10-Q 1 v354214_10q.htm FORM 10-Q

 

UNITED STATES

 

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 July 31, 2013

 

¨ 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 1-15517

Nevada Gold & Casinos, Inc.

 

(Exact name of registrant as specified in its charter)

 

Nevada 

 88-0142032
   
(State or other jurisdiction of Incorporation or organization) (I.R.S. Employer Identification No.)

 

133 E. Warm Springs Road    
Suite 102    
Las Vegas, Nevada 89119  
(Address of principal executive offices) (Zip Code)  
     
Registrant’s telephone number including area code: (702) 685-1000  

 

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 12 months (or for any shorter period that the registrant was required to file the reports), and (2) has been subject to those filing requirements for the past 90 days. x Yes ¨ No

 

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 twelve months (or for such shorter period that the registrant was required to submit and post such files).

x Yes ¨ No

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller Reporting Company x

 

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

 

¨Yes x No

 

The number of common shares, $0.12 par value per share, issued and outstanding, was 16,100,553 as of September 12, 2013.

 
 

 

TABLE OF CONTENTS

 

 

    Page
     
  PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
  Consolidated Balance Sheets – July 31, 2013 (unaudited) and April 30, 2013 2
  Consolidated Statements of Operations – Three months ended July 31, 2013 (unaudited) and July  31, 2012 (unaudited) 3
  Consolidated Statements of Cash Flows – Three months ended July 31, 2013 (unaudited) and July 31, 2012 (unaudited) 4
  Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
     
  PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 19
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. Mine Safety Disclosures 19
Item 5. Other Information 20
Item 6. Exhibits 20

 

 
 

 

FORWARD-LOOKING STATEMENTS

 

Factors that May Affect Future Results

 

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

 

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us or our representatives) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or other words or expressions of similar meaning, may identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. Forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations, intentions with respect to the financial condition, results of operations, future performance and the business of us, including statements relating to our business strategy and our current and future development plans. These statements may also involve other factors which are detailed in the “Risk Factors” and other sections of our Annual Report on Form 10-K for the year ended April 30, 2013 and other filings with the Securities and Exchange Commission.

 

Although we believe that the assumptions underlying these forward-looking statements are reasonable, any or all of the forward-looking statements in this report and in any other public statements that are made may prove to be incorrect. This may occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this report will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this report or other public communications that we might make as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.

 

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission should be consulted.

 

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Part I. Financial Information

 

Item 1. Financial Statements

Nevada Gold & Casinos, Inc.

Consolidated Balance Sheets

 

   July 31,   April 30, 
   2013   2013 
   (unaudited)     
         
         
ASSETS        
Current assets:          
Cash and cash equivalents  $7,198,167   $6,723,919 
Restricted cash   1,353,907    1,306,487 
Accounts receivable, net   757,431    445,481 
Prepaid expenses   1,270,838    854,092 
Notes receivable, current portion   231,417    216,596 
Other current assets   329,854    373,923 
Total current assets   11,141,614    9,920,498 
           
Investments in development projects   56,959    56,959 
Real estate held for sale   1,100,000    1,100,000 
Notes receivable, net of current portion   2,004,008    2,082,853 
Goodwill   16,103,583    16,103,583 
Intangible assets, net of accumulated amortization of $4,714,831 and $4,413,439 at July 31, 2013 and April 30, 2013, respectively   6,269,490    6,570,882 
Property and equipment, net of accumulated depreciation of $2,860,429 and $2,599,940 at July 31, 2013 and April 30, 2013, respectively   4,876,712    5,028,122 
Deferred tax asset, net   4,896,735    4,738,373 
Other assets   852,398    922,716 
Total assets  $47,301,499   $46,523,986 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY                   
Current liabilities:          
Accounts payable and accrued liabilities  $2,262,812   $2,024,465 
Accrued interest payable   113,340    34,393 
Other accrued liabilities   2,132,393    2,127,140 
Long-term debt, current portion   2,320,000    1,280,000 
Total current liabilities   6,828,545    5,465,998 
Other long - term liabilities   430,123    421,253 
Long-term debt, net of current portion   12,520,000    12,930,000 
Total liabilities   19,778,668    18,817,251 
           
Stockholders' equity:          
Common stock, $0.12 par value per share; 50,000,000 shares authorized; 16,883,390 and 16,864,122 shares issued and 16,100,553 and 16,081,285 shares outstanding at July 31, 2013, and April 30, 2013, respectively   2,026,018    2,023,705 
Additional paid-in capital   24,449,467    24,419,858 
Retained earnings   7,984,920    8,200,746 
Treasury stock, 782,837 shares at July 31, 2013 and April 30, 2013, respectively, at cost   (6,932,035)   (6,932,035)
Accumulated other comprehensive loss   (5,539)   (5,539)
Total stockholders' equity   27,522,831    27,706,735 
Total liabilities and stockholders' equity  $47,301,499   $46,523,986 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Nevada Gold & Casinos, Inc.

Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended 
   July 31,   July 31, 
   2013   2012 
Revenues:        
Casino  $13,790,536   $14,761,259 
Food and beverage   2,358,309    2,557,601 
Other   589,988    668,699 
Gross revenues   16,738,833    17,987,559 
Less promotional allowances   (1,048,044)   (1,176,856)
Net revenues   15,690,789    16,810,703 
           
Expenses:          
Casino   8,373,184    8,362,014 
Food and beverage   1,216,650    1,185,087 
Other   106,304    143,578 
Marketing and administrative   4,309,941    4,404,262 
Facility   478,760    543,621 
Corporate and legal expense   617,161    912,636 
Depreciation and amortization   561,937    538,981 
Total operating expenses   15,663,937    16,090,179 
Operating income   26,852    720,524 
Non-operating income (expenses):          
Loss on sale of assets   (3,971)   (1,245)
Interest income   34,395    900 
Interest expense and amortization of loan issue costs   (431,464)   (463,044)
Income (loss) before income tax benefit (expense)   (374,188)   257,135 
Income tax benefit (expense)   158,361    (88,689)
Net income (loss) from continuing operations  $(215,827)  $168,446 
Net loss from discontinued operations, net of taxes   -    (321)
Net income (loss)  $(215,827)  $168,125 
Per share information:          
Net income (loss) per common share - basic and diluted for continuing operations  $(0.01)  $0.01 
           
Net loss per common share - basic and diluted for discontinued operations  $-   $- 
           
Basic weighted average number of shares outstanding   16,087,568    15,935,655 

Diluted weighted average number of shares outstanding

   16,087,568    16,355,655 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Nevada Gold & Casinos, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

   Three Months Ended 
   July 31,   July 31, 
   2013   2012 
Cash flows from operating activities:        
Net income (loss)  $(215,827)  $168,125 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization   561,937    538,981 
Stock-based compensation   13,620    4,077 
Amortization of deferred loan issuance costs   77,543    77,543 
Deferred interest income   11,581    - 
Deferred rent   4,561    19,034 
Loss on sale/settlement of assets   3,971    1,245 
Changes to restricted cash   (47,420)   (170,046)
Deferred income tax expense (benefit)   (158,361)   88,689 
Changes in operating assets and liabilities:          
Receivables and other assets   (666,853)   (836,788)
Accounts payable and accrued liabilities   315,276    447,619 
Net cash provided by (used in) operating activities   (99,972)   338,479 
Cash flows from investing activities:          
Capitalized development costs   -    (9,005)
Collections on notes receivable   64,024    1,839 
Purchase of property and equipment   (113,308)   (84,783)
Proceeds from the sale of assets   202    800,000 
Net cash provided by (used in) investing activities   (49,082)   708,051 
Cash flows from financing activities:          
Employee stock plan purchases   18,302    41,169 
Proceeds from credit facilities   1,500,000    1,700,000 
Prepayment of deferred loan costs   (25,000)   (25,000)
Repayment of credit facilities   (870,000)   (1,697,751)
Net cash provided by financing activities   623,302    18,418 
           
Net increase in cash and cash equivalents   474,248    1,064,948 
Cash and cash equivalents at beginning of period   6,723,919    5,200,160 
Cash and cash equivalents at end of period  $7,198,167   $6,265,108 
Supplemental cash flow information:          
Cash paid for interest  $274,940   $390,801 
           
Non-cash investing and financing activities:          
Issuance of note receivable to purchasers of wholly-owned subsidiary  $-   $2,325,000 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Nevada Gold & Casinos, Inc.

