XASE:UWN Nevada Gold & Casinos Inc Annual Report 10-K Filing - 4/30/2012

Effective Date 4/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

 

FORM 10-K

 

x   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
    for fiscal year ended April 30, 2012
    or
¨   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. 001-15517

 

 

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.)
   
50 Briar Hollow Lane, Suite 500W, Houston, Texas 77027
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (713) 621-2245

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
     
Common stock, $0.12 par value   New York Stock Exchange Market

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

¨ Yes x No

 

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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” and “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 Act.)

¨ Yes x No

 

As of October 31, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price per share of $2.10, as reported on the NYSE MKT Stock Exchange, was $27,157,330.

 

As of July 19, 2012, the registrant had 15,960,174 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement for the registrant’s 2012 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year end of April 30, 2012 are incorporated by reference into Part III of this report.

 

 
 

 

NEVADA GOLD & CASINOS, INC.

TABLE OF CONTENTS

 

    Page
     
PART I    
     
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 7
ITEM 1B. UNRESOLVED STAFF COMMENTS 9
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. MINE SAFETY DISCLOSURES 10
     
PART II    
     
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 10
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 22
ITEM 9A. CONTROLS AND PROCEDURES 22
ITEM 9B. OTHER INFORMATION 23
     
PART III    
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 23
ITEM 11. EXECUTIVE COMPENSATION 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 24
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 24
     
PART IV    
     
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 24

 

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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-K 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 the Company or its 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 our financial condition, results of operations, future performance and the business, including statements relating to our business strategy and our current and future development plans.

 

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, such as the competitive environment and government regulation, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this report or other public communications that we might make as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.

 

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

 

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Part I

 

Item 1. Business

 

Overview

 

Nevada Gold & Casinos, Inc., a Nevada corporation (the “Company,” “we” or “us”), was formed in 1977 and, since 1994, has been primarily a gaming company involved in financing, developing, owning and operating gaming projects.

 

Commercial Gaming Projects.

 

We own and operate 10 gaming facilities in Washington, and a slot machine route operation in South Dakota. We owned a gaming operation in Colorado that we sold subsequent to our fiscal year end, on May 25, 2012. The following properties are wholly-owned and operated by us: the Crazy Moose Casinos in Pasco and Mountlake Terrace, Washington, the Coyote Bob’s Casino in Kennewick, Washington, the Silver Dollar Casinos in SeaTac, Bothell and Renton, Washington, the Club Hollywood Casino in Shoreline, Washington, the Royal Casino in Everett, Washington, the Golden Nugget Casino in Tukwila, Washington, and the Red Dragon Casino in Mountlake Terrace, Washington (collectively, “Washington Gold”), and the South Dakota Gold slot route operation in Deadwood, South Dakota.

 

Native American Gaming Project.

 

As of May 2007, we owned a 40% interest in Buena Vista Development Company, LLC (“BVD”), which is developing a casino for the Buena Vista Rancheria of Me-Wuk Indians, a Native American tribe in Amador County, California. Effective November 25, 2008, through our wholly-owned subsidiary, Nevada Gold BVR, L.L.C., we sold our interest in BVD to B.V. Oro, LLC (“BVO”), which is owned by our former partner in this project and related parties, for $16 million in cash and a $4 million receivable from BVD due upon the developer receiving repayment of the loan advanced to the tribe, which loan is currently due. The developer has reached a verbal agreement with the tribe to extend the loan until receipt of permanent financing for the project. Should the proceeds of this loan repayment be insufficient to pay off the receivable, the remainder is due from BVO no later than two years after the opening of the opening of a gaming/entertainment facility to be built by BVD for the tribe. This receivable bears interest at the rate of prime plus 1% and is guaranteed by our former partner and related parties. In addition, we are entitled to a 5% carried interest in the membership interest sold to BVO.

 

According to the principal of BVD, the project continues to slowly progress and he is committed and financially able to continue to fund ongoing expenses until permanent funding is arranged. Also, the investment bank that has been engaged to assist BVD to raise the project funding, with whom we have had prior experience, has indicated to us in recent conversations that they believe project funding will be attained. However, given the prevailing very challenging capital market conditions and continued uncertainties as to the economy, and based upon our “Level 3” analysis, we have recorded a $4.6 million valuation allowance for the total principal and interest due effective as of April 30, 2012.

 

Management Agreements and Real Estate.

 

We continue to pursue outside management agreements.

 

We have interest in approximately 268 acres of undeveloped land in Colorado which is currently held for sale.

 

We report our operations in three segments: gaming projects, non-core assets and assets held for sale. For a summary of financial information concerning these three segments, please refer to the information provided in Note 13 to our Consolidated Financial Statements.

 

Objective and Strategies

 

Our primary business objective is to increase long-term returns to shareholders through appreciation in the value of our common shares. To achieve this objective, we intend to grow our assets and our earnings by following three business strategies:

 

-enhancing the return from, and the value of, the gaming properties in which we own interest;
-acquiring or developing additional gaming properties; and
-assisting in finding financing, developing and/or managing of, or providing consulting services to gaming projects.

 

Current Commercial Casino Projects

 

Washington Gold – Washington State

 

On May 12, 2009, through our wholly-owned subsidiary, NG Washington, LLC, we completed an acquisition of three mini-casinos in the state of Washington for $15.75 million. The mini-casinos and related real estate were owned by Crazy Moose Casino, Inc., Crazy Moose Casino II, Inc., Coyote Bob’s, Inc., and Gullwing III, LLC (collectively, the “Sellers”) and the transaction was funded by existing cash as well as a $4.0 million note issued to the Sellers.

 

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The three mini-casinos are the Crazy Moose Casino in Pasco, the Coyote Bob's Casino in Kennewick, and the Crazy Moose Casino in Mountlake Terrace (collectively, “Washington I”). Combined, the facilities have a total of 42 table games including Blackjack, Pai Gow poker, Baccarat, Player Banked Poker, Spanish 21, Blackjack-Double Action, Ultimate Hold’em, and Three and Four Card Poker. New games are frequently introduced to keep the customers interested and active. Additional banked table games are permitted along with poker and pull tabs. Each mini-casino includes a full service restaurant with bar. The friendly atmosphere is enhanced as good customers are treated to "comps" in the form of free non-alcoholic drinks, free meals, or other benefits. The three mini-casinos operate with approximately 400 employees and have a total of approximately 306 parking spaces.

 

As of January 1, 2009, a new law in Washington State increased the maximum bet for each facility from $200 to $300 and allowed mini-casinos to be open 24 rather than 20 hours per day, provided that they close for at least four continuous hours two times per week.

 

Two of the mini-casinos are located in the Tri-Cities area while one is located in the Seattle area. We believe that the Crazy Moose Casino in Mountlake Terrace attracts customers from the Seattle area whereas the Crazy Moose Casino in Pasco and Coyote Bob’s Casino, located in the southeast region of Washington State, attract customers from Walla Walla, southeastern Washington State and northeastern Oregon.

 

On July 23, 2010, through our wholly-owned subsidiary, NG Washington II, LLC, we acquired six additional mini-casinos in the state of Washington and their related administrative center, for $11.07 million, which was comprised of $6.0 million in cash and $5.07 million financed by the prior owner’s senior debt holder. The mini-casinos were acquired through bankruptcy proceedings. See Note 7 of our consolidated financial statements.

 

The six mini-casinos are the Silver Dollar Casinos in SeaTac, Renton, and Bothell, the Golden Nugget Casino in Tukwila, the Club Hollywood Casino in Shoreline, and the Royal Casino in Everett (collectively, “Washington II”). All of the mini-casinos are located in western Washington State. Combined, the six facilities have a total of approximately 90 table games including Blackjack, Spanish 21, Player Banked Poker, and other popular banked table games. The six mini-casinos operate with approximately 900 employees, all are located within 25 miles of Seattle and have a total of approximately 1,065 parking spaces. We believe that the mini-casinos attract customers from the Seattle area and western Washington State.

 

On July 18, 2011, through our wholly-owned subsidiary, NG Washington III, LLC, we completed the acquisition of the Red Dragon mini-casino in Mountlake Terrace, Washington (“Washington III”) for $1.25 million. As a result, we now own the only two mini-casinos currently operating in Mountlake Terrace. The transaction was financed by $400,000 in cash, $500,000 in our common stock and $350,000 in two promissory notes payable to the seller, 3 Point Inc. (“3 Point”). See Note 7 of our consolidated financial statements.

 

The Red Dragon mini-casino, located in western Washington State, has a total of 15 table games including Player Banked Poker, Baccarat, and other popular banked table games. The mini-casino operates with approximately 113 employees, is located within 14 miles of downtown Seattle and has a total of approximately 122 parking spaces. We believe that the mini-casino attracts customers from the Seattle area and western Washington State. With this acquisition, we have become the largest owner of mini-casinos in the state of Washington with ten such facilities, which represent approximately 17% of the state's active mini-casinos.

 

South Dakota Gold – Deadwood, South Dakota

 

On January 27, 2012, through our wholly-owned subsidiary, NG South Dakota, LLC, we completed the acquisition of all of the shares of A.G. Trucano, Son & Grandsons, Inc. (“South Dakota Gold”) for $5.1 million. The transaction was financed by $3.2 million in cash, $25,000 in our common stock, and $1.9 million in three promissory notes payable to the sellers, Michael J. Trucano and Patricia Burns.

 

South Dakota Gold is a slot machine route operator that has been in business since the legalization of gaming in South Dakota in 1989. It currently operates over 900 slots at approximately 20 locations in Deadwood, South Dakota, which represent about 24% of the total number of slot machines in that market. Deadwood is a town of 1,300 residents located in the Black Hills, South Dakota, in the southwest corner of the state. The town attracts over a million visitors each year and is a 1-hour drive from Mount Rushmore and 40-minute drive from Rapid City. Initiated in 1989, Deadwood was only the third jurisdiction in the United States to host legalized gambling.

 

Colorado Grande CasinoCripple Creek, Colorado

 

The Colorado Grande Casino is located at a primary intersection, near the center of the Cripple Creek market. The property consists of a casino with approximately 191 slot machines, four table games, two restaurants with bars, seven hotel rooms, and approximately 44 parking spaces.

 

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On May 25, 2012, subsequent to our fiscal year end, we sold substantially all of the assets, including any rights in the Colorado Grande name and gaming-related liabilities, of the Colorado Grande Casino to G Investments, LLC (“GI”). We elected to sell the Colorado Grande Casino as a result of receiving an offer at an attractive earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple from GI whose principals own a property in close proximity to the Colorado Grande Casino. As a result of the declining Cripple Creek, Colorado gaming market, this enables the buyer to create synergies not available to us. See Note 23 of our consolidated financial statements. Under the terms of the agreement, the buyer agreed to pay us $3.1 million, of which $800,000 was paid in cash and $2.3 million will be paid through a five year, 6% interest rate promissory note (the “GI Note”). On May 29, 2012, we filed a Form 8-K which provides details regarding the transaction.

 

Native American Casino Projects

 

Buena Vista Rancheria of Me-Wuk Indians; Ione, Amador County, California

 

On May 4, 2005, through our wholly-owned subsidiary, Nevada Gold BVR, L.L.C., we acquired a 20% interest in BVD in exchange for an approximately $14.8 million loan and an equity investment of approximately $200,000. BVD is developing a casino for the Buena Vista Rancheria of Me-Wuk Indians, a Native American tribe in Amador County, California. Our initial 20% ownership interest in BVD increased by five percentage points at the end of every six-month period the loan remained outstanding, up to a maximum of an additional 20%, for a total of 40%. As of May 2007, we owned a 40% interest in BVD.

 

Effective November 25, 2008, we sold our 40% interest in BVD to BVO, which is owned by our former partner in this project and related parties, for $16 million in cash and a $4 million receivable from BVD due upon the developer receiving repayment of the loan advanced to the tribe, which loan is currently due. The developer has reached a verbal agreement with the tribe to extend the loan until receipt of permanent financing for the project. Should the proceeds of this loan repayment be insufficient to pay off the receivable, the remainder is due from BVO no later than two years after the opening of the opening of a gaming/entertainment facility to be built by BVD for the tribe. This receivable bears interest at the rate of prime plus 1% and is guaranteed by our former partner and related parties. In addition, we are entitled to a 5% carried interest in the membership interest sold to BVO. See Note 5 of our Consolidated Financial Statements.

 

According to the principal of BVD, the project continues to slowly progress and he is committed and financially able to continue to fund ongoing expenses until permanent funding is arranged. Also, the investment bank that has been engaged to assist BVD to raise the project funding, with whom we have had prior experience, has indicated to us in recent conversations that they believe project funding will be attained. However, given the prevailing very challenging capital market conditions and continued uncertainties as to the economy, and based upon our “Level 3” analysis, we have recorded a $4.6 million valuation allowance for the total principal and interest due effective as of April 30, 2012.

 

Other Casino Projects

 

Speedway

 

Speedway is a to-be-built hotel and casino on a parcel adjacent to the Las Vegas Motor Speedway in North Las Vegas, Nevada. It is anticipated that, once completed, this project will include a hotel with 200 rooms and a casino with up to 500 gaming positions. Additional amenities will include restaurants, entertainment facilities, and meeting space. The owner of the parcel, CML-NV Speedway, LLC, an affiliate of Rialto Capital Advisors, LLC (“Rialto”), foreclosed on the prior developer in August of 2011. On April 24, 2012, we signed a non-binding Memorandum of Understanding with Rialto, pursuant to which we will be involved as the developer, manager, and minority equity holder.

 

The project remains subject to numerous conditions, including securing financing for the development.

 

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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, Crazy Moose Casino in Pasco, Crazy Moose Casino in Mountlake Terrace, Coyote Bob’s Casino in Kennewick, Silver Dollar Casino in SeaTac, Silver Dollar Casino in Renton, Silver Dollar Casino in Bothell, Club Hollywood Casino in Shoreline, Royal Casino in Everett, Golden Nugget Casino in Tukwila, and Red Dragon Casino in Mountlake Terrace, 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% percent 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.

 

Colorado

 

Upon the sale of the Colorado Grande Casino to G Investments, LLC, which took place 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.

 

The ownership and operation of gaming facilities in Colorado are subject to extensive state and local regulations. No gaming may be conducted in Colorado unless licenses are obtained from the Colorado Limited Gaming Control Commission (the “CO Gaming Commission”). In addition, the State of Colorado created the Division of Gaming (the “CDG”) within its Department of Revenue to license, implement, regulate, and supervise the conduct of gaming. The Director of the CDG (“CDG Director”), under the supervision of the Gaming Commission, has been granted broad powers to ensure compliance with the laws and regulations. The Gaming Commission, CDG and CDG Director that have responsibility for regulation of gaming are collectively referred to as the “Colorado Gaming Authorities.”

 

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The laws, regulations, and supervisory procedures of the Colorado Gaming Authorities seek to maintain public confidence and trust that licensed limited gaming is conducted honestly and competitively, that the rights of the creditors of licensees are protected, and that gaming is free from criminal and corruptive elements. The Colorado Gaming Authorities’ stated policy is that public confidence and trust can be maintained only by strict regulation of all persons, locations, practices, associations, and activities related to the operation of the licensed gaming establishments and the manufacturing and distribution of gaming devices and equipment.

 

To operate our Colorado Grande Casino we were required to maintain a retail gaming license, which must be renewed every two years. The CO Gaming Commission has broad discretion to revoke, suspend, condition, limit, or restrict the licensee at any time. Under Colorado gaming regulations, no person or entity can have an ownership interest in more than three retail licenses, and our business opportunities in this state will be limited accordingly. The failure or inability of the Colorado Grande Casino, or the failure or inability of others associated with the Colorado Grande Casino, to maintain necessary gaming licenses or approvals would have a material adverse effect on our operations.

 

The Colorado Grande Casino must meet specified architectural requirements, fire safety standards, as well as standards for access for disabled persons. It also must not exceed specified gaming square footage limits as compared to a total square footage of each floor and the full building. They are permitted to operate slot machines and various types of table games, such as Blackjack, Poker, Craps and Roulette. Casino patrons must be 21 or older to gamble in the casino. Effective January 2, 2009, casinos are permitted to operate 24 hours per day and the maximum bet limit was increased from $5 to $100. No Colorado casino may provide credit to its gaming patrons.

 

The Colorado Constitution permits a gaming tax of up to 20% on adjusted gross gaming proceeds, and authorizes the CO Gaming Commission to change the rate annually. As of January 2, 2009, any increase in the gaming tax rate requires statewide voter approval. The most current gaming tax rate is 0.25% on adjusted gross gaming proceeds of up to and including $2 million, 2% over $2 million up to and including $5 million, 9% over $5 million up to and including $8 million, 11% over $8 million up to and including $10 million, 16% over $10 million up to and including $13 million and 20% on adjusted gross proceeds in excess of $13 million.

 

Colorado gaming law requires that every officer and director, as well as any stockholder holding either a 5% or greater interest or controlling interest of a publicly traded corporation, or owners of an applicant or licensee, is a person of good moral character and must submit to a full background investigation conducted by the CO Gaming Commission. The CO Gaming Commission may require any person having an interest in a licensee to undergo a full background investigation and to pay the cost of investigation in the same manner as an applicant. Persons found unsuitable by the CO Gaming Commission may be required to immediately terminate any interest in, association or agreement with, or relationship to, a licensee. A finding of unsuitability with respect to any officer, director, employee, associate, lender or beneficial owner of a licensee or applicant may also jeopardize an already issued license or applicant’s license application. Licenses may be conditioned upon termination of any relationship with unsuitable persons.

 

We may not issue any voting securities except in accordance with the provisions of the Colorado Limited Gaming Act of 1991, as amended (the “Act”) and the regulations promulgated thereunder. The issuance of any voting securities in violation will be void and the voting securities will be deemed not to be issued and outstanding. No voting securities may be transferred, except in accordance with the provisions of the Act and the regulations promulgated thereunder. Any transfer in violation of these provisions will be void. If the CO Gaming Commission at any time determines that a holder of our voting securities is unsuitable to hold the securities, then we may, within sixty (60) days after the finding of unsuitability, purchase the voting securities of the unsuitable person at the lesser of (a) the cash equivalent of such person’s investment, or (b) the current market price as of the date of the finding of unsuitability, unless such voting securities are transferred to a suitable person within sixty (60) days after the finding of unsuitability. Until our voting securities are owned by persons found by the CO Gaming Commission to be suitable to own them, (a) we are not permitted to pay any dividends or interest with regard to such voting securities, (b) the holder of such voting securities will not be entitled to vote for any purposes nor be included in the voting securities entitled to vote, and (c) we may not pay any remuneration in any form to the holder of such voting securities, except in exchange for such voting securities.

