19, 2009 (the "Third Amendment") and September 22, 2011 (the "Fourth Amendment"). The result of the First Amendment, Second Amendment, Third Amendment and Fourth Amendment is to provide that twenty (20%) of net profits from The Stables are distributed to BNSC, to end per the joint venture agreement the participation of the Miami Indian tribe from the business and to extend the duration of the Stables Management Agreement through September 30, 2018. BCS Design assisted with the design, construction and continued refurbishment of the Stables.

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From this experience with IGRA and the success of the Indian gaming industry, we determined that the IGRA model may be applicable for state owned gaming. We spent Butler National Corporation innovation, legal and market development funds to design and encourage the use of an Indian owned gaming model in the State of Kansas. From these efforts, Kansas enacted the Kansas Expanded Lottery Act (KELA) in 2007 allowing four state owned casinos to be developed in Kansas. In 2007, BNSC made application to manage a state owned casino. In 2008, BNSC was awarded a fifteen year term to manage the Boot Hill Casino in Dodge City, Kansas pursuant to a Lottery Gaming Facility Management Contract (the "Boot Hill Casino Management Contract"). The Boot Hill Casino Management Contract was amended on December 29, 2009 (the "First Amendment to the Boot Hill Casino Management Contract") to bring the definition of "Fiscal Year" in line with the fiscal year of BNSC (May 1 to April 30). BHCMC was organized to be the manager of the Boot Hill Casino in Dodge City, Kansas. The casino opened in December 2009.  BCS Design assisted with the design, construction and continued refurbishment of Boot Hill Casino.

The Phase II expansion of Boot Hill Casino began in early 2012 and was completed in January 2013. The unfinished gaming floor space built during Phase I construction and tenant improvements was funded by tenant improvement leases, gaming machine leases, and casino earnings, with minimum exposure to Butler National Corporation. The Phase II expansion included the interior finish of 15,000 square feet of casino shell and 216 additional gaming machines. Part of the expansion included a breezeway connecting the Boot Hill Casino and the Dodge City special events center (United Wireless Arena). In late January 2013 the snack bar was reopened with additional seating and space as the "Cowboy Cafe."  BCS Design assisted with the design, construction and continued refurbishment of Boot Hill Casino.

By 2009, Butler National Corporation was clearly established into two segments; the Professional Services and Aerospace Products business segments.

Results Overview

The six months ending October 31, 2014 revenue increased 11% to $24.1 million compared to $21.8 million in the six months ending October 31, 2013. In the six months ending October 31, 2014 the professional services revenue was $15.1 million compared to $15.8 million in the six months ending October 31, 2013, a decrease of 5%. In the six months ending October 31, 2014 the Aerospace Products revenue was $9.1 million compared to $6.0 million in the six months ending October 31, 2013, an increase of 52%.

RESULTS OF OPERATIONS

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Professional Services derives its revenue from (a) professional management services in the gaming industry through Butler National Service Corporation ("BNSC") and BHCMC, LLC ("BHCMC"), and (b) professional architectural, engineering and management support services through BCS Design ("BCS"). Revenue from Professional Services decreased 5% to $15.1 million in the six months ended October 31, 2014 from $15.8 million in the six months ended October 31, 2013.

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Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue increased 52% for the six months to $9.1 million at October 31, 2014 compared to $6.0 million at October 31, 2013. We anticipate future domestic military spending reductions and continued slow growth of the United States economy.

Costs and expenses increased 5% in the six months ended October 31, 2014 to $23.0 million compared to $21.9 million in the six months ended October 31, 2013. Costs and expenses were 95% of total revenue in the six months ended October 31, 2014, as compared to 100% of total revenue in the six months ended October 31, 2013. The increase in costs and expenses in the six months ended October 31, 2014 was primarily due to the increased spending on Aerospace Products due to the increase in segment revenue.

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We have two operating segments, Professional Services and Aerospace Products. The Professional Services segment includes revenue contributions and expenditures associated with casino management services and professional architectural, engineering and management support services. Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft.