 

Notes to Consolidated Financial Statements

(unaudited)

 

Note 1.   Basis of Presentation

 

The interim financial information included herein is unaudited. However, the accompanying consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly our Consolidated Balance Sheets at July 31, 2013 and April 30, 2013, Consolidated Statements of Operations for the three months ended July 31, 2013 and July 31, 2012, and Consolidated Statements of Cash Flows for the three months ended July 31, 2013 and July 31, 2012. Although we believe the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended April 30, 2013 and the notes thereto included in our Annual Report on Form 10-K. The results of operations for the three months ended July 31, 2013 are not necessarily indicative of the results expected for the full year.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, investments, intangible assets and goodwill, property, plant and equipment, income taxes, employment benefits and contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

Certain reclassifications have been made to conform prior year financial information to the current period presentation. Those reclassifications did not impact working capital, total assets, total liabilities, net income, net loss or stockholders’ equity. We have revised certain statement of cash flow amounts for the three months ended July 31, 2012 from the amounts previously reported in our Form 10-Q quarterly report for the quarterly period ended July 31, 2012.  We corrected the classification of proceeds from credit facilities that we had previously reported as supplemental cash flow information for non-cash financing activities rather than as a direct cash flow provided by financing activities.   The correction increased previously reported net cash provided by financing activities by $1.7 million in the three months ended July 31, 2012, and it reduced previously reported net cash provided by operating activities by an equal amount since the credit facility proceeds were used to prepay our annual slot machine registration fees in South Dakota.  We also corrected the classification of additions to restricted cash that we had previously reported as cash flow from investing activities rather than as cash flow from operating activities.  Refer to Note 3 for the nature of restricted cash.  This correction increased previously reported net cash provided by investing activities by $170,046 in the three months ended July 31, 2012, and it reduced previously reported net cash provided by operating activities by an equal amount.  We assessed the materiality of the corrections and concluded that the corrections were not material to any of our previously issued financial statements.  The correction did not affect net revenues, operating income, income before income tax, or working capital for any period.

 

Note 2.   Critical Accounting Policies

 

Revenue Recognition

 

We record revenues from casino operations, interest on notes receivable and management fees on the accrual basis as earned. The dates on which payments are collected may vary depending upon the term of the contracts or note receivable agreements. Interest income related to notes receivable is recorded when earned and its collectability is reasonably certain.

 

The retail value of food and beverage and other services furnished to guests without charge is included in gross revenue and deducted as promotional allowances. Net revenues do not include the retail amount of food, beverage and other items provided gratuitously to customers. We record the redemption of coupons and points for cash as a reduction of revenue as they are earned. These amounts are included in promotional allowances in the accompanying consolidated statements of operations. The estimated cost of providing such complimentary services included in casino expense in the accompanying consolidated statements of operations was as follows:

 

   Three Months Ended 
   July 31,
2013		   July 31,
2012		 
Food and beverage  $768,818   $903,561 
Other   35,277    43,528 
Total cost of complimentary services  $804,095   $947,089 

 

Fair Value and Concentrations of Credit Risk 

 

The U. S. generally accepted accounting principles defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date and establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are as follows:

 

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Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2 – Other inputs that are observable directly or indirectly such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 – Unobservable inputs for which there is little or no market data and which we make our own assumptions about how market participants would price the assets and liabilities.

 

The following describes the valuation methodologies used by us to measure fair value:

 

Real estate held for sale is recorded at fair value and tested for impairment annually, or more frequently, using third party valuations.

 

Goodwill, other intangible assets and other long lived assets are recorded at carrying value and tested for impairment annually, or more frequently, using projections of undiscounted future cash flows.

 

The recorded value of cash, accounts receivable and payable approximate fair value based on their short term nature. The recorded value of long term debt approximates fair value as interest rates approximate market rates.

 

Financial instruments that potentially subject us to concentrations of credit risk are primarily notes receivable, cash and cash equivalents, accounts receivable and payable, and long term debt. As of July 31, 2013 we had three notes receivable, as well as the BVD/BVO receivable, outstanding. Two of these notes were issued in connection with a potential gaming project and one is for the sale of the Colorado Grande Casino. Management performs periodic evaluations of the collectability of these notes. Our cash deposits are held with large, well-known financial institutions, and, at times, such deposits may be in excess of the federally insured limit. The recorded value of cash, accounts receivable and payable, approximate fair value based on their short term nature; the recorded value of long term debt approximates fair value as interest rates approximate current market rates.

 

New Accounting Pronouncements and Legislation Issued

 

Since the filing of our Form 10-K for the fiscal year ended April 30, 2013, there are no new accounting standards effective which are material to our financial statements or that are required to be adopted by the Company.

 

Note 3. Restricted Cash

 

As of July 31, 2013 and April 30, 2013, we maintained approximately $1.4 million and $1.3 million, respectively, in restricted cash, which consists of player-supported jackpot funds. Player-supported jackpot is a progressive game of chance directly related to the play or outcome of an authorized non-house-banked card game separately funded by our patrons. Any jackpots hit in these card games are paid from such reserved funds.

 

Note 4. Notes and BVD/BVO Receivable

 

Notes Receivable - Development Projects

 

G Investments, LLC

 

Upon completion of the sale of the Colorado Grande Casino on May 25, 2012, we recorded a $2.3 million note receivable. This note bears interest at 6% per annum through the maturity date of June 1, 2017 and is secured with all of the assets of the Colorado Grande Casino, pledge of membership interest in G Investments, LLC (“GI”), and a personal guaranty by GI’s principal.

 

Repayments are scheduled to be made as follows:

 

·No monthly installments of principal and accrued interest shall be due and payable for three months following the sale date of May 25, 2012;
·One monthly installment of principal and accrued interest of $5,000 on September 1, 2012;
·Beginning October 1, 2012, eight monthly installments of principal and accrued interest of $20,000;
·Beginning June 1, 2013, twelve monthly installments of principal and accrued interest of $30,000;

 

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·Beginning June 1, 2014, thirty six monthly installments of principal and accrued interest of $40,000; and
·A final installment of $907,061 which is due on the maturity date of June 1, 2017.

 

Since the inception of this note we have collected $255,000 which consists of $89,575 of principal plus $165,425 of interest.

 

Big City Capital, LLC

 

At July 31, 2013 and April 30, 2013, our balance sheet reflects net notes receivable of $0, net of a $3.2 million valuation allowance, related to the development of gaming/entertainment projects from Big City Capital, LLC (“Big City Capital”). These notes receivable have a maturity date of December 31, 2014. On a quarterly basis, we review each of our notes receivable to evaluate whether collection is still probable. During prior fiscal years we determined that our ability to collect these notes receivable and related accrued interest had been impaired. As a result, given the prevailing very challenging capital market conditions and continued uncertainties as to the economy, and based upon our “Level 3” analysis, we recorded $3.2 million of valuation allowances and wrote off the accrued interest.

