10-Q 1 v433943_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 January 31, 2016
   
¨ 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 17,763,856 as of March 1, 2016.

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
  PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets – January 31, 2016 (unaudited) and April 30, 2015 2
  Condensed Consolidated Statements of Operations – Three and nine months ended January 31, 2016 (unaudited) and January 31, 2015 (unaudited) 3
  Condensed Consolidated Statements of Cash Flows – Nine months ended January 31, 2016 (unaudited) and January 31, 2015 (unaudited) 4
  Notes to Condensed 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 20
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, 2015 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.

Condensed Consolidated Balance Sheets

 

   January  31,   April 30, 
   2016   2015 
   (unaudited)     
ASSETS          
Current assets:             
Cash and cash equivalents   $8,822,156   $8,541,670 
Restricted cash      1,525,803    1,724,439 
Accounts receivable, net of allowances      768,163    297,316 
Prepaid expenses      1,603,449    845,505 
Deferred tax asset, current portion      882,394    863,366 
Notes receivable, current portion      411,370    384,464 
Inventory and other current assets      1,027,181    377,625 
Total current assets      15,040,516    13,034,385 
           
Real estate held for sale      1,100,000    1,100,000 
Notes receivable, net of current portion       849,059    1,314,467 
Goodwill      18,860,059    16,103,583 
Intangible assets, net of accumulated amortization of $7,678,862 and             
$6,811,799 at January 31, 2016 and April 30, 2015, respectively      5,316,520    4,561,377 
Property and equipment, net of accumulated depreciation             
of $5,143,361 and $4,451,553 at January 31, 2016 and             
April 30, 2015, respectively      15,431,612    3,990,791 
Deferred tax asset, net of current portion      1,875,176    2,706,430 
Other assets      267,567    331,980 
Total assets   $58,740,509   $43,143,013 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:             
Accounts payable and accrued liabilities   $1,478,394   $1,222,139 
Accrued payroll and related      1,365,751    1,581,557 
Accrued player's club points and progressive jackpots      1,945,031    1,993,537 
Total current liabilities      4,789,176    4,797,233 
Long-term debt      18,594,044    7,350,000 
Other long-term  liabilities      814,777    570,717 
Total liabilities      24,197,997    12,717,950 
           
Stockholders' equity:             
Common stock, $0.12 par value per share; 50,000,000             
shares authorized; 18,526,693 and 17,134,928 shares issued and 17,743,856 and 16,352,091 shares outstanding at January 31, 2016, and April 30, 2015, respectively    2,223,212    2,056,200 
Additional paid-in capital      27,253,193    24,845,094 
Retained earnings      11,998,142    10,455,804 
Treasury stock, 782,837 shares at January 31, 2016 and April 30, 2015, respectively, at cost      (6,932,035)   (6,932,035)
Total stockholders' equity      34,542,512    30,425,063 
Total liabilities and stockholders' equity   $58,740,509   $43,143,013 

 

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

 

 2 

 

 

Nevada Gold & Casinos, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended   Nine Months Ended 
   January 31,   January 31,   January 31,   January 31, 
   2016   2015   2016   2015 
Revenues:                    
Casino  $16,217,164   $13,821,745   $44,578,057   $42,400,880 
Food and beverage   3,294,142    2,672,738    8,216,330    7,601,608 
Other   529,568    432,329    1,437,452    1,334,215 
Gross revenues   20,040,874    16,926,812    54,231,839    51,336,703 
Less promotional allowances   (1,680,127)   (1,122,522)   (3,794,103)   (3,251,269)
Net revenues   18,360,747    15,804,290    50,437,736    48,085,434 
 Expenses:                    
Casino   8,166,630    7,338,366    24,074,390    23,733,827 
Food and beverage   1,710,461    1,391,532    4,318,491    4,033,675 
Other   94,500    72,804    223,035    210,032 
Marketing and administrative   4,823,503    4,396,240    13,145,912    12,801,575 
Facility   524,892    509,723    1,510,113    1,526,237 
Corporate   1,121,138    675,846    2,612,247    1,814,505 
Depreciation and amortization   739,699    553,910    1,739,202    1,643,565 
(Gain) loss on sale of assets   (2,271)   24,613    (163,702)   41,700 
Total operating expenses   17,178,552    14,963,034    47,459,688    45,805,116 
Operating income   1,182,195    841,256    2,978,048    2,280,318 
Non-operating income (expenses):                    
Interest income   22,794    29,066    73,424    90,583 
Interest expense and amortization of loan issue costs   (187,894)   (127,035)   (401,514)   (453,337)
Interest rate swap expense   (21,006)   (19,495)   (51,332)   (60,960)
Change in swap fair value   (246,146)   (35,383)   (244,062)   (37,729)
Write-off of marketable securities   -    -    -    (7,539)
Income before income tax expense   749,943    688,409    2,354,564    1,811,336 
Income tax expense   (283,592)   (240,301)   (812,226)   (593,131)
Net income  $466,351   $448,108   $1,542,338   $1,218,205 
Per share information:                    
Net income per common share - basic  $0.03   $0.03   $0.09   $0.08 
                     