The following table presents a summary of our operating segment information for the six months ended October 31, 2014 and October 31, 2013:

Professional Services

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Revenue from Professional Services decreased 5% to $15.1 million for the six months ended October 31, 2014, compared to $15.8 million for the six months ended October 31, 2013. The decrease in Professional Services revenue was driven by decreased revenue in gaming activities of $645 and other management and professional services of $114. In the six months ended October 31, 2014 Boot Hill Casino received gross receipts for the State of Kansas of $19.7 million compared to $20.5 million for the six months ended October 31, 2013. Mandated fees, taxes and distributions reduced gross receipts by $6.6 million resulting in gaming revenue of $13.1 million for the six months ended October 31, 2014, compared to a reduction to gross receipts of $6.7 million resulting in gaming revenue of $13.8 million for the six months ended October 31, 2013, a decrease of 5%.  Non-gaming revenue at Boot Hill Casino remained constant at $1.5 million for the six months ended October 31, 2014 and 2013. The remaining management and Professional Services revenue includes professional management services in the gaming industry, and licensed architectural services. Professional Services revenue excluding Boot Hill casino decreased 23% to $392 in the six months ended October 31, 2014.

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Costs of Professional Services decreased 4% in the six months ended October 31, 2014 to $9.2 million compared to $9.6 million in the six months ended October 31, 2013. Costs were 61% of segment total revenue in the six months ended October 31, 2014, as compared to 60% of segment total revenue in the six months ended October 31, 2013.  The decrease in direct costs were a result of reductions of electronic gaming machines.

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Expenses decreased 8% in the six months ended October 31, 2014 to $5.1 million compared to $5.5 million in the six months ended October 31, 2013. Expenses were 33% of segment total revenue in the six months ended October 31, 2014, as compared to 35% of segment total revenue in the six months ended October 31, 2013.

Aerospace Products

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Revenue increased 52% to $9.1 million in the six months ended October 31, 2014, compared to $6.0 million in the six months ended October 31, 2013. This increase is attributable to increased revenue of $3.4 million in the modification business.  We anticipate future domestic military spending reductions and continued slow growth of the United States economy. In an effort to offset decreased domestic military spending, we have invested in the development of several STCs.  These STCs are state of the art avionics and we are aggressively marketing both domestically and internationally.

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Costs of Aerospace Products increased by 35% in the six months ended October 31, 2014 to $6.7 million compared to $4.9 million for the six months ended October 31, 2013.  Costs were 73% of segment total revenue in the six months ended October 31, 2014, as compared to 83% of segment total revenue in the six months ended October 31, 2013.

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Expenses increased 13% in the six months ended October 31, 2014 at $2.1 million compared to $1.8 million in the six months ended October 31, 2013.  Expenses were 23% of segment total revenue in the six months ended October 31, 2014, as compared to 31% of segment total revenue in the six months ended October 31, 2013.

Other than persons employed by our gaming subsidiaries there were 84 full time and 3 part time employees on October 31, 2014, compared to 82 full time and 2 part time employees on October 31, 2013. As of December 5, 2014, staffing is 86 full time and 3 part time employees. Our staffing at Boot Hill Casino & Resort on October 31, 2014 was 200 full time and 38 part time employees. At December 5, 2014 there are 201 full time employees and 42 part time employees. None of the employees are subject to any collective bargaining agreements.

SECOND QUARTER FISCAL 2015 COMPARED TO SECOND QUARTER FISCAL 2014

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Professional Services derives its revenue from (a) professional management services in the gaming industry through Butler National Service Corporation ("BNSC") and BHCMC, LLC ("BHCMC"), and (b) professional architectural, engineering and management support services through BCS Design ("BCS").  Revenue from Professional Services decreased 1% to $7.5 million in the three months ended October 31, 2014 from $7.5 million in the three months ended October 31, 2013.

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Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue increased 31% for the three months to $4.3 million at October 31, 2014 compared to $3.3 million at October 31, 2013. We anticipate future domestic military spending reductions and continued slow growth of the United States economy.

Costs and expenses increased 4% in the three months ended October 31, 2014 to $11.4 million compared to $11.0 million in the three months ended October 31, 2013. Costs and expenses were 97% of total revenue in the three months ended October 31, 2014, as compared to 102% of total revenue in the three months ended October 31, 2013. The increase in costs and expenses in the three months ended October 31, 2014 was primarily due to the increased spending on Aerospace Products due to the increase in segment revenue.