 

BVD/BVO Receivable

 

At July 31, 2013 and April 30, 2013, our balance sheet reflects a net receivable of $0, net of a $4.6 million valuation allowance, related to the development of gaming/entertainment projects from B. V. Oro, LLC (“BVO”). On a quarterly basis, we review each of our receivables to evaluate whether collection is still probable. During a prior fiscal year we determined that our ability to collect this receivable and related accrued interest had been impaired. As a result, given the prevailing very challenging capital market conditions and continued uncertainties as to the economy, and based upon our “Level 3” analysis, we recorded a $4.6 million valuation allowance for the total principal and interest due.

 

Note 5.   Long-Term Debt  

 

Our long-term financing obligations are as follows:

 

   July 31,   April 30, 
   2013   2013 
         
$11.0 million note payable, LIBOR, with 0.25% floor, plus 9.50% interest, payments of $250,000 due each quarter and remainder due at maturity of October 7, 2014  $9,250,000   $9,500,000 
$4.0 million note payable, 11.5% interest until maturity at June 30, 2015   2,945,000    3,055,000 
$250,000 note payable, 6% interest, to be paid in two annual installments of $100,000 plus accrued interest and the final payment of $50,000 plus accrued interest at the maturity date of December 15, 2013   50,000    50,000 
$100,000 note payable, 6% imputed interest, to be paid in thirty equal monthly installments, beginning August 5, 2011, maturing January 18, 2014   20,000    30,000 
$1.4 million promissory note, 6% interest, payable in fifty nine monthly installments of $10,000 plus all accrued interest, and the remaining principle at the maturity date of January 27, 2017   1,245,000    1,275,000 
$400,000 note payable, 6% imputed interest, to be paid in sixty equal monthly installments, beginning February 27, 2012, maturing January 27, 2017   280,000    300,000 
$1.5 million note payable, base rate interest, which equals the greater of 2.5%, the Federal Reserve rate plus 1/2%, LIBOR plus 1%, or the prime rate charged by Wells Fargo Bank, plus the margin rate of 3.5%, maturing March 31, 2014   1,050,000    - 
Total   14,840,000    14,210,000 
Less: current portion   (2,320,000)   (1,280,000)
Total long-term financing obligations  $12,520,000   $12,930,000 

 

On May 31, 2012, following the closing of the sale of the Colorado Grande Casino we repaid $800,000 of the $4 million debt due on June 30, 2015 from the cash proceeds of the sale price paid to us at closing. Pursuant to the terms of the $4 million loan, we are required to remit all principal and interest payments received pursuant to the $2.3 million note receivable issued to us by the buyer of the Colorado Grande Casino towards further reduction of the principal of the $4 million debt.

 

On June 26, 2013, we obtained a $1.5 million revolving loan from Wells Fargo Gaming Capital, LLC to pay a slot machine registration fee due to the South Dakota Commission on Gaming by June 30 of each year. The loan matures on March 31, 2014 and bears an annual interest rate of the base rate, which equals the greater of (a) 2.5%, (b) the Federal Reserve rate plus 1/2%, (c) the LIBOR plus 1% or (d) the prime rate charged by Well Fargo Bank, N.A., plus the margin rate of 3.5%. The terms of the loan requires South Dakota Gold to make amortization payments in order to reduce a large portion of the principal balance through October 31, 2013. The repayment of the loan is secured by the assets of South Dakota Gold and NG South Dakota, LLC, while we and NG South Dakota, LLC serve as the guarantors. With this loan, we incurred $25,000 of deferred loan issue costs which are amortizable over the life of the loan.

 

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We are in compliance with financial covenants of the $11.0 million and the $1.5 million Wells Fargo Gaming Capital, LLC notes payable as of July 31, 2013 and the filing date of this document. We are not permitted to incur additional indebtedness without this lender’s prior approval.

 

Note 6.   Stock-Based Compensation

 

Information about our share-based plans

 

We have obligations under two employee stock plans: (1) the 2009 Equity Incentive Plan (the “2009 Plan”) and (2) the 2010 Employee Stock Purchase Plan, as amended (the “2010 Plan”).

 

The 2009 Plan

 

On April 14, 2009, our shareholders approved the 2009 Plan providing for the granting of awards to our directors, officers, employees and independent contractors. The number of common stock shares reserved for issuance under the 2009 Plan is 1,750,000 shares. The plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors. The Committee has complete discretion under the plan regarding the vesting and service requirements, exercise price and other conditions. Under the 2009 Plan, the Committee is authorized to grant the following types of awards:

 

·Stock Options including Incentive Stock Options (“ISO”),
·Options not intended to qualify as ISOs,
·Stock Appreciation Rights, and
·Restricted Stock Grants.

 

To date, the Committee has only awarded stock options for stock-based compensation. Our practice has been to issue new or treasury shares upon the exercise of stock options. Stock option rights granted under the 2009 Plan generally have 5 or 10 year terms and vest in two or three equal annual installments, with some options grants providing for immediate vesting for a portion of the grant.

 

A summary of activity under our share-based payment plans for the three months ended July 31, 2013 is presented below:

 

           Weighted     
       Weighted   Average   Aggregate 
       Average   Remaining   Intrinsic 
   Shares   Exercise   Contractual   Value 
       Price   Term     
Outstanding at April 30, 2013   865,000   $1.08           
Granted   -    -           
Exercised   -    -           
Forfeited or expired   -    -           
                     
Outstanding at July 31, 2013   865,000   $1.08    7.7   $- 
                     
Exercisable at July 31, 2013   731,667   $1.13    7.4   $- 

 

As of July 31, 2013, there was a total of $81,457 of unamortized compensation related to stock options, which cost is expected to be recognized over a weighted-average of approximately 1.5 years.

 

Compensation cost for stock options granted will be based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant and using the weighted-average assumptions of (i) expected volatility, (ii) expected term, (iii) expected dividend yield, (iv) risk-free interest rate and (v) forfeiture rate. Expected volatility is based on historical volatility of our stock. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award.

 

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The 2010 Plan

 

On October 11, 2010, our shareholders approved the 2010 Plan which permits all our eligible employees, including employees of certain of our subsidiaries, to purchase shares of our common stock through payroll deductions at a purchase price not to be less than 90% of the fair market value of the shares on each purchase date. The number of shares available for issuance under the 2010 Plan is a total of 500,000 shares.  On November 30, 2010, our Board of Directors amended the 2010 Plan, effective December 1, 2010, to allow its participants to contribute up to a maximum of twenty (20%) percent of their paid compensation. The 2010 Plan became available for employee participation on January 1, 2011, employee payroll deductions began in January of 2011, and shares are to be purchased at the end of each calendar quarter. As of July 31, 2013, 312,408 shares were issued to 140 participants under the 2010 Plan.

