10-Q 1 v388413_10q.htm FORM 10-Q

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended July 31, 2014

 

¨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 16,210,267 as of September 2, 2014.

 

 
 

 

TABLE OF CONTENTS

 

    Page
     
  PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 2
  Consolidated Balance Sheets – July 31, 2014 (unaudited) and April 30, 2014 2
  Consolidated Statements of Operations – Three months ended July 31, 2014 (unaudited) and July  31, 2013 (unaudited) 3
  Consolidated Statements of Cash Flows – Three months ended July 31, 2014 (unaudited) and July 31, 2013 (unaudited) 4
  Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
     
  PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Mine Safety Disclosures 20
Item 5. Other Information 20
Item 6. Exhibits 21

 

 
 

 

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, 2014 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.

 

-1-
 

 

Part I. Financial Information

 

Item 1. Financial Statements

Nevada Gold & Casinos, Inc.

Consolidated Balance Sheets

 

   July 31,   April 30, 
   2014   2014 
   (unaudited)     
         
ASSETS                
Current assets:        
Cash and cash equivalents  $8,288,939   $7,738,985 
Restricted cash   1,517,532    1,388,995 
Accounts receivable, net of allowances of $42,098 at July 31, 2014 and April 30, 2014, respectively   683,443    252,504 
Prepaid expenses   1,335,317    829,228 
Deferred tax asset, current portion   -    98,643 
Notes receivable, current portion   338,245    332,973 
Inventory and other current assets   345,248    344,686 
Total current assets   12,508,724    10,986,014 
           
Real estate held for sale   1,100,000    1,100,000 
Notes receivable, net of current portion   1,636,126    1,730,246 
Goodwill   16,103,583    16,103,583 
Intangible assets, net of accumulated amortization of $5,928,539 and $5,619,009 at July 31, 2014 and April 30, 2014, respectively   5,444,637    5,754,167 
Property and equipment, net of accumulated depreciation of $3,866,820 and $3,632,349 at July 31, 2014 and April 30, 2014, respectively   4,193,492    4,289,178 
Deferred tax asset, net of current portion   4,315,325    4,356,972 
Other assets   462,019    486,466 
Total assets  $45,763,906   $44,806,626 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued payroll  $2,219,254   $1,427,010 
Accrued interest payable   38,071    37,470 
Other accrued liabilities   2,367,148    2,178,317 
Deferred tax liability, current portion   12,741    - 
Long-term debt, current portion   1,650,000    1,625,000 
Total current liabilities   6,287,214    5,267,797 
Long-term debt, net of current portion   10,300,000    10,725,000 
Other long-term liabilities   469,662    486,870 
Total liabilities   17,056,876    16,479,667 
           
Stockholders' equity:          
Common stock, $0.12 par value per share; 50,000,000 shares authorized; 16,993,104 and 16,980,676 shares issued and 16,210,267 and 16,197,839 shares outstanding at July 31, 2014, and April 30, 2014, respectively   2,039,181    2,037,689 
Additional paid-in capital   24,602,667    24,578,117 
Retained earnings   9,002,756    8,648,727 
Treasury stock, 782,837 shares at July 31, 2014 and April 30, 2014, respectively, at cost   (6,932,035)   (6,932,035)
Accumulated other comprehensive loss   (5,539)   (5,539)
Total stockholders' equity   28,707,030    28,326,959 
Total liabilities and stockholders' equity  $45,763,906   $44,806,626 

 


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

 

-2-
 

 

Nevada Gold & Casinos, Inc.

Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended 
   July 31,   July 31, 
   2014   2013 
Revenues:        
Casino  $14,151,990   $13,948,479 
Food and beverage   2,368,941    2,358,309 
Other   440,107    432,045 
Gross revenues   16,961,038    16,738,833 
Less promotional allowances   (1,052,424)   (1,059,109)
Net revenues   15,908,614    15,679,724 
           
Expenses:          
Casino   8,203,967    8,418,066 
Food and beverage   1,270,650    1,216,650 
Marketing and administrative   4,112,620    4,298,876 
Facility   483,666    478,760 
Corporate   586,447    617,161 
Depreciation and amortization   545,035    561,937 
(Gain) loss on sale of assets   (8,032)   3,971 
Other   67,703    61,422 
Total operating expenses   15,262,056    15,656,843 
Operating income   646,558    22,881 
Non-operating income (expenses):          
Interest income   31,155    34,395 
Interest expense and amortization of loan issue costs   (167,763)   (431,464)
Interest rate swap expense   (21,200)   - 
Increase in swap fair value   18,308    - 
Income (loss) before income tax (expense) benefit   507,058    (374,188)
Income tax (expense) benefit   (153,029)   158,361 
Net income (loss)  $354,029   $(215,827)
Per share information:          
Net income (loss) per common share - basic and diluted  $0.02   $(0.01)
           