Net income per common share - diluted  $0.03   $0.03   $0.09   $0.07 

 

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

 

 3 

 

 

Nevada Gold & Casinos, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   Nine Months Ended 
   January 31,   January 31, 
   2016   2015 
Cash flows from operating activities:          
Net income  $1,542,338   $1,218,205 
Adjustments to reconcile net income to net cash provided by operating activities:          
  Depreciation and amortization   1,739,202    1,643,565 
  Change in deferred income taxes   812,226    593,133 
  Amortization of deferred debt issuance costs   104,329    67,566 
  Stock-based compensation   140,669    84,851 
  (Gain) loss on sale of assets   (163,702)   41,700 
  Write-off of licensing costs   54,729    - 
  Write-off of marketable securities   -    7,539 
  Amortization of deferred rent   24,502    4,067 
  Change in swap fair value   244,062    37,729 
  Other   1,524    906 
Changes in operating assets and liabilities:          
  Restricted cash   198,636    (144,847)
  Receivables and other assets   (1,432,555)   (372,534)
  Accounts payable and accrued liabilities   (656,293)   394,549 
Net cash provided by operating activities   2,609,667    3,576,429 
Cash flows from investing activities:          
Purchase of property and equipment   (400,742)   (627,674)
Collections on notes receivable   438,502    270,500 
Club Fortune acquisition, net of cash acquired   (13,840,967)   - 
Capitalized licensing costs   (96,935)   - 
Proceeds from the sale of assets   305,820    1,125 
Net cash used in investing activities   (13,594,322)   (356,049)
Cash flows from financing activities:          
Repayment of credit facilities   (4,110,000)   (3,550,000)
Employee stock plan purchases   41,810    41,189 
Repayment of capital lease   (170,391)   (10,590)
Proceeds from credit facilities   15,500,000    - 
Payment of loan costs   (186,528)   - 
Cash proceeds from exercise of stock options   190,250    14,700 
Net cash provided by (used in) financing activities   11,265,141    (3,504,701)
           
Net increase (decrease) in cash and cash equivalents   280,486    (284,321)
Cash and cash equivalents at beginning of period   8,541,670    7,738,985 
Cash and cash equivalents at end of period  $8,822,156   $7,454,664 
           
Supplemental cash flow information:          
Cash paid for interest  $310,786   $456,478 
           
Non-cash investing and financing activities:          
 Issuance of stock to finance Club Fortune acquisition  $2,202,382   $- 
Acquisition of equipment via capital lease  $-   $38,282 

 

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

 

 4 

 

 

Nevada Gold & Casinos, Inc.

 

Notes to Condensed Consolidated Financial Statements

 

Note 1. Basis of Presentation

 

The interim financial information included herein is unaudited. However, the accompanying condensed consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly our condensed consolidated balance sheets at January 31, 2016 and April 30, 2015, condensed consolidated statements of operations for the three and nine months ended January 31, 2016 and 2015, and condensed consolidated statements of cash flows for the nine months ended January 31, 2016 and 2015. 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, 2015 and the notes thereto included in our Annual Report on Form 10-K. The results of operations for the three and nine months ended January 31, 2016 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. Property taxes of $104,510 and $248,308 were reclassified from casino expense to administrative expense for the three and nine months ended January 31, 2015, respectively. Also, segment presentation of assets eliminated the impact of intercompany balances. Those reclassifications did not impact working capital, total assets, total liabilities, net income or stockholders’ equity.

 

Note 2. Critical Accounting Policies

 

Revenue Recognition

 

We record revenues from casino operations on the accrual basis as earned. 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 condensed consolidated statements of operations. The estimated cost of providing such complimentary services included in casino expense in the accompanying condensed consolidated statements of operations was as follows:

 

   Three Months Ended   Nine Months Ended 
   January 31,   January 31,   January 31,   January 31, 
   2016   2015   2016   2015 
Food and beverage  $1,170,089   $808,941   $2,750,283   $2,401,566 
Other   46,205    39,228    112,000    107,720 
Total cost of complimentary services  $1,216,294   $848,169   $2,862,283   $2,509,286 

 

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 discounted 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. Management performs periodic evaluations of the collectability of these notes and accounts receivable. 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

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued amended accounting guidance that changes the accounting for leases and requires expanded disclosures about leasing activities. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations.

 

In November 2015, the FASB issued final guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016. Early adoption is permitted. The Company expects to adopt this guidance in the fourth quarter of fiscal 2016. The adoption will have no effect on the Company's results of operations.

 

In April 2015, the FASB issued amended accounting guidance that changes the balance sheet presentation of debt issuance costs. Under the amended guidance, debt issuance costs will be presented on the balance sheet as a direct deduction from the related debt liability rather than as an asset. In August 2015, the FASB issued Update 2015-15, which further clarifies the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Debt issuance costs related to line-of-credit of arrangements can be recorded as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. For public companies, the new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015 (including interim periods within those fiscal years), and is required to be applied on a retrospective basis. Early adoption is permitted. The Company expects to adopt this guidance in the first quarter of fiscal 2017. The adoption will have no effect on the Company's results of operations.