 

Note 7.   Computation of Earnings Per Share

 

The following is presented as a reconciliation of the numerators and denominators of basic and diluted earnings per share computations:

 

   Three Months Ended 
   July 31,   July 31, 
   2013   2012 
Numerator:        
Basic and Diluted:          
Net income (loss) from continuing operations available to common shareholders  $(215,827)  $168,446 
           
Denominator:          
Basic weighted average number of common shares outstanding   16,087,568    15,935,655 
Dilutive effect of common stock options and warrants   -    420,000 
           
Diluted weighted average number of common shares outstanding   16,087,568    16,355,655 
           
Income per share from continuing operations:          
           
Net income (loss) per common share - basic and diluted for continuing operations  $(0.01)  $0.01 

 

For the three months ended July 31, 2013 and July 31, 2012, potential dilutive common shares issuable under options of 730,000 and 1,245,000, respectively, were not included in the calculation of diluted earnings per share as they were anti-dilutive.

 

Note 8.   Segment Reporting  

 

We have three business segments (i) Washington Gold, (ii) South Dakota Gold, (iii) Corporate and for reporting purposes we include assets of operations held for sale. For the three month periods ended July 31, 2013 and July 31, 2012, the Washington Gold segment consists of the Washington mini-casinos, the South Dakota Gold segment consists of our slot route operation in South Dakota, the Corporate column includes the vacant land in Colorado and its taxes and maintenance expenses, while the “assets of operations held for sale” consists of the Colorado Grande Casino.

 

Summarized financial information for our reportable segments is shown in the following table. The “Corporate” column includes corporate-related items, results of insignificant operations, and segment profit (loss) and income and expenses not allocated to other reportable segments.

 

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   As of and for the Three Months Ended July 31, 2013 
   Washington Gold   South Dakota Gold   Corporate   Total Continuing Operations   Assets of Discontinued Operations   Totals 
                         
Net revenue  $12,837,302   $2,850,519   $2,968   $15,690,789   $        -   $15,690,789 
Casino and food and beverage expense  $7,181,693   $2,401,178   $-   $9,589,834   $-   $9,589,834 
Marketing and administrative expense  $4,231,959   $77,982   $-   $4,309,941   $-   $4,309,941 
Facility and other expenses  $556,620   $28,444   $624,124   $1,202,225   $-   $1,202,225 
Depreciation and amortization  $391,142   $169,573   $1,222   $561,937   $-   $561,937 
Segment operating income (loss)  $475,888   $173,342   $(622,378)  $26,852   $-   $26,852 
Segment assets  $21,381,079   $4,959,623   $7,511,988   $33,852,690   $-   $33,852,690 
Additions to property and equipment  $48,029   $61,308   $-   $109,337   $-   $109,337 

 

   As of and for the Three Months Ended July 31, 2012 
   Washington Gold   South Dakota Gold   Corporate   Total Continuing Operations   Assets of Discontinued Operations   Totals 
                         
Net revenue  $13,871,796   $2,938,907   $-   $16,810,703   $-   $16,810,703 
Casino and food and beverage expense  $7,121,958   $2,418,847   $-   $9,547,101   $(2,638)  $9,544,463 
Marketing and administrative expense  $4,333,015   $71,247   $-   $4,404,262   $(8,396)  $4,395,866 
Facility and other expenses  $662,676   $25,525   $917,930   $1,599,835   $11,355   $1,611,190 
Depreciation and amortization  $381,945   $152,872   $4,164   $538,981   $-   $538,981 
Segment operating income (loss)  $1,372,202   $270,416   $(922,094)  $720,524   $(321)  $720,203 
Segment assets  $20,320,643   $5,356,031   $10,837,244   $36,513,918   $-   $36,513,918 
Additions to property and equipment  $72,310   $12,473   $-   $84,783   $-   $84,783 

 

Reconciliation of reportable segment assets to our consolidated totals is as follows:

 

   July 31, 2013 
     
Total assets for reportable segments  $33,852,690 
Cash and restricted cash not allocated to segments   8,552,074 
Deferred tax asset   4,896,735 
Total assets  $47,301,499 

 

Note 9. Other Assets

 

Other assets consist of the following:

 

   July 31, 2013   April 30, 2013 
Other assets  $75,779   $93,553 
State gaming license   388,855    388,855 
Deferred loan issue cost, net   387,764    440,307 
Other assets  $852,398   $922,716 

 

Note 10.   Commitments and Contingencies  

 

We currently lease 3,131 square feet of office space for our corporate headquarters in Las Vegas, Nevada. The lease expires on January 15, 2015. The total annual rent, including mandatory common area maintenance (“CAM”) for this space is currently $48,844. The CAM contractually increases five percent effective each January 1.

 

As a result of acquiring facilities in Washington, we own the buildings for the Crazy Moose Casino in Pasco and Coyote Bob Casino’s in Kennewick, and the real property leases are as follows:

 

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·Crazy Moose Casino in Mountlake Terrace has a building lease which expires on May 31, 2014 with an option to renew for two additional terms of two years and five years, respectively. The annual rent for this lease is $157,000.
·Crazy Moose Casino in Pasco has a parking lot lease which expires on December 31 2013. The annual rent for this lease is $6,600.
·Silver Dollar Casino in SeaTac has a building lease which expires in May of 2022 with an option to renew for an additional term of 10 years. The annual rent is $238,000, with escalation of 4% annually.
·Silver Dollar Casino in Renton has a building lease which expires in April of 2019 with an option to renew for up to two additional terms of 10 years each. The annual rent is $517,000, with escalation of 8% every three years.
·Silver Dollar Casino in Bothell has a building lease which expires in April of 2017 with an option to renew for an additional term of 5 years. The annual rent is $286,000.
·Club Hollywood Casino in Shoreline has casino building and parking lot leases which expire in March of 2017 with options to renew for up to four additional five-year terms. The annual rentals are $700,000, with escalation of 3% annually.
·Golden Nugget Casino in Tukwila has a building lease which expires in November of 2014 with an option to renew for an additional term of 10 years. The annual rent is $166,000, with escalation of 3% annually.
·Royal Casino in Everett has a building lease which expires in January of 2016 with an option to renew for up to four additional five-year terms. The annual rent is $360,600, with escalation of 3% annually.
·Administrative offices lease in Renton expires in December of 2013. The annual rent is $53,000.
·Red Dragon Casino in Mountlake Terrace has a building lease which expires in October of 2016 with an option to renew for up to two additional five-year terms. The annual rent is $384,000, with escalation of 2% annually.

 

South Dakota Gold. As a result of acquiring the South Dakota Gold slot route operation, we have the following real property leases:

 

·An administrative center lease which expires in January of 2017 with an option to renew for an additional five-year term. The annual rent is $55,200.
·Two leases which expired on May 31, 2013 with annual rents of $36,000 and $18,000, respectively. We extended these leases through June 30, 2013. As of June 30, 2013 we terminated the leases.

 

The expected remaining future rolling twelve months minimum lease payments as of July 31, 2013 are as follows:

 

Period  Corporate Office
Lease Payment		   South Dakota Gold Payment   Washington Gold Lease Payment   Total
Lease Payment		 
                 
August 2013 - July 2014  $49,172   $55,200   $2,944,233   $3,048,605 
August 2014 - July 2015   24,751    55,200    2,732,718    2,812,669 
August 2015 - July 2016   --    55,200    2,502,401    2,557,601 
August 2016 - July 2017   --    27,600    1,544,263    1,571,863 
August 2017 - July 2018   --    --    875,577    875,577 
Thereafter   --    --    1,757,524    1,757,524 
   $73,923   $193,200   $12,356,716   $12,623,839 

 

On November 23, 2011, we signed an agreement to sell substantially all of the assets of the Colorado Grande Casino, located in Cripple Creek, Colorado, including any rights in the Colorado Grande name and gaming-related liabilities, to G Investments, LLC (“GI”). Prior to the sale to GI, we leased this property at an annual rent of the greater of $144,000 or 5% of Colorado Grande Casino’s adjusted gross gaming revenues with an annual cap of $400,000. Starting from April 30, 2012, the annual rent was changed to $252,548 with an option by the landlord to revert to the original rent structure upon obtaining necessary approvals from the Colorado Gaming Commission. Although this lease was assigned to GI as a result of the sale of the Colorado Grande Casino, which occurred on May 25, 2012, we retained contingent liability of the tenant’s obligations under this lease through May 24, 2017. We have evaluated financial information provided by GI as of July 31, 2013, and not recorded an accrual for contingent liability since it appears unlikely that GI will default on their lease obligation.