Basic weighted average number of shares outstanding   16,200,135    16,087,568 
           
Diluted weighted average number of shares outstanding   16,338,534    16,087,568 

 

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

 

-3-
 

 

Nevada Gold & Casinos, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

    Three Months Ended  
    July 31,     July 31,  
    2014     2013  
Cash flows from operating activities:            
Net income (loss)   $ 354,029     $ (215,827 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Depreciation and amortization     545,035       561,937  
Stock based compensation     13,619       13,620  
Amortization of deferred loan issuance costs     22,522       77,543  
Amortization of deferred rent     1,099       4,561  
Deferred interest income     (2 )     11,581  
(Gain) loss on sale/settlement of assets     (8,032 )     3,971  
Change in swap fair value     (18,308 )     -  
Changes in deferred income taxes     153,031       (158,361 )
Changes in operating assets and liabilities:                
Changes to restricted cash     (128,537 )     (47,420 )
Receivables and other assets     (935,665 )     (666,853 )
Accounts payable and accrued liabilities     981,677       315,276  
Net cash provided by (used in) operating activities     980,468       (99,972 )
Cash flows from investing activities:                
Collections on notes receivable     88,848       64,024  
Purchase of property and equipment     (140,785 )     (113,308 )
Proceeds from the sale of assets     9,000       202  
Net cash used in investing activities     (42,937 )     (49,082 )
Cash flows from financing activities:                
Employee stock plan purchases     12,423       18,302  
Proceeds from credit facilities     -       1,500,000  
Prepayment of deferred loan costs     -       (25,000 )
Repayment of credit facilities     (400,000 )     (870,000 )
Net cash (used in) provided by financing activities     (387,577 )     623,302  
                 
Net increase in cash and cash equivalents     549,954       474,248  
Cash and cash equivalents at beginning of period     7,738,985       6,723,919  
Cash and cash equivalents at end of period   $ 8,288,939     $ 7,198,167  
Supplemental cash flow information:                
Cash paid for interest   $ 165,841     $ 274,940  

 

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

 

-4-
 

 

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, 2014 and April 30, 2014, Consolidated Statements of Operations for the three months ended July 31, 2014 and July 31, 2013, and Consolidated Statements of Cash Flows for the three months ended July 31, 2014 and July 31, 2013. 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, 2014 and the notes thereto included in our Annual Report on Form 10-K. The results of operations for the three months ended July 31, 2014 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 at the consolidated statements of operations have been made to conform prior year financial information to the current period presentation.  The reclassifications did not impact operating income, loss before income tax benefit, or net loss. 

 

Note 2.   Critical Accounting Policies

 

Revenue Recognition

 

We record revenues from casino operations and interest on notes receivable 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,
2014
   July 31,
2013
 
Food and beverage  $781,267   $768,818 
Other   38,084    35,277 
Total cost of complimentary services  $819,351   $804,095 

 

Fair Value

 

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:

 

-5-
 

 

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 less selling costs.

 

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

 

Interest rate swaps are adjusted on a recurring basis pursuant to accounting standards for fair value measurements. We categorize our interest rate swap as Level 2 for fair value measurement.

 

Concentrations of Credit Risk

 

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. At July 31, 2014 and April 30, 2014, 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 the third was to the investors who purchased the Colorado Grande Casino from us. 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

 

Discontinued Operations

 

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued amended accounting guidance that changes the criteria for reporting discontinued operations and expands the related disclosure requirements. This guidance is effective in the first quarter of our fiscal year 2016, and early adoption is permitted. The Company will adopt this guidance during the first quarter of fiscal year 2016 and does not expect the adoption to have a material impact on its financial position or results of operations.