 

 6 

 

 

In May 2014, the FASB issued a new accounting standard for revenue recognition which requires entities to recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard supersedes the existing accounting guidance for revenue recognition, including industry-specific guidance, 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, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016 (including interim periods within those periods). 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 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.

 

In April 2014, 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. The Company adopted this guidance during the first quarter of fiscal year 2016 with no material impact on our financial position or results of operations. The Golden Nugget casino was not considered a significant component of the Company and therefore the sale was not treated as discontinued operations. See Goodwill and Intangible Assets footnote.

 

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 January 31, 2016 and April 30, 2015, we maintained $1,525,803 and $1,724,439, respectively, in restricted cash, which consists of player-supported jackpot funds for our Washington operations.

 

Note 4. Notes Receivable

 

As of January 31, 2016 and April 30, 2015, we had net notes receivable of $1,260,429 and $1,698,931, respectively. We record revenues from 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.

 

G Investments, LLC

 

Upon completion of the sale of the Colorado Grande Casino on May 25, 2012, we recorded a $2,325,000 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.

 

As of January 31, 2016, the remaining principal and interest payments are scheduled to be made as follows:

 

·Beginning February 1, 2016, sixteen monthly installments of principal and accrued interest of $40,000; and
·A final installment of $743,302 which is due on the maturity date of June 1, 2017.

 

Through January 31, 2016, GI has timely made required principal and interest payments.

 

Note 5. 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, the South Dakota Gold slot route on January 27, 2012, and the Club Fortune Casino in Nevada on December 1, 2016 (see Acquisition of Club Fortune Casino footnote), we have goodwill and intangible assets of $24,176,579, net of amortization for intangible assets with finite lives. As a result of the sale of the Golden Nugget, Washington Gold’s goodwill was reduced by $74,958 during the nine months ended January 31, 2016.

 

 7 

 

 

The change in the carrying amount of goodwill and other intangible assets for the nine months ended January 31, 2016 is as follows:

 

   Total   Goodwill   Other
intangible
assets, net
 
Balance as of April 30, 2015  $20,664,960   $16,103,583   $4,561,377 
Current year amortization   (867,063)   -    (867,063)
Gaming license   42,206    -    42,206 
Acquisition of Club Fortune   4,411,434    2,831,434    1,580,000 
Sale of Golden Nugget   (74,958)   (74,958)   - 
Balance as of January 31, 2016  $24,176,579   $18,860,059   $5,316,520 

 

Goodwill and net other intangible assets by segment as of January 31, 2016 are as follows:

 

   Total   Goodwill   Other
intangible
assets, net
 
Washington  $16,951,820   $14,092,154   $2,859,666 
South Dakota   2,407,899    1,936,471    471,428 
Nevada   4,385,799    2,831,434    1,554,365 
Corporate   431,061    -    431,061 
Balance as of January 31, 2016  $24,176,579   $18,860,059   $5,316,520 

 

Intangible assets are generally amortized on a straight line basis over the useful lives of the assets.  State gaming license and trade names are not amortizable. A summary of intangible assets and accumulated amortization as of January 31, 2016 are as follows:

 

   Gross
Carrying
Amount
   Accumulated
Amortization
   Net 
Customer relationships  $8,673,321   $(6,403,751)  $2,269,570 
Non-compete agreements   1,379,000    (1,275,111)   103,889 
State gaming license   431,061    -    431,061 
Trade names   2,512,000    -    2,512,000 
Total  $12,995,382   $(7,678,862)  $5,316,520 

 

The weighted average useful lives of acquired intangibles related to customer relationships is 7.0 years and non-compete agreements is 3.0 years. The estimated future annual amortization of intangible assets, which excludes trade names and state gaming license, is as follows:

 

Period  Amount 
February 2016-January 2017  $977,099 
February 2017-January 2018   612,509 
February 2018-January 2019   334,803 
February 2019-January 2020   117,143 
February 2020-January 2021   117,143 
Thereafter   214,762 
Total  $2,373,459 

 

Note 6. Other Assets 

 

Other assets consisted of the following:

 

   January 31, 2016   April 30, 2015 
Debt issuance costs, net   $197,567   $261,323 
Other    70,000    70,657 
Other assets   $267,567   $331,980 

 

Debt issuance costs not paid directly to the lender are capitalized and amortized using the effective interest rate method over the expected terms of the related debt agreements and are included in other assets on our condensed consolidated balance sheets.

 

 8 

 

 

Note 7. Long-Term Debt  

 

Our long-term financing obligations are as follows:

 

   January 31,   April 30, 
   2016   2015 
$23.0 million reducing revolving credit agreement, less discount discount of $145,956, LIBOR plus an Applicable Margin, $625,000 quarterly reductions beginning January 31, 2016 through November 30, 2020, and the remaining $11,125,000 principal due on the maturity date of November 30, 2020.  $18,594,044   $7,350,000 
Less: current portion   -    - 
Total long-term financing obligations  $18,594,044   $7,350,000 

 

On November 30, 2015, the Company amended its existing credit agreement with Mutual of Omaha Bank to increase the lending commitment to $23 million.  The Amended and Restated Credit Agreement (“Credit Facility”) matures on November 30, 2020, and 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, determined quarterly beginning April 1, 2016, based on the total leverage ratio for the trailing twelve month period. The initial interest rate on the balance as of January 31, 2016, is 4.422%. In addition, the Company was required to fix the interest rate on at least 50% of the credit facility through a swap agreement.