 

We continue to pursue additional development opportunities that may require, individually and in the aggregate, significant commitments of capital, extensions of credit, up-front payments to third parties and guarantees by us for third-party debt.

 

We indemnify our officers and directors for certain events or occurrences while the director or officer is or was serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, we have a directors and officers liability insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid, provided that such insurance policy provides coverage.

 

Note 11. Legal Proceedings

 

We are not currently involved in any material legal proceedings.

 

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Note 12. Acquisitions

 

South Dakota Gold

 

On January 27, 2012, through our wholly owned subsidiary, NG South Dakota, LLC, we completed the acquisition of 100% of the shares of South Dakota Gold for $5.1 million. The transaction was financed by $3.2 million in cash, $25,000 in our common stock, and $1.9 million in three promissory notes payable to the sellers, Michael J. Trucano and Patricia Burns. The first promissory note, in the principal amount of $1,425,000, is due on January 27, 2017 and bears an annual interest rate of 6% per annum. Starting February 27, 2012, this note is to be repaid in fifty-nine monthly principal installments of $10,000, plus all accrued and unpaid interest. The remaining balance is due on the maturity date. The second promissory note, in the principal amount of $400,000, bears an imputed annual interest of 6% per annum, matures on January 27, 2017, and is payable in sixty equal monthly installments of $6,667 on the twenty-seventh day of each month, with the first installment being paid in February of 2012. The third promissory note, in the principal amount of $60,324, bears an imputed annual interest of 6% per annum and matured, and was repaid, on January 27, 2013. We acquired this slot route in furtherance of our strategy of being an owner and operator of gaming facilities. The purchase was accounted for as a purchase business combination in accordance with ASC 805, Business Combinations (“ASC 805”). Goodwill is defined in ASC 805 as the future economic benefits of other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is attributable to the synergies from the existing customer base, as well as other intangible assets that do not qualify for separate recognition. Closing costs and pre-opening expenses of $1,000 related to the acquisition are included in the consolidated statement of operations in marketing and administrative, legal and other expenses of $108,000 related to the acquisition are reflected separately in the consolidated statement of operations. The summary of the purchase price allocation is as follows:

 

   (000’s) 
Current assets and liabilities, net  $65 
Property and equipment   1,775 
Non-compete   251 
Customer relationships   1,100 
Goodwill   1,936 
      
Purchase price  $5,127 

 

At July 31, 2013, goodwill acquired was approximately $1,936,000, all of which is expected to be deductible for tax purposes.

 

We reviewed the South Dakota Gold operating results and concluded that pro-forma financial statements were not required due to immateriality.

 

Note 13. Goodwill and Intangible Assets

 

In connection with our acquisitions of the Washington mini-casinos on May 12, 2009, July 23, 2010, and July 18, 2011 as well as South Dakota Gold on January 27, 2012 (see Note 12), we have goodwill and intangible assets of $22.4 million, net of amortization.

 

The change in the carrying amount of goodwill and intangibles assets for the three months ended July 31, 2013 are as follows (in thousands):

 

   Total   Goodwill   Other
Intangibles		 
Balance as of April 30, 2013  $22,675   $16,104   $6,571 
Current year amortization   (302)   -    (302)
Balance as of July 31, 2013  $22,373   $16,104   $6,269 

 

Intangible assets are generally amortized on a straight line basis over the useful lives of the assets.  All goodwill and intangible assets pertain to the Washington Gold and South Dakota Gold segments.

 

Amortization of intangible assets by category, as of July 31, 2013, is as follows (in thousands):

 

   Gross
Carrying
Amount		   Accumulated
Amortization		   Net 
Customer relationships  $7,853   $(3,574)  $4,279 
Non-compete agreements   1,269    (1,141)   128 
Trade names   1,862    -    1,862 
Total  $10,984   $(4,715)  $6,269 

 

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The estimated future annual amortization of intangible assets, which excludes Trade Names, is as follows (in thousands):

 

Period  Amount 
August 1, 2013-July 31, 2014  $1,205 
August 1, 2014-July 31, 2015   1,171 
August 1, 2015-July 31, 2016   1,017 
August 1, 2016-July 31, 2017   700 
August 1, 2017-July 31, 2018   217 
Thereafter   97 
Total  $4,407 

 

The expected average useful lives of acquired intangibles related to customer relationships and non-compete agreements are 7.0 years and 3.0 years, respectively.  The weighted average useful life of intangible assets in total is 5.5 years.

 

Note 14. State Gaming Laws

 

Washington

 

The gaming legislation in Washington State is codified in chapter 9.46 of the Revised Code of Washington (“RCW”) which stipulates the Washington State Gambling Commission (the “WA Gambling Commission”) to be the regulator of gambling activities in this state.  The WA Gambling Commission enforces its authority through an extensive set of rules and regulations promulgated in Title 230 of the Washington Administrative Code.  The state of Washington allows certain gambling activities, such as amusement games, bingo, raffles, punch boards, pull-tabs, card-rooms, and public card games.  In order to be considered legal, these activities must be operated by either non-profit organizations or by commercial food and drink establishments.  Some activities may be operated solely by non-profit organizations, such as raffles.  Some traditional casino games, such as craps, roulette and keno, are prohibited.  House-banked card-rooms have been authorized in Washington State since 1997 and, under current law, each establishment is allowed to have up to 15 tables offering games, such as Blackjack, Ultimate Texas Hold’em, Three Card Poker, Four Card Poker, Spanish Poker, Texas Shootout, Spanish 21, Pai Gow Poker, and others.  The law allows both player-sponsored and house-banked card-rooms.  As of January 1, 2009, the WA Gambling Commission increased the maximum bet for house-banked card-rooms’ table game wager limit to $300 and allowed card-rooms to offer Mini-Baccarat. In addition, these establishments are allowed to be open 24 hours per day, provided they close for at least four continuous hours two times per week. 

 

To operate our ten “mini-casinos” in Washington State, each of them is required to maintain a Public Card-room and Punch Board/Pull-Tab Commercial Stimulant license.  These licenses are renewable annually, subject to continued compliance with applicable gaming regulations.  In addition, the WA Gambling Commission requires, prior to the licenses being issued, each substantial interest holder in the licensees (including our officers, directors and owners of 5% percent or more of any class of our stock) to submit to the WA Gambling Commission certain disclosure forms and be subject to background investigations.  The failure or inability of our “mini-casinos” to maintain their respective licenses would have a material adverse effect on our operations.

