XASE:UWN Nevada Gold & Casinos Inc Quarterly Report 10-Q Filing - 7/31/2012

Effective Date 7/31/2012

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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

 

For the quarterly period ended July 31, 2012

 

¨

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

 

 

For the transition period from_______________________ to ___________________________

 

Commission File Number 1-15517

 

 

Nevada Gold & Casinos, Inc.

 

(Exact name of registrant as specified in its charter)

 

Nevada

 

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

 

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

 

Registrant’s telephone number including area
code:

(713) 621-2245

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file the reports), and (2) has been subject to those filing requirements for the past 90 days. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).

x Yes ¨ No

 

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

 

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

 

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

 

¨ Yes   x No

 

The number of common shares, $0.12 par value per share, issued and outstanding, was 15,960,174 as of September 11, 2012.

 

 
 

 

TABLE OF CONTENTS

 

    Page
     
  PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
  Consolidated Balance Sheets – July 31, 2012 (unaudited) and April 30, 2012 2
  Consolidated Statements of Operations – Three months ended July 31, 2012 (unaudited) and July  31, 2011 (unaudited) 3
  Consolidated Statements of Cash Flows – Three months ended July 31, 2012 (unaudited) and July 31, 2011 (unaudited) 4
  Notes to Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
     
  PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Mine Safety Disclosures 24
Item 5. Other Information 24
Item 6. Exhibits 24

 

 
 

 

FORWARD-LOOKING STATEMENTS

 

Factors that May Affect Future Results

 

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

 

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us or our representatives) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or other words or expressions of similar meaning, may identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. Forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations, intentions with respect to the financial condition, results of operations, future performance and the business of us, including statements relating to our business strategy and our current and future development plans. These statements may also involve other factors which are detailed in the “Risk Factors” and other sections of our Annual Report on Form 10-K for the year ended April 30, 2012 and other filings with the Securities and Exchange Commission.

 

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

 

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

 

- 1 -
 

 

Part I. Financial Information

 

Item 1. Financial Statements

Nevada Gold & Casinos, Inc.

Consolidated Balance Sheets

 

   July 31,   April 30, 
   2012   2012 
   (unaudited)     
         
ASSETS          
Current assets:          
Cash and cash equivalents  $6,265,107   $5,200,161 
Restricted cash   1,957,114    1,787,068 
Accounts receivable   990,919    653,433 
Prepaid expenses   1,471,516    909,834 
Notes receivable, current portion   104,058    20,600 
Other current assets   360,591    354,817 
Assets of operations held for sale   -    33,601 
Total current assets   11,149,305    8,959,514 
           
Investments in development projects   264,360    255,355 
Real estate held for sale   1,100,000    1,100,000 
Notes receivable, net of current portion   2,239,703    - 
Goodwill   16,103,584    16,090,799 
Identifiable intangible assets, net of accumulated amortization of $3,509,262 and $3,201,868 at July 31, 2012 and April 30, 2012, respectively   7,475,059    7,782,453 
Property and equipment, net of accumulated depreciation of $1,965,835 and $1,785,064 at July 31, 2012 and April 30, 2012, respectively   5,238,267    5,399,103 
Deferred tax asset, net   5,162,547    5,251,236 
Other assets   1,165,861    1,219,356 
Assets of operations held for sale   -    3,115,097 
Total assets  $49,898,686   $49,172,913 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $2,371,932   $2,176,545 
Accrued interest payable   56,875    61,141 
Other accrued liabilities   2,810,702    2,632,067 
Long-term debt, current portion   2,512,573    1,400,324 
Liabilities of discontinued operations   145,062    23,699 
Total current liabilities   7,897,144    6,293,776 
Other long term  liabilities   356,883    337,849 
Long-term debt, net of current portion   14,045,000    15,155,000 
Total liabilities   22,299,027    21,786,625 
           
           
Stockholders' equity:          
Common stock, $0.12 par value per share; 50,000,000 shares authorized; 16,743,011 and 16,707,205 shares issued and 15,960,174 and 15,924,368 shares outstanding at July 31, 2012, and April 30, 2012, respectively   2,009,161    2,004,865 
Additional paid-in capital   24,196,108    24,155,158 
Retained earnings   8,331,964    8,163,839 
Treasury stock, 782,837 shares at July 31, 2012 and April 30, 2012, respectively, at cost   (6,932,035)   (6,932,035)
Accumulated other comprehensive loss   (5,539)   (5,539)
Total stockholders' equity   27,599,659    27,386,288 
Total liabilities and stockholders' equity  $49,898,686   $49,172,913 

 

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

 

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Nevada Gold & Casinos, Inc.

Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended 
   July 31,   July 31, 
   2012   2011 
Revenues:          
Casino  $14,761,259   $10,921,276 
Food and beverage   2,557,601    2,592,780 
Other   668,699    515,487 
Gross revenues   17,987,559    14,029,543 
Less promotional allowances   (1,176,856)   (1,279,073)
Net revenues   16,810,703    12,750,470 
           
Expenses:          
Casino   8,048,694    5,312,352 
Food and beverage   1,185,087    977,363 
Marketing and administrative   4,385,228    3,918,345 
Facility   543,621    489,579 
Corporate expense   873,774    1,082,764 
Legal expense   38,862    6,933 
Depreciation and amortization   538,981    438,663 
Deferred rent   19,034    - 
Acquisition costs   -    51,945 
Excise taxes   313,320    292,251 
Other   143,578    102,856 
Total operating expenses   16,090,179    12,673,051 
Operating income   720,524    77,419 
Non-operating income (expenses):          
Loss on sale of assets   (1,245)   (314)
Interest income   900    42,849 
Interest expense   (385,501)   (379,649)
Amortization of loan issue costs   (77,543)   (11,250)
Income (loss) before income tax benefit (expense)   257,135    (270,945)
Income tax benefit (expense)   (88,689)   283,927 
Net income from continuing operations  $168,446   $12,982 
Net loss from discontinued operations, net of taxes   (321)   (204,841)
Net income (loss)  $168,125   $(191,859)
Per share information:          
Net income per common share - basic and diluted for continuing operations  $0.01   $0.00 
           
Net loss per common share - basic and diluted for discontinued operations  $0.00  $(0.01)
           
Basic weighted average number of shares outstanding   15,935,655    12,856,030 
           
Diluted weighted average number of shares outstanding   16,355,655    13,916,030 

 

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

 

- 3 -
 

 

Nevada Gold & Casinos, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

   Three Months Ended 
   July 31,   July 31, 
   2012   2011 
Cash flows from operating activities:          
Net income (loss)  $168,125   $(191,859)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization   538,981    479,540 
Stock-based compensation   4,077    289,838 
Amortization of deferred loan issuance costs   77,543    11,250 
Deferred rent   19,034    - 
Loss on sale/settlement of assets   1,245    314 
Deferred income tax expense (benefit)   88,689    (97,815)
Changes in operating assets and liabilities:          
Receivables and other assets   838,212    (247,555)
Accounts payable and accrued liabilities   447,619    564,845 
Net cash provided by operating activities   2,183,525    808,558 
Cash flows from investing activities:          
Capitalized development costs   (9,005)   (250,612)
Collections on notes receivable   1,839    - 
Purchase of property and equipment   (84,783)   (529,129)
Proceeds from the sale of assets   800,000    125 
Additions to restricted cash   (170,046)   (281,373)
Net cash provided by (used in) investing activities   538,005    (1,060,989)
Cash flows from financing activities:          
Payments on capital lease   -    (5,627)
Employee stock plan purchases   41,169    35,023 
Repayment of short term loans   (1,697,751)   (79,455)
Net cash used in financing activities   (1,656,582)   (50,059)
           
Net increase (decrease) in cash and cash equivalents   1,064,948    (302,490)
Cash and cash equivalents at beginning of period   5,200,160    5,656,110 
Cash and cash equivalents at end of period  $6,265,108   $5,353,620 
Supplemental cash flow information:          
Cash paid for interest  $390,801   $378,185 
           
Non-cash investing and financing activities:          
Issuance of note receivable to purchasers of wholly-owned subsidiary  $2,325,000   $- 
Non-cash purchase of licenses, property and equipment  $1,675,000   $850,000 

 

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

 

- 4 -
 

 

Nevada Gold & Casinos, Inc.

 

Notes to Consolidated Financial Statements

 

Note 1.   Basis of Presentation

 

The interim financial information included herein is unaudited. However, the accompanying consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly our Consolidated Balance Sheets at July 31, 2012 and April 30, 2012, Consolidated Statements of Operations for the three months ended July 31, 2012 and July 31, 2011, and Consolidated Statements of Cash Flows for the three months ended July 31, 2012 and July 31, 2011. Although we believe the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended April 30, 2012 and the notes thereto included in our Annual Report on Form 10-K. The results of operations for the three months ended July 31, 2012 are not necessarily indicative of the results expected for the full year.