 

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.

 

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.

 

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

 

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

 

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

 

Due to the fact that 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.

 

General Gaming Regulations in Other Jurisdictions 

 

If we become involved in gaming operations in any other jurisdictions, such gaming operations will subject us and certain of our officers, directors, key employees, stockholders and other affiliates to strict legal and regulatory requirements, including mandatory licensing and approval requirements, suitability requirements, and ongoing regulatory oversight with respect to such gaming operations. There can be no assurance that we will obtain all of the necessary licenses, approvals and findings of suitability or that our officers, directors, key employees, other affiliates and certain other stockholders will satisfy the suitability requirements in one or more jurisdictions, or that such licenses, approvals and findings of suitability, if obtained, will not be revoked, limited, suspended or not renewed in the future.

 

Failure by us to obtain, or the loss or suspension of, any necessary licenses, approval or findings of suitability would prevent us from conducting gaming operations in such jurisdiction and possibly in other jurisdictions.

 

Other Assets

 

Gold Mountain Development. Through our wholly-owned subsidiary, Gold Mountain Development, LLC, we own approximately 268 acres of undeveloped land in the vicinity of Black Hawk, Colorado. In November of 2004, the Central City Business Improvement District completed the construction of a new 8.4-mile four-lane road connecting Interstate 70 to Central City, Colorado. Our evaluation of the carrying value of our long-lived assets for sale led us to conclude that there was an impairment of this asset, and, accordingly, we recorded a pre-tax non-cash charge of $2.3 million to our operating results for the period ended April 30, 2012. The $2.3 million expense is in response to the receipt of an appraisal of the land, which used a market approach and other external data related to mineral rights, which, in the aggregate, estimate the value of the land at $1.1 million due to the downturn in vacant Colorado land held for development. This acreage is currently held for sale.

 

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Nevada Gold Speedway, LLC. Through our wholly-owned subsidiary, Nevada Gold Speedway, LLC, we have signed a non-binding Memorandum of Understanding with Rialto to provide technical services for the development and management of a hotel and casino adjacent to the Las Vegas Motor Speedway in North Las Vegas, Nevada. It is anticipated that the project will be owned by various legal entities of which we may hold a minority interest. We will assist in the development and manage the operation of the property.  The development is expected to be completed in three phases. The first phase will include a hotel with 200 rooms, restaurants and meeting rooms, and a casino with up to 500 gaming positions. The project remains subject to numerous conditions, including securing financing for the development.

 

Employees

 

As of April 30, 2012, we employed approximately 1,458 people.

 

Available Information

 

We make available on our website (www.nevadagold.com) under “Investor Relations - SEC Filings,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission (the “SEC”). These reports are also available at the SEC’s website (www.sec.gov).

 

Item 1A. Risk Factors

 

The following is a description of what we consider our key challenges and risks:

 

Financing future acquisitions may be difficult.

 

Our principal challenge is the necessity to obtain financing in order to expand gaming operations, generate cash flow, and service debt obligations. There can be no assurance that such financing will be obtained.

 

If our key personnel leave us, our business could be adversely affected.

 

Our success is largely dependent upon the efforts and skills of our key executive officers. The loss of the services of any key executive officer could have a material adverse effect on us. There can be no assurance that we would be able to attract and hire suitable replacements in the event of any such loss of services. We currently have employment agreements with our Chief Executive Officer, our Executive Vice President/Chief Financial Officer, and our Vice President/Chief Regulatory & Compliance Officer.

 

Indebtedness could adversely affect our financial health.

 

As of April 30, 2012, we had $16.6 million of indebtedness outstanding. On October 7, 2011, we borrowed $11.0 million from Wells Fargo Gaming Capital Advisors, LLC (“Wells Fargo Loan”). The proceeds were used to repay $4.0 million of debt due May 12, 2012, $5.0 million of debt due July 23, 2012, and $2.0 million of debt originally due June 30, 2013 of which the balance has been extended to June 30, 2015. As of April 30, 2012, the principal balance of the Wells Fargo Loan is $10.5 million. As a result of the South Dakota Gold and Washington III acquisitions, we also added an additional $2.1 million of debt.

 

As a result of closing on the Wells Fargo Loan, we incurred $819,455 of deferred loan issue costs which are amortizable over the life of the loan. As a result of a $2,000,000 repayment and renegotiating terms on our $6,000,000 note payable, we recorded a loss on extinguishment of debt of $154,000 and we added approximately $91,000 of deferred loan issue costs amortized over the remaining life of the note.

 

The Wells Fargo Loan has a limited number of financial covenants of which we are in compliance with as of April 30, 2012 and the filing date of this document. We are also not permitted to incur additional indebtedness without this lender’s prior approval.

 

In May of 2012, upon closing the sale of the Colorado Grande Casino, we repaid $800,000 of the $4 million debt due on June 30, 2015. In June of 2012, we added $1.7 million of short-term debt to pay the $2,000 per slot machine registration fee for our South Dakota Gold operation. Since the South Dakota Commission on Gaming requires the entire fee to be paid in advance, the former owner of the South Dakota Gold has historically financed this obligation with a short-term loan. The $1.7 million loan represents a continuation of that practice. Please see Note 24 of our consolidated financial statements.

 

As we increase our debt, our indebtedness could have important consequences and significant effects on our business and future operations. For example, it could:

 

·increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;

 

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·limit our ability to fund future working capital, capital expenditures and other general operating requirements;
·place us at a competitive disadvantage compared to our competitors that have less debt or greater resources; and
·limit our ability to borrow additional funds.

 

The occurrence of any one of these events or conditions could have a material adverse effect on our business, financial condition, results of operations, prospects, ability to service or otherwise satisfy our obligations.

 

We will require cash to service our indebtedness and fund our gaming operations. Our ability to generate cash depends on many factors beyond our control.

 

Our success in funding our gaming operations will depend on our ability to generate cash flow from our gaming operations and borrow or refinance $10.5 million by October 7, 2014, $4.0 million by June 30, 2015, and $1.8 million by January 27, 2017. Our ability to generate sufficient cash flow to satisfy our debt obligations will depend on our future operating performance that is subject to many economic, competitive, regulatory and business factors that are beyond our control. If we are unable to generate sufficient cash flow to service our debt obligations, we will need to refinance or restructure our debt, sell assets, reduce or delay capital investments or seek to raise additional capital. These measures may not be available to us or, if available, they may not be sufficient to enable us to satisfy our obligations and may restrict our ability to pay operating expenses. If our cash flow is insufficient and we are unable to implement one or more of these alternatives, we may not be able to service our debt obligations or fund our gaming operations.

 

We face significant competition from other gaming operations that could have a material adverse effect on our future operations.

 

There is intense competition among companies in the gaming industry, many of which have significantly greater resources than we do. We compete with numerous casinos of varying quality and size in market areas where our properties are located. The gaming business is characterized by competitors that vary considerably by their size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic diversity. In most markets, we compete directly with other casino facilities in the immediate and surrounding market areas. If our competitors operate more successfully, if competitors’ properties are enhanced or expanded, or if additional casinos are established in and around locations in which we conduct business, we may lose market share. The expansion of casino gaming in or near any geographic area from which we attract or expect to attract a significant number of our customers could have a significant adverse effect on our business, financial condition and results of operations.

 

We are subject to extensive governmental gaming regulation that could adversely affect us. We could be prevented from pursuing future development projects due to changes in the laws, regulations and ordinances (including tribal or local laws) that apply to gaming facilities or the inability of us or our key personnel, significant shareholders or joint venture partners to obtain or retain gaming regulatory licenses.

 

The gaming industry is highly regulated and we must maintain our licenses in order to continue our operations. Each of our gaming operations is subject to extensive regulation under the laws, rules and regulations of the jurisdiction where located. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interests in the gaming operations. Certain jurisdictions empower their regulators to investigate participation by licensees in gaming outside their jurisdiction and require access to and periodic reports concerning the gaming activities. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. Regulatory authorities have broad powers with respect to the licensing of casino operations and may revoke, suspend, condition or limit our gaming or other licenses, impose substantial fines and take other actions, any one of which could have a significant adverse effect on our business, financial condition and results of operations.

 

The rapidly changing political and regulatory environment governing the gaming industry (including gaming operations which are conducted on Indian land) makes it impossible for us to accurately predict the effects that an adoption of or changes in the gaming laws, regulations and ordinances will have on us. However, the failure of us, or any of our key personnel, significant shareholders or joint venture partners, to obtain or retain required gaming regulatory licenses could prevent us from expanding into new markets, prohibit us from generating revenues in certain jurisdictions, and subject us to sanctions and fines.

 

Our business is subject to various federal, state and local laws and regulations in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our results of operations and financial condition.

 

We cannot ensure that we will be able to comply with or conduct business in accordance with applicable regulations.

 

8
 

 

We could fail to monetize recorded assets.

 

We have receivables that are expected to be collected. If we are not able to collect or monetize these assets timely, the lack of such collection may have a negative impact on our projected cash flow. Failure to monetize our recorded assets could have a material adverse effect on our business, financial condition, results of operations, prospects, ability to service or otherwise satisfy our obligations.

 

There are significant risks in the development and management of casinos that could adversely affect our financial results.

 

The development and management of casinos require the satisfaction of various conditions, many of which are beyond our control. The failure to satisfy any of such conditions may significantly delay the completion of a project or prevent a project's completion altogether.

 

The opening of any facility will be contingent upon, among other things, the receipt of all regulatory licenses, permits, approvals and authorizations, the completion of construction and the hiring and training of sufficient personnel. The scope of the approvals to construct and open a casino is extensive, and the failure to obtain such approvals could prevent or delay the completion of construction or opening of all or part of such casino.

 

No assurance can be given that development activities will begin or will be completed, or that the budget for such a project will not be exceeded, or that we will have the continuing support of the community.

 

In addition, the regulatory approvals necessary for the construction and operation of casinos are often challenged in litigation brought by government entities, citizens groups and other organizations and individuals. Such litigation can significantly delay the construction and opening of casinos.

 

Major construction projects entail significant risks, including shortages of materials or skilled labor, unforeseen engineering, environmental and/or geological problems, work stoppages, weather interference, and unanticipated cost increases. Delays or difficulties in obtaining any of the requisite licenses, permits, allocations and authorizations from regulatory authorities could increase the total cost, delay or prevent the construction or opening of any casino development. In addition, once developed, no assurances can be given that we will be able to manage the casino on a profitable basis or to attract a sufficient number of guests, gaming customers and other visitors to make the operation profitable.

 

With each project, we are subject to the risk that our investment may be lost if the project cannot obtain adequate financing to complete development and open the casino successfully. In some cases, we may be forced to provide more financing than originally planned in order to complete development thereby increasing our risk.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Washington Gold Casinos. As a result of acquiring facilities in Washington, the real property leases are as follows:

 

·Crazy Moose Casino in Mountlake Terrace has a building lease which expires on May 31, 2013 with an option to renew for two additional terms of three years and five years, respectively. The annual rent for this lease is $192,000 in the current fiscal year and $154,000 going forward. We own the buildings for the Crazy Moose Casino in Pasco and Coyote Bob Casino’s in Kennewick.
·Crazy Moose Casino in Pasco has a parking lot lease which expires on December 31 2013. The annual rent for this lease is $6,600.
·Silver Dollar Casino in SeaTac has a building lease which expires in May of 2022 with an option to renew for an additional term of 10 years. The annual rent is $238,000, with escalation of 4% annually.
·Silver Dollar Casino in Renton has a building lease which expires in April of 2019 with an option to renew for up to two additional terms of 10 years each. The annual rent is $480,000, with escalation of 8% every three years.
·Silver Dollar Casino in Bothell has a building lease which expires in April of 2017 with an option to renew for an additional term of 5 years. The annual rent is $286,000.
·Club Hollywood Casino in Shoreline has casino building and parking lot leases which expire in March of 2017 with options to renew for up to four additional five-year terms. The annual rentals are $671,350, with escalation of 3% annually.
·Golden Nugget Casino in Tukwila has a building lease which expires in November of 2014 with an option to renew for an additional term of 10 years. The annual rent is $166,000, with escalation of 3% annually.
·Royal Casino in Everett has a building lease which expires in January of 2016 with an option to renew for up to four additional five-year terms. The annual rent is $360,600, with escalation of 3% annually.
·Administrative offices lease in Renton expires in December of 2013. The annual rent is $53,000.
·Red Dragon Casino in Mountlake Terrace has a building lease which expires in October of 2016 with an option to renew for up to two additional five-year terms. The annual rent is $384,000, with escalation of 2% annually.

  

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

 

·An administrative center lease which expires in January of 2017 with an option to renew for an additional five-year term. The annual rent is $55,200.
·Two leases which expire on May 31, 2013 with annual rents of $36,000 and $18,000, respectively.

 

Colorado Grande Casino. Through our wholly-owned subsidiary, CGE Assets, Inc. (formerly, Colorado Grande Enterprises, Inc.), we leased a portion of a building in Cripple Creek, Colorado, and an adjacent parking lot, for use in connection with the Colorado Grande Casino and hotel facilities. We leased this property at an annual rent of the greater of $144,000 or 5% of Colorado Grande Casino’s adjusted gross gaming revenues, with an annual cap of $400,000. Starting from April 30, 2012, the annual rent was changed to $252,548 with an option by the landlord to revert to the original rent structure upon obtaining necessary approvals from the Colorado Gaming Commission. Although this lease was assigned to G Investments, LLC as a result of the sale of the Colorado Grande Casino, which occurred on May 25, 2012, we retained contingent liability of the tenant’s obligations under this lease through May 24, 2017.

 

Gold Mountain Development. Through our wholly-owned subsidiary, Gold Mountain Development, LLC, we own approximately 268 acres of undeveloped land in the vicinity of Black Hawk, Colorado. In November of 2004, the Central City Business Improvement District completed the construction of a new 8.4-mile four-lane road connecting Interstate 70 to Central City, Colorado. Our evaluation of the carrying value of our long-lived assets for sale led us to conclude that there was an impairment of this asset, and, accordingly, we recorded a pre-tax non-cash charge of $2.3 million to our operating results for the period ended October 31, 2011. The $2.3 million expense is in response to the receipt of an appraisal of the land, which used a market approach and other external data related to mineral rights, which, in the aggregate, estimate the value of the land at $1.1 million due to the downturn in vacant Colorado land held for development. This acreage is currently held for sale.

 

Office Lease. We currently lease approximately 5,219 square feet of office space for our corporate headquarters in Houston, Texas. The lease expires on March 31, 2013. The total annual rent for this office space is currently $88,800.

 

Las Vegas Office Lease. We currently lease approximately 180 square feet of office space in Las Vegas, Nevada. The lease is on a month-to–month basis. The total monthly rent for this office space is approximately $1,000, including utilities.

 

Item 3. Legal Proceedings

 

We are currently not involved in any material legal proceedings.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Part II

 

Item 5.Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock is traded on the NYSE MKT Stock Exchange (formerly, the NYSE Amex) under the symbol “UWN.” The following table sets forth the high and low sales prices per share of the common stock for the last two fiscal years.

 

   Fiscal Years Ended 
   April 30, 2012   April 30, 2011 
   High   Low   High   Low 
                 
First Quarter  $1.66   $1.25   $1.05   $.84 
Second Quarter   2.23    1.45    1.25    .97 
Third Quarter   2.01    1.12    1.18    1.01 
Fourth Quarter   1.73    1.30    1.75    1.02 

 

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Holders of Common Stock

 

As of July 23, 2012, we had approximately 4,344 holders of our common stock, which includes the number of record holders and participants in security position listings.

 

Dividends

 

We have not paid any dividends during the last six fiscal years and our current policy is to retain earnings to provide for our growth. Consequently, no cash dividends are expected to be paid on our common stock in the foreseeable future.

 

Equity Compensation Plan

 

The following table gives information about our shares of common stock that may be issued upon the exercise of options, warrants, and rights under all of our existing equity compensation plans as of April 30, 2012 including the 1999 Stock Option Plan, as amended, and the 2009 Equity Incentive Plan, as well as shares of our common stock that may be issued under individual compensation arrangements that were not approved by our stockholders.

 

Plan Category  Number of 
Securities
To be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
(A)
   Weighted Average
Exercise Price of
Outstanding 
Options,
Warrants and 
Rights
   Number of Securities
Remaining Available for 
Future Issuance Under 
Equity Compensation 
Plans Excluding 
Securities
Reflected in Column (A)
 
             
Equity Compensation Plans Approved by Security Holders   1,865,000   $1.57    831,000 
Equity Compensation Plans Not Approved by Security Holders      $     
Total   1,865,000   $1.57    831,000 

 

Recent Sales of Unregistered Securities

 

On January 27, 2012, pursuant to a Stock Purchase Agreement dated October 18, 2011, as amended on January 27, 2012, among Nevada Gold & Casinos, Inc., NG South Dakota, LLC, the stockholders of A.G. Trucano, Son & Grandsons, Inc. and A.G. Trucano, Son & Grandsons, Inc., we issued 13,223 shares of our common stock to Michael J. Trucano, in capacity as the seller’s representative, as a part of the total purchase price consideration of $5.1 million for the acquisition of all of the shares of A.G. Trucano, Son & Grandsons, Inc., the owner of the South Dakota Gold slot route operation in Deadwood, South Dakota. The shares, valued at $24,991, were issued in reliance of the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Act”). The stock certificate issued pursuant to the Agreement contained a restrictive legend in accordance with Rule 144 of the Act.

 

Issuer Purchases of Equity Securities

 

During the years ended April 30, 2012 and April 30, 2011, we did not repurchase any shares.

 

Item 6. Selected Financial Data

 

Not required for smaller reporting companies.

 

Item 7. 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 contained in Item 8 herein. Management is of the opinion that inflation and changing prices, including foreign exchange fluctuations, will have little, if any, effect on our consolidated financial position or results of our operations.