 

Revised Code of Washington (“RCW”) 9.46.110 allows local governments (including cities, counties and towns) to prohibit any or all gambling activities for which licenses are required as well as tax such activities.  The maximum tax limitations imposed by law include 20% of gross receipts for public card-room games and either 5% of gross receipts or 10% of net receipt (as chosen by a local authority) for pull-tabs activities.  The current gaming tax rate for public card-room games in the cities of Pasco, Mountlake Terrace, Kennewick, SeaTac, Renton, Tukwila and Shoreline, as well as in Snohomish County, is 10% of table games gross receipts. The current gaming tax rate for pull-tabs in the city of Kennewick is 10% of pull-tabs net receipts, while in the cities of Pasco, Mountlake Terrace, SeaTac, Renton, Tukwila and Shoreline, as well as in Snohomish County, the tax rate is 5% of pull-tabs gross receipts.  In addition, Washington State charges a business and occupational tax in the amount of 1.63% of all gaming activities’ net receipts in order to promote responsible gaming. 

 

South Dakota

 

Gaming in South Dakota began in November 1989 and is presently authorized within the City of Deadwood. The gaming legislation is codified in Chapter 42-7B of the South Dakota Codified Laws as well as Article 20:18 of the South Dakota Legislature Administrative Rules (collectively, the “SD Regulations”) and is regulated by the South Dakota Commission on Gaming (the “SD Gaming Commission”). The SD Regulations allow gambling activities to be conducted at bars and taverns, including slot machines and limited card games, such as Blackjack and Poker. The SD Regulations limit each licensed location to have a maximum of 30 slot machines. The current tax rate is 9% of the adjusted gross gaming revenues in addition to an annual fee of $2,000 for each licensed gaming device located in a licensed location. In order to operate our slot route business in this state, we are required to hold Operator and Route Operator licenses issued by the SD Gaming Commission.

 

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The SD Regulations require that every officer and director, as well as any stockholder holding 5% or greater ownership in a company involved with the conduct of gaming in the state to be a person of good moral character and must submit to a full background investigation conducted by the SD Gaming Commission. Our gaming licenses may be suspended or revoked for any cause which may have prevented their issuance, or for violation by us, or any of our officers, directors, agents, members or employees, of the SD Regulations or for conviction of a crime of moral turpitude or a felony. In addition to the revocation or suspension or in lieu of revocation or suspension, the SD Gaming Commission may impose a reprimand or a monetary penalty.

 

Colorado

 

Upon the sale of the Colorado Grande Casino to G Investments, LLC on May 25, 2012, we surrendered our license to operate the Colorado Grande Casino and are no longer subject to the provisions of the Act and the regulations promulgated thereunder.

 

Nevada

 

Upon the recommendation of the Nevada Gaming Control Board (the “NV Gaming Board”), on January 26, 2012, the Nevada Gaming Commission (the “NV Gaming Commission” and, collectively with the NV Gaming Board, the “NV Gaming Authorities”) approved our application for registration as a publicly-traded corporation submitted in connection with an acquisition of a 1% interest in The Nugget, a non-restricted gaming licensee located in Reno, NV, by our wholly-owned subsidiary, Nevada Gold Speedway, LLC (“NG Speedway”). Our acquisition of equity in the Nugget required us to file the application. In connection therewith, we, NG Speedway, and certain of our key employees and directors were found suitable by the NV Gaming Authorities. We took this action to accelerate future Nevada acquisitions or management contracts. In May 2013, as permitted by the agreement, the Heaney Trust exercised its right to repurchase our 1% ownership of The Nugget for $1,000. As a result we were licensed in Nevada and remain registered with the Nevada Gaming Control Board as a publicly traded corporation that has been found suitable.

 

The ownership and operation of gaming establishments in the State of Nevada are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the “NGCA”). A finding of suitability is comparable to licensing and it requires submission of detailed personal and financial information followed by a thorough investigation. A finding of unsuitability with respect to any officer, director, employee, associate, lender or beneficial owner of a licensee or applicant may jeopardize an already issued license or applicant’s license application. Licenses may be conditioned upon termination of any relationship with unsuitable persons.

 

Although any beneficial holder of our voting securities, regardless of the number of shares owned, may be required to file an application for a finding of suitability, the general rule provides that beneficial owners of more than 10% of any class of our voting securities must apply to the NV Gaming Authorities for a finding of suitability. Under certain circumstances, an “institutional investor” (as defined in the NGCA) who acquires more than 10% but not more than 25% of any class of our voting securities, may apply to the NV Gaming Authorities for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor that has obtained a waiver may, in certain circumstances, own up to 29% of the voting securities of a registered company for a limited period of time and maintain the waiver. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the NV Gaming Authorities, or who refuses or fails to pay the investigative costs in connection with investigation of its application, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any shareholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of our common stock beyond such period of time as may be prescribed by the NV Gaming Authorities may be guilty of a criminal offense. We and NG Speedway would be subject to disciplinary action if, after receipt of notice that a person is unsuitable, we:

 

• pay such a person any dividend or interest upon any of our voting securities;
• allow such a person to exercise, directly or indirectly, any voting right conferred through securities held by that person;
• pay remuneration in any form to such a person for services rendered or otherwise; or
• fail to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value.

 

Corporations registered with the NV Gaming Commission may not make a public offering of any securities without the prior approval of the NV Gaming Authorities if the securities or the proceeds therefrom are intended to be used to construct, acquire, or finance gaming facilities in the State of Nevada, or to retire or extend obligations incurred for those purposes or for similar purposes. An approval, if given, does not constitute a finding, recommendation, or approval by the NV Gaming Authorities as to the accuracy or adequacy of the prospectus or the investment merits of the securities, and any representation to the contrary is unlawful.

 

Because we are involved in gaming activities outside the State of Nevada, we are required to deposit with the NV Gaming Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay for the expenses of investigation by the NV Gaming Board of our participation in gaming in other jurisdictions. The revolving fund is subject to increase or decrease at the discretion of the NV Gaming Commission. Upon our registration and finding of suitability, we are also required to comply with certain other requirements imposed by the NGCA, including reporting requirements.

 

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We currently do not operate any gaming establishment in the State of Nevada.

 

Note 15. Impairment of Assets

 

Long-lived assets, including property, plant and equipment and amortizable intangible assets, comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators exist or when circumstances indicate that impairment may exist under authoritative guidance. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. Our evaluation of the carrying value of our long-lived assets for sale indicates that we have no further impairment. This fair value measurement uses level 3 inputs under the fair value hierarchy.

 

On a quarterly basis, we review each of our notes receivable to evaluate whether the collection of our notes receivable and receivables are still probable. In our analysis, we review the economic feasibility and the current financial, legislative and development status of the project. If our analysis indicates that the project is no longer economically feasible, the note receivable will be written down to its estimated fair value. This fair value measurement uses level 3 inputs under the fair value hierarchy.

 

At July 31, 2013 and April 30, 2013, our balance sheet reflects notes receivable related to Big City Capital of $0, net of a $3.2 million allowance related to the development of gaming/entertainment projects from Big City Capital. During fiscal year ended April 30, 2008, we determined that our ability to collect $859,000 of accrued interest and $1.5 million of the original $3.2 million notes receivable from Big City Capital, LLC (“Big City Capital”) had been impaired. As a result we wrote down the notes receivable to $1.7 million, by establishing a $1.5 million allowance, and we wrote off the accrued interest. At April 30, 2012, we determined our ability to collect the remaining $1.7 million is doubtful and therefore increased the valuation allowance to $3.2 million. These notes receivable have a maturity date of December 31, 2014.  

 

At July 31, 2013 and April 30, 2013, our balance sheet reflects a receivable related to BVO of $0, net of a $4.6 million allowance. In the period ending April 30, 2012, we determined our ability to collect the $4.6 million BVO Receivable and its accrued interest was doubtful. Therefore we established a $4.6 million valuation allowance against its principal and interest due.