 

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

 

Certain reclassifications have been made to conform prior year financial information to the current period presentation. Those reclassifications did not impact working capital, total assets, total liabilities, net income, net loss or stockholders’ equity.

 

Note 2.   Critical Accounting Policies

 

Revenue Recognition

 

In accordance with gaming industry practice, we recognize casino revenues as the net win from gaming activities, which is the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive jackpots which are recorded as a progressive jackpot liability. Revenues from food, beverage, entertainment, and the gift shops are recognized at the time the related service or sale is provided or made.

 

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. 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 included in casino expense in the accompanying consolidated statements of operations was as follows:

 

   Three Months Ended 
   July 31,
2012
   July 31,
 2011
 
Food and beverage  $903,561   $1,144,874 
Other   43,528    7,049 
Total cost of complimentary services  $947,089   $1,151,923 

 

 

Fair Value of Financial Instruments and Concentrations of Credit Risk 

 

GAAP 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 defined as follows: 

 

- 5 -
 

 

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

 

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

 

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

 

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

 

Real estate held for sale is recorded at carrying value and tested for impairment annually using projections of undiscounted future cash flows as well as third party valuations (see Note 15).

 

Goodwill is recorded at carrying value and tested for impairment annually 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, while the recorded value of long term debt approximates fair value as interest rates approximate market rates.

 

Financial instruments that potentially subject us to concentrations of credit risk are primarily notes receivable, cash and cash equivalents, accounts receivable and payable, and long term debt. As of July 31, 2012 we had four notes receivable, as well as the BVD/BVO receivable, outstanding. Two of these notes were issued in connection with a potential gaming project, one is for the sale of the Colorado Grande Casino (see Note 16), and the fourth is 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.

 

New Accounting Pronouncements and Legislation Issued

 

As of the beginning of the fiscal year ending April 30, 2013, there are new accounting standards effective which are discussed below:

 

Intangibles — Goodwill and Other

 

In September 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 “Level 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 July 31, 2012 and July 31, 2011, we maintained approximately $2.0 million and $1.8 million, respectively, in restricted cash, which consists of player-supported jackpot funds. Player-supported jackpot is a progressive game of chance directly related to the play or outcome of an authorized non-house-banked card game separately funded by our patrons. Any jackpots hit in these card games are paid from such reserved funds.

 

As a result of refinancing our debt through Wells Fargo Gaming Capital, LLC (the “Wells Fargo Loan”) (see Note 5), we are no longer required to maintain reserve funds for insurance and taxes.

 

Note 4.   Notes Receivable 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 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 July 31, 2012 and April 30, 2012, our balance sheet reflects notes receivable of $0, net of a $3.2 million allowance, related to the development of gaming/entertainment projects from Big City Capital. These notes receivable have a maturity date of December 31, 2014.

 

- 6 -
 

 

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 prime rate 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, 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.

 

G Investments, LLC

 

Upon completion of the sale of the Colorado Grande Casino, we recorded a $2.3 million note receivable. The note bears interest at 6% per annum through the maturity date of June 1, 2017, and is secured with all of the assets of the Colorado Grande Casino, pledge of the membership interest in GI, and a personal guaranty by GI’s principal.

 

Repayments are scheduled to be made as follows:

 

·No monthly installments of principal and accrued interest shall be due and payable for three months following the sale date of May 25, 2012;
·One monthly installment of principal and accrued interest of $5,000 on September 1, 2012;
·Beginning October 1, 2012, eight monthly installments of principal and accrued interest of $20,000;
·Beginning June 1, 2013, twelve monthly installments of principal and accrued interest of $30,000;
·Beginning June 1, 2014, thirty six monthly installments of principal and accrued interest of $40,000; and
·A final installment of $907,061 which is due on the maturity date of June 1, 2017.

 

Please see Note 16.