 

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Critical Accounting Policies and Estimates

 

Our critical accounting policies and estimates involve the use of complicated processes, assumptions, estimates and/or judgments in the preparation of our consolidated financial statements. An accounting estimate is an approximation made by management of a financial statement element, item or account in the consolidated financial statements. Accounting estimates in our historical consolidated financial statements measure the effects of past business transactions or events, or the present status of an asset or liability. The accounting estimates described below require us to make assumptions about matters that are uncertain at the time the estimate is made. Additionally, different estimates that we could have used or changes in an accounting estimate that are reasonably likely to occur could have a material impact on the presentation of our consolidated financial condition or results of operations. 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. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Our significant accounting policies are discussed in Note 2 to our Consolidated Financial Statements included in Item 8 of this report. We have discussed the development and selection of our critical accounting policies and related disclosures with the Audit Committee of the Board of Directors and have identified the following critical accounting policies for the current fiscal year.

 

Principles of Consolidation

 

We consolidate entities when we have the ability to control the operating and financial decisions and policies of that entity and record the portion we do not own as noncontrolling interest. The determination of our ability to control or exert significant influence over an entity involves the use of judgment. We apply the equity method of accounting where we can exert significant influence over, but do not control the policies and decisions of an entity. We use the cost method of accounting where we are unable to exert significant influence over the entity.

 

Capitalized Development Costs

 

We capitalize certain third party, professional, licensing, and other miscellaneous fees directly related to the procurement, evaluation and establishment of contracts for development projects. Development costs are recorded on the cost basis and are amortized over the estimated economic term of the contract. We review each project on a quarterly basis to assess whether any changes to our estimates are appropriate. If accumulated costs of a specific project exceed the net realizable value of such project or the project is abandoned, the costs are charged to earnings.

 

Goodwill, Other Intangible, and Other Long-Lived Assets

 

In connection with our acquisitions of the ten Washington mini-casinos from May 12, 2009 to July 18, 2011, and the acquisition of the South Dakota Gold slot route operation in South Dakota on January 27, 2012, we have goodwill and identifiable intangible assets of $23.9 million, net of amortization. Goodwill represents a significant portion of our total assets. We review goodwill for impairment annually or more frequently if certain impairment indicators arise under the provisions of authoritative guidance. We review goodwill at the reporting level unit, which is one level below an operating segment. We compare the carrying value of the net assets of each reporting unit to the estimated fair value of the reporting unit, based upon a multiple of estimated earnings. If the carrying value exceeds the estimated fair value of the reporting unit, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position or results of operations. All of our goodwill is attributable to reporting units within our gaming segment.  

 

We use earnings before interest, taxes, depreciation, amortization, non-cash goodwill and other long-lived asset impairment charges, litigation charges, non-cash foreign currency transaction gains and losses, and net losses/gains from asset dispositions as the measure for future earnings in our impairment test. Management estimates future adjusted EBITDA based primarily on its projections of future revenues. We utilized comparable industry average multiples of adjusted EBITDA rates based on industry standards ranging from 5.5 to 7.5 times adjusted EBITDA when we estimated fair values of our operating facilities as of April 30, 2012.   

    

Long-lived assets, including property, plant and equipment and amortizable intangible assets, also comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist under authoritative guidance. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For property 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.

 

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Allowance for Doubtful Accounts 

 

We establish provisions for losses on accounts and notes receivable if we determine that we will not collect all or part of the outstanding balance. We regularly review acollectability and establish or adjust our allowance as necessary using the specific identification method. We make advances to third parties under executed promissory notes for project costs related to the development of gaming and entertainment properties. Due diligence is conducted by our management with the assistance of legal counsel prior to entering into arrangements with third parties to provide financing in connection with their efforts to secure and develop the properties. Repayment terms are largely dependent upon the operating performance of each opportunity for which the funds have been loaned. Interest income is not accrued until it is reasonably assured that the project will be completed and that there will be sufficient profits from the facility to cover the interest to be earned under the respective note. If projected cash flows are not sufficient to recover amounts due, the note is evaluated to determine the appropriate discount to be recorded on the note for it to be considered a performing note. If the note is performing, interest is recorded using the effective interest method based on the value of the discounted note balance. See Note 5 of our Consolidated Financial Statements.

 

We review on a quarterly basis each of our notes receivable to evaluate whether the collection of such note receivable is 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 would be written down to its estimated fair value.

 

Revenue Recognition

 

We record revenues from casino operations, management fees, 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. These amounts are included in promotional allowances in the accompanying consolidated statements of operations. The estimated cost of providing such complimentary services that is included in casino expense in the accompanying consolidated statements of operations was as follows:

 

   Fiscal Year Ended 
   April 30, 2012   April 30, 2011 
Food and beverage  $4,801,738   $3,754,336 
Other   115,968    29,261 
Total cost of complimentary services  $4,917,706   $3,783,597 

 

Accrued Jackpot Liability

 

We accrue slot jackpot liability as games are played under a matching concept of coin-in. In addition, as of April 30, 2012 and April 30, 2011, we also maintained approximately $1,787,000 and $918,000, respectively, in player-supported jackpot accrued liability. Player-supported jackpot is a progressive game of chance directly related to the play or outcome of an authorized non-house-banked card game separately funded by our patrons. Any jackpots hit in these card games are paid from such reserved funds.

 

Income Taxes

 

Income taxes are accounted using an asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis. We record current income taxes based on our current taxable income, and we provide for deferred income taxes to reflect estimated future tax payments and receipts. We account for tax credits under the flow-through method, which reduces the provision for income taxes in the year the tax credits first become available. Deferred tax assets are reduced by a valuation allowance when, based on our estimates, it is more likely than not that a portion of those assets will not be realized in a future period. The estimates utilized in recognition of deferred tax assets are subject to revision, either up or down, in future periods based on new facts or circumstances.

 

To fully recognize our net deferred tax assets, we must achieve future taxable income of approximately $3.7 million. These earnings will be achieved through our operating properties and increased revenues from future acquisitions. We believe that such earnings will be sufficient to fully utilize current NOLs.

 

We have federal net operating losses of approximately $3.7 million which expire from 2029 to 2032.

 

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A summary of our deferred tax assets and liabilities is presented in the table below:

 

   April 30, 2012   April 30, 2011 
Deferred tax assets:            
Net operating loss carryforwards    $1,280,810   $681,358 
Fixed assets     61,720    (48,179)
Stock options     662,523    536,374 
Impairment of notes receivable and goodwill     3,609,313    511,308 
Other     3,129    1,707 
Total deferred tax assets     5,617,495    1,682,568 
Deferred tax liabilities:            
Amortization of intangibles     (529,583)   (272,172)
Revenue not recognized for tax reporting and other     195,633    82,797 
Total deferred tax liabilities     (333,950)   (189,375)
Net deferred tax assets before valuation allowance   5,283,545    1,493,193 
Valuation allowance     (32,309)   (32,309)
Net deferred tax assets    $5,251,236   $1,460,884 

 

Reconciliations between the statutory federal income tax expense rate of 34.0% in the fiscal years ended April 30, 2012 and April 30, 2011 and our effective income tax rate as a percentage of income before income tax benefit is as follows:

 

   Years Ended 
   April 30, 2012   April 30, 2011 
   Percent   Dollars   Percent   Dollars 
                 
Income tax benefit at statutory federal rate   (34.0)  $(3,328,964)   (34.0)  $(366,259)
State taxes   0.0    -    (0.5)   (5,670)
                     
Permanent differences:                    
                     
Filed return to financial statement provision (permanent true-up of book balance to return)   -    -    (17.3)   (186,780)
Federal refund in excess of amount recorded   0.0    -    (16.5)   (176,750)
State tax refund resulting from amendments to federal return   0.0    -    3.0    32,309 
Change in valuation allowance and other   (0.2)   (22,812)   2.9    30,734 
Effective income tax rate   (34.2)  $(3,351,776)   (62.4)  $(672,416)

 

Accrued Litigation Liability

 

We assess our exposure to loss contingencies including legal matters. If the potential loss is justified to be probable and estimative, we will provide for the exposure. If the actual loss from a contingency differs from management’s estimate, operating results could be impacted. As of April 30, 2012 and April 30, 2011, we did not record any accrued litigation liability.

 

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:

 

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

 

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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 carrying value and tested for impairment annually or more frequently, if impairment indicators arise, using projections of undiscounted future cash flows as well as third party valuations (see Note 21 of our Consolidated Financial Statements).

 

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

 

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

 

Stock-Based Compensation

 

Under Accounting Standards Codification (“ASC”) Topic 718, “Compensation - Stock Compensation,” the fair value and compensation expense of each option award is estimated as of the date of grant using a Black-Scholes option pricing formula. Expected volatility is based on historical volatility of our stock over a preceding period commensurate with the expected term of the option. The expected term of the option is an estimate of the period of time that the option is expected to be outstanding and is based on our historical experience. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we historically have not paid dividends and have no current plans to do so in the future.

  

The compensation cost related to these share-based awards is recognized over the requisite service period. The requisite service period is generally the period during which an employee is required to provide service in exchange for the award.

 

Executive Overview

 

We were formed in 1977 and, since 1994, have primarily been a gaming company involved in financing, developing, owning and operating gaming facilities. Our gaming facility operations are located in the United States of America (the “U.S.”), specifically in the states of Washington, South Dakota and, until recently, Colorado. On April 25, 2005, we acquired the Colorado Grande Casino in Cripple Creek, Colorado, which we sold on May 25, 2012. On May 12, 2009, we acquired three mini-casinos in Washington State. On July 23, 2010, we acquired six additional mini-casinos and, on July 18, 2011, we acquired one more mini-casino in Washington State. On January 27, 2012, we acquired all of the shares of A.G. Trucano, Son and Grandsons, Inc. (“South Dakota Gold”), a slot machine route operation in Deadwood, South Dakota. Our business strategy will continue to focus on gaming projects with a continued emphasis on owning and operating gaming establishments. If we are successful, both our future revenues and costs and our profitability can be expected to increase. Our net revenues were $56.0 million and $43.0 million for the fiscal years ended April 30, 2012 and April 30, 2011, respectively.

 

We hold investments in various development projects that we consolidate. Our net ownership interest and capitalized development costs in development projects are as follows (see Note 4 to the Consolidated Financial Statements):

 

   Net Ownership Interest   Capitalized Development Costs 
Development Projects:  April 30,
2012
   April 30,
2011
   April 30,
2012
   April 30,
2011
 
   (Percent)     
Nevada Gold Speedway, LLC (1)   100    100   $209,305   $163,692 
Nugget (2)   1    1    26,000    26,000 
Other (3)   100    -    20,050    - 
Total investments– development projects            $255,355   $189,692 

 

(1)Deposit and acquisition costs related to management and technical services contract for a to-be-built casino and hotel in North Las Vegas, Nevada.
(2)Costs incurred with acquisition of 1% of The Nugget Casino in Reno, Nevada to obtain a Nevada gaming license.
(3)Development costs incurred for other development projects.

 

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The following table sets forth our consolidated results of operations for the three months and fiscal years ended April 30, 2012, and April 30, 2011:

 

Consolidated Results of Operations

 

   Three Months Ended (unaudited)  Twelve Months Ended
   April 30,   April 30,   April 30,   April 30, 
   2012   2011   2012   2011 
Revenues:                    
Casino  $14,269,776   $11,064,635   $47,445,348   $35,975,783 
Food and beverage   3,060,696    2,679,220    11,409,426    8,669,112 
Other   762,920    566,686    2,456,028    1,828,966 
Gross revenues   18,093,392    14,310,541    61,310,802    46,473,861 
Less promotional allowances   (1,525,298)   (1,261,687)   (5,682,168)   (3,937,559)
Net revenues   16,568,094    13,048,854    55,628,634    42,536,302 
                     
Expenses:                    
Casino   7,803,268    5,266,398    24,391,072    18,485,867 
Food and beverage   1,084,429    1,033,653    4,202,546    3,719,073 
Marketing and administrative   4,354,931    3,622,595    16,412,562    10,136,618 
Facility   582,520    507,997    2,112,397    2,664,820 
Corporate expense   707,496    861,829    3,548,276    3,709,804 
Legal expense   48,617    52,451    113,078    315,800 
Depreciation and amortization   628,144    442,695    2,004,311    1,597,498 
Acquisition costs   82,966    -    173,852    805,149 
Deferred rent escalation   337,849    -    337,849    - 
Valuation allowance of assets   4,574,904    -    6,848,870    - 
Excise taxes   320,399    317,848    1,205,238    967,565 
(Recovery) write-off of project development costs   (10,249)   54,406    (10,249)   54,406 
Valuation allowance of project development costs   1,700,000    -    1,700,000    - 
Other   213,659    97,337    594,764    303,467 
Total operating expenses   22,428,933    12,257,209    63,634,566    42,760,067 
Operating income (loss) from continuing operations   (5,860,839)   791,645    (8,005,932)   (223,765)
Non-operating income (expenses):                    
Gain (loss) on settlement - sale of assets   (32,092)   -    (54,746)   392,243 
Interest income   42,524    41,457    171,075    173,436 
Interest expense   (400,634)   (367,438)   (1,552,948)   (1,374,146)
Amortization of loan issue costs   (74,765)   (11,250)   (194,249)   (45,000)
Loss on extinguishment of debt   -    -    (154,270)   - 
Earnings (loss) before income tax   (6,325,806)   454,414    (9,791,070)   (1,077,232)
Income tax benefit (expense)   1,994,383    (184,660)   3,351,776    672,416 
Net income (loss) from continuing operations   (4,331,423)   269,754    (6,439,294)   (404,816)
Net income (loss) from operations held for sale, net of taxes   (996,649)   11,367    (1,489,290)   (82,210)
Net income (loss)  $(5,328,072)  $281,121   $(7,928,584)  $(487,026)
Per share information:                    
Net income (loss) per common share - basic for continuing operations  $(0.27)  $0.02   $(0.45)  $(0.03)
                     
Net income (loss) per common share - diluted for continuing operations  $(0.27)  $0.02   $(0.45)  $(0.03)
                     
Net loss per common share - basic and diluted for discontinued operations  $(0.06)  $0.00   $(0.10)  $(0.01)
                     
Basic weighted average number of shares outstanding   15,893,950    12,773,263    14,381,896    12,766,382 
                     
Diluted weighted average number of shares outstanding   15,893,950    13,343,263    14,381,896    12,766,382 

  

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Comparison of the Three Months Ended April 30, 2012 and April 30, 2011

 

Net revenues. Net revenues for the three months ended April 30, 2012 increased 26.9%, or $3.5 million, to $16.5 million compared to the same period ended April 30, 2011. Casino revenues increased $3.2 million due to the addition of Washington III and the South Dakota Gold slot route. Our casino revenues increased though our hold percentage decreased almost 1%, which negatively impacted our year over year revenues by $0.2 million, our drop increased $0.7 million, or 1.5%, to offset the decrease in our hold. Food and beverage revenues increased $0.4 million due to the addition of the restaurant at Washington III. Other revenues increased $0.2 million mainly due to additional commission revenue for ATMs, check cashing, and vending as well as retail, and Pull Tab from Washington III of $0.1 million, plus other revenue from South Dakota Gold of $0.1 million during our three months of operations. These increases were offset by a $0.3 million increase in promotional allowances due to the additional casino operations.

 

Total operating expenses. Total operating expenses for the three months ended April 30, 2012 increased 82.9%, or $10.2 million, to $22.4 million compared to the same period ended April 30, 2011. Operating expenses specifically related to the casinos increased $2.5 million and marketing and administrative increased $0.7 million in tandem with the increase in revenue, as well as a $0.1 million increase in excise taxes and other. We also saw an increase in depreciation and amortization expense of $0.2 million directly related to the annualized amortization of intangible assets from the Washington III and South Dakota Gold purchases. Corporate and legal expenses decreased by $0.2 million, offset by having acquisition expenses of $0.1 million related to the South Dakota Gold acquisition in the fourth quarter of the fiscal year ended April 30, 2012. We also recorded several non-cash transactions including an $0.3 million recording of deferred rent escalation, and, based upon a Level 3 analysis, we have conservatively recorded a $1.7 million valuation allowance related to the Big City Capital note receivable and a $4.6 million valuation allowance on the BVD/BVO receivable and its accrued interest. These valuation allowances do not relate to our on-going operations in Washington, South Dakota, or the Corporate offices.

 

Interest income, interest expense, and amortization of loan issue costs. Interest expense for the fiscal year ended April 30, 2012 increased 9.0%, or $33,000, to $0.4 million compared to the fiscal year ended April 30, 2011. The increase is primarily the result of a higher debt balance caused by the acquisition of the South Dakota Gold slot route operation, as well a one-half percent interest rate increase on the $4 million note which resulted from refinancing our long term debt. Interest income for the fiscal year ended April 30, 2012 remained consistent with the fiscal year ended April 30, 2011. Amortization of loan issue costs were $75,000 and $11,000 for the fiscal years ended April 30, 2012 and April 30, 2011, respectively. The increased amortization is due to refinancing of our long term debt.

 

Net income (loss) from continuing operations. Net loss from continuing operations was $6.4 million compared to $0.3 million income for the three month period ended April 30, 2012 and April 30, 2011, respectively. Income from operations was consistent with the prior year, with the difference in our pre-tax income being directly related to the pre-tax $1.7 million valuation allowance on the Big City Capital note, the $4.6 million valuation allowance of the BVD/BVO receivable and accrued interest, and the $0.3 million recording of deferred rent escalation, and the $0.1 million increase in net interest expense.

 

Operations held for sale. Net revenues for assets of operations held for sale were $1.5 million and $1.4 million for the three months periods ended April 30, 2012 and April 30, 2011, respectively. Total expenses were $2.1 million and $1.4 million for the three months periods ended April 30, 2012 and April 30, 2011, respectively. Pre-tax net loss was $743,000 and income of $17,000 at April 30, 2012 and April 30, 2011, respectively. The increased loss in the fiscal year ended April 30, 2012 primarily relates to a $0.6 million impairment of tax assets related to the sale of the Colorado Grande Casino.