 

Note 16. Stock Offering

 

On November 7, 2011, we closed on the sale of 2,625,652 shares of our common stock at a price of $1.65 per share to certain investors through a registered direct offering for the total proceeds of approximately $4.3 million, net of offering costs of approximately $444,000. In addition, for each share of our common stock purchased by an investor, we issued to such investor a warrant to purchase 0.75 shares of our common stock. The warrants have an exercise price of $2.18 per share and are exercisable for five years from the initial exercise date, which date is six months from the date of their issuance. The warrants expire on May 7, 2017. The proceeds of the offering were used to assist us in the $5.1 million acquisition of South Dakota Gold.

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report for the year ended April 30, 2013, filed on Form 10-K with the SEC on July 29, 2013.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with GAAP. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report for the year ended April 30, 2013, filed on Form 10-K with the SEC on July 29, 2013.

 

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Executive Overview

 

We were formed in 1977 and, since 1994, have primarily been a gaming company involved in financing, developing, owning and operating gaming properties. Our gaming facility operations are located in the United States of America (“U.S.”), specifically in the states of Washington and South Dakota. Our business strategy will continue to focus on owning and operating gaming establishments. If we are successful, our future revenues, costs and profitability can be expected to increase. However, there is no guarantee that we will be successful in implementing our business strategy in the future and, as such, no guarantee that our future revenues, costs and profitability will increase. Our net revenues were $15.7 million and $16.8 million for the three months ended July 31, 2013 and July 31, 2012, respectively.

 

When compared to the three months ended July 31, 2012, the three month period ended July 31, 2013 was impacted by the following items:

 

- Decreased drop at our Washington properties due to abnormally dry weather conditions in the Seattle market during the first quarter of fiscal year 2014 compared to abnormally wet weather conditions during the same period in fiscal year 2013;

 

- Reduced operating expenses; and

 

- Decreased net interest expense.

 

COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2013 AND JULY 31, 2012

 

Net revenues. Net revenues decreased 6.7%, to $15.7 million from $16.8 million, for the three month period ended July 31, 2013, compared to the same period ended July 31, 2012. Casino revenues decreased 6.6%, or $1.0 million, due to abnormally dry weather conditions in the Seattle market during June 2013 and July 2013 versus abnormally wet weather conditions during the same months last year. Revenues at our Seattle properties were down approximately 11% for the quarter ended July 31, 2013 compared to the same period last year, while revenues at our tri-cities properties were up approximately 6% during the quarter compared to the same period last year. Food and beverage revenues decreased 7.8%, or $0.2 million, and other revenues decreased 11.8%, or $0.1 million, mainly as a result of reduced patron counts. Our promotional allowances correspondingly decreased 10.9%, or $0.1 million, for the three month period ended July 31, 2013, compared to the same period ended July 31, 2012.

 

Total operating expenses. Total operating expenses decreased 2.6%, to $15.7 million from $16.1 million, for the three month period ended July 31, 2013, compared to the same period ended July 31, 2012. Casino expenses were flat at $8.4 million when compared to the same period last year. Marketing and administrative decreased 2.1%, or $0.1 million. Food and beverage expenses were flat at $1.2 million when compared to the same period last year. Corporate and legal expense decreased 32.4%, or $0.3 million, due to the cost reductions initiated during the third quarter of fiscal 2013, and depreciation and amortization and other expenses combined were flat at $0.7 million when compared to the same period last year.

 

Interest income (expense), net. Interest income (expense), net, consists of a net balance of interest expense and amortization of loan issue cost, offset by interest income from our various notes receivable. Interest expense decreased 8.2%, or $31,000, for the three month period ended July 31, 2013, compared to the three month period ended July 31, 2012. The decrease is due to repayment of our long-term debt. Interest income increased from $1,000 to $34,000 due to the note receivable recorded when we sold the Colorado Grande Casino in May 2012. Amortization of loan issue cost was flat at $77,543 for the three month periods ended July 31, 2013 and July 31, 2012.

 

Income Taxes. Our consolidated tax rate for the periods ending July 31, 2013 and July 31, 2012 were a 42.3% benefit and a 34.5% expense, respectively. Our effective tax rate for the quarter ending July 31, 2013 was 42.3%

 

Net income (loss). Operating income decreased $0.7 million, to $27,000 from $0.7 million. Net income was $(0.2) million loss compared to $0.2 million income for the three month periods ended July 31, 2013 and July 31, 2012, respectively. The decrease is primarily due to the $1.1 million decreased revenues compared to the same period ended July 31, 2012.

 

Non-GAAP Financial Measures

 

The term “adjusted EBITDA” is used by us in presentations, quarterly earnings calls, and other instances as appropriate. Adjusted EBITDA is defined as net income before interest, income taxes, depreciation and amortization, non-cash goodwill and other long-lived asset impairment charges, write-offs of project development costs, litigation charges, non-cash stock option grants, exclusion of net income or loss from operations held for sale, and net losses/gains from asset dispositions. Adjusted EBITDA excludes the impact of slot and table games hold percentages compared to the prior year. Adjusted EBITDA is presented because it is a required component of financial ratios reported by us to our lenders, and it is also frequently used by securities analysts, investors, and other interested parties, in addition to and not in lieu of GAAP results to compare to the performance of other companies who also publicize this information.

 

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Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to net income as an indicator of our operating performance or any other measure of performance derived in accordance with GAAP.

 

The following table shows adjusted EBITDA by segment for the three months ended July 31, 2013 and July 31, 2012:

 

   For the three months ended July 31, 2013 
   Washington Gold   South Dakota Gold   Corporate - Other  

Total

Continuing Operations

 
Revenues:                
Gross revenues  $13,863,215   $2,872,649   $2,969   $16,738,833 
Less promotional allowances   (1,025,914)   (22,130)   -    (1,048,044)
Net revenues   12,837,301    2,850,519    2,969    15,690,789 
                     
Expenses:   11,965,711    2,507,604    608,674    15,081,989 
                     
Adjusted EBITDA  $871,590   $342,915   $(605,705)  $608,800 

 

   For the three months ended July 31, 2012 
   Washington Gold   South Dakota Gold   Corporate - Other   Total
Continuing Operations		 
Revenues:                
Gross revenues  $15,028,422   $2,959,137   $-   $17,987,559 
Less promotional allowances   (1,166,741)   (10,115)   -    (1,176,856)
Net revenues   13,861,681    2,949,022    -    16,810,703 
                     
Expenses:   12,079,602    2,535,849    912,636    15,528,087 
                     
Adjusted EBITDA  $1,782,079   $413,173   $(912,636)  $1,282,616 

 

The following table reconciles adjusted EBITDA to net income (loss) for the three months ended July 31, 2013 and July 31, 2012:

 

Adjusted EBITDA reconciliation to net income (loss):

 

   For the three months ended 
   July 31, 2013   July 31, 2012 
         
Net income (loss)  $(215,827)  $168,125 
Add:          
Income tax expense (benefit)   (158,361)   88,689 
Net interest expense   397,069    462,144 
Loss on sale of assets   3,971    1,245 
Depreciation and amortization   561,937    538,981 
Deferred rent   4,561    19,034 
Stock option and ESPP grants   15,450    4,077 
Loss on operations held for sale   -    321 
Adjusted  EBITDA  $608,800   $1,282,616 

 

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Liquidity and Capital Resources

 

Historical Cash Flows

 

The following table sets forth our consolidated net cash provided by (used in) operating, investing and financing activities for the three month periods ended July 31, 2013 and July 31, 2012:

 

   July 31,   July 31, 
   2013   2012 
Net cash provided by (used in):        
Operating activities  $(99,972)  $338,479 
Investing activities   (49,082)   708,051 
Financing activities   623,302    18,418 

 

Operating activities. The net change in cash used in operating activities during the three month period ended July 31, 2013 compared to same period in the prior fiscal year is a decrease of $0.4 million. This decrease mainly resulted from weaker operating results in Washington State which caused a $0.2 million net loss for the quarter ended July 31, 2013 versus net income of $0.2 million in the same period last year.