 

- 7 -
 

 

Note 5.   Long-Term Debt  

 

Our long-term financing obligations are as follows:

 

   July 31   April 30, 
   2012   2012 
         
$11.0 million note payable, LIBOR, with 0.25% floor, plus 9.50% interest, payments of $250,000 due each quarter and remainder due at maturity of October 7, 2014  $10,250,000   $10,500,000 
$4.0 million promissory note, 11% through October 7, 2011, 11.5% interest until maturity at June 30, 2015   3,200,000    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 accrued interest at the maturity date of December 15, 2013   150,000    150,000 
$100,000 note payable, 6% imputed interest, to be paid in thirty equal monthly installments, beginning August 5, 2011, maturing January 13, 2014   60,000    70,000 
$1.4 million promissory note, 6% interest, payable in fifty nine monthly installments of $10,000 plus all accrued interest beginning February 27, 2012, and the remaining principle at the maturity date of January 27, 2017   1,365,000    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   360,000    380,000 
$60,324 note payable, 6% imputed interest, maturing January 27, 2013   60,324    60,324 
$1.7 million note payable, base rate interest, which equals the greater of 2.5%, the Federal Reserve rate plus 1/2%, LIBOR plus 1%, or the prime rate charged by Wells Fargo Bank, plus the margin rate of 3.5%, maturing March 31, 2013   1,112,249    - 
Total   16,557,573    16,555,324 
Less: current portion   (2,512,573)   (1,400,324)
Total long-term financing obligations  $14,045,000   $15,155,000 

 

On May 31, 2012, following the closing of the sale of the Colorado Grande Casino (see Note 16), we repaid $800,000 of the $4 million debt due on June 30, 2015 from the cash proceeds of the sale price paid to us at closing. Pursuant to the terms of the $4 million loan, we are required to remit all principal and interest payments received pursuant to the $2.3 million note receivable issued to us by the buyer of the Colorado Grande Casino towards further reduction of the principal of the $4 million debt.

 

On June 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. Historically, the prior owner of South Dakota Gold had financed this obligation with a short-term loan. The loan from Wells Fargo Gaming Capital, LLC represents a continuation of that practice. With this loan, we incurred $25,000 of deferred loan issue costs which are amortizable over the life of the loan.

 

The Wells Fargo Loan has a limited number of financial covenants of which we are in compliance with as of July 31, 2012 and the filing date of this document. We are also not permitted to incur additional indebtedness without this lender’s prior approval.

 

Note 6.   Stock-Based Compensation

 

Information about our share-based plans

 

We have obligations under three employee stock plans: (1) the 1999 Stock Option Plan, as amended (the “1999 Plan”), (2) the 2009 Equity Incentive Plan (the “2009 Plan”), and (3) the 2010 Employee Stock Purchase Plan, as amended (the “2010 Plan”).

 

The 1999 Plan

 

Our 1999 Plan provided for the granting of common stock awards to our directors, officers, employees and independent contractors. The 1999 Plan expired in January 2009 and was replaced with the 2009 Plan. The number of shares 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. No further grants can be issued under the 1999 Plan; however, there are unexercised awards outstanding.

 

- 8 -
 

 

The 2009 Plan

 

On April 14, 2009, our shareholders approved the 2009 Plan. The number of common stock shares reserved for issuance 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, we have only awarded stock options and restricted stock. Our policy has been to issue new shares upon the exercise of stock options. Stock option rights granted prior to the fiscal year ended in 2006 generally have 5-year terms and are fully vested and exercisable immediately. Subsequent option rights granted generally have 5- or 10-year terms and are generally exercisable in two or three equal annual installments, with some options grants providing for immediate vesting for the entire or a portion of the grant.

 

A summary of activity under our share-based payment plans for the three months ended July 31, 2012 is presented below:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Shares   Price   Term   Value 
Outstanding at April 30, 2012   1,865,000   $1.57           
Granted   -    -           
Exercised   -    -           
Forfeited or expired   (200,000)   2.01           
                     
Outstanding at July 31, 2012   1,665,000   $1.52    4.8   $- 
                     
Exercisable at July 31, 2012   1,665,000   $1.52    4.8   $- 

 

As of July 31, 2012, we have no unamortized compensation related to stock options.

 

Compensation cost for stock options granted for the three month period ended July 31, 2011 was based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant and using the following weighted-average assumptions:

 

   Three Months Ended 
   July 31, 2012   July 31, 2011 
         
Expected volatility   -    190.5%
Expected term   -    10.0 
Expected dividend yield   -    - 
Risk-free interest rate   -    2.98%
Forfeiture rate   -    - 

 

Expected volatility is based on historical volatility of our stock. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award.