 

Comparison of Fiscal Years Ended April 30, 2012 and April 30, 2011

 

Net revenues. Net revenues for the fiscal year ended April 30, 2012 increased 30.8%, or $13.0 million, to $55.6 million compared to the fiscal year ended April 30, 2011. Casino revenues increased $11.5 million, or 31.9% due to (a) the addition of Washington III and the South Dakota Gold slot route operation, and (b) increased drop percentages at the Washington II mini-casinos as well as having those properties for a full twelve months in the fiscal year ended April 30, 2012 compared to only nine months in the fiscal year ended April 30, 2011. Food and beverage revenues increased $2.7 million, or 31.6%, due to the addition of Washington III and the bar revenue from South Dakota Gold. Other revenues increased $0.6 million, or 34.2%, mainly due to the additional commission revenue for ATMs, check cashing, and vending as well as retail, Pull Tabs, and other revenue at Washington III and South Dakota Gold, all of which was offset by a $1.7 million increase in promotional allowances due to the additional casino operations in line with the increases in revenue.

 

Total operating expenses. Total operating expenses for the fiscal year ended April 30, 2012 increased 38.13%, or $16.3 million, to $59.0 million compared to the fiscal year ended April 30, 2011. Operating expenses specifically related to the casinos increased $5.9 million, or 31.9%, food and beverage expenses increased $0.4 million, or 13%, marketing and administrative increased $6.3 million, or 61.9%, in tandem with the increase in revenue as well as reclassifications of rent from facilities to administrative at our Washington properties. We also saw an increase in depreciation and amortization expense of $0.4 million directly related to a $0.1 million annualized amortization of intangible assets and additional depreciation on the fixed assets from Washington III, plus $0.2 million related to the South Dakota Gold acquisition. We also booked a $2.3 million non-cash impairment related to the undeveloped land in Colorado. We also recorded several non-cash transactions including a $0.3 million recording of deferred rent escalation, and, based upon a “Level 3” analysis, we have conservatively recorded a $1.7 million valuation allowance related to the Big City Capital note receivable and a $4.6 million valuation allowance on the BVD/BVO receivable and its accrued interest. These valuation allowances do not relate to our ongoing operations in Washington, South Dakota, or the corporate offices, all of which was offset by $0.4 million decrease in corporate and legal expenses and $0.6 million decrease in acquisition costs compared to the fiscal year ended April 30, 2011.

 

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Interest income, interest expense, and amortization of loan issue costs. Interest expense for the fiscal year ended April 30, 2012 increased 13.0%, or $0.2 million, to $1.6 million compared to the fiscal year ended April 30, 2011. The increase is primarily the result of a higher debt balance caused by the acquisition of Washington III and the South Dakota Gold slot route operation in addition to a one-half percent interest rate increase on the $4.0 million note which resulted from refinancing our long-term debt. Interest income for the fiscal year ended April 30, 2012 remained consistent with the same period ended April 30, 2011. In the fiscal year ended April 30, 2012, we recorded a loss on extinguishment of debt of $154,000 related to the refinancing of our long-term debt. Amortization of loan issue costs were $195,000 and $45,000 for the fiscal years ended April 30, 2012 and April 30, 2011, respectively. The increase in amortization was also due to the refinancing of our long-term debt.

 

Other non-operating income and expenses. During the fiscal year ended April 30, 2011, we recorded a $0.4 million pre-tax gain related to additional proceeds received from the sale of our equity interest in the Isle of Capri-Black Hawk, LLC, which took place in January of 2008. We had no significant gains or losses in the fiscal year ended April 30, 2012.

 

Income taxes. The abnormal effective rate for the fiscal year ended April 30, 2011 resulted from the receipt of a federal tax refund of $186,780 in excess of the estimated amount, recognition of a $176,750 receivable for an estimated state refund offset by recognition of a valuation allowance on deferred tax assets of $32,300. The net effect on earnings per share from these tax benefits was $.02. The federal refund related to the carryback of our loss in the fiscal year ended April 30, 2010 to our 2008 federal income tax return which was impacted by the federal 1% surtax paid on taxable income in excess of $10 million during the carryback period. The state refund is due to the impact on state tax returns of adjustments made to our federal tax returns for tax years 2007 and 2008, which is the result of an examination by the Internal Revenue Service.

 

Net loss from continuing operations. The fiscal year ended April 30, 2012 reflects a net loss of $6.4 million compared to a net loss of $0.4 million for the fiscal year ended April 30, 2011. The decrease is primarily related to the $2.3 million impairment of the undeveloped land in Colorado, the $1.7 million valuation allowance on the Big City Capital note receivable, a $4.6 million valuation allowance on the BVD/BVO receivable and its accrued interest, and the $0.3 million of deferred rent escalation, all non-cash items. The effective tax rate for the fiscal years ended April 30, 2012 and 2011 was a benefit of (40.5%) and (62.4%), respectively.

 

Operations held for sale. Net revenues for assets of operations held for sale were $5.2 million and $5.5 million for the fiscal periods ended April 30, 2012 and April 30, 2011, respectively. Total expenses were $6.7 million and $5.6 million for the fiscal periods ended April 30, 2012 and April 30, 2011, respectively. Pre-tax net loss was $1.2 million and $0.1 at April 30, 2012 and April 30, 2011, respectively. The increased loss in the fiscal year ended April 30, 2012 partly relates to a $0.6 million impairment of tax assets related to the sale of the Colorado Grande Casino.

 

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, litigation charges, non-cash foreign currency transaction gains and losses and net losses/gains from asset dispositions. Adjusted EBITDA also excludes write-offs of project development costs, non-cash stock option expenses, and deferred rent escalation. 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, the U.S. generally accepted accounting procedures (“GAAP”) results to compare to the performance of other companies who also publicize this information. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as 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 operating unit for the three months ended April 30, 2012 and April 30, 2011:

 

   For the three months ended April 30, 2012 - unaudited 
   NG Washington I   NG Washington II   NG Washington
III
   South Dakota
Gold
   Corporate -
Other
   Total
Continuing
Operations
 
Revenues:                              
Gross revenues  $5,074,338   $9,362,432   $1,306,962   $2,349,660   $-   $18,093,392 
Less promotional allowances   (380,018)   (1,014,731)   (125,264)   (5,285)   -    (1,525,298)
Net revenues   4,694,320    8,347,701    1,181,698    2,344,375    -    16,568,094 
                               
Expenses:                              
Total operating expenses (excludes depreciation, amortization, write downs, acquisition costs, and impairments)   3,663,617    7,397,521    1,127,546    2,170,522    756,113    15,115,319 
                               
Adjusted EBITDA  $1,030,703   $950,180   $54,152   $173,853   $(756,113)  $1,452,775 

 

   For the three months ended April 30, 2011 - unaudited 
   NG Washington I   NG Washington II   NG Washington
III
   South Dakota
Gold
   Corporate -
Other
   Total
Continuing
Operations
 
Revenues:                              
Gross revenues  $5,294,204   $9,016,337   $-   $-   $-   $14,310,541 
Less promotional allowances   (383,081)   (878,606)   -    -    -    (1,261,687)
Net revenues   4,911,123    8,137,731    -    -    -    13,048,854 
Expenses:                              
Total operating expenses (excludes depreciation, amortization, write downs, acquisition costs, and impairments)   3,768,126    7,077,702    -    -    914,280    11,760,108 
                               
Adjusted EBITDA  $1,142,997   $1,060,029   $-   $-   $(914,280)  $1,288,746 

 

The following table shows adjusted EBITDA by operating unit for the twelve months ended April 30, 2012 and April 30, 2011:

 

   For the twelve months ended April 30, 2012 
   NG Washington I   NG Washington II   NG Washington
III
   South Dakota
Gold
   Corporate -
Other
   Total
Continuing
Operations
 
Revenues:                              
Gross revenues  $19,534,892   $35,646,590   $3,748,121   $2,381,199   $-   $61,310,802 
Less promotional allowances   (1,486,218)   (3,856,352)   (334,215)   (5,383)   -    (5,682,168)
Net revenues   18,048,674    31,790,238    3,413,906    2,375,816    -    55,628,634 
                               
Expenses:                              
Total operating expenses (excludes depreciation, amortization, write downs, acquisition costs, stock option grants, and impairments)   14,502,199    28,896,801    3,320,086    2,199,493    3,661,354    52,579,933 
                               
Adjusted EBITDA  $3,546,475   $2,893,437   $93,820   $176,323   $(3,661,354)  $3,048,701 

 

   For the twelve months ended April 30, 2011 
   NG Washington I   NG Washington II   NG Washington
III
   South Dakota
Gold
   Corporate -
Other
   Total
Continuing
Operations
 
Revenues:                              
Gross revenues  $19,827,812   $26,644,799   $-   $-   $1,250   $46,473,861 
Less promotional allowances   (1,339,333)   (2,598,226)   -    -    -    (3,937,559)
Net revenues   18,488,479    24,046,573    -    -    1,250    42,536,302 
Expenses:                              
Total operating expenses (excludes depreciation, amortization, write downs, acquisition costs, stock option grants, and impairments)   14,699,966    21,577,444    -    -    4,025,604    40,303,014 
                               
Adjusted EBITDA  $3,788,513   $2,469,129   $-   $-   $(4,024,354)  $2,233,288 

 

19
 

 

Adjusted EBITDA reconciliation for the three months and fiscal years ended April 30, 2012 and April 30, 2011:

 

Adjusted EBITDA reconciliation to net income (loss):        
   For the quarter ended - unaudited 
   April 30, 2012   April 30, 2011 
         
Net Income (loss)  $(5,328,072)  $281,121 
Add:          
Income tax (benefit) expense   (1,994,383)   184,660 
Net interest expense   432,875    337,231 
Loss on sale of assets   32,092    - 
(Income) loss on operations held for sale   996,649    (11,367)
Acquisition expenses   82,966    - 
Depreciation and amortization   628,144    442,695 
Deferred rent escalation   337,849    - 
Impairments, write-offs, recoveries, net   6,264,655    54,406 
Adjusted EBITDA  $1,452,775   $1,288,746 

 

Adjusted EBITDA reconciliation to net loss:        
   For the fiscal year ended 
   April 30, 2012   April 30, 2011 
         
Net Loss  $(7,928,584)  $(487,026)
Add:          
Income tax benefit   (3,351,776)   (672,416)
Net interest expense   1,576,122    1,245,710 
Loss on extinguishment of debt   154,270    - 
(Gain) loss on sale of assets   54,746    (392,243)
Loss on operations held for sale   1,489,290    82,210 
Acquisition expenses   173,852    805,149 
Depreciation and amortization   2,004,311    1,597,498 
Deferred rent escalation   337,849    - 
Impairments, write-offs, recoveries, net   8,538,621    54,406 
Adjusted EBITDA  $3,048,701   $2,233,288 

 

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 fiscal years ended April 30, 2012 and April 30, 2011:

 

   Fiscal Years Ended 
   April 30,
2011
   April 30,
2011
 
Cash provided by (used in):          
Operating activities  $2,132,063   $2,650,465 
Investing activities  $(4,820,702)  $(210,052)
Financing activities  $2,232,690   $59,961 

 

Operating activities. Net cash provided by operating activities during the fiscal year ended April 30, 2012 decreased $0.5 million compared to the same period in the fiscal year ended April 30, 2011. This decrease resulted mainly from the $0.4 million investment in the Nevada gaming license and its related costs.

 

20
 

 

Investing activities. Net cash used in investing activities during the fiscal year ended April 30, 2012 increased to $4.8 million cash used compared to $0.2 million used during the fiscal year ended April 30, 2011. The increase of funds used is primarily due to a net $0.8 million increase in player-supported jackpots in the fiscal year ended April 30, 2012 compared to the release of $4.3 million in the fiscal year ended April 30, 2011 used for purchase of the Washington II mini-casinos.

 

Financing activities. Net cash provided by financing activities was $2.2 million for the fiscal year ended April 30, 2012 compared to $60,000 net cash provided by financing activities for the fiscal year ended April 30, 2011. During fiscal the year ended April 30, 2012, we issued common stock for which we received a net $3.9 million. During fiscal year ended April 30, 2012 we repaid a net $0.9 million of debt and used $0.9 million for loan issuance costs related to refinancing of our long-term debt.

 

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 recent and future acquisitions;
-new management contracts;
-working capital requirements;
-obtaining funds via long-term debt instruments;
-debt service requirements; and
-disposition of non-gaming related assets.

  

The 268 acres in Black Hawk, CO is currently for sale. If the acreage is sold we will use the proceeds to reduce debt.

 

As of April 30, 2012, excluding restricted cash of $1.8 million, we had cash and cash equivalents of $5.2 million. The restricted cash consists of approximately $1.8 million of player-supported jackpots.

 

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

 

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 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 as of April 30, 2012, we have a 1.42 ratio, sufficient to service debt and maintain operations.

 

       Current Ratio as of
April 30, 2012
 
Current Ratio   Current Assets   $8,959,514    1.42 
   Current Liabilities   $6,293,776     

 

Indebtedness

 

As of April 30, 2012, outstanding indebtedness was $16.6 million, of which $1.4 million is due by April 30, 2013.

 

21
 

 

On October 7, 2011, we closed on the Wells Fargo Loan, the proceeds of which were used to refinance debt and pay fees associated with the loan. Proceeds from the loan were used to repay debt of $4.0 million due May 12, 2012, $5.0 million due July 23, 2012, and $2.0 million due June 30, 2013. As part of the transaction, we extended $4.0 million of debt due June 30, 2013 to June 30, 2015. The Wells Fargo Loan matures on October 7, 2014 and bears annual interest of LIBOR, with a 0.25% floor, plus 9.5%. The accrued interest is due monthly along with $250,000 principal payments that are due quarterly. We also have $4.0 million of debt that is due June 30, 2015 with an 11.5% annual interest rate. The accrued interest is due monthly.

 

The Wells Fargo Loan has a limited number of financial covenants of which we are in compliance with as of April 30, 2012 and the filing date of this document. We are also not permitted to incur additional indebtedness without this lender’s prior approval.

 

Following the sale of the Colorado Grande Casino on May 25, 2012 (see Note 23 of our Consolidated Financial Statements), we repaid $0.8 million of the $4.0 million debt from the cash proceeds we received from this sale. In addition, we are required to use all payments we receive pursuant to the GI Note to further pay down the $4.0 million debt.

 

As a result of the South Dakota Gold acquisition, we issued three promissory notes. The first promissory note, in the principal amount of $1,425,000, is due on January 27, 2017 and bears an interest rate of 6% per annum. It is to be repaid in fifty-nine monthly principal installments of $10,000 plus all accrued and unpaid interest, starting on February 27, 2012. The second promissory note, in the principal amount of $400,000, with a stated 0% interest rate and an imputed interest rate of 6%, matures on January 27, 2017, and is payable in sixty equal monthly installments of $6,667 on the twenty-seventh day of each month, the first installment being payable on February 27, 2012. The third promissory note, in the principal amount of $60,324, with a stated 0% interest rate and an imputed interest rate of 6%, matures on January 27, 2013. As of April 30, 2012, our total indebtedness is $16.6 million.

 

Off-Balance Sheet Arrangements

 

None.

 

New Accounting Pronouncements Pending

 

Intangibles — Goodwill and Other

 

In September of 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” Under the amendments in this guidance, an entity may consider qualitative factors before applying Step 1 of the goodwill impairment assessment, but may no longer be permitted to carry forward estimates of a reporting unit’s fair value from a prior year when specific criteria are met. These amendments are effective for goodwill impairment tests performed in fiscal years beginning after December 15, 2011. Early adoption is permitted. We do not believe the new guidance will have a material effect on our consolidated financial statements.

 

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting companies.

 

Item 8.Financial Statements and Supplementary Data

 

The information required under Item 310(a)  of Regulation S-K is included in this report as set forth in the “Index to Consolidated Financial Statements.” See Index to Consolidated Financial Statements.

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.Controls and Procedures

 

(a)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 Securities and Exchange Commission (“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 Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

 

22
 

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  As described below under Management’s Annual Report on Internal Control over Financial Reporting, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

(b)Management’s Annual Report on Internal Control over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

 

  1.  

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

  2.  

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and

 

  3.   Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of our internal control over financial reporting as of April 30, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management, including our CEO and CFO, has concluded that the internal control over financial reporting was effective as of April 30, 2012.

 

(c)Changes in Internal Control Over Financial Reporting.

 

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

(d)Report of Independent Registered Public Accounting Firm.

 

This annual report does not include an attestations report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit us to provide only Management’s report in this annual report.

 

Item 9B. Other Information

 

None.

 

Part III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

We have adopted a Code of Ethics that applies to directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics is posted on our website at http://www.nevadagold.com, under Investor Relations – Investor Info. Changes to and waivers granted with respect to this Code of Ethics related to our officers, other executive officers and directors are required to be disclosed pursuant to applicable rules and regulations of the SEC, will also be posted on our website, and a Current Report on Form 8-K will be filed within four business days of the change or waiver.

 

The other information required by this item is incorporated by reference to our definitive proxy statement for our next Annual Stockholders Meeting to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

 

23
 

 

Item 11. Executive Compensation

 

The information required by this item is incorporated by reference to our definitive proxy statement for our next Annual Stockholders Meeting to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this item is incorporated by reference to our definitive proxy statement for our next Annual Stockholders Meeting to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

 

Item 13. Certain Relationships and Related Party Transactions and Director Independence

 

The information required by this item is incorporated by reference to our definitive proxy statement for our next Annual Stockholders Meeting to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

 

Item 14. Principal Accountant Fees and Services 

 

The information required by this item is incorporated by reference to our definitive proxy statement for our next Annual Stockholder Meeting to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

 

Part IV

 

Item 15. Exhibits, Financial Statement Schedules 

 

(a)(1) Financial Statements.

 

Included in Part II, Item 8 of this Report:

 

Consolidated Financial Statements of Nevada Gold & Casinos, Inc.

 

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of April 30, 2012 and April 30, 2011

Consolidated Statements of Operations for fiscal years ended April 30, 2012 and April 30, 2011

Consolidated Statements of Stockholders’ Equity for fiscal years ended April 30, 2012 and April 30, 2011

Consolidated Statements of Cash Flows for fiscal years ended April 30, 2012 and April 30, 2011

Notes to Consolidated Financial Statements

 

(a)(2) Financial Statement Schedules.