 

Investing activities. Net cash used in investing activities during the three month period ended July 31, 2013 decreased to $0.1 million compared to net cash provided of $0.7 million for the comparable period in the prior fiscal year. The decrease of funds provided is primarily due to the $0.8 million proceeds from the Colorado Grande Casino sale we received in the prior fiscal year.

 

Financing activities. Net cash provided in financing activities during the three month period ended July 31, 2013 increased $0.6 million from the comparable period in the prior fiscal year. The increase is mainly attributable to the $0.8 million repayment of debt in the prior year due to the sale of the Colorado Grande Casino.

 

Future Sources and Uses of Cash

 

We expect that our future liquidity and capital requirements will be affected by:

 

- capital requirements related to future acquisitions;

- cash flow from operations;

- new management contracts;

- working capital requirements;

- obtaining debt financing; and

- debt service requirements.

 

At July 31, 2013, outstanding indebtedness was $14.8 million, of which $2.3 million is due by July 31, 2014. On October 7, 2011, we closed on an $11.0 million loan with Wells Fargo Gaming Capital, LLC. The proceeds were used to refinance debt and pay fees associated with the loan.

 

The 268 acres in Black Hawk, Colorado is currently held for sale. If the acreage is sold, we will use the proceeds to reduce debt. On October 31, 2011, we took an impairment charge of $2.3 million on this land thereby writing it down to the estimated value of $1.1 million.

 

On July 31, 2013, excluding restricted cash of $1.4 million, we had cash and cash equivalents of $7.2 million. The restricted cash consists of approximately $1.4 million of player supported jackpots.

 

Our Consolidated Financial Statements have been prepared assuming that we will have adequate availability of cash resources to satisfy our liabilities in the normal course of business. We have made, and are in the process of making, arrangements to ensure that we have sufficient working capital to fund our obligations as they come due. These potential funding transactions include divesting of non-core assets and obtaining long-term financing. We believe that some or all of these sources of funds will be funded in a timely manner and will provide sufficient working capital for us to meet our obligations as they come due; however, there can be no assurance that we will be successful in divesting of the non-core assets or achieving the desired level of working capital at terms that are favorable to us. Should cash resources not be sufficient to meet our current obligations as they come due, repay or refinance our long-term debt, and acquire operations that generate positive cash flow, we would be required to curtail our activities and grow at a pace that cash resources could support which may require a restructuring of our debt or selling core assets.

 

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Liquidity

 

The current ratio is an indication of a company’s market liquidity and ability to meet creditor’s demands. Acceptable current ratios vary from industry to industry and are generally between 1.25 and 3.0 for healthy businesses. If a company’s current ratio is in this range, then it generally indicates good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management. The table below shows that, as of July 31, 2013, we have a 1.6 ratio, which is sufficient to service debt and maintain operations.

 

      Current Ratio as of July 31, 2013 
Current Ratio  Current Assets  $11,141,614    1.6 
   Current Liabilities  $6,828,545      

 

Off-Balance Sheet Arrangements

 

None.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4.   Controls and Procedures

 

Disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our President and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

 

In accordance with Rules 13a-15 and 15d-15 of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our President and CFO, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. As a result of our evaluation, they concluded that our disclosure controls and procedures were effective as of July 31, 2013.

 

Changes in internal controls over financial reporting. There have not been any changes in our control over financial reporting during the three months ended July 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1.   Legal Proceedings

 

We are not currently involved in any material legal proceedings.

 

Item 1A. Risk Factors

 

There have been no material changes in our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2013, filed with the SEC on July 29, 2013.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

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Item 5.   Other Information

 

None.

 

Item 6.   Exhibits

 

See the Index to Exhibits following the signature page hereto for a list of the exhibits filed pursuant to Item 601 of Regulation S-K

 

 

INDEX TO EXHIBITS

 

EXHIBIT

NUMBER

   DESCRIPTION
10.1   First Amendment to Asset Purchase Agreement between Colorado Grande Enterprises, Inc., as seller, and G Investments, LLC, as purchaser (filed previously as Exhibits 10.1 to the Company’s Form 8-K filed May 29, 2012).
     
10.2   Third Amended and Restated Promissory Note dated May 25, 2012 issued by Nevada Gold & Casinos, Inc. to Louise H. Rogers, as her separate property (filed previously as Exhibits 10.1 to the Company’s Form 8-K filed June 1, 2012).
     
10.3   May 2012 Amended and Restated Security Agreement dated May 25, 2012 between Nevada Gold & Casinos, Inc. and Louise H. Rogers, as her separate property (filed previously as Exhibits 10.2 to the Company’s Form 8-K filed June 1, 2012).
     
10.4   Credit Agreement dated June 27, 2012 by and among Wells Fargo Gaming Capital, LLC, as administrative agent, the Lenders that are parties thereto, Nevada Gold & Casinos, Inc., as parent, and A.G. Trucano, Son & Grandsons, Inc., as borrower (filed previously as Exhibits 10.1 to the Company’s Form 8-K filed July 3, 2012).
     
10.5   Guaranty and Security Agreement dated June 27, 2012 among Nevada Gold & Casinos, Inc., certain Grantors listed on the signature page and Wells Fargo Gaming Capital, LLC, in capacity as administrative agent (filed previously as Exhibits 10.2 to the Company’s Form 8-K filed July 3, 2012).
     
10.6   Intercompany Subordination Agreement dated June 27, 2012 by and among certain Obligors listed on the signature page in favor of Wells Fargo Gaming Capital, LLC, in capacity as administrative agent (filed previously as Exhibits 10.3 to the Company’s Form 8-K filed July 3, 2012).
     
10.7   Amendment Number Two to Credit Agreement dated October 7, 2011 by and among Wells Fargo Gaming Capital, LLC, in capacity as administrative agent and lender, Nevada Gold & Casinos, Inc., as parent, and NG Washington, LLC, NG Washington II, LLC and NG Washington III, LLC, as borrowers (filed previously as Exhibits 10.4 to the Company’s Form 8-K filed July 3, 2012).
     
10.8   Intercreditor Agreement and Subordination dated June 27, 2012 by and between Wells Fargo Gaming Capital, LLC, as administrative agent, and Michael J. Trucano, as sellers’ representative (filed previously as Exhibits 10.5 to the Company’s Form 8-K filed July 3, 2012).
     
31.1(*)   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2(*)   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1(*)   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2(*)   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS (*)   XBRL Instance Document
   
101.SCH (*)   XBRL Taxonomy Schema

 

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101.CAL(*)   XBRL Taxonomy Calculation Linkbase
   
101.DEF (*)   XBRL Taxonomy Definition Linkbase
   
101.LAB (*)   XBRL Taxonomy Label Linkbase
   
101.PRE (*)   XBRL Taxonomy Presentation Linkbase

 

* Filed or furnished herewith.

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

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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.

 

Date: September 13, 2013

 

  Nevada Gold & Casinos, Inc.
   
  By: /s/ James J. Kohn
  James J. Kohn, Chief Financial Officer
  (Duly Authorized Officer and
  Principal Financial Officer)