 

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The 2010 Plan

 

On October 11, 2010, our shareholders approved the 2010 Plan which permits all our eligible employees, including employees of certain of our subsidiaries, to purchase shares of our common stock through payroll deductions at a purchase price not to be less than 90% of the fair market value of the shares on each purchase date. The number of shares available for issuance under the 2010 Plan is a total of 500,000 shares.  On November 30, 2010, our Board of Directors amended the 2010 Plan, effective December 1, 2010, to allow its participants to contribute up to a maximum of twenty (20%) percent of their paid compensation. The 2010 Plan became available for employee participation on January 1, 2011, employee payroll deductions began in January of 2011, and shares are to be purchased at the end of each calendar quarter. As of July 31, 2012, 182,029 shares were issued to 140 participants under the 2010 Plan.

 

Note 7.   Computation of Earnings Per Share

 

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

 

   Three Months Ended 
   July 31,   July 31, 
   2012   2011 
Numerator:          
Basic and Diluted:          
Net income from continuing operations available to common shareholders  $168,446   $12,982 
           
Denominator:          
Basic weighted average number of common shares outstanding   15,935,655    12,856,030 
Dilutive effect of common stock options and warrants   420,000    1,060,000 
           
Diluted weighted average number of common shares outstanding   16,355,655    13,916,030 
           
Income per share from continuing operations:          
           
Net income per common share - basic and diluted for continuing operations  $0.01   $0.00 

 

For the three months ended July 31, 2012 and July 31, 2011, potential dilutive common shares issuable under options of 1,245,000 and 864,000, respectively, were not included in the calculation of diluted earnings per share as they were anti-dilutive.

 

Note 8.   Segment Reporting  

 

We have three business segments: (i) gaming, (ii) non-core, and (iii) assets of discontinued operations. The gaming segment for the three month period ended July 31, 2012 consists of the Washington mini-casinos and our slot route operation in South Dakota. The gaming segment for the three month period ended July 31, 2011 consists of the Washington mini-casinos. The “non-core” column is the land in Colorado and its taxes and maintenance expenses, and the “assets of discontinued operations” consists of the Colorado Grande Casino.

 

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

 

   As of and for the Three Months Ended  July 31, 2012 
   Gaming   Non-Core   Subtotal   Assets of
Discontinued
Operations
   Totals 
Net revenue  $16,810,703   $-   $16,810,703   $-   $16,810,703 
Segment income (loss) pre tax   262,508    (5,373)   257,135    (321)   256,814 
Segment assets   35,411,918    1,102,000    36,513,918    -    36,513,918 
Depreciation and amortization   538,981    -    538,981    -    538,981 
Additions to property and equipment   84,783    -    84,783    -    84,783 
Interest expense, net (includes amortization)   462,144    -    462,144    -    462,144 
Income tax benefit (expense)   (90,516)   1,827    (88,689)   -    (88,689)
                          

 

   As of and for the Three Months Ended July 31, 2011 
   Gaming   Non-Core   Subtotal   Assets of
Discontinued
Operations
   Totals 
                     
Net revenue  $12,750,470   $-   $12,750,470   $1,408,277   $14,158,747 
Segment loss pre tax   (258,341)   (12,604)   (270,945)   (18,648)   (289,593)
Segment assets   33,701,998    3,375,966    37,077,964    4,507,039    41,585,003 
Depreciation and amortization   438,663    -    438,663    40,877    479,540 
Additions to property and equipment   1,379,129    -    1,379,129    -    1,379,129 
Interest expense, net (includes amortization)   348,050    -    348,050    864    348,914 
Income tax benefit (expense)   283,927    -    283,927    (186,193)   97,734 

 

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

 

   July 31, 2012 
Total assets for reportable segments  $36,513,918 
Cash and restricted cash not allocated to segments   8,222,221 
Deferred tax asset   5,162,547 
Total assets  $49,898,686 

 

Note 9. Other Assets

 

Other assets consist of the following at July 31, 2012 and April 30, 2012, respectively:

 

   July 31, 2012   April 30, 2012 
Other assets  $70,000   $70,952 
State gaming license   409,000    409,000 
Deferred loan issue cost, net   686,861    739,404 
Other assets  $1,165,861   $1,219,356 

 

As a result of closing on the Wells Fargo Loan and the repayment and renegotiating terms of our $4,000,000 note payable, we incurred $910,455 of deferred loan issue costs which are amortizable over the life of the loan. As a result of the $1,700,000 device fee loan, we incurred $25,000 of deferred loan issue costs, which are amortizable over the life of the loan.