 

As of January 31, 2016, principal reductions due on the Credit Facility are as follows:

 

February 1, 2016 – January 31, 2017  $- 
February 1, 2017 – January 31, 2018   1,365,000 
February 1, 2018 – January 31, 2019   2,500,000 
February 1, 2019 – January 31, 2020   2,500,000 
February 1, 2020 – November 30, 2020   12,375,000 
Total payments   18,740,000 
Unamortized debt discount   (145,956)
Total long-term debt  $18,594,044 

 

The unamortized debt discount above consists of debt costs paid directly to the lender. The discount is amortized over the period of the Credit Facility through interest expense.

 

During the current quarter, we paid $2.0 million to reduce the outstanding balance of the Credit Facility. As of January 31, 2016, we have $3.6 million available to borrow per the Credit Agreement.

 

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 including a maximum total leverage ratio ranging from 3.00 to 1.00 through January 31, 2017, 2.75 to 1.00 from February 1, 2017 through January 31, 2018, and 2.50 to 1.00 from February 1, 2018 until maturity; and lease adjusted fixed charge coverage ratio of no less than 1.15 to 1.00. We are in compliance with the covenant requirements of the Credit Facility as of January 31, 2016.

 

Note 8. Interest Rate Swap

 

We are required by the Credit Facility to have a secured interest rate swap for at least 50% of the Credit Facility commitment. On December 28, 2015, 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 through the maturity date of the Credit Facility. As of January 31, 2016, the Company had one outstanding interest rate swap with MOOB with a notional amount of $11,187,500 at a swap rate of 1.77%, which as of January 31, 2016, effectively converts $11,187,500 of our floating-rate debt to a synthetic fixed rate of 5.77%. Under the terms of the swap agreement, the Company pays a fixed rate of 1.77% 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 January 31, 2016 is set at 0.4238%.

 

The Company did not designate the interest rate swap as a cash flow hedge and the interest rate swap did not qualify for hedge accounting under ASC Topic 815. Changes in our interest rate swap fair value are recorded in our condensed consolidated statements of operations. 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. As a result of our evaluation of our interest rate swap as of January 31, 2016, we recorded a $246,146 decrease in our interest rate swap fair value for the three months ended January 31, 2016. As of January 31, 2016, our interest rate swap fair value is a $313,013 liability which is included in other long-term liabilities on the condensed consolidated balance sheet.

 

 9 

 

 

Note 9. Equity Transactions and Stock Option 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 2009 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.

 

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.

 

On October 12, 2015, the Committee granted stock to the board of directors as part of a revision of director compensation with $10,000 in annual compensation paid in the form of a stock grant and reducing the cash compensation by $5,000 per director. The Committee also granted 12,600 shares of restricted stock to our VP of Washington Operations to vest over three years.

 

A summary of stock option activity under our share-based payment plans for the nine months ended January 31, 2016 is presented below:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Options   Price   Term (Year)   Value 
Outstanding at April 30, 2015   895,000   $1.08           
Granted   -                
Exercised   (145,000)  $1.31           
Forfeited or expired   -                
Outstanding at January 31, 2016   750,000   $1.09    6.50   $819,500 
                     
Exercisable at January 31, 2016   650,000   $1.07    6.20   $724,500 
                     
Available for grant at January 31, 2016   672,400                

 

As of January 31, 2016, there was a total of $70,705 of unamortized compensation cost related to stock options, which is expected to be recognized over a weighted-average of approximately 0.6 years.

 

Compensation cost for stock options granted is 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.

 

 10 

 

 

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. There was a total of 500,000 shares available for issuance under the 2010 Plan.  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 purchased at the end of each calendar quarter. As of January 31, 2016, approximately 430,704 shares were issued under the 2010 Plan. The 2010 Plan had a term of 5 years and expired on January 1, 2016. Therefore, no further stock will be issued under the plan.

 

Note 10. 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.

 

Note 11. 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   Nine Months Ended 
   January 31,   January 31,   January 31,   January 31, 
   2016   2015   2016   2015 
Numerator:                    
Basic and Diluted:                    
Net income available to common shareholders  $466,351   $448,108   $1,542,338   $1,218,205 
                     
Denominator:                    
Basic weighted average number of common shares outstanding   17,349,217    16,225,562    16,751,944    16,212,916 
Dilutive effect of common stock options and warrants   295,509    285,807    260,266    161,937 
                     
Diluted weighted average number of common shares outstanding   17,644,726    16,511,369    17,012,210    16,374,853 
                     
Net income per common share - basic  $0.03   $0.03   $0.09   $0.08 
Net income per common share - diluted  $0.03   $0.03   $0.09   $0.07 

 

Note 12. Commitments and Contingencies  

 