 

Revenue Recognition

 

In May 2014, the FASB issued a new accounting standard for revenue recognition. The new standard supersedes the existing accounting guidance for revenue recognition and amends certain accounting guidance for recognition of gains and losses on the transfer of non-financial assets. For public companies, the new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016, and early adoption is not permitted. Upon adoption, financial statement issuers may elect to apply the new standard either retrospectively to each prior reporting period presented, or using a modified retrospective approach by recognizing the cumulative effect of initial application and providing certain additional disclosures. The Company will adopt this guidance in the first quarter of fiscal year 2018. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations, and has not yet determined which adoption method it will elect.

 

A variety of proposed or otherwise potential accounting guidance is currently under study by standard-setting organizations and certain regulatory agencies. Due to the tentative and preliminary nature of such proposed accounting guidance, the Company has not yet determined the effect, if any, that the implementation of such proposed accounting guidance would have on its condensed consolidated financial statements.

 

Note 3. Restricted Cash

 

As of July 31, 2014 and April 30, 2014, we maintained $1,517,532 and $1,388,995, respectively, in restricted cash, which consists of player-supported jackpot funds.

 

-6-
 

 

Note 4.   Notes and BVD/BVO Receivable

 

Notes Receivable

 

As of July 31, 2014 and April 30, 2014, we had net notes receivable of $1,974,371 and $2,063,219, respectively.  

 

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.

 

Principal and interest payments 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;
·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 $645,000 which consists of $350,628 of principal plus $294,372 of interest.

 

Big City Capital, LLC

 

At July 31, 2014 and April 30, 2014, our balance sheet reflects net notes receivable of $0, net of a $3,200,000 valuation allowance, related to the development of gaming/entertainment projects from Big City Capital, LLC (“Big City Capital”). These two notes receivable have a maturity date of December 31, 2014. On an annual 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 $3,200,000 of valuation allowances and wrote off the accrued interest.

 

BVD/BVO Receivable

 

At July 31, 2014 and April 30, 2014, our balance sheet reflects a net receivable of $0, net of a $4,575,000 valuation allowance, related to the development of gaming/entertainment projects from B. V. Oro, LLC (“BVO”). On an annual 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 $4,575,000 valuation allowance for the total principal and interest due.

 

Note 5.   Long-Term Debt  

 

Our long-term financing obligations as of July 31, 2014 and April 30, 2014 are as follows:

 

   July 31,   April 30, 
   2014   2014 
$12.75 million reducing revolving credit agreement, LIBOR plus an Applicable Margin, increasing quarterly payments beginning March 31, 2014 through September 30, 2018, and the remaining $4,250,000 principal due on the maturity date of December 10, 2018  $11,950,000   $12,350,000 
Less: current portion   (1,650,000)   (1,625,000)
Total long-term financing obligations  $10,300,000   $10,725,000 

 

-7-
 

 

On December 18, 2013, the Company and certain of its subsidiaries entered into a new $12,750,000 Reducing Revolving Credit Agreement with Mutual of Omaha Bank (the “Credit Facility”).  The Credit Facility and $1,170,000 of the Company’s cash were utilized to pay off all of the Company’s outstanding long term debt obligations. The Credit Facility matures on December 10, 2018, is secured by liens on substantially all of the real and personal property of the Company and its subsidiaries. The interest rate on the borrowing is based on LIBOR plus an Applicable Margin, which will be determined quarterly, based on the total leverage ratio for the trailing twelve month period. The initial Applicable Margin was 5.00% until July 1, 2014, when the first quarterly pricing change took effect. The interest rate on the borrowing as of July 31, 2014, is 4.656%. In addition, the Company is required to fix the interest rate on at least 50% of the borrowing through a swap agreement.

 

As of July 31, 2014, scheduled principal payments on the Credit Facility for each of the next five years and thereafter are as follows:

 

August 1, 2014 – July 31, 2015  $1,650,000 
August 1, 2015 – July 31, 2016  $1,750,000 
August 1, 2016 – July 31, 2017  $1,850,000 
August 1, 2017 – July 31, 2018  $1,950,000 
August 1, 2018 – December 10, 2018  $4,750,000 

 

The Credit Facility contains customary covenants for a facility of this nature, including, but not limited to, covenants requiring the preservation and maintenance of the Company’s assets and covenants restricting our ability to merge, transfer ownership, incur additional indebtedness, encumber assets and make certain investments.  The Credit Facility also contains covenants requiring the Company to maintain certain financial ratios commencing as of the fiscal quarter ending April 30, 2014, including a minimum total leverage ratio ranging from 3.00 to 1.00 through July 31, 2015, 2.50 to 1.00 from August 1, 2015 through January 31, 2017, and 2.00 to 1.00 from February 1, 2017 until maturity; and lease adjusted fixed charge coverage ratio no less than 1.15 to 1.00. We are in compliance with the covenant requirements of the Credit Facility as of July 31, 2014.