 

We have omitted all schedules because they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes to the consolidated financial statements.

 

24
 

  

(a)(3) Exhibits

INDEX TO EXHIBITS

EXHIBIT
NUMBER
  DESCRIPTION
     
3.1A   Amended and Restated Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit A to the Company's definitive proxy statement filed on Schedule 14A on July 30, 2001 and incorporated herein by reference).
     
3.1B   Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 4.2 to the Company’s Form S-8 filed October 11, 2002 and incorporated herein by reference).
     
3.1C   Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 3.3 to the Company’s Form 10-Q filed November 9, 2004 and incorporated herein by reference).
     
3.1D   Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 3.1 to the Company’s Form 8-K filed October 17, 2007 and incorporated herein by reference).
     
3.2   Amended and Restated Bylaws of Nevada Gold & Casinos, Inc., effective July 24, 2007 (filed previously as Exhibit 3.2 to the Company’s Form 8-K filed July 27, 2007 and incorporated herein by reference).
     
4.1   Common Stock Certificate of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 4.1 to the Company’s Form S-8/A filed June 4, 1999, file no. 333-79867, and incorporated herein by reference).
     
4.2   Second Amended and Restated Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed previously as Exhibit 4.6 to the Company’s Form S-8 filed June 22, 2005, file no. 333-126027, and incorporated herein by reference).
     
4.3   Nevada Gold & Casinos, Inc.’s 2009 Equity Incentive Plan (filed previously as Exhibit 10.1 to the Company’s Form S-8 filed on April 14, 2009, file no. 333-158576, and incorporated herein by reference).
     
4.4   Nevada Gold & Casinos, Inc.’s 2010 Employee Stock Purchase Plan (filed previously as Exhibit 10.1 to the Company’s Form S-8 filed on October 12, 2010, file no. 333-169892, and incorporated herein by reference).
     
10.1   Asset Purchase Agreement dated March 12, 2009 among Crazy Moose Casino, Inc., Crazy Moose Casino II, Inc., Coyote Bob’s, Inc. and Gullwing III, LLC, as sellers, and NG Washington, LLC, as purchaser, and the Exhibits thereto (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed March 13, 2009 and incorporated herein by reference).
     
10.2   Asset Purchase Agreement dated April 14, 2010 between NG Washington II, LLC, as buyer, and Grant Thornton, Ltd, as receiver for Big Nevada, Inc., Gameco, Inc., Gaming Consultants, Inc., Gaming Management, Inc., Golden Nugget Tukwila, Inc., Hollydrift Gaming, Inc., Little Nevada, Inc., Mill Creek Gaming, Inc., Royal Casino Holdings, Inc., and Silver Dollar Mill Creek, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K/A filed April 23, 2010 and incorporated herein by reference).
     
10.3   Amendment to the Asset Purchase Agreement dated April 14, 2010 between NG Washington II, LLC, as buyer, and Grant Thornton, Ltd, in its capacity as court-appointed receiver for Big Nevada, Inc., Gameco, Inc., Gaming Consultants, Inc., Gaming Management, Inc., Golden Nugget Tukwila, Inc., Hollydrift Gaming, Inc., Little Nevada, Inc., Mill Creek Gaming, Inc., Royal Casino Holdings, Inc. and Silver Dollar Mill Creek, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed July 29, 2010 and incorporated herein by reference).
     
10.4   Stock Purchase Agreement dated October 18, 2011 by and among Nevada Gold & Casinos, Inc., NG South Dakota, LLC, the stockholders of A.G. Trucano, Son & Grandsons, Inc. and A.G. Trucano, Son & Grandsons, Inc. and the Exhibits thereto (filed previously as Exhibit 10.17 to the Company’s Form 10-Q/A filed December 16, 2011 and incorporated herein by reference).
     
10.5   First Amendment to the Stock Purchase Agreement dated October 18, 2011 by and among Nevada Gold & Casinos, Inc., NG South Dakota, LLC, the stockholders of A.G. Trucano, Son & Grandsons, Inc. and A.G. Trucano, Son & Grandsons, Inc. and the form of a Third Promissory Note filed in connection therewith (filed previously as Exhibits 10.1 and 10.2, respectively, to the Company’s Form 8-K filed February 2, 2012 and incorporated herein by reference).

 

25
 

 

10.6   Asset Purchase Agreement dated May 20, 2011 among 3Point, Inc., as seller, Geordie Sze, as stockholder, and NG Washington III, LLC, as purchaser, and the Exhibits thereto (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed May 23, 2011 and incorporated herein by reference).
     
10.7   Asset Purchase Agreement dated November 23, 2011 between Colorado Grande Enterprises, Inc., as seller, and G Investments, LLC, as purchaser, and the Exhibits thereto (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed November 30, 2011 and incorporated herein by reference).
     
10.8   First Amendment to Asset Purchase Agreement between Colorado Grande Enterprises, Inc., as seller, and G Investments, LLC, as purchaser (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed May 29, 2012 and incorporated herein by reference).
     
10.9   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 Exhibit 10.1 to the Company’s Form 8-K filed June 1, 2012 and incorporated herein by reference).
     
10.10   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 Exhibit 10.2 to the Company’s Form 8-K filed June 1, 2012 and incorporated herein by reference).
     
10.11   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 Exhibit 10.1 to the Company’s Form 8-K/A filed October 28, 2011 and incorporated herein by reference).
     
10.12   Guaranty and Security Agreement dated October 7, 2011 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 Exhibit 10.2 to the Company’s Form 8-K/A filed October 28, 2011 and incorporated herein by reference).
     
10.13   Intercompany Subordination Agreement dated October 7, 2011 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 Exhibit 10.3 to the Company’s Form 8-K/A filed October 28, 2011 and incorporated herein by reference).
     
10.14   Intercreditor Agreement dated October 7, 2011 by and between Wells Fargo Gaming Capital, LLC, in capacity as administrative agent, and Louise H. Rogers (filed previously as Exhibit 10.4 to the Company’s Form 8-K/A filed October 28, 2011 and incorporated herein by reference).
     
10.15   Amendment Number One to Credit Agreement and Waiver dated March 30, 2012 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 Exhibit 10.1 to the Company’s Form 8-K filed April 3, 2012 and incorporated herein by reference).
     
10.16   Joinder No. 1 dated March 30, 2012 to Guaranty and Security Agreement dated October 7, 2011 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 Exhibit 10.2 to the Company’s Form 8-K filed April 3, 2012 and incorporated herein by reference).
     
10.17   Joinder No. 1 dated March 30, 2012 to Intercompany Subordination Agreement dated October 7, 2011 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 Exhibit 10.3 to the Company’s Form 8-K filed April 3, 2012 and incorporated herein by reference).
     
10.18   Intercreditor Agreement dated March 30, 2012 by and between Wells Fargo Gaming Capital, LLC, in capacity as agent, and Michael J. Trucano, in capacity as sellers’ representative (filed previously as Exhibit 10.4 to the Company’s Form 8-K filed April 3, 2012 and incorporated herein by reference).

 

26
 

 

10.19   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 Exhibit 10.1 to the Company’s Form 8-K filed July 3, 2012 and incorporated herein by reference).
     
10.20   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 Exhibit 10.2 to the Company’s Form 8-K filed July 3, 2012 and incorporated herein by reference)
     
10.21   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 Exhibit 10.3 to the Company’s Form 8-K filed July 3, 2012 and incorporated herein by reference).
     
10.22   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 Exhibit 10.4 to the Company’s Form 8-K filed July 3, 2012 and incorporated herein by reference).
     
10.23   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 Exhibit 10.5 to the Company’s Form 8-K filed July 3, 2012 and incorporated herein by reference).
     
10.24   Purchase Agreement dated November 25, 2009 between Nevada Gold BVR, LLC and B.V. Oro, LLC (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed December 12, 2008 and incorporated herein by reference).
     
10.25(+)   Employment Agreement dated January 24, 2011 by and between Robert B. Sturges and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed January 25, 2011 and incorporated herein by reference)
     
10.26(+)   Employment Agreement dated February 4, 2011 by and between James J. Kohn and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed February 4, 2011 and incorporated herein by reference).
     
10.27(+)   Employment Agreement dated April 14, 2011 by and between Ernest E. East and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed April 14, 2011 and incorporated herein by reference).
     
21.1(*)   Subsidiaries of Nevada Gold & Casinos, Inc.
     
23.1(*)   Consent of Independent Registered Public Accounting Firm.
     
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

 

27
 

 

101.LAB(†)   XBRL Taxonomy Label Linkbase
     
101.PRE(†)   XBRL Taxonomy Presentation Linkbase

_________________

+ Management contract or compensatory plan, or arrangement.

* Filed herewith.

† Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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

  

28
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Nevada Gold & Casinos, Inc.
   
  By: /s/ James J. Kohn
  James J. Kohn
  Chief Financial Officer
  (Duly Authorized officer and Principal Financial and Accounting Officer)
   
  Date: July 26, 2012

 

29
 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s /WILLIAM J. SHERLOCK        
William J. Sherlock   Chairman of the Board of Directors   July 26, 2012
         
/s/ WILLIAM G. JAYROE        
William G. Jayroe   Director   July 26, 2012
         
/s/ FRANK CATANIA        
Frank Catania   Director   July 26, 2012
         
/s/ FRANCIS M. RICCI        
Francis M. Ricci   Director   July 26, 2012
         
/s/ WAYNE H. WHITE        
Wayne H. White   Director   July 26, 2012
         
/s/ ROBERT B. STURGES   Director and Chief Executive Officer    
Robert B. Sturges   (Principal Executive Officer)   July 26, 2012
         
/s/ JAMES J. KOHN    EVP and Chief Financial Officer (Principal  
James J. Kohn   Financial and Accounting Officer)   July 26, 2012 

 

30
 

 

Index to Consolidated Financial Statements

Consolidated Financial Statements of Nevada Gold & Casinos, Inc.

 

  Page
   
Report of Independent Registered Public Accounting Firm 32
Consolidated Balance Sheets as of April 30, 2012 and April 30, 2011 33
Consolidated Statements of Operations for fiscal years ended April 30, 2012 and April 30, 2011 34

Consolidated Statements of Stockholders’ Equity for fiscal years ended April 30, 2012 and April 30, 2011

35
Consolidated Statements of Cash Flows for fiscal years ended April 30, 2012 and April 30, 2011 36
Notes to Consolidated Financial Statements 37

 

31
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Nevada Gold & Casinos, Inc.

 

We have audited the accompanying consolidated balance sheets of Nevada Gold & Casinos, Inc. and Subsidiaries as of April 30, 2012 and April 30, 2011 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nevada Gold & Casinos, Inc. and Subsidiaries as of April 30, 2012 and April 30, 2011 and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

/s/ Pannell Kerr Forster of Texas, P.C.  
   
Houston, Texas  
July 26, 2012  

 

32
 

 

Nevada Gold & Casinos, Inc.

Consolidated Balance Sheets

 

   April 30,   April 30, 
   2012   2011 
           
ASSETS          
Current assets:          
Cash and cash equivalents  $5,200,161   $5,656,110 
Restricted cash   1,787,068    944,359 
Accounts receivable   653,433    571,032 
Prepaid expenses   909,834    785,975 
Income tax receivable   -    176,750 
Notes receivable, current portion   20,600    - 
Other current assets   354,817    290,433 
Assets of operations held for sale   33,601    36,187 
Total current assets   8,959,514    8,460,846 
           
Investments in development projects   255,355    189,692 
Real estate held for sale   1,100,000    3,373,966 
Notes receivable - development projects, net of allowances   -    1,700,000 
Goodwill   16,090,799    13,474,980 
Identifiable intangible assets, net of accumulated amortization of $3,201,868 and $1,852,553 at April 30, 2012 and April 30, 2011, respectively   7,782,453    7,361,298 
Property and equipment, net of accumulated depreciation of $1,785,064 and $1,189,555 at April 30, 2012 and April 30, 2011, respectively   5,399,103    3,909,157 
Deferred tax asset, net   5,251,236    1,460,884 
BVD/BVO receivable   -    4,000,000 
Other assets   1,219,356    574,339 
Assets of operations held for sale   3,115,097    4,514,715 
Total assets  $49,172,913   $49,019,877 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $2,176,545   $1,442,661 
Accrued interest payable   61,141    118,024 
Other accrued liabilities   2,632,067    1,518,315 
Other current liabilities   -    100,000 
Long-term debt, current portion   1,400,324    - 
Liabilities of operations held for sale   23,699    405,249 
Total current liabilities   6,293,776    3,584,249 
Other long term liabilities   337,849    - 
Long-term debt, net of current portion   15,155,000    15,070,000 
Total liabilities   21,786,625    18,654,249 
           
Stockholders' equity:          
Common stock, $0.12 par value per share; 50,000,000 shares authorized; 16,707,205 and 13,968,210 shares issued and 15,924,368 and 12,797,010 shares outstanding at April 30, 2012, and April 30, 2011, respectively   2,004,865    1,676,185 
Additional paid-in capital   24,155,158    20,086,236 
Retained earnings   8,163,839    18,977,946 
Treasury stock, 782,837 and 1,171,200 shares at April 30, 2012 and April 30, 2011, respectively, at cost   (6,932,035)   (10,369,200)
Accumulated other comprehensive loss   (5,539)   (5,539)
Total stockholders' equity   27,386,288    30,365,628 
Total liabilities and stockholders' equity  $49,172,913   $49,019,877 

 

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

 

33
 

 

Nevada Gold & Casinos, Inc.

Consolidated Statements of Operations

 

   Twelve Months Ended 
   April 30,   April 30, 
   2012   2011 
Revenues:          
Casino  $47,445,348   $35,975,783 
Food and beverage   11,409,426    8,669,112 
Other   2,456,028    1,828,966 
Gross revenues   61,310,802    46,473,861 
Less promotional allowances   (5,682,168)   (3,937,559)
Net revenues   55,628,634    42,536,302 
           
Expenses:          
Casino   24,391,072    18,485,867 
Food and beverage   4,202,546    3,719,073 
Marketing and administrative   16,412,562    10,136,618 
Facility   2,112,397    2,664,820 
Corporate expense   3,548,276    3,709,804 
Legal expense   113,078    315,800 
Depreciation and amortization   2,004,311    1,597,498 
Acquisition costs   173,852    805,149 
Deferred rent escalation   337,849    - 
Valuation allowance of assets   6,848,870    - 
Excise taxes   1,205,238    967,565 
(Recovery) write-off of project development costs   (10,249)   54,406 
Valuation allowance of project development costs   1,700,000    - 
Other   594,764    303,467 
Total operating expenses   63,634,566    42,760,067 
Operating loss from continuing operations   (8,005,932)   (223,765)
Non-operating income (expenses):          
Gain (loss) on settlements - sale of assets   (54,746)   392,243 
Interest income   171,075    173,436 
Interest expense   (1,552,948)   (1,374,146)
Amortization of loan issue costs   (194,249)   (45,000)
Loss on extinguishment of debt   (154,270)   - 
Loss before income tax   (9,791,070)   (1,077,232)
Income tax benefit   3,351,776    672,416 
Net loss from continuing operations   (6,439,294)   (404,816)
Net loss from operations held for sale, net of taxes   (1,489,290)   (82,210)
Net loss  $(7,928,584)  $(487,026)
Per share information:          
Net loss per common share - basic and diluted for continuing operations  $(0.45)  $(0.03)
           
Net loss per common share - basic and diluted for discontinued operations  $(0.10)  $(0.01)
           
Basic and diluted weighted average number of shares outstanding   14,381,896    12,766,382 

 

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

 

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Nevada Gold & Casinos, Inc.

Consolidated Statements of Stockholders' Equity

  

                       Accumulated     
           Additional           Other   Total 
   Common Stock   Paid-in   Retained   Treasury   Comprehensive   Stockholders' 
   Shares   Amount   Capital   Earnings   Stock   Income   Equity 
Balance at April 30, 2010   13,935,330   $1,672,240   $19,859,966   $19,464,972   $(10,369,200)  $(5,539)  $30,622,439 
Comprehensive income:                                 - 
Net loss               (487,026)           (487,026)
Employee stock plan purchases   32,880    3,945    28,051                31,996 
Stock based compensation           198,219                198,219 
Balance at April 30, 2011   13,968,210   $1,676,185   $20,086,236   $18,977,946   $(10,369,200)  $(5,539)  $30,365,628 
Net loss               (7,928,584)           (7,928,584)
Stock options exercised    —     —     —    (194,687)   221,337        26,650 
Stock issuance   2,625,652    315,078    3,573,683                3,888,761 
Stock issued for acquisitions    —            (2,690,836   3,215,828        524,992 
Employee stock plan purchases   113,343    13,602    156,106               169,708
Stock based compensation           339,133                339,133 
Balance at April 30, 2012   16,707,205   $2,004,865   $24,155,158   $8,163,839   $(6,932,035)  $(5,539)  $27,386,288 

 

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

 

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Nevada Gold & Casinos, Inc.

Consolidated Statements of Cash Flows

 

   Fiscal Years Ended 
   April 30,   April 30, 
   2012   2011 
Cash flows from operating activities:        
Net loss  $(7,928,584)  $(487,026)
Adjustments to reconcile net loss to net cash provided by operating activities:          
 Depreciation and amortization   2,109,369    1,807,952 
 Stock based compensation   339,133    198,219 
 Valuation allowance of assets   7,406,856    - 
 Valuation allowance of project development note receivable   1,689,751    54,406 
 Amortization of deferred loan issuance costs   194,249    45,000 
 Amortization of deferred rent   337,849    - 
 (Gain) loss on sale/settlement of assets   33,246    (384,414)
 Loss on extinguishment of debt   154,270    - 
 Deferred income tax benefit   (3,050,593)   (352,224)
Changes in operating assets and liabilities:          
 Receivables and other assets   (658,231)   415,475 
 Accounts payable and accrued liabilities   1,504,748    1,353,077 
Net cash provided by operating activities   2,132,063    2,650,465 
Cash flows from investing activities:          
Capitalized development costs   (65,663)   (99,040)
Purchase of property and equipment   (3,891,730)   (4,881,970)
Advances on notes receivable   (20,600)   - 
Proceeds from the sale of assets   -    448,379 
Net (additions) and reductions of restricted cash   (842,709)   4,322,579 
Net cash used in investing activities   (4,820,702)   (210,052)
Cash flows from financing activities:          
Net proceeds from term loans   -    43,227 
Payments on capital lease   (15,683)   (15,262)
Employee stock plan purchases   156,106    31,996 
Repayment of credit facilities   (910,655)   - 
Deferred loan issuance costs   (912,339)   - 
Stock issuance proceeds, net   3,888,761    - 
Cash proceeds from exercise of stock options   26,500    - 
Net cash provided by financing activities   2,232,690    59,961 
           
Net increase (decrease) in cash and cash equivalents   (455,949)   2,500,374 
Cash and cash equivalents at beginning of period   5,656,110    3,155,736 
Cash and cash equivalents at end of period  $5,200,161   $5,656,110 
Supplemental cash flow information:          
Cash paid for interest  $1,609,921   $1,373,761 
           
Non-cash investing and financing activities:          
Non-cash purchase of property and equipment  $2,760,315   $5,187,429 
Refinancing of long-term debt (see note 6)  $11,000,000   $- 

 

 

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

 

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Nevada Gold & Casinos, Inc.