We have two operating segments, Professional Services and Aerospace Products. The Professional Services segment includes revenue contributions and expenditures associated with casino management services and professional architectural, engineering and management support services. Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft.

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The following table presents a summary of our operating segment information for the three months ended October 31, 2014 and October 31, 2013:

Professional Services

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Revenue from Professional Services decreased 1% to $7.5 million for the three months ended October 31, 2014, compared to $7.5 million for the three months ended October 31, 2013. The decrease in Professional Services revenue was driven by decreased revenue in gaming activities of $55 and other management and professional services of $2. In the three months ended October 31, 2014 Boot Hill Casino received gross receipts for the State of Kansas of $9.7 million compared to $9.7 million for the three months ended October 31, 2013. Mandated fees, taxes and distributions reduced gross receipts by $3.2 million resulting in gaming revenue of $6.5 million for the three months ended October 31, 2014, compared to a reduction to gross receipts of $3.2 million resulting in gaming revenue of $6.5 million for the three months ended October 31, 2013, a decrease of 1%.  Non-gaming revenue at Boot Hill Casino was $768 for the three months ended October 31, 2014 and $766 for the three months ended October 31, 2013. The remaining management and Professional Services revenue includes professional management services in the gaming industry, and professional architectural, engineering and management support services. Professional Services revenue excluding Boot Hill casino decreased 1% to $194 in the three months ended October 31, 2014.

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Revenue increased 31% to $4.3 million in the three months ended October 31, 2014, compared to $3.3 million in the three months ended October 31, 2013. This increase is attributable to increased revenue of $1.0 million in the modification business.  We anticipate future domestic military spending reductions and continued slow growth of the United States economy. In an effort to offset decreased domestic military spending, we have invested in the development of several STCs.  These STCs are state of the art avionics and we are aggressively marketing both domestically and internationally.

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Costs of Aerospace Products increased by 30% in the three months ended October 31, 2014 to $3.2 million compared to $2.4 million for the three months ended October 31, 2013.  Costs were 74% of segment total revenue in the three months ended October 31, 2014, as compared to 74% of segment total revenue in the three months ended October 31, 2013.

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Expenses increased 13% in the three months ended October 31, 2014 at $1.2 million compared to $1.0 million in the three months ended October 31, 2013.  Expenses were 27% of segment total revenue in the three months ended October 31, 2014, as compared to 31% of segment total revenue in the three months ended October 31, 2013.

Liquidity and Capital Resources

We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in fiscal 2015 and beyond.

The ownership structure of BHCMC, LLC is now:

Our wholly owned subsidiary, Butler National Service Corporation continues friendly discussions with the other member of BHCMC LLC to explore the possible acquisition by Butler National Service Corporation of other member's 20% equity interest in BHCMC LLC.   If and when a definitive agreement is reached, such definitive agreement and a press release concerning the acquisition will be issued to describe the terms of the agreement and the intentions of the members.   We have not set a definitive timetable for our discussions and there can be no assurances that the process will result in any transaction being announced or completed.  At present there is no disagreement between the members of BHCMC LLC.   We do not plan to disclose or comment on developments until further disclosure is deemed appropriate.

BHCMC, LLC, rents the casino building under the terms of a 25 year lease from BHC Development L.C. "BHCD". Butler National Corporation, its management, or subsidiaries have no ownership interest in BHCI or BHCD.


The terms of the agreement between the Kansas Lottery and BNSC/BHCMC required the completion of an addition to the Boot Hill Casino. The Phase II development of an adjacent hotel and community owned special events center was funded by BHI, is completed, and open to the public. The Phase II expansion of Boot Hill Casino began in early 2012 and was completed in January 2013. Phase II expansion of the unfinished gaming floor space built during Phase I construction and tenant improvements was funded by tenant improvement leases, gaming machine acquisitions, and casino earnings, with minimum exposure to Butler National Corporation. The Phase II expansion included the interior finish of 15,000 square feet of casino shell and 216 additional gaming machines. Part of the expansion included a breezeway connecting the Boot Hill Casino and the Dodge City special events center (United Wireless Arena). Boot Hill Casino now has approximately 690 gaming machines on the floor.