 

The Company evaluated the refinancing transaction in accordance with the accounting standards for debt modifications and extinguishments and evaluated the refinancing transaction on a lender by lender basis. As a result of this evaluation, the Company concluded the refinancing was an extinguishment of debt and recognized a loss on debt extinguishment of $283,550 in the third quarter of fiscal year 2014, representing the write-off of unamortized debt issuance costs as of the date of the refinancing. In connection with the refinancing transaction in the third quarter of fiscal 2014, the Company has paid $450,000 in fees and other costs which have been capitalized and included in other assets on the consolidated balance sheet.

 

Note 6.   Interest Rate Swap

 

We are required by the Credit Facility to have a secured interest rate swap for at least 50% of the remaining Credit Facility principal balance. The Company has an approved interest rate swap policy which establishes guidelines for the use and management of interest rate swaps to either reduce the cost or hedge existing or planned debt. The policy states that the Company shall not enter into swap transactions for speculative purposes. At the inception of any hedge agreement, as required by ASC 815, Derivatives and Hedging, the Company documented the hedging relationship and the risk management objective and strategy for the undertaking of all qualifying hedges.

 

On January 17, 2014, the Company entered into a swap transaction with Mutual of Omaha Bank (“MOOB”), which has a calculation period as of the tenth day of each month beginning with February 10, 2014 until the maturity date of the Credit Facility. As of July 31, 2014, the Company had one outstanding interest rate swap with MOOB with a notional amount of $5,975,000 at a swap rate of 1.52%, which as of July 31, 2014, effectively converts $5,975,000 of our floating-rate debt to a synthetic fixed rate of 6.02%. Under the terms of the swap agreement, the Company pays a fixed rate of 1.52% and receives variable rate based on one-month LIBOR as of the first day of each floating-rate calculation period. Under the International Swap Dealers Association, Inc. (“ISDA”) confirmation, the floating index as of July 31, 2014 is set at 0.156%.

 

The Company will not designate the interest rate swap as a cash flow hedge and the interest rate swap will not qualify for hedge accounting under ASC Topic 815. Changes in our interest rate swap fair value will be recorded in our Consolidated Statements of Operations.

 

As required by ASC 815, on a quarterly basis, the Company will assess whether any changes to the hedge instrument, or underlying debt agreement, have occurred which would alter the original designation of the hedge instrument. Each quarter, the Company receives fair value statements from the counterparty, MOOB. The fair value of the interest rate swap is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. To comply with the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. As a result of our evaluation of our interest rate swap as of July 31, 2014, we recorded an $18,308 increase in our interest rate swap fair value for the three months ended July 31, 2014. As of July 31, 2014, our interest rate swap fair value is a $40,044 liability which is included in other long-term liabilities on the consolidated balance sheet.

 

-8-
 

 

Note 7. Income Taxes 

 

For the three months ended July 31, 2014 and 2013, our overall effective income tax rates were a 30.2% expense and a 42.3% benefit, respectively. The increase in the year-to-date effective tax rate as of July 31, 2014 as compared to the same period of the prior year is primarily due to our pre-tax income of $507,059 in the three months ended July 31, 2014, compared to a pre-tax loss of $374,188 during the three months ended July 31, 2013.

 

We have analyzed our filing position in each jurisdiction where we are required to file tax returns. We believe our income tax filing position and deductions will be sustained on audit and we do not anticipate any adjustments that will result in a material change to our financial position.

 

We filed income tax returns in the United States federal jurisdiction and in several state jurisdictions. No jurisdiction is currently examining our tax filings for any tax years.

 

Note 8.  Equity Transactions and Stock Option Plans 

 

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, 2014 is presented below:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Shares   Price   Term (Year)   Value 
Outstanding at April 30, 2014   800,000   $1.09           
Granted   100,000   $1.23           
Exercised   -                
Forfeited or expired   -                
Outstanding at July 31, 2014   900,000   $1.10    7.19   $155,850 
                     
Exercisable at July 31, 2014   733,333   $1.11    6.70   $155,850 
                     
Available for grant at July 31, 2014   775,000                

 

The weighted-average grant-date fair value of options granted during the three months ended July 31, 2014 was $1.23. There were no stock options exercised during the three months ended July 31, 2014. As of July 31, 2014, there was a total of $149,784 of unamortized compensation cost related to stock options, which cost is expected to be recognized over a weighted-average of approximately 2.0 years.