As a result of acquiring facilities in Washington and South Dakota and our commitment to lease office space for our corporate headquarters in Las Vegas, Nevada, as of January 31, 2016, we have future annual minimum lease payments as follows:

 

Period  Corporate   Nevada   Washington   South
Dakota
   Total 
                     
February 2016-January 2017  $47,554   $10,200   $2,986,299   $55,200   $3,099,253 
February 2017-January 2018   -    5,950    3,032,848    -    3,038,798 
February 2018-January 2019   -         3,074,146    -    3,074,146 
February 2019-January 2020   -         2,548,842    -    2,548,842 
February 2020-January 2021   -         2,419,444    -    2,419,444 
Thereafter   -         2,079,325    -    2,079,325 
   $47,554   $16,150   $16,140,904   $55,200   $16,259,808 

 

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.

 

 11 

 

 

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. Income Taxes 

 

For the three months ended January 31, 2016 and 2015, our effective income tax rates were 36% and 35%, respectively. For the nine months ended January 31, 2016 and 2015, our effective income tax rates were 34% and 33%, respectively. The difference between the federal statutory rate of 34% and the current quarter’s effective tax rate is primarily due to permanent differences that increase taxable income.

 

At January 31, 2016, we have $2.8 million in net deferred tax assets, which is primarily a result of the $7.8 million in receivables that have been fully reserved for book purposes. We believe that it is more-likely-than-not that the deferred tax assets will be realized prior to any expiration and therefore we have not applied a valuation allowance on our deferred tax assets.

 

We filed income tax returns in the United States federal jurisdiction. No jurisdiction is currently examining our tax filings for any tax years. All of the Company’s tax positions are considered more-likely-than-not to be sustained upon an IRS examination.

 

Note 14. Segment Reporting  

 

We have three business segments and Corporate: (i) Washington, (ii) South Dakota and (iii) Nevada. For the three and nine month periods ended January 31, 2016, the Washington segment consists of the Washington mini-casinos, the South Dakota segment consists of our slot route operation in South Dakota, Nevada segment consists of Club Fortune casino (see Acquisition of Club Fortune Casino footnote) and the Corporate column includes the vacant land in Colorado and its taxes and maintenance expenses. The Corporate column also includes corporate-related items, results of insignificant operations, and segment loss and income and expenses not allocated to other reportable segments.

 

Summarized financial information for our reportable segments is shown in the following table.

 

   As of and for the Three Months Ended  January 31, 2016 
   Washington   South
Dakota
   Nevada   Corporate   Total 
Net revenue  $14,647,144   $1,334,391   $2,379,212   $-   $18,360,747 
Casino and food and beverage expense   7,254,960    1,292,036    1,330,095    -    9,877,091 
Marketing and administrative expense   4,093,537    63,714    666,252    -    4,823,503 
Facility, corporate and other expenses   521,844    41,685    55,863    1,121,138    1,740,530 
Depreciation and amortization   340,034    156,209    240,360    3,096    739,699 
Operating income (loss)   2,434,944    (220,456)   91,941    (1,124,234)   1,182,195 
Assets   28,436,653    4,295,587    18,054,786    7,953,483    58,740,509 
Purchase of property and equipment   112,167    3,679    7,413    -    123,259 

 

   As of and for the Three Months Ended January 31, 2015 
   Washington   South
Dakota
   Nevada   Corporate   Total 
Net revenue    $14,356,584   $1,446,706    -   $1,000   $15,804,290 
Casino and food and beverage expense   7,414,083    1,315,816    -    -    8,729,899 
Marketing and administrative expense   4,306,962    89,278    -    -    4,396,240 
Facility, corporate and other expenses   549,778    31,787    -    676,808    1,258,373 
Depreciation and amortization     369,544    181,270    -    3,096    553,910 
Operating income (loss)     1,716,185    (196,026)   -    (678,904)   841,255 
Assets     29,388,634    4,855,319    -    8,841,280    43,085,233 
Purchase of property and equipment   70,667    16,896    -    -    87,563 

 

 12 

 

 

   As of and for the Nine Months Ended  January 31, 2016 
   Washington   South Dakota   Nevada   Corporate   Total 
Net revenue    $42,138,437   $5,920,087   $2,379,212   $-   $50,437,736 
Casino and food and beverage expense   21,796,442    5,266,344    1,330,095    -    28,392,881 
Marketing and administrative expense   12,279,544    200,116    666,252    -    13,145,912 
Facility, corporate and other expenses   1,570,409    106,876    55,863    2,612,247    4,345,395 
Depreciation and amortization     1,028,465    461,090    240,360    9,287    1,739,202 
Segment operating income (loss)     5,627,640    (119,999)   91,941    (2,621,534)   2,978,048 
Segment assets     28,436,653    4,295,587    18,054,786    7,953,483    58,740,509 
Purchase of property and equipment   311,097    82,233    7,413    -    400,743 

 