Notes to Consolidated Financial Statements

 

Note 1. Background and Basis of Presentation

 

Background

 

Nevada Gold & Casinos, Inc. (“we”), a Nevada corporation, was formed in 1977 and, since 1994, has primarily been a gaming company involved in gaming projects and gaming operations. Our gaming operations are located in the United States of America (the “U.S.”), specifically in the states of Washington, South Dakota, and, until recently, Colorado. Our business strategy will continue to focus on gaming projects.

 

Basis of Presentation

 

Our consolidated financial statements include the accounts of all majority-owned and controlled subsidiaries after the elimination of all significant intercompany accounts and transactions. Additionally, our financial statements for prior periods include reclassifications that were made to conform to the current year presentation. Those reclassifications did not impact working capital, total assets, total liabilities, our reported net loss or stockholders’ equity.

 

Note 2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

We consolidate entities when we have the ability to control the operating and financial decisions and policies of that entity and record the portion we do not own as non-controlling interest. The determination of our ability to control or exert significant influence over an entity involves the use of judgment. We apply the equity method of accounting where we can exert significant influence over, but do not control the policies and decisions of an entity. We use the cost method of accounting where we are unable to exert significant influence over the entity.

 

Use of Estimates

 

The preparation of financial statements in conformity with the U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results can, and often do, differ from those estimates.

 

Fair Value

 

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

 

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 carrying value and tested for impairment annually, or more frequently, using projections of undiscounted future cash flows as well as third party valuations (see Note 21).

 

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

 

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

 

37
 

 

Cash and Cash Equivalents

 

We consider short-term investments with an original maturity of less than three months to be cash equivalents.

 

We maintain cash accounts in major U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts occasionally exceed the federally insured limits, although no losses have been incurred in connection with such cash balances.

   

Allowance for Doubtful Accounts

 

We establish provisions for losses on accounts and notes receivable if we determine that we will not collect all or part of the outstanding balance. We regularly review collectability and establish or adjust our allowance as necessary using the specific identification method. We make advances to third parties under executed promissory notes for project costs related to the development of gaming and entertainment properties. Due diligence is conducted by our management with the assistance of legal counsel prior to entering into arrangements with third parties to provide financing in connection with their efforts to secure and develop the properties. Repayment terms are largely dependent upon the operating performance of each opportunity for which the funds have been loaned. Interest income is not accrued until it is reasonably assured that the project will be completed and that there will be sufficient profits from the facility to cover the interest to be earned under the respective note. If projected cash flows are not sufficient to recover amounts due, the note is evaluated to determine the appropriate discount to be recorded on the note for it to be considered a performing loan. If the note is performing, interest is recorded using the effective interest method based on the value of the discounted note balance.

 

We review on a quarterly basis each of our receivables to evaluate whether the collection of such receivable is 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 then the receivable would be written down to its estimated fair value.

 

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 April 30, 2012 and April 30, 2011, 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 to an owner of a location used by the South Dakota Gold slot route operation. 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.

 

Capitalized Development Cost

 

We capitalize certain third party, professional, and other miscellaneous fees directly related to the procurement, evaluation and establishment of contracts for development projects. Development costs are recorded on the cost basis and are amortized over the estimated economic term of the contract. We review each project on a quarterly basis to assess whether any changes to our estimates are appropriate. If accumulated costs of a specific project exceed the net realizable value of such project or the project is abandoned, the costs are charged to earnings.

 

Real Estate Held for Sale

 

Real estate held for sale consists of undeveloped land located in and around Black Hawk, Colorado and related development costs and capitalized interest. Property held for sale is carried at the lower of cost or net realizable value.

 

Property and Equipment

 

Expenditures for property and equipment are capitalized at cost. We depreciate property and equipment over their respective estimated useful lives, ranging from three to thirty years, using the straight-line method. When items are retired or otherwise disposed of, a gain or loss is recorded for the difference between net book value and proceeds realized. Ordinary maintenance and repairs are charged to earnings, and replacements and betterments are capitalized.

 

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Property and equipment at April 30, 2012 and April 30, 2011 consist of the following:

 

           Estimated
   April 30,   April 30,   Service Life
   2012   2011   in Years
Leasehold improvements  $1,202,154   $1,032,157   7-25
Gaming equipment   1,980,034    284,741   3-5
Furniture and office equipment   2,295,072    2,081,814   3-7
Building and improvements   1,612,250    1,612,250   15-30
Land   87,750    87,750    
Construction in Progress   6,907    -    
    7,184,167    5,098,712    
Less accumulated depreciation   (1,785,064)   (1,189,555)   
              
Property and equipment, net  $5,399,103   $3,909,157    

 

Deferred Loan Issuance Costs

 

Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized over the expected terms of the related debt agreements and are included in other assets on our consolidated balance sheets.

 

Goodwill and Other Intangible Assets

 

Goodwill and intangible assets with indefinite useful lives are tested for impairment annually or more frequently if an event occurs or circumstances change that may reduce the fair value of our goodwill below its carrying value.

 

We review goodwill at the reporting level unit, which is one level below an operating segment. We review the carrying value of the net assets of each reporting unit to the estimated fair value of the reporting unit, based upon a multiple of estimated earnings. If the carrying value exceeds the estimated fair value of the reporting unit, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation uses level 3 inputs and includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position or results of operations. All of our goodwill is attributable to reporting units within our gaming segment.

 

We use earnings before interest, taxes, depreciation, amortization, non-cash goodwill and other long-lived asset impairment charges, litigation charges, non-cash foreign currency transaction gains and losses, non-cash stock option expense, and net losses/gains from asset dispositions (“adjusted EBITDA”) as the measure for future earnings in our impairment test. Management estimates future adjusted EBITDA based primarily on its projections of future revenues. We utilized comparable industry average multiples of adjusted EBITDA rates based on industry standards ranging from 5.5 to 7.5 times adjusted EBITDA when we estimated fair values of our casinos as of April 30, 2012.

 

We considered the impact of adverse changes in the economic and business climate as we performed our annual impairment assessment of goodwill as of April 30, 2012.

 

Long-lived assets, including property, plant and equipment and amortizable intangible assets, also comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist under authoritative guidance. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available.

 

Slot Club Awards

 

We reward our slot customers for their loyalty based on the dollar amount of play on slot machines. We accrue for these slot club awards based on an estimate of the value of the outstanding awards utilizing the age and prior history of redemptions. Future events such as a change in our marketing strategy or new competition could result in a change in the value of the awards.

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Advertising Costs

 

We expense advertising costs as incurred. Advertising expense related primarily to our casino operations and for the years ended April 30, 2012 and April 30, 2011 was approximately $2,203,000 and $1,612,000, respectively.

 

Revenue Recognition

 

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

 

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

 

   Fiscal Year
Ended
   Fiscal Year
Ended
 
   April 30, 2012   April 30, 2011 
Food and beverage  $4,801,738   $3,754,336 
Other   115,968    29,261 
           
Total cost of complimentary services  $4,917,706   $3,783,597 

 

Accrued Jackpot Liability

 

We accrue slot jackpot liability as games are played under a matching concept of coin-in. In addition, as of April 30, 2012 and April 30, 2011, we also maintain approximately $1,787,000 and $918,000, respectively, in accrued player-supported jackpot liability. Player-supported jackpot is a progressive game of chance, allowed in Washington State, directly related to the play or outcome of an authorized non-house-banked card game separately funded by our patrons. Any jackpots hit in these card games are paid from such reserved funds.

 

Income Taxes

  

Income taxes are accounted using an asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis. We record current income taxes based on our current taxable income, and we provide for deferred income taxes to reflect estimated future tax payments and receipts. We account for tax credits under the flow-through method, which reduces the provision for income taxes in the year the tax credits first become available. We reduce deferred tax assets by a valuation allowance when, based on our estimates, it is more likely than not that a portion of those assets will not be realized in a future period.

 

We maintain a tax accrual policy to record both regular and alternative minimum taxes for companies included in our consolidated federal and state income tax returns. The policy provides, among other things, that (i) each company in a taxable income position will accrue a current expense equivalent to its federal and state income taxes, and (ii) each company in a tax loss position will accrue a benefit to the extent its deductions, including general business credits, can be utilized in the consolidated returns. We pay all consolidated U.S. federal and state income taxes directly to the appropriate taxing jurisdictions and, under a separate tax billing agreement, we may bill or refund our subsidiaries for their portion of the these income tax payments.

 

We adopted guidance codified under Accounting Standard Codification (“ASC”) Topic 740, effective April, 30, 2007 which clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of this guidance did not have a material effect on our consolidated financial position or results of operations. Should interest and penalty be incurred as a result of a review of our income tax returns, we will record the interest and penalty in accordance with applicable guidance.

 

Our federal tax returns for years after 2009 remain subject to examination.

 

Stock-Based Compensation

 

Under ASC Topic 718, “Compensation - Stock Compensation,” the fair value and compensation expense of each option award is estimated as of the date of grant using a Black-Scholes option pricing formula. Expected volatility is based on historical volatility of our stock over a preceding period commensurate with the expected term of the option. The expected term of the option is an estimate of the time that the option is expected to be outstanding and is based on our historical experience. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we historically have not paid dividends and have no current plans to do so in the future.

 

40
 

 

 

The compensation cost related to these share-based awards is recognized over the requisite service period. The requisite service period is generally the period during which an employee is required to provide service in exchange for the award. Total stock-based compensation for the years ended April 30, 2012 and April 30, 2011 was $339,133 and $198,219, respectively.

 

Earnings Per Share

 

Earnings per share, both basic and diluted, are presented on the consolidated statement of operations. Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding during each period. Diluted earnings per share assumes the exercise of all stock options having exercise prices less than the average market price of the common stock using the “treasury stock method” and for convertible debt securities using the “if converted method” (See Note 11).

 

Accrued Litigation Liability

 

We assess our exposure to loss contingencies including legal matters. If the potential loss is justified to be probable and estimable, we will provide for the exposure. If the actual loss from a contingency differs from management’s estimate, operating results could be impacted. As of April 30, 2012 and April 30, 2011, we did not record any accrued litigation liability.

 

New Accounting Pronouncements — Intangibles — Goodwill and Other

 

In September of 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” Under the amendments in this guidance, an entity may consider qualitative factors before applying Step 1 of the goodwill impairment assessment, but may no longer be permitted to carry forward estimates of a reporting unit’s fair value from a prior year when specific criteria are met. These amendments are effective for goodwill impairment tests performed in fiscal years beginning after December 15, 2011. Early adoption is permitted. We do not believe the new guidance will have a material effect on our consolidated financial statements.

 

Note 3. Restricted Cash

 

As of April 30, 2012 and April 30, 2011, we maintained approximately $1,787,000 and $944,000, respectively, in restricted cash, which consists of player-supported jackpot funds. As a result of refinancing our debt through Wells Fargo Gaming Capital, LLC (see Note 6), we are no longer required to maintain reserve funds for insurance and taxes.

 

Note 4. Investments in Development Projects

 

We also hold investments in various development projects that we consolidate. Our net ownership interest and capitalized development costs in development projects are as follows:

 

   Net Ownership Interest   Capitalized Development Costs 
Development Projects:  April 30,
2012
   April 30,
2011
   April 30,
2012
   April 30,
2011
 
   (Percent)     
Nevada Gold Speedway, LLC (1)   100    100   $209,305   $163,692 
Nugget (2)   1    1    26,000    26,000 
Other (3)   100    -    20,050    - 
Total investments– development projects            $255,355   $189,692 

 

(1)Deposit and acquisition costs related to management and technical services for a to-be-built casino and hotel in North Las Vegas, Nevada.
(2)Costs incurred with acquisition of 1% of the Nugget Casino in Reno, Nevada to obtain a Nevada gaming license.
(3)Development cost incurred for other development projects.

 

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Note 5. Notes and BVD/BVO Receivable 

 

Notes Receivable - Development Projects

 

Big City Capital, LLC

 

From time to time, we make advances to third parties related to the development of gaming/entertainment projects. We make these advances after undertaking extensive due diligence. On a quarterly basis, we review each of our notes receivable to evaluate whether the collection of our note receivable is 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. During the fiscal 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. At April 30, 2012 and April 30, 2011, our balance sheet reflects notes receivable of $0 and $1.7 million, respectively, net of a $3.2 million and $1.5 million allowance, respectively, related to the development of gaming/entertainment projects from Big City Capital. These notes receivable have a maturity date of December 31, 2014.

 

Recent conversations with the principal of Big City Capital and an independent third party investment banker indicate the project is progressing slowly and may never be built. Our management has previously worked with the investment banker. As of the filing date of this document, we believe the repayment of these loans will be largely dependent upon the ability to obtain financing for the development project and/or the performance of the development project.

 

BVD/BVO Receivable

 

As of May 2007, we owned a 40% interest in Buena Vista Development Company, LLC (“BVD”) which plans to develop a casino hotel facility for the Buena Vista Rancheria of Me-Wuk Indians, a Native American tribe in Amador County, California. Effective November 25, 2008, we sold our 40% interest in BVD to B. V. Oro, LLC (“BVO”), which is owned by our former partner and related parties, for $16 million in cash and a $4 million receivable from BVD due upon the developer receiving repayment of the loan advanced to the tribe, which loan is currently due. To the best of our knowledge, the developer has reached a verbal agreement with the tribe to extend the loan until receipt of permanent financing for the project. Should the proceeds of this loan repayment be insufficient to pay off our receivable, the remainder is due from BVO no later than two years after the opening of a gaming/entertainment facility to be built by BVD for the tribe. This receivable accrues interest at the rate of prime plus 1% and is guaranteed by our former partner and related parties. In addition, we are entitled to a 5% carried interest in the membership interest sold to BVO. According to the principal of BVO, the project continues to slowly progress and he is committed and financially able to continue to fund ongoing expenses until permanent funding is arranged. Also, the investment bank that has been engaged to assist BVD to raise the project funding, with whom we have had experience, has indicated to us in recent conversations that they believe project funding will be attained. However, given the prevailing very challenging capital market conditions and continued uncertainties as to the economy, and based upon our “Level 3” analysis, we have recorded a $4.6 million valuation allowance for the total principal and interest due effective as of April 30, 2012.

 

Note 6. Long-Term Debt 

 

Long-Term Financing Obligations 

 

Our long-term financing obligations for the fiscal years ended April 30, 2012 and April 30, 2011 are as follows:

 

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   April 30,   April 30, 
   2012   2011 
         
$11.0 million note payable, LIBOR, with 0.25% floor, plus 9.50% interest, principal payments of $250,000 due each quarter and remainder due at maturity of October 7, 2014  $10,500,000   $- 
$4.0 million note payable, 11% through October 7, 2011, 11.5% interest until maturity at June 30, 2015   4,000,000    6,000,000 
$5.1 million note payable, LIBOR, with a 2% floor, plus 9% interest, maturing July 23, 2012   -    5,070,000 
$4.0 million note payable, 7% interest, maturing May 12, 2012   -    4,000,000 
$250,000 note payable, 6% interest, to be paid in two annual installments of $100,000 plus accrued interest and the final payment of $50,000 plus accured interest at the maturity date of December 15, 2013,   150,000    - 
$100,000 note payable, 6% imputed interest, to be paid in thirty equal monthly installments, beginning August 5, 2011, maturing January 18, 2014   70,000      
$1.4 million promissory note, 6% interest, payable in fifty nine monthly installments of $10,000 plus all accrued interest, and the remaining principle at the maturity date of January 27, 2017   1,395,000    - 
$400,000 note payable, 6% imputed interest, to be paid in sixty equal monthly installments, beginning February 27, 2012, maturing January 27, 2017   380,000    - 
$60,324 note payable, 6% imputed interest, maturing January 27, 2013   60,324    - 
Total   16,555,324    15,070,000 
Less: current portion   (1,400,324)   - 
Total long-term financing obligations  $15,155,000   $15,070,000 

 

On October 7, 2011, we closed on the Wells Fargo Loan, thereby refinancing existing indebtedness of which $4.0 million was due May 12, 2012 and $5.0 million was due July 23, 2012. We also retired $2.0 million of the $6.0 million debt that was previously due June 30, 2013. Assets of, and equity interests in, NG Washington, LLC, NG Washington II, LLC, and NG Washington III, including their ten respective operating mini-casinos, as well as certain of our other subsidiaries (NG Washington II Holdings, LLC, NG South Dakota LLC, and A.G. Trucano, Son and Grandsons, Inc.) are collateral for the loan. The loan matures on October 7, 2014 and is guaranteed by us.

 

The Wells Fargo Loan has a limited number of financial covenants of which we are in compliance with as of April 30, 2012 and the filing date of this document. We are also not permitted to incur additional indebtedness without this lender’s prior approval.

 

As a result of closing on the Wells Fargo Loan, we incurred $819,455 of deferred loan issue costs which are amortizable over the life of the loan. As a result of a $2,000,000 repayment and renegotiating terms on our $6,000,000 note payable, we recorded a loss on extinguishment of debt of $154,000 and we added approximately $91,000 of deferred loan issue costs to be amortized over the life of the note.