 

-9-
 

 

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.

 

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, 2014, approximately 367,500 shares were issued to 140 participants under the 2010 Plan.

 

Treasury Stock

 

During the three months ended July 31, 2014, we did not issue any treasury stock.

 

Note 9.   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, 
   2014   2013 
Numerator:        
Basic and Diluted:        
Net income (loss) available to common shareholders  $354,029   $(215,827)
           
Denominator:          
Basic weighted average number of common shares outstanding   16,200,135    16,087,568 
Dilutive effect of common stock options and warrants   138,399    - 
           
Diluted weighted average number of common shares outstanding   16,338,534    16,087,568 
           
Income per share:          
           
Net income (loss) per common share - basic and diluted  $0.02   $(0.01)

 

 

For the three months ended July 31, 2014 and July 31, 2013, potential dilutive common shares issuable under options of 761,600 and 730,000, respectively, were not included in the calculation of diluted earnings per share as they were anti-dilutive.

 

Note 10.   Segment Reporting

 

We have three business segments (i) Washington Gold, (ii) South Dakota Gold, and (iii) Corporate. For the three month periods ended July 31, 2014 and July 31, 2013, 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.

 

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 loss and income and expenses not allocated to other reportable segments.

 

-10-
 

 

   As of the Three Months Ended  July 31, 2014 
   Washington Gold   South Dakota
Gold
   Corporate   Total 
                 
Net revenue  $13,342,038   $2,565,344   $1,232   $15,908,614 
Casino and food and beverage expense   7,276,749    2,197,868    -    9,474,617 
Marketing and administrative expense   4,034,802    77,818    -    4,112,620 
Facility and other expenses   515,669    24,218    589,897    1,129,784 
Depreciation and amortization   370,682    172,666    1,687    545,035 
Segment operating income (loss)   1,144,136    92,774    (590,352)   646,558 
Segment assets   7,399,149    1,035,864    23,207,097    31,642,110 
Additions to property and equipment   126,453    14,332    -    140,785 

 

   As of the Three Months Ended  July 31, 2013 
   Washington Gold   South Dakota
Gold
   Corporate   Total 
                 
Net revenue  $12,837,302   $2,839,454   $2,968   $15,679,724 
Casino and food and beverage expense   7,233,538    2,401,178    -    9,634,716 
Marketing and administrative expense   4,231,959    66,917    -    4,298,876 
Facility and other expenses   508,745    28,444    624,125    1,161,314 
Depreciation and amortization   391,142    169,573    1,222    561,937 
Segment operating income (loss)   471,918    173,342    (622,379)   22,881 
Segment assets   21,381,079    4,959,623    7,511,988    33,852,690 
Additions to property and equipment   48,029    61,308    -    109,337 

 

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

 

   July 31, 
   2014 
     
Total assets for reportable segments  $31,642,110 
Cash and restricted cash not allocated to segments   9,806,471 
Deferred tax asset   4,315,325 
Total assets  $45,763,906 

 

Note 11. Other Assets

 

Other assets consist of the following:

 

   July 31, 2014   April 30, 2014 
Other assets  $71,638   $73,279 
Deferred loan issue cost, net   390,381    413,187 
Other assets  $462,019   $486,466 

 

-11-
 

 

Note 12.   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 $49,400. 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. In addition we have real property leases as follows:

 

·Crazy Moose Casino in Mountlake Terrace has a building lease which expires on May 31, 2016 with an option to renew for an additional term of five years. The annual rent for this lease is $157,000.
·Crazy Moose Casino in Pasco has a parking lot lease which expired on December 31, 2013. Effective January 1, 2014, the parking lot is leased on a monthly basis.
·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 $278,000, 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 $294,000.
·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 $759,000, 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 $186,500, 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 $399,950, with escalation of 3% annually.
·Administrative offices lease in Renton expires in October of 2018. The monthly rent for the first 22 months is $4,100 and then $4,250 for months 23-34; $4,425 for months 35-48 and; $4,595 for months 49-58.
·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 $405,500, 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 lease:

 

·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.