Analysis and Discussion of Cash Flow

During six months ended October 31, 2014 our cash position decreased by $1,164. Net income was $452. Cash flows from operating activities provided $2,277. Non-cash activities consisting of depreciation and amortization contributed $1,979. Customer deposits increased our cash position by $601 while inventories decreased our cash position by $1,020. Accounts receivable increased our cash position by $609. Prepaid expenses and other current assets decreased our cash by $223, while a decrease in accounts payable and accrued expenses decreased our cash by an additional $121.

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Cash used in investing activities was $847. We invested $74 to purchase equipment, $569 towards STCs, and $204 to equipment purchases and leasehold improvements at Boot Hill Casino.

Cash used in financing activities was $2,594. We reduced our debt by $2,384 and decreased promissory notes by $210.

We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management judgments and estimates. These significant accounting policies relate to revenue recognition, the use of estimates, long-lived assets, and Supplemental Type Certificates. These policies and our procedures related to these policies are described in detail below and under specific areas within this "Management Discussion and Analysis of Financial Condition and Results of Operations."

Revenue from Avionics products are recognized when shipped. Payment for these Avionics products is due within 30 days of the invoice date after shipment. Revenue from Gaming Management and other Corporate/Professional Services is recognized as the service is rendered and invoiced. Payments for these service invoices are usually received within 30 days.

In regard to warranties and returns, our products are special order and are not suitable for return. Our products are unique upon installation and tested prior to their release to the customer and acceptance by the customer. In the rare event of a warranty claim, the claim is processed through the normal course of business and may include additional charges to the customer. In our opinion any future warranty work would not be material to the financial statements.

Gaming revenue is the gross gaming win as reported by the Kansas Lottery casino reporting systems, less the mandated payments by and for the State of Kansas. Electronic games-slots and table games revenue is the aggregate of gaming wins and losses. Liabilities are recognized for chips and "ticket-in, ticket-out" coupons in the customers' possession, and for accruals related to anticipated payout of progressive jackpots. Progressive gaming machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are deducted from revenue as the amount of jackpots increase. Food, beverage, and other revenue is recorded when the service is received and paid for.

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We have experienced upward pressure from inflation in fiscal year 2015. From fiscal year 2013 to fiscal year 2014 a majority of the increases we experienced were in material costs. This additional cost may not be transferable to our customers resulting in lower income in the future.

We do not have any off-balance sheet arrangements.

We are a smaller reporting Company as defined by Rule 12b-2 under the Securities Exchange Act of 1934, and are not required to provide the information required under this item.

Item 4.

CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures as of the end of the period covered by this report on Form 10-K and have determined that such disclosure controls and procedures are effective, based on criteria in Internal Control-Integrated Framework, issued by COSO.

In connection with the preparation of this Form 10-Q, our Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2014. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2014.

Internal Control Over Financial Reporting

Limitations on Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II.  OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS.

BHCMC, LLC and BHC Development LC filed a lawsuit in the United States District Court on June 21, 2012 against Bally Gaming Inc. doing business as Bally Technologies for negligent misrepresentation, among other claims related to the performance of computer software systems. On March 7, 2014 a jury verdict in favor of BHCMC, LLC and BHC Development against Bally was entered for $1,424.  The jury rejected the Bally alleged counter claim of $441 and awarded no damages to Bally.  Bally has filed an appeal to the United States Court of Appeals for the Tenth Circuit.

As of December 5, 2014, there are no other significant known legal proceedings pending against us. We consider all such unknown proceedings, if any, to be ordinary litigation incident to the character of the business. We believe that the resolution of any claims will not, individually or in the aggregate, have a material adverse effect on the financial position, results of operations, or liquidity of the Company.

Item 1A.

RISK FACTORS.

There are no material changes to the risk factors disclosed under Item 1A of our Form 10-K or to the Cautionary Statements filed by us as Exhibit 99 to the Form 10-K for the fiscal year ended April 30, 2014.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

Item 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

Item 4.

MINE SAFETY DISCLOSURES.

None.

Item 5.

OTHER INFORMATION.

None.

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Item 6.

EXHIBITS.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Exhibit Index

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