   As of and for the Nine Months Ended January 31, 2015 
   Washington   South Dakota   Nevada   Corporate   Total 
Net revenue  $41,417,439   $6,665,147    -   $2,848   $48,085,434 
Casino and food and beverage expense   22,025,610    5,741,892    -    -    27,767,502 
Marketing and administrative expense   12,552,525    249,050    -    -    12,801,575 
Facility, corporate and other expenses   1,628,380    100,541    -    1,821,853    3,550,774 
Depreciation and amortization   1,109,336    526,161    -    8,068    1,643,565 
Segment operating income (loss)   4,100,587    7,333    -    (1,827,602)   2,280,318 
Segment assets   29,388,634    4,855,319    -    8,841,280    43,085,233 
Purchase of property and equipment   354,169    268,169    -    43,618    665,956 

 

Note 15. Acquisition of Club Fortune Casino 

 

On November 30, 2015, the Company completed the acquisition of the Club Fortune casino in Henderson, Nevada pursuant to an Asset Purchase Agreement dated May 22, 2015 between Gaming Ventures of Las Vegas, Inc., as Seller and Nevada Gold & Casinos LV, LLC, a wholly owned subsidiary of the Company, as Buyer. The purchase price for the acquisition, exclusive of working capital, is $14,159,623 and 1,190,476 shares of common stock of the Company for a total purchase price of $16,362,004.

 

The acquisition was financed pursuant to an expansion of the Company’s existing Credit Agreement with Mutual of Omaha Bank (see Long-Term Debt footnote).

 

We incurred $0.6 million of acquisition related expenses through January 31, 2016, which are included in Corporate expense in our condensed consolidated statement of operations.

 

We have recorded Club Fortune casino’s assets acquired and liabilities assumed based on our preliminary estimates of their fair values at the acquisition date. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable and amortizable tangible and identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates that reflect risk inherent in the future cash flows. The estimated fair values of Club Fortune casino’s assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as we finalize our fair value analysis. We do not currently expect our fair value determinations to change; however, there may be differences compared to those amounts reflected in our condensed consolidated financial statements at January 31, 2016, as we finalize our fair value analysis and such changes could be material.

 

 13 

 

 

The preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed was as follows (in millions):

 

Building  $   5.8 
Equipment   3.9 
Land   2.1 
Land improvements   0.2 
Customer relationships   0.8 
Tradename   0.7 
Non-compete agreement   0.1 
Goodwill   2.8 
Working capital(1)    0.8 
   $17.2 

 

(1)         Working capital includes $1.2 million of cash acquired. It also includes $0.3 million which was refunded to us in February, as part of the final working capital calculation.

 

The goodwill is the excess purchase price over the assets purchased and is primarily attributable to the assembled workforce and the synergies expected to arise due to our acquisition of Club Fortune. None of the goodwill associated with the acquisition is deductible for income tax purposes.

 

The fair value of building and equipment was primarily determined using cost approaches in which we determined an estimated reproduction or replacement cost, as applicable. The fair value of the land was determined based on a market approach, analyzing recent sales or offerings of similar assets in the market to apply an appropriate price per acre.

 

The estimated fair value of the acquired tradename was determined using the royalty savings method, which is a risk-adjusted discounted cash flow approach.

 

The estimated fair values of customer relationships was determined using the excess earnings method, which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets. The contribution to the cash flows that are made by other assets - such as fixed assets, working capital, workforce and other intangible assets - was estimated through contributory asset capital charges. The value of the acquired customer relationship asset is the present value of the attributed post-tax cash flows, net of the post-tax return on fair value attributed to the other assets.

 

Related to the acquisition, we were required to advance estimated deposits of $0.3 million, which were subsequently collected in February. Also, as required by the Asset Purchase Agreement, we paid an estimated working capital amount to the seller. Upon calculating the actual working capital amount, the $0.3 million excess was collected by us in February. Both amounts are in other current assets on our balance sheet.

 

The following unaudited pro forma data gives effect to the Club Fortune acquisition as if it had been completed on May 1, 2014. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of what the operating results actually would have been during the periods presented had the acquisition been completed on May 1, 2014. In addition, the unaudited pro forma financial information does not purport to project future operating results. This information is preliminary in nature and subject to change based on final purchase price adjustments. The pro forma information do not reflect any anticipated synergies or the impact of non-recurring items directly related to the Club Fortune acquisition.

 

   Three months ended January 31,   Nine months ended January 31, 
   2016   2015   2016   2015 
                 
Net Revenue  $19,655,619   $19,726,314   $59,006,254   $59,887,939 
                     
Net Income  $264,907   $504,469   $1,158,005   $1,171,192 

 

 

 

 14 

 

  

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 condensed 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, 2015, filed on Form 10-K with the SEC on July 27, 2015.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based upon our condensed 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, 2015, filed on Form 10-K with the SEC on July 27, 2015.

 

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 Nevada, 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 financial results are dependent upon the number of patrons that we attract to our properties and the amounts those guests spend per visit. Additionally, our operating results may be affected by, among other things, overall economic conditions affecting the disposable income of our guests, weather conditions affecting our properties, achieving and maintaining cost efficiencies, competitive factors, gaming tax increases and other regulatory changes, the commencement of new gaming operations and construction at existing facilities. We may experience significant fluctuations in our quarterly operating results due to seasonality, variations in gaming hold percentages and other factors. Consequently, our operating results for any quarter or year are not necessarily comparable and may not be indicative of future periods’ results.