 

The expected remaining future annual minimum lease payments as of July 31, 2014 are as follows:

 

Period  Corporate Office
Lease Payment
  

Washington Gold

Lease Payment

   South Dakota
Gold
   Total
Lease Payment
 
                 
August 2014-July 2015  $24,751   $2,955,022   $55,200   $3,034,973 
August 2015-July 2016   --    2,929,498    55,200    2,984,698 
August 2016-July 2017   --    1,774,794    27,600    1,802,394 
August 2017-July 2018   --    929,860    --    929,860 
August 2018-July 2019   --    769,778    --    769,778 
Thereafter   --    1,001,529    --    1,001,529 
   $24,751   $10,360,481   $138,000   $10,523,232 


Rent expense for our corporate offices in Las Vegas, Nevada for the three months ended July 31, 2014 and July 31, 2013 was $13,269 and $13,128, respectively. Rent expense for the Washington mini-casinos for the three months ended July 31, 2014 and July 31, 2013 was $808,122 and $806,348, respectively. Rent expense for the South Dakota Gold slot route for the three months ended July 31, 2014 and July 31, 2013 was $15,159 and $24,003, respectively.

 

For scheduled rent escalation clauses for the lease terms for the Washington properties, we recorded approximately $1,099 and $4,561 of amortization of deferred rent escalation for the three months ended July 31, 2014 and July 31, 2013, respectively. These escalations are recorded on the balance sheet in other long term liabilities.

 

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 of third-party debt.

 

-12-
 

 

We indemnified 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 13. Legal Proceedings

 

We are not currently involved in any material legal proceedings.

 

Note 14. Goodwill and Intangible Assets

 

In connection with our acquisitions of the of the Washington mini-casinos on May 12, 2009, July 23, 2010 and July 18, 2011, as well as the South Dakota Gold slot route on January 27, 2012, we have goodwill and intangible assets of $21,548,220, net of amortization for intangible assets with finite lives.

 

The change in the carrying amount of goodwill and other intangibles for the three months ended July 31, 2014 is as follows:

 

   Total   Goodwill   Other
Intangibles
 
Balance as of April 30, 2014  $21,857,750   $16,103,583   $5,754,167 
Current year amortization   (309,530)   -    (309,530)
Balance as of July 31, 2014  $21,548,220   $16,103,583   $5,444,637 

 

Intangible assets are generally amortized on a straight line basis over the useful lives of the assets.  All goodwill and other intangible assets pertain to the gaming segment.

 

Goodwill and net intangibles assets by segment as of July 31, 2014 are as follows:

 

   Total   Goodwill   Other
Intangibles, net
 
Washington Gold  $18,473,918   $14,167,112   $4,306,806 
South Dakota Gold   2,685,447    1,936,471    748,976 
Corporate   388,855    -    388,855 
Balance as of July 31, 2014  $21,548,220   $16,103,583   $5,444,637 

 

A summary of intangible assets and accumulated amortization are as follows. State gaming registration and trade names are not amortizable:

 

   As of July 31, 2014 
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net 
Customer relationships  $7,853,321   $(4,701,372)  $3,151,949 
Non-compete agreements   1,269,000    (1,227,167)   41,833 
State gaming registration   388,855    -    388,855 
Trade names   1,862,000    -    1,862,000 
Total  $11,373,176   $(5,928,539)  $5,444,637 

 

The estimated future annual amortization of intangible assets, which excludes Trade Names and State gaming registration, is as follows. The weighted 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 amortizable intangible assets in total is 5.5 years.

 

  Period  Amount 
  August 2014-July 2015  $1,163,736 
  August 2015-July 2016   1,034,076 
  August 2016-July 2017   700,332 
  August 2017-July 2018   217,067 
  August 2018-July 2019   78,571 
  Thereafter   - 
  Total  $3,193,782 

 

-13-
 

 

Note 15. Regulation and Licensing

 

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.

 

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.

 

-14-
 

 

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 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.

 

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

 

Note 16. 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 if impairment indicators are present or if other 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.

 

-15-
 

 

Each reporting period 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, 2014 and April 30, 2014, 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, 2014 and April 30, 2014, our balance sheet reflects a receivable related to BVD/BVO of $0, net of a $4,575,000 allowance. In the period ending April 30, 2012, we determined our ability to collect the BVD/BVO Receivable and its accrued interest was doubtful. Therefore we established a $4,575,000 valuation allowance against its principal and interest due.