 

The Washington I properties had a $150,000 line of credit, which was paid off during the period ending January 31, 2012. The line of credit had a one-year cycle and, during the fiscal years ended April 30, 2012 and April 30, 2011, interest of $3,456 and $5,757, respectively, was paid on the principal drawn.

 

On January 27, 2012, we completed the acquisition of A.G. Trucano, Son and Grandsons, Inc., a slot machine route operation in Deadwood, South Dakota (“South Dakota Gold”) and, as part of the purchase price, issued three promissory notes. The first promissory note, in the principal amount of $1,425,000, is due on January 27, 2017 and bears an annual interest rate of 6% per annum. Starting from February 27, 2012, this note is to be repaid in fifty-nine monthly principal installments of $10,000 plus all accrued and unpaid interest while the remaining balance is due on the maturity date. The second promissory note, in the principal amount of $400,000, bears an imputed annual interest of 6% per annum, matures on January 27, 2017, and is payable in sixty equal monthly installments of $6,667 on the twenty-seventh day of each month, the first installment being payable on February 27, 2012. The third promissory note, in the principal amount of $60,324, bears an imputed annual interest of 6% per annum and matures on January 27, 2013.

 

The aggregate principal payments due on total long-term debt over the next five fiscal years and thereafter are as follows:

 

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Fiscal Year Ending
 
2013  $1,400,324 
2014   1,280,000 
2015   8,700,000 
2016   4,200,000 
2017   975,000 
Total  $16,555,324 

 

Note 7.   Acquisitions

 

NG Washington II, LLC

 

On July 23, 2010, through our wholly-owned subsidiary, NG Washington II, LLC, we acquired six mini-casinos, and the leasehold to the related administrative office, in the state of Washington. The mini-casinos are the Silver Dollar Casino in SeaTac, the Silver Dollar Casino in Renton, the Silver Dollar Casino in Bothell, the Club Hollywood Casino in Shoreline, the Royal Casino in Everett, and the Golden Nugget Casino in Tukwila (collectively, “Washington II”). All of the Washington II mini-casinos are located in western Washington State.  We acquired the Washington II mini-casinos through bankruptcy proceedings for $11.07 million, $6.0 million of which was paid in cash to Grant Thornton, Ltd., a court appointed receiver, and $5.07 million financed pursuant to a credit agreement between NG Washington II Holdings, LLC, as debtor, and Fortress Credit Corp., as an agent for the lenders.  Two promissory notes, issued pursuant to the credit agreement, were due July 23, 2012, and did bear an interest rate based on the 30-day LIBOR at the end of each calendar month, plus 9% per annum, with a 30-day LIBOR floor of 2.0%.  Interest was due monthly.  This debt was retired with the closing of the Wells Fargo Loan. See Note 6. The current liabilities assumed were primarily gaming based payables, such as Player’s Club points. We were able to purchase these mini-casinos, combine overhead operations with our previously acquired Washington mini-casinos, reduce expenses, and operate our Washington mini-casinos with more efficiency. For example, we reduced the previous owner’s administration office headcount from 26 to 11, eliminated several management positions, and integrated the 11 with the administrative staff of 5 who were operating the original three operating units acquired by us in May of 2009. We acquired these mini-casinos in furtherance of our strategy of being an owner and operator of gaming facilities. The purchase was accounted for as a purchase business combination in accordance with ASC 805. Goodwill is defined in ASC 805 as the future economic benefits of other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is attributable to the synergies expected to arise from combining the operations of the acquired casinos with our other Washington-owned properties, as well as other intangible assets that do not qualify for separate recognition. The purchase price was allocated to the assets acquired and liabilities assumed based on our management’s estimate of their fair value on the date of acquisition. Closing costs, legal, and other expenses of $576,000 related to the acquisition are reflected separately in the consolidated statement of operations. A summary of the final purchase price allocations, are as follows:

 

   (000’s) 
Current assets and liabilities, net  $(146)
Property and equipment   1,888 
Customer relationships   3,383 
Goodwill   5,945 
      
Purchase price  $11,070 

  

The pre-tax results of operations of $1,106,000, which includes depreciation and amortization of $577,000, as well as closing costs, pre-opening expenses, and severance pay totaling an additional $830,000, have been included in our consolidated statements of operations since the date of acquisition of July 23, 2010 through April 30, 2011. As of April 30, 2012, goodwill acquired was approximately $5,945,000, all of which is expected to be deductible for tax purposes.

 

NG Washington III, LLC

 

On July 18, 2011, through our wholly-owned subsidiary NG Washington III, LLC, we completed the acquisition of the Red Dragon mini-casino in Mountlake Terrace, Washington (“Washington III”) for $1.25 million. The transaction was financed by cash, stock and promissory notes issued to the seller. As a result, we now own the only two mini-casinos currently operating in Mountlake Terrace. We paid $400,000 in cash, $500,000 in our common stock, and $350,000 in two notes payable to the seller, 3 Point Inc. (“3 Point”). The first promissory note, in the principal amount of $250,000, is due on December 15, 2013 and bears an annual interest rate of 6%. It is to be repaid in three installments: the first payment of $100,000, and all accrued and unpaid interest, was due on December 15, 2011; the second installment of $100,000, and all accrued and unpaid interest, is due on December 15, 2012; and the remaining principal of $50,000, and all accrued and unpaid interest, is due on the maturity date of December 15, 2013. The second promissory note, in the principal amount of $100,000, bears imputed annual interest of 6% per annum, matures on January 18, 2014, and is payable in thirty equal monthly installments of $3,333 on the fifth day of each month, starting in August of 2011. We acquired this mini-casino in furtherance of our strategy of being an owner and operator of gaming facilities. The purchase was accounted for as a purchase business combination in accordance with ASC 805. Goodwill is defined in ASC 805 as the future economic benefits of other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is attributable to the synergies expected to arise from combining the operations of the acquired mini-casinos with our other Washington-owned properties, as well as other intangible assets that do not qualify for separate recognition. Closing costs and pre-opening expenses of $8,700 related to the acquisition are included in the consolidated statement of operations in marketing and administrative, and legal and other expenses of $66,000 related to the acquisition are reflected separately in the consolidated statement of operations. The preliminary summary of the purchase price allocation is as follows:

 

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   (000’s) 
Current assets and liabilities, net  $(6)
Property and equipment   145 
Customer relationships   419 
Goodwill   692 
      
Purchase price  $1,250 

 

Results of operations of $24,000, which includes depreciation and amortization of $70,000, as well as closing costs, pre-opening expenses, and legal and escrow fees of $8,700, have been included in our consolidated statement of operations since the date of acquisition of July 18, 2011. At April 30, 2012, goodwill acquired was approximately $692,000, all of which is expected to be deductible for tax purposes.

 

We have reviewed the Washington III mini-casino operating results and concluded that pro-forma financial statements are not required due to immateriality.

 

South Dakota Gold

 

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

 

   (000’s) 
Current assets and liabilities, net  $50 
Property and equipment   1,775 
Non-compete   251 
Customer relationships   1,100 
Goodwill   1,924 
      
Purchase price  $5,100 

  

Results of operations of $7,000, which includes depreciation and amortization of $174,000, have been included in our consolidated statement of operations since the date of acquisition of January 27, 2012. At April 30 2012, goodwill acquired was approximately $1,924,000, all of which is expected to be deductible for tax purposes.

 

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

 

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Note 8. Goodwill and Intangible Assets

 

In connection with our acquisitions of the Washington mini-casinos on May 12, 2009, July 23, 2010 and July 18, 2011, as well as the South Dakota Gold slot route on January 27, 2012 (see Note 7), we have goodwill with an indefinite useful life and identifiable intangible assets of $23.9 million, net of amortization.

 

The change in the carrying amount of goodwill and other intangibles for the fiscal year ended April 30, 2012 is as follows (in thousands):

 

  

 

Total

  

 

Goodwill

   Other
Intangibles
 
Balance as of April 30, 2011  $20,836   $13,475   $7,361 
Acquired during the year   4,386    2,616    1,770 
Current year amortization   (1,349)   -    (1,349)
Balance as of April 30, 2012  $23,873   $16,091   $7,782 

 

The $2.6 million increase in goodwill and the $1.8 million increase in other intangibles from April 30, 2011 to April 30, 2012 is the result of recording the acquisition of the Washington III mini-casino and South Dakota Gold, both acquired during the fiscal year ended April 30, 2012.   Other 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.

 

A summary of amortizable other intangible assets follow (in thousands):

 

   As of April 30, 2012 
   Gross
Carrying
Amount
   Accumulated
Amortization
 
Customer relationships  $7,853   $(2,177)
Non-compete agreements   1,269    (1,025)
Trade names   1,862    - 
Total  $10,984   $(3,202)

 

The estimated future annual amortization of intangible assets for each of the next five years is as follows (in thousands):

 

For the fiscal year  Amount 
2013  $1,220 
2014   1,205 
2015   1,185 
2016   1,122 
2017   718 
Thereafter   470 
Total  $5,920 

 

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.

 

Note 9. Income Taxes 

 

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of all assets and liabilities, measured by using the enacted statutory tax rates. Deferred tax assets for net operating loss carryforwards (“NOLs”) are recorded. As of April 30, 2012 we have federal NOLs of $3.7 million which expire from 2029 to 2032.

 

As of April 30, 2012 and April 30, 2011, we had deferred tax assets as a result of the future tax benefit attributable to timing differences, determined by applying the enacted statutory rate of 34.0%. We recorded a deferred tax asset in connection with tax credit carryforwards, compensation expense in connection with the issuance of stock options, and impairment charges for goodwill and receivables. We recorded a deferred tax liability for the excess of tax deductible amortization of intangibles over the recorded amortization for book purposes.

 

The unusually high tax benefit rate in the fiscal year ended April 30, 2011 resulted from the receipt of a federal tax refund of $186,000 in excess of the estimated amount, recognition of a $176,750 receivable for an estimated state tax refund and the recognition of a valuation allowance on deferred tax assets of $32,309. The federal refund related to the carryback of our fiscal year ended April 30, 2010 loss to our 2008 federal income tax return which was impacted by the 1% surtax paid on taxable income in excess of $10 million during the carryback period. The state tax refund is due to the impact on state tax returns of adjustments made to our federal returns for tax years 2007 and 2008 which is the result of an examination by the Internal Revenue Service in the fiscal year ended April 30, 2011. The valuation allowance was established to reflect management’s assessment that it is more likely than not that certain tax assets will not be realized.

 

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To fully recognize our net deferred tax assets, we must achieve future taxable income of approximately $3.7 million. These earnings will be achieved through our operating properties and increased revenues from future acquisitions. We believe that such earnings will be sufficient to fully utilize current NOLs.

 

Deferred tax assets and liabilities at April 30, 2012 and April 30, 2011 are comprised of the following:

 

   April 30, 2012   April 30, 2011 
Deferred tax assets:          
Net operating loss carryforwards  $1,280,810   $681,358 
Fixed assets   61,720    (48,179)
Stock options   662,523    536,374 
Impairment of notes receivable and goodwill   3,609,313    511,308 
Other   3,129    1,707 
Total deferred tax assets   5,617,495    1,682,568 
Deferred tax liabilities:          
Amortization of intangibles   (529,583)   (272,172)
Revenue not recognized for tax reporting and other   195,633    82,797 
Total deferred tax liabilities   (333,950)   (189,375)
Net deferred tax assets before valuation allowance   5,283,545    1,493,193 
Valuation allowance   (32,309)   (32,309)
Net deferred tax assets  $5,251,236   $1,460,884 

 

Reconciliations between the statutory federal income tax expense rate of 34.0% in the fiscal years ended April 30, 2012 and April 30, 2011 and our effective income tax rate as a percentage of income before income tax benefit is as follows:

 

   Years Ended 
   April 30, 2012   April 30, 2011 
   Percent   Dollars   Percent   Dollars 
                     
Income tax benefit at statutory federal rate   (34.0)  $(3,328,964)   (34.0)  $(366,259)
State taxes   0.0    -    (0.5)   (5,670)
                     
Permanent differences:                    
                     
Filed return to financial statement provision (permanent true-up of book balance to return)   -    -    (17.3)   (186,780)
Federal refund in excess of amount recorded   0.0    -    (16.5)   (176,750)
State tax refund resulting from amendments to federal return   0.0    -    3.0    32,309 
Change in valuation allowance and other   (0.2)   (22,812)   2.9    30,734 
Effective income tax rate   (34.2)  $(3,351,776)   (62.4)  $(672,416)

 

In addition to our federal income tax return, we file income tax returns in various state jurisdictions. We are no longer subject to tax examinations by federal or state tax authorities prior to the fiscal year ended April 30, 2008. The examination of our federal income tax returns for federal income tax years 2007 and 2008 was completed in April of 2010. The results of the audit did not have a material effect on our financial position or results of operations. Our federal tax returns for years after the fiscal year ended April 30, 2009 remain subject to examination.

 

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Note 10. Equity Transactions, Stock Option Plan and Warrants 

 

Information about our share-based plans

 

Our 1999 Stock Option Plan, as amended (the “1999 Plan”), provided for the granting of awards to our directors, officers, employees and independent contractors. The 1999 Plan expired in January of 2009 and was replaced with a new plan described below. The number of shares of common stock reserved for issuance under the 1999 Plan was 3,250,000 shares. The plan was administered by the Compensation Committee (the “Committee”) of the Board of Directors. The Committee had discretion under the plan regarding the vesting and service requirements, exercise price and other conditions.

 

On April 14, 2009, our shareholders approved the 2009 Equity Incentive Plan (the “2009 Plan”). The number of shares with respect to which awards may be granted under the 2009 Plan is 1,750,000 shares. The 2009 Plan is similar to the 1999 Plan in most respects and continues to provide for awards which may be made subject to time based or performance based vesting. 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 and restricted stock under both plans. Our practice has been to issue new shares upon the exercise of stock options. Stock option rights granted prior to the fiscal year ended April 30, 2006 under the 1999 Plan generally have 5-year terms and are fully vested and exercisable immediately. Subsequent option rights granted generally have 3, 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 years ended April 30, 2012 and April 30, 2011 is presented below:

  

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Shares   Price   Term (Year)   Value 
Outstanding at April 30, 2010   1,456,000   $1.77           
Granted   340,000    0.98           
Exercised   -                
Forfeited or expired   (20,000)   1.25           
                     
Outstanding at April 30, 2011   1,776,000   $1.62    4.90   $124,370 
                     
Exercisable at April 30, 2011   1,536,833   $1.69    4.49   $0 
                     
Outstanding at April 30, 2011   1,776,000   $1.62           
Granted   250,000    1.57           
Exercised   (25,000)   1.07           
Forfeited or expired   (136,000)   2.29           
                     
Outstanding at April 30, 2012   1,865,000   $1.57    4.56   $0 
                     
Exercisable at April 30, 2012   1,865,000   $1.57    4.56   $0 
                     
Available for grant at April 30, 2012   896,000                

 

The weighted-average grant-date fair value of options granted during the years ended April 30, 2012, and April 30, 2011 was $1.57 and $.98, respectively. There were 25,000 and 0 of stock options exercised during the years ended April 30, 2012 and April 30, 2011, respectively. The intrinsic value of the options exercised in 2012 was approximately $35,667. As of April 30, 2012, there was a total of $4,077 of unamortized compensation cost related to stock options, which cost is expected to be recognized over a weighted-average of approximately 0.25 year.

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Compensation cost for stock options was based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant, using the following weighted-average assumptions:

 

   April 30, 2012   April 30, 2011 
         
Expected volatility   190.5%   195.9%
Expected term (years)   10.00    10.00 
Expected dividend yield   -    - 
Risk-free interest rate   3.01%   3.08%
Forfeiture rate   -    - 

 

Under ASC Topic 718, “Compensation - Stock Compensation,” the fair value and compensation expense of each option award is estimated as of the date of grant using a Black-Scholes option pricing formula. Expected volatility is based on historical volatility of our stock over a preceding period commensurate with the expected term of the option. The expected term of the option is the period of time that the option is expected to be outstanding and is based on our historical experience. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we historically have not paid dividends and have no current plans to do so in the future.

 

The compensation cost related to these share-based awards is recognized over the requisite service period. The requisite service period is generally the period during which an employee is required to provide service in exchange for the award.

 

On October 11, 2010, the shareholders approved our 2010 Employee Stock Purchase Plan (the “2010 Plan”), which permits all our eligible employees, including employees of certain of our subsidiaries, to purchase shares of the Company's common stock through payroll deductions at a purchase price not to be less than 90% of the fair market value of the common stock on each purchase date. The total number of shares available for issuance under the 2010 Plan is 500,000 shares.  On November 30, 2010, the Board of Directors amended the 2010 Plan 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 therefrom. 146,223 and 37,880 shares were issued to 133 participants under the 2010 Plan as of April 30, 2012 and April 30, 2011, respectively.

 

Treasury Stock

 

During the fiscal year ended April 30, 2012, we issued 363,363 shares of treasury stock in two acquisitions. On July 18, 2011, we issued 350,140 shares to 3 Point, Inc. as part of the Washington III mini-casino acquisition. The value of these shares was based on average closing price of our stock over the ten consecutive trading days ending two trading days prior to the closing of the transaction. On January 27, 2012, we issued 13,223 shares to Michael J. Trucano and Patricia Burns as part of the South Dakota Gold acquisition. The value of these shares was based on average closing price of our stock over the seven consecutive trading days ending on the trading day immediately prior to the day of the public announcement of the transaction. See Note 7. In addition, on February 29, 2012, we issued 25,000 shares of treasury stock in connection with an exercise of an employee stock option.

 

Note 11. Earnings Per Share

 

The following is presented as a reconciliation of the numerators and denominators of basic and diluted earnings per share computations, in accordance with ASU 260:

 

 

 

   Fiscal Year Ended 
   April 30,   April 30, 
   2012   2011 
Numerator:          
Basic:          
Net loss available to common stockholders from continuing operations  $(6,439,294)  $(404,816)
Diluted:          
Net loss available to common stockholders from continuing operations  $(6,439,294)  $(404,816)
Denominator:          
Basic weighted average number of common shares          
outstanding   14,381,896    12,766,382 
Diluted weighted average number of common shares          
outstanding   14,381,896    12,766,382 
Loss per share for continuing operations:          
Net loss per common share – basic  $(.45)  $(.03)
Net loss per common share - diluted  $(.45)  $(.03)

 

49
 

 

For the fiscal years ended April 30, 2012 and April 30, 2011, potential dilutive common shares issuable under options of 1,865,000 and 1,776,000, respectively, were not included in the calculation of diluted earnings per share as they were anti-dilutive.