 

COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2016 AND JANUARY 31, 2015

 

Net revenues. Net revenues were $18.4 million for the three month period ended January 31, 2016, and $15.8 million for the same period ended January 31, 2015. The increase is primarily due to the inclusion of Club Fortune’s $2.4 million of net revenue. Club Fortune was acquired on December 1, 2015. Washington revenues were $14.6 million for the current quarter and $14.4 million in the prior year’s quarter in spite of the impact of selling the Golden Nugget property at the end of June 2015, which generated $0.6 million in net revenue during the prior year’s quarter. South Dakota revenues were $1.3 million this quarter compared to $1.4 million in the prior year’s quarter due to lower handle as a result of 45 fewer units in operation. Overall, consolidated casino revenue increased by $2.4 million.

 

Total operating expenses. Total operating expenses were $17.2 million for the three month period ended January 31, 2016, compared to $15.0 million in the same period ended January 31, 2015. The increase was primarily due to Club Fortune operating expenses, which were $2.3 million. Excluding Club Fortune’s operating expenses, casino expenses decreased $0.1 million when compared to the same period last year primarily due to the sale of the Golden Nugget property and lower revenue driven commissions and gaming taxes in South Dakota. Corporate expenses increased $0.4 million when compared to the same period last year primarily due to acquisition related expenses of $0.4 million. Marketing and administration, food and beverage, depreciation and amortization and other expenses remained relatively steady when compared to the same period last year on a same property basis.

 

Non-operating income (expense). Net interest expense increased $0.1 million for the three month period ended January 31, 2016, compared to the three month period ended January 31, 2015. The increase resulted primarily from the $9.9 million increase in outstanding debt since January 31, 2015, partially offset by lower loan amortization fees due to the extended term of the loan. The swap valuation expense increase by $0.2 million due to the required amendment of the swap agreement which increased the notional amount by $6.5 million as of January 31, 2016.

 

 15 

 

 

Income Taxes. For the three months ended January 31, 2016, our effective income tax rate was 36% compared to 35% in the prior year’s quarter ended January 31, 2015. The difference between the federal statutory rate of 34% and the effective tax rate for the quarter is primarily due to an increase in permanent differences.

 

COMPARISON OF THE NINE MONTHS ENDED JANUARY 31, 2016 AND JANUARY 31, 2015

 

Net revenues. Net revenues were $50.4 million for the nine month period ended January 31, 2016, and $48.1 million for the same period ended January 31, 2015. The increase is primarily due to the inclusion of Club Fortune’s $2.4 million of net revenue. Club Fortune was acquired on December 1, 2015. Washington revenues were $42.1 million this year compared to $41.4 million in the prior year period. Washington ‘same property’ revenues increased $2.3 million year to date over prior year considering our June 30, 2015 sale of the Golden Nugget property, which generated net revenue of $1.6 million in the prior July through January period. South Dakota revenues decreased $0.7 million due to lower handle as a result of 45 fewer units in operation. Overall, consolidated casino revenue increased by $2.2 million.

 

Total operating expenses. Total operating expenses were $47.5 million for the nine month period ended January 31, 2016, compared to $45.8 million in the same period ended January 31, 2015. The increase was primarily due to Club Fortune operating expenses, which were $2.3 million. Excluding Club Fortune’s operating expenses, casino expenses decreased $0.6 million when compared to the same period last year primarily due to the sale of the Golden Nugget property and lower revenue driven commissions and gaming taxes in South Dakota. Corporate expenses increased $0.8 million when compared to the same period last year primarily due to acquisition related expenses of $0.6 million and employee and director compensation. Marketing and administration, facilities, food and beverage, depreciation and amortization and other expenses remained relatively steady when compared to the same period last year on a same property basis.

 

Non-operating income (expense). Net interest expense decreased $0.1 million for the nine month period ended January 31, 2016, compared to the nine month period ended January 31, 2015. The decrease resulted primarily from the lower outstanding debt for the majority of the period until the increase in debt on December 1, 2015.

 

Income Taxes. For the nine months ended January 31, 2016, our effective income tax rate was 34% compared to 33% in the prior year’s nine months ended January 31, 2015.

 

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, acquisition 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 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 January 31 of 2016 and 2015:

 

   Adjusted EBITDA 
    Washington    South Dakota    Nevada     Corporate     Total 
                          
Three months ended January 31, 2016   $2,788,444   $(63,044)  $327,001   $(722,138)  $2,330,263 
                          
Three months ended Janauary 31, 2015   $2,087,632   $9,826   $-   $(632,015)  $1,465,443 

 

The following table shows adjusted EBITDA by segment for the nine months ended January 31 of 2016 and 2015:

 

   Adjusted EBITDA 
    Washington    South Dakota    Nevada     Corporate     Total 
                          
Nine months ended January 31, 2016   $6,516,547   $346,751   $327,001   $(1,891,974)  $5,298,325 
                          