 

Note 17. Stock Offering and Warrants

 

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 $4,300,000, 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 $5,100,000 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, 2014, filed on Form 10-K with the SEC on July 29, 2014.

 

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, 2014, filed on Form 10-K with the SEC on July 29, 2014.

 

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 $15,908,614 and $15,679,724 for the three months ended July 31, 2014 and July 31, 2013, respectively.

 

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When compared to the three months ended July 31, 2013, the three month period ended July 31, 2014 was impacted by the following items:

 

- Approximately 20% reduction of gaming devices at our South Dakota Gold route operation;

 

- Slightly higher table games drop and hold percentage at our Washington Gold casino operations; and

 

- Decreased net interest expense.

 

COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2014 AND JULY 31, 2013

 

Net revenues. Net revenues increased 1.5%, to $15,908,614 from $15,679,724, for the three month period ended July 31, 2014, compared to the same period ended July 31, 2013. Casino revenues increased 1.5%, or $203,511. Revenues in Washington increased $504,737 on increased volume while revenues in South Dakota decreased $285,175 due to fewer gaming units. Food and beverage, other revenues and promotional allowances for the three months ended July 31, 2014, were flat when compared to the three months ended July 31, 2013.

 

Total operating expenses. Total operating expenses decreased 2.5%, to $15,262,056 from $15,656,843, for the three month period ended July 31, 2014, compared to the same period ended July 31, 2013. Casino expenses decreased 2.5%, or $214,099, when compared to the same period last year primarily due to reduced commissions in South Dakota due to the lower revenues. Marketing and administrative expenses decreased 4.3%, or $186,256, primarily due to reduced promotional and event expenditures in Washington. Food and beverage expenses increased 4.4%, or $54,000, when compared to the same period last year primarily due to increased cost of goods. Corporate expenses decreased 5.0%, or $30,714, due to reductions in payroll offset by an increase in professional fees during the 2014 quarter when compared to the prior year quarter. Depreciation and amortization and other expenses combined were flat when compared to the same period last year.

 

Interest income (expense). Interest expense and amortization of loan issue costs decreased 61.1%, or $263,701, for the three month period ended July 31, 2014, compared to the three month period ended July 31, 2013. The decrease resulted from the reduction of outstanding debt since July 31, 2013 and the refinancing of all remaining debt in December 2013 (See Note 5 of our Consolidated Financial Statements). Interest income decreased $3,240 for the three month period ended July 31, 2014, compared to the three month period ended July 31, 2013, which was related to interest earned on notes receivables based on note terms. We recorded $21,200 of interest rate swap expense and an $18,308 increase of the fair value of the interest rate swap we were required to enter into as a result of refinancing our debt in December 2013, whereas we did not have any swaps during the three months ended July 31, 2013.

 

Income Taxes. For the three months ended July 31, 2014 and July 31, 2013, our overall effective income tax rates were a 30.2% expense and a 42.3% benefit, respectively. The increase in the quarterly effective tax rate for the three months ended July 31, 2014 as compared to the same period of the prior year is primarily due to our pre-tax income of $507,059 in the three months ended July 31, 2014, compared to a pre-tax loss of $374,188 during the three months ended July 31, 2013.

 

Net income. Net income was $354,029 compared to a loss of $215,827 for the three month periods ended July 31, 2014 and July 31, 2013, respectively. The increase is primarily a result of the $623,678 increased operating income, the $239,261 reduction of net interest expense offset by a $311,390 increase in income tax expense.

 

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 grants, non-cash employee stock purchase plan discounts, exclusion of net income or loss from assets 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 that also publicize this information.

 

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.

 

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The following table shows adjusted EBITDA by segment for the three months ended July 31, 2014 and July 31, 2013:

 

   For the three months ended July 31, 2014 
                 
   Washington Gold  

South Dakota

Gold

  

Corporate -

Other

   Total  
Revenues:            
Gross revenues  $14,375,412   $2,584,394   $1,232   $16,961,038 
Less promotional allowances   (1,033,374)   (19,050)   -    (1,052,424)
Net revenues   13,342,038    2,565,344    1,232    15,908,614 
                     
Expenses:   11,826,122    2,307,937    575,033    14,709,092 
                     
Adjusted EBITDA  $1,515,916   $257,407   $(573,801)  $1,199,522 

 