 

Note 12. Other Assets 

 

Other assets consisted of the following at April 30, 2012 and April 30, 2011:

 

   April 30, 2012   April 30, 2011 
Accrued interest receivable  $-   $406,839 
Other assets   70,952    70,000 
State gaming license   409,000    - 
Deferred loan issue cost, net   739,404    97,500 
Other assets  $1,219,356   $574,339 

 

Note 13. Segment Reporting 

 

We have three business segments (i) gaming, (ii) non-core, and (iii) assets of operations held for sale. The gaming segment for the twelve-month period ended April 30, 2012 consists of the Washington mini-casinos and our slot route operation in South Dakota. The gaming segment for the twelve-month period ended April 30, 2011 consists of the Washington mini-casinos. The “non-core” column is the land in Colorado and its taxes and maintenance expenses, while the “assets of operations held for sale” consists of the Colorado Grande Casino.

 

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

 

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   For the Twelve Months Ended  April 30, 2012 
   Gaming   Non-Core   Subtotal   Assets of
Operations
Held for Sale
   Totals 
                     
Net revenue  $55,628,634   $-   $55,628,634   $5,193,749   $60,822,383 
Segment loss pre tax   (7,463,845)   (2,327,225)   (9,791,070)   (1,185,626)   (10,976,696)
Segment assets   32,683,750    1,102,000    33,785,750    3,148,698    36,934,448 
Depreciation and amortization   2,004,311    -    2,004,311    105,058    2,109,369 
Additions to property and equipment   6,652,045    -    6,652,045    -    6,652,045 
                          
Interest expense, net (includes amortization)   1,576,122    -    1,576,122    2,342    1,578,464 
Income tax benefit (expense)   2,560,520    791,256    3,351,776    (301,183)   3,050,593 

 

   For the Twelve Months Ended  April 30, 2011 
   Gaming   Non-Core   Subtotal   Assets of
Operations
Held for Sale
   Totals 
                     
Net revenue  $42,536,302   $-   $42,536,302   $5,492,577   $48,028,879 
Segment loss pre tax   (1,055,409)   (21,823)   (1,077,232)   (124,523)   (1,201,755)
Segment assets   41,093,009    3,375,966    44,468,975    4,550,902    49,019,877 
Depreciation and amortization   1,597,498    -    1,597,498    210,454    1,807,952 
Additions to property and equipment   10,069,399    -    10,069,399    -    10,069,399 
                          
Interest expense, net (includes amortization)   1,245,710    -    1,245,710    5,389    1,251,099 
Income tax benefit   664,996    7,420    672,416    42,313    714,729 

 

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

  

   April 30, 
   2012 
     
Total assets for reportable segments    $33,785,750 
Assets of operations held for sale     3,148,698 
Cash and restricted cash not allocated to segments   6,987,229 
Deferred tax asset     5,251,236 
Total assets    $49,172,913 

  

Note 14. 401(k) Plan

 

Effective December 31, 2011, we terminated our 401(k) plan under which employees 21 years of age or older qualified for participation. The plan administration provided each plan participant with reinvestment options. Our discretionary contributions for the 401(k) plan for the fiscal years ended April 30, 2012 and April 30, 2011, were $37,891 and $43,289, respectively, exclusive of the South Dakota Gold plan described below.

 

Following our acquisition of all the shares of South Dakota Gold, we have assumed a 401(k) Profit Sharing Plan, a qualified retirement plan, covering all of the employees of South Dakota Gold who have completed one year of employment and are age 21 or older. Under the plan, South Dakota Gold makes annual discretionary contributions on behalf of each participant. Other than qualified rollover contributions, participants are not allowed to make contributions into the plan. Participants are always fully vested in their rollover contributions; however, vesting in South Dakota Gold’s profit sharing contribution is based on years of service, with a participant fully vested after six years. Since our acquisition, South Dakota Gold has made no discretionary profit sharing contributions.

 

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Following our acquisition of all the shares of South Dakota Gold, we have also assumed a 401(k) Savings Plan, a qualified retirement plan, covering all of the employees of South Dakota Gold who have completed one year of employment and are age 21 or older. Under the plan, participants may defer up to 10% of their compensation up to the maximum limit determined by law. Participants are always fully vested in their respective rollover and elective contributions while vesting in matching contributions is based on years of service, with a participant fully vested after six years. The discretionary match is a maximum of 3%. Since the date of acquisition, discretionary match for the period of January 27 through April 30, 2012, was $2,547. At the appropriate time, we will consider replacing this plan with the Nevada Gold Employee Savings Plan or another employee benefit plan (see Note 15 of our consolidated financial statements).

 

Note 15. Employee Savings Plan

 

Effective May 1, 2012, we initiated the Nevada Gold Employee Savings Plan (“ESP”) for key employees of our corporate office in Houston, Texas, and the operations in Washington State. Participation in the non-qualified plan is voluntary. The ESP is a life insurance plan with an A+ rated insurance carrier, which is partially paid by us and employee voluntary post-tax payroll deductions. Employee contributions are immediately vested. Our contributions vest after three years of employment, with credit given for past years employed. We will match employee contributions up to 3% of employee compensation, 50% of each dollar the employee contributes thereafter up to a maximum of 4% of employee total compensation. We can change or eliminate eligibility and contribution match at our discretion.

 

As we did not have a 401(k) plan or ESP for the period of January 1, 2012 through April 30, 2012, we decided to allow employees participating in the terminated 401(k) plan to make catch-up contributions which we would match up to 4% of the employee’s compensation. The employees are permitted to make the catch-up contributions through payroll deductions until December 31, 2012. As of April 30, 2012, we have accrued ESP catch-up match contributions of $16,279.

 

Note 16. Related Party Transactions 

 

During the fiscal year ended April 30, 2011, we engaged the law firm of Catania & Ehrlich, P.C., of which one of our board members is a partner. The firm was engaged to locate assets pertaining to a settlement agreement for a judgment awarded to us as well as to assist us with the licensing process before the Nevada Gaming Control Board. We paid the firm approximately $11,000 and $22,000 during the fiscal years ended April 30, 2012 and April 30, 2011, respectively.

 

We are required to obtain approval from the Audit Committee of the our Board of Directors for any related party transactions. The Audit Committee is comprised of independent directors.

 

Note 17. Commitments and Contingencies 

 

We rent office space in Houston, Texas under a non-cancelable operating lease which expires on March 31, 2013. The annual rent for the office space is $88,800.

 

As a result of acquiring facilities in Washington, the real property leases are as follows:

 

·Crazy Moose Casino in Mountlake Terrace has a building lease which expires on May 31, 2013 with an option to renew for two additional terms of three years and five years, respectively. The annual rent for this lease is $192,000 in the current fiscal year and $154,000 going forward. We own the buildings for the Crazy Moose Casino in Pasco and Coyote Bob Casino’s in Kennewick.
·Crazy Moose Casino in Pasco has a parking lot lease which expires on December 31 2013. The annual rent for this lease is $6,600.
·Silver Dollar Casino in SeaTac has a building lease which expires in May of 2022 with an option to renew for an additional term of 10 years. The annual rent is $238,000, with escalation of 4% annually.
·Silver Dollar Casino in Renton has a building lease which expires in April of 2019 with an option to renew for up to two additional terms of 10 years each. The annual rent is $480,000, with escalation of 8% every three years.
·Silver Dollar Casino in Bothell has a building lease which expires in April of 2017 with an option to renew for an additional term of 5 years. The annual rent is $286,000.
·Club Hollywood Casino in Shoreline has casino building and parking lot leases which expire in March of 2017 with options to renew for up to four additional five-year terms. The annual rentals are $671,350, with escalation of 3% annually.
·Golden Nugget Casino in Tukwila has a building lease which expires in November of 2014 with an option to renew for an additional term of 10 years. The annual rent is $166,000, with escalation of 3% annually.
·Royal Casino in Everett has a building lease which expires in January of 2016 with an option to renew for up to four additional five-year terms. The annual rent is $360,600, with escalation of 3% annually.
·Administrative offices lease in Renton expires in December of 2013. The annual rent is $53,000.
·Red Dragon Casino in Mountlake Terrace has a building lease which expires in October of 2016 with an option to renew for up to two additional five-year terms. The annual rent is $384,000, with escalation of 2% annually.

  

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

 

·An administrative center lease which expires in January of 2017 with an option to renew for an additional five-year term. The annual rent is $55,200.
·Two leases which expire on May 31, 2013 with annual rents of $36,000 and $18,000, respectively.

 

The expected remaining future annual minimum lease payments as of April 30, 2012 are as follows:

 

Fiscal Years  Corporate Office
Lease Payment
   Washington I, II &
III Casinos Lease
Payment
   South Dakota
Gold
   Total
Lease Payment
 
                 
2013  $73,300   $2,942,820   $109,200   $3,125,320 
2014       2,827,266    59,700    2,886,966 
2015       2,757,022    55,200    2,812,222 
2016       2,573,119    55,200    2,628,319 
2017       1,877,923    41,400    1,919,323 
Thereafter       2,849,599        2,849,599 
   $73,300   $15,827,749   $320,700   $16,221,749 

 

Rent expense for our corporate office in Houston, Texas, for the fiscal years ended April 30, 2012 and April 30, 2011 was $115,745 and $127,689, respectively. Rent expense for the Washington mini-casinos for the fiscal years ended April 30, 2012 and April 30, 2011 was $2,982,283 and $2,103,015, respectively. Acquisition-to-April 30, 2012 rent expense for South Dakota Gold was $24,268. The above schedule does not include rent expense our Las Vegas office, which is on a month-to-month basis with rent expense of approximately $1,000 per month.

 

For scheduled rent escalation clauses for the lease terms for the Washington properties, we recorded approximately $338,000 of amortization of deferred rent escalation. These escalations are shown on the consolidated income statement and 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.

 

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 18. Legal Proceedings 

 

We are not currently involved in any material legal proceedings.

 

Note 19. Quarterly Financial Information (Unaudited) 

 

The following table sets forth certain quarterly financial information for each of the fiscal quarters during the years ended April 30, 2012 and April 30, 2011.

 

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               Net income   Diluted income 
           Income   (loss) applicable   (loss) per 
           (loss) before   to common   common 
      Net revenues   tax benefit   stockholders   share (e) 
Consolidated Statements of Operations:      (in thousands, except per share amounts) 
Continuing Operations                         
Fiscal Year ended April 30, 2012                         
Quarter ended July 31, 2011       $12,750   $(271)  $(12)  $(0.01)
Quarter ended October 31, 2011        12,833    (3,063)(a)   (2,023)   (0.15)
Quarter ended January 31, 2012   (b)    13,477    (131)   (73)   - 
Quarter ended April 30, 2012   (c)    16,568    (6,326)   (4,331)   (0.27)
Fiscal Year ended April 30, 2011                         
Quarter ended July 31, 2010   (d)   $5,041   $(828)  $(562)  $(0.04)
Quarter ended October 31, 2010        12,263    (632)   (410)   (0.03)
Quarter ended January 31, 2011        12,184    (71)   297    0.02 
Quarter ended April 30, 2011        13,049    454    270    0.02 

 

(a)Includes pre-tax impairment of $2.3 million for land in Colorado.
(b)Includes only four days of operations from South Dakota Gold, which was acquired on January 27, 2012.
(c)Includes pre-tax valuation allowance of $1.7 million and $4.6 million for Big City Capital note and BVO/BVD receivable, respectively, and deferred rent amortization of $338,000.
(d)Includes only seven days of operations from the Washington II mini-casinos, which were acquired on July 23, 2010.
(e)Due to the fact that income per share amounts are calculated using the weighted average number of common and dilutive common equivalent shares outstanding during each quarter, the sum of the per share amounts for the four quarters may not equal the total income per share amounts for the year.

 

Note 20. Gain on Sale/Settlement of Assets

 

We sold all our interests in Isle of Capri Casino-Black Hawk, L.L.C. (“ICBH”) in January of 2008. In July of 2010, ICBH restated its financial statements for the fiscal years ended in 2007 and 2008 and concluded that additional cash distributions were owed to us. As a result, we received an additional cash distribution of $384,414 during the year ended April 30, 2011. As the assets were previously disposed, we treated the distribution in a manner similar to additional consideration received for the sale and classified the entire amount as Gain on Sale of Equity Investments. We had no material gains or losses in the fiscal year ended April 30, 2012.

 

Note 21. Impairment of Assets

 

Long-lived assets, including property, plant and equipment and amortizable intangible assets, comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist under authoritative guidance. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. Our evaluation of the carrying value of our long-lived assets for sale led us to conclude that there was an impairment of our undeveloped land asset adjacent to the city of Blackhawk, Colorado, and, accordingly, we recorded a pre-tax non-cash charge of $2.3 million to our operating results for the period ended October 31, 2011. The $2.3 million expense is in response to the receipt of an appraisal of the land, which used a market approach and other external data related to mineral rights, which, in the aggregate, estimate the value of the land at $1.1 million due to the downturn in vacant Colorado land held for development. This fair value measurement uses “Level 3” inputs under the fair value hierarchy. The asset is included in the non-core segment of our operations.

 

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

 

During the 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. At April 30, 2012 and April 30, 2011, our balance sheet reflects notes receivable of $0 and $1.7 million, respectively, net of a $3.2 million and $1.5 million allowance, respectively, related to the development of gaming/entertainment projects from Big City Capital. These notes receivable have a maturity date of December 31, 2014.  

 

54
 

 

 

In the period ending April 30, 2012, we determined our ability to collect the $4.6 million BVD/BVO receivable and its accrued interest was doubtful. Therefore, we established a $4.6 million valuation allowance against its principal and interest due.

 

Note 22. Stock Offering

 

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

 

Note 23. Sale of Assets/Asset Held for Sale

 

On November 23, 2011, we signed an agreement to sell substantially all of the assets of the Colorado Grande Casino, located in Cripple Creek, Colorado, including any rights in the Colorado Grande name and gaming-related liabilities, to G Investments, LLC (“GI”). We elected to sell the Colorado Grande Casino as a result of receiving an offer at an attractive EBITDA multiple from GI whose principals own a property in close proximity to the Colorado Grande Casino. As a result of the declining Cripple Creek, Colorado gaming market, this enables the buyer to create synergies not available to us. We closed the sale on May 25, 2012. Under the terms of the agreement, the buyer agreed to pay us $3.1 million, of which $800,000 was paid in cash and $2.3 million will be paid through a five year, 6% interest rate promissory note. On May 29, 2012, we filed a Form 8-K which provides details regarding the transaction.

 

We leased this property at an annual rent of the greater of $144,000 or 5% of Colorado Grande Casino’s adjusted gross gaming revenues with an annual cap of $400,000. Starting from April 30, 2012, the annual rent was changed to $252,548 with an option by the landlord to revert to the original rent structure upon obtaining necessary approvals from the Colorado Gaming Commission. Although this lease was assigned to GI as a result of the sale of the Colorado Grande Casino, which occurred on May 25, 2012, we retained contingent liability of the tenant’s obligations under this lease through May 24, 2017.

 

In preparation for the sale, we also recorded an impairment of Goodwill of approximately $558,000 to lower its carrying value to the fair value. We also wrote off the remaining deferred tax assets of $706,000, as it will not be available due to the sale of underlying assets.

 

The cash received from Colorado Grande Casino operating activities was maintained by us, and the investing and financing operations were not material therefore the cash flow is presented as consolidated for the ease of accounting.

 

A summary of the Colorado Grande Casino’s assets and liabilities which were held for sale are as follows:

 

   April 30, 2012   April 30, 2011 
Goodwill  $2,154,932   $2,712,918 
Net PP&E   960,165    1,062,038 
Inventory   33,601    36,187 
Deferred tax asset   -    739,759 
Total Assets  $3,148,698   $4,550,902 
           
Accounts payable and accrued liabilities  $23,699   $328,910 
Short term debt   -    76,339 
Total Liabilities  $23,699   $405,249 
           
Consideration received  $3,125,000    - 
Net Gain (loss)  $1    - 

 

A summary of the Colorado Grande Casino’s year-to-date operations are as follows:

 

   Twelve months
ended April 30,
2012
   Twelve months
ended April 30,
2011
 
Net revenues  $5,193,749   $5,492,578 
Total expenses   6,683,039    5,574,788 

 

The assets and revenues of the Colorado Grande Casino are currently reported in the assets of operations held for sale and were previously reported in the gaming segment of our consolidated financial statements. The loss on sale was not material to our Financial Statements.

 

55
 

 

Note 24. Subsequent Events

 

Other than the sale of the Colorado Grande Casino assets (see Note 23), the following events occurred subsequent to the year end April 30, 2012:

 

Revolving Credit Loan

 

On June 27, 2012, South Dakota Gold obtained a $1.7 million revolving loan from Wells Fargo Gaming Capital, LLC in order to pay a slot machine registration fee due to the South Dakota Commission on Gaming by June 30 of each year. The loan matures on March 31, 2013 and bears an annual interest rate of the base rate, which equals the greater of (a) 2.5%, (b) the Federal Reserve rate plus 1/2%, (c) the LIBOR plus 1% or (4) the prime rate charged by Well Fargo Bank, N.A., plus the margin rate of 3.5%. The terms of the loan requires South Dakota Gold to make amortization payments in order to reduce a large portion of the principal balance through October 31, 2012. The loan may be extended until October 7, 2014 upon obtaining prior approval from the sellers of South Dakota Gold. The repayment of the loan is secured by the assets of South Dakota Gold and NG South Dakota, LLC, while we and NG South Dakota, LLC serve as the guarantors. In connection with entering into this transaction, we incurred an additional $25,000 of loan closing charges. Historically, the prior owner of South Dakota Gold has financed this obligation with a short term loan. The loan from Wells Fargo Gaming Capital, LLC represents a continuation of that practice.

 

On July 3, 2012, we filed a Form 8-K which provides details regarding this transaction.

 

Reduction of Debt

 

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

 

56

 

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