Nine months ended January 31, 2015   $5,208,269   $580,388   $-   $(1,730,070)  $4,058,587 

 

Adjusted EBITDA reconciliation to net income:

 

   For the three months ended 
   January 31, 2016   January 31, 2015 
         
Net income   $466,351   $448,108 
Adjustments:           
Net interest expense and change in swap fair value   432,252    152,847 
Income tax expense    283,592    240,301 
Depreciation and amortization   739,699    553,910 
Acquisition expenses   368,824    - 
Stock compensation and employee stock purchases   30,177    43,794 
(Gain) loss on sale of assets   (2,271)   24,613 
Amortization of deferred rent   11,639    1,870 
Adjusted EBITDA   $2,330,263   $1,465,443 

 

   For the nine months ended 
   January 31, 2016   January 31, 2015 
         
Net income   $1,542,338   $1,218,205 
Adjustments:           
Net interest expense and change in swap fair value   623,484    461,443 
Income tax expense    812,226    593,131 
Depreciation and amortization   1,739,202    1,643,565 
Acquisition expenses   629,603    - 
Stock compensation and employee stock purchases   90,672    88,937 
(Gain) loss on sale of assets   (163,702)   41,700 
Write off of marketable securities   -    7,539 
Amortization of deferred rent   24,502    4,067 
Adjusted EBITDA   $5,298,325   $4,058,587 

 

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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 nine month periods ended January 31, 2016 and 2015:

 

   Nine Months Ended 
   January 31,   January 31, 
   2016   2015 
Net cash provided by (used in):          
Operating activities  $2,609,667   $3,576,429 
Investing activities  $(13,594,322)  $(356,049)
Financing activities  $11,265,141   $(3,504,701)

 

Operating activities. Net cash provided by operating activities during the nine months ended January 31, 2016, decreased by $1.0 million over the comparable period in the prior fiscal year. This decrease mainly resulted from changes in working capital, including the timing of payments for payroll, taxes, insurance and gaming progressives.

 

Investing activities. Net cash used in investing activities during the nine months ended January 31, 2016 increased by $13.2 million over the comparable period in the prior fiscal year primarily due to the $13.8 million cash paid toward the Club Fortune Casino acquisition, of which $0.3 million was refunded back to the Company in February as part of the working capital adjustment.

 

Financing activities. Net cash provided by financing activities during the nine month period ended January 31, 2016 increased $14.8 million over the comparable period in the prior fiscal year. The increase mainly resulted from the $15.5 million bank loan to finance the Club Fortune acquisition, partially offset by debt payments.

 

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;

- working capital requirements;

- obtaining debt financing; and

- debt service requirements.

 

The Company, through a wholly-owned subsidiary, acquired the assets of the Club Fortune Casino in Henderson, Nevada for a purchase price, before the working capital adjustment, of $14,159,623 in cash and 1,190,476 restricted shares of the Company’s common stock. The December 1, 2015 acquisition was financed through an expansion of the Company’s existing credit facility to $23.0 million. The amended facility is scheduled to mature on November 30, 2020 and 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 is determined quarterly, based on the total leverage ratio for the trailing twelve month period. In addition, the Company was required to fix the interest rate for 50% of the facility through a swap agreement. Quarterly commitment reductions of $625,000 began January 31, 2016. The Company’s debt balance as of January 31, 2016 is $18.6 million leaving $3.6 million in availability and no principal payments required until the fiscal quarter ending July 2017.

 

On January 31, 2016, excluding restricted cash of $1,525,803, we had cash and cash equivalents of $8,822,156. The restricted cash consists of funds for player supported jackpots.

 

Our condensed 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.

 

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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. As of January 31, 2016, we have a 3.1 ratio, which is sufficient to service debt and maintain operations.

 

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 January 31, 2016.

 

Changes in internal controls over financial reporting. On December 1, 2015, the Company acquired Club Fortune casino and management is currently continuing its assessment of the effectiveness of Club Fortune’s internal controls. Upon completion of our assessment, as well as implementation of certain controls and procedures, we will provide a conclusion in our annual report on Form 10-K for the fiscal year ended April 30, 2016, about whether or not our internal control over financial reporting was effective as of April 30, 2016, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework 2013. There have not been any changes in our control over financial reporting during the three months ended January 31, 2016 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, 2015, filed with the SEC on July 27, 2015.

 

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

 

None.

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

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Item 4.   Mine Safety Disclosures

 

Not applicable.

 

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

  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).
     
10.3   Amended and Restated Credit Agreement dated November 30, 2015 by and among Mutual of Omaha Bank, as the Lender, Nevada Gold & Casinos, Inc., as parent, and Restricted Subsidiaries, as borrower (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed December 3, 2015).
     
10.4   Asset Purchase Agreement between Gaming Ventures of Las Vegas, Inc., as seller, and Nevada Gold & Casinos LV, LLC, as buyer (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed May 22, 2015).
     
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.

 

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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: March 16, 2016

 

  Nevada Gold & Casinos, Inc.
   
  By: /s/ James D. Meier
  James D. Meier
 

Chief Financial Officer

(Principal Financial Officer)

 

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