   For the three months ended July 31, 2013 
   Washington Gold   South Dakota
Gold
   Corporate -
Other
   Total  
Revenues:                
Gross revenues  $13,863,215   $2,872,649   $2,969   $16,738,833 
Less promotional allowances   (1,025,914)   (33,195)   -    (1,059,109)
Net revenues   12,837,301    2,839,454    2,969    15,679,724 
                     
Expenses:   11,965,711    2,496,539    608,674    15,070,924 
                     
Adjusted EBITDA  $871,590   $342,915   $(605,705)  $608,800 

 

The following table reconciles adjusted EBITDA to net income (loss) for the three months ended July 31, 2014 and July 31, 2013:

 

Adjusted EBITDA reconciliation to net income (loss):

 

   For the three months ended 
   July 31, 2014   July 31, 2013 
         
Net income (loss)  $354,029   $(215,827)
Add:          
Income tax expense (benefit)   153,029    (158,361)
Net interest expense   139,500    397,069 
(Gain) loss on sale of assets   (8,032)   3,971 
Depreciation and amortization   545,035    561,937 
Deferred rent   1,099    4,561 
Stock options amortization   13,619    13,620 
Employee stock purchase discount   1,243    1,830 
Adjusted  EBITDA  $1,199,522   $608,800 

 

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, 2014 and July 31, 2013:

 

-18-
 

 

   Three Months Ended 
   July 31,   July 31, 
   2014   2013 
Net cash provided by (used in):        
Operating activities  $980,468   $(99,972)
Investing activities   (42,937)   (49,082)
Financing activities   (387,577)   623,302 

 

Operating activities. The net change in cash provided by (used in) operating activities during the three month period ended July 31, 2014, compared to same period in the prior fiscal year, is an increase of $1,080,440. This increase mainly resulted from improved operating results in Washington State which caused net income of $354,029 for the quarter ended July 31, 2014 versus a net loss of $215,827 in the same period last year.

 

Investing activities. Net cash used in investing activities during the three month period ended July 31, 2014 was flat when compared to the same period in the prior fiscal year. There were no significant year over year swings in investing activities.

 

Financing activities. Net cash (used in) provided by financing activities during the three month period ended July 31, 2014 decreased $1,010,879 from the comparable period in the prior fiscal year quarter. The decrease is mainly attributable to internally funding the $1,315,400 payment of the annual South Dakota device fees in the three months ended July 31, 2014, whereas we borrowed a net $1,475,000 during the three months ended July 31, 2013, to pay the fees. The change in the device fee activity was offset by $400,000 of debt repayment in the current period compared to $870,000 in the prior year.

 

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, 2014, outstanding indebtedness was $11,950,000, of which $1,650,000 is due by July 31, 2015.

 

As of July 31, 2014, scheduled principal payments on the Credit Facility for each of the next five years and thereafter are as follows:

 

August 1, 2014 – July 31, 2015  $1,650,000 
August 1, 2015 – July 31, 2016  $1,750,000 
August 1, 2016 – July 31, 2017  $1,850,000 
August 1, 2017 – July 31, 2018  $1,950,000 
August 1, 2018 – December 10, 2018  $4,750,000 

 

On July 31, 2014, excluding restricted cash of $1,517,532, we had cash and cash equivalents of $8,288,939. The restricted cash consists 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 arrangements to ensure that we have sufficient working capital to fund our obligations as they come due. We believe that funds from operations 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. 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 maintain, or grow, at a pace that cash resources could support.

 

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, 2014, we have a 2.0 ratio, which is sufficient to service debt and maintain operations.

 

-19-
 

 

      Current Ratio as of July 31, 2014 
Current Ratio  Current Assets  $12,508,724    2.0 
   Current Liabilities  $6,287,214      

 

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, 2014.

 

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, 2014 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, 2014, filed with the SEC on July 29, 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

 

Not applicable.

 

Item 5.   Other Information

 

None.

 

-20-
 

 

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).
     
10.9   Credit Agreement dated December 10, 2013 by and among Mutual of Omaha Bank, as the Lender, Nevada Gold & Casinos, Inc., as parent, and Restricted Subsidiaries, as borrower (filed previously as Exhibits 10.9 to the Company’s Form 10-Q filed December 23, 2013).  
31.1(*)   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2(*)   Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1(*)   Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2(*)   Certification Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS(†)   XBRL Instance Document
     
101.SCH(†)   XBRL Taxonomy Schema
     
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 herewith.

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

 

-21-
 

 

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 15, 2014

 

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