 

Note 10.   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.

 

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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 and five years, respectively. The annual rent for this lease is $154,000 going forward. We own the buildings for the Crazy Moose Casino in Pasco and Coyote Bob Casino 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 costs 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.

 

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 rolling twelve months minimum lease payments as of July 31, 2012 are as follows:

 

Period  Corporate
Office
Lease
Payment
   South
Dakota
Gold
   Washington Gold
Lease Payment
   Total
Lease
Payment
 
                     
August 2012 - July 2013  $51,310   $100,200   $2,928,855   $3,080,365 
August 2013 - July 2014       55,200    2,810,862    2,866,062 
August 2014 - July 2015       55,200    2,730,174    2,785,374 
August 2015 -July 2016       55,200    2,480,352    2,535,552 
August 2016 - July 2017       27,600    1,544,263    1,571,863 
Thereafter           2,633,101    2,633,101 
   $51,130   $293,400   $15,127,607   $15,472,317 

 

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

 

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

 

Note 11. Legal Proceedings

 

We are not currently involved in any material legal proceedings.

 

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Note 12. Acquisitions

 

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. 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 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 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 and paid 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 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 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 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 summary of the purchase price allocation is as follows:

 

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

 

The July 31, 2011, year-to-date net revenues of $134,000 and results of operations of ($2,000), which includes closing costs, pre-opening expenses, and legal and escrow expenses totaling $8,700, have been included in our consolidated statements of operations since the date of the acquisition of July 18, 2011. At July 31, 2012, goodwill acquired was approximately $692,000, all of which is expected to be deductible for tax purposes.

 

Management has reviewed the Washington III mini-casino operating results and concluded that the 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 were included in the April 30, 2012 consolidated statement of operations in marketing and administrative, legal and other expenses of $108,000 related to the acquisition were reflected separately in the consolidated statement of operations. The preliminary summary of the purchase price allocation is as follows:

 

- 13 -
 

 

   (000’s) 
Current assets and liabilities, net  $38 
Property and equipment   1,775 
Non-compete   251 
Customer relationships   1,100 
Goodwill   1,936 
      
Purchase price  $5,100 

 

At July 31, 2012, goodwill acquired was approximately $1,936,000, all of which is expected to be deductible for tax purposes.

 

Note 13. Goodwill and Other Intangible Assets

 

In connection with our acquisitions of the Washington mini-casinos on May 12, 2009, July 23, 2010, and July 18, 2011 as well as South Dakota Gold on January 27, 2012 (see Note 12), we have goodwill with an indefinite useful life and identifiable intangible assets of $23.6 million, net of amortization.

 

The change in the carrying amount of goodwill and other intangibles for the fiscal year ending April 30, 2013 is as follows (in thousands):

 

   Total   Goodwill   Other
Intangibles
 
Balance as of April 30, 2012  $23,873   $16,091   $7,782 
Acquired during the year   13    13    - 
Current year amortization   (307)   -    (307)
Balance as of July 31, 2012  $23,579   $16,104   $7,475 

 

The $13,000 increase in goodwill from April 30, 2012 to July 31, 2012 is the result of finalizing the working capital adjustment for South Dakota Gold in July of 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 amortization of other intangible assets as of July 31, 2012 is as follows (in thousands):

 

   
   Gross
Carrying
Amount
   Accumulated
Amortization
 
         
Customer relationships  $7,853   $(2,457)
Non-compete agreements   1,269    (1,052)
Trade names   1,862    - 
Total  $10,984   $(3,509)

 

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

 

For the 
fiscal year
  Amount 
2013  $1,205 
2014   1,205 
2015   1,185 
2016   1,122 
2017    718 
Thereafter   178 
Total  $5,613 

 

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.

 

- 14 -
 

 

Note 14. State Gaming Laws

 

Washington

 

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

 

To operate our ten “mini-casinos” in Washington State, 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% 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.

 

- 15 -
 

 

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.”

 

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.

 

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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.

 

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.

 

Note 15. Impairment of Assets

 

Long-lived assets, including property, plant and equipment, and amortizable intangible assets, comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators 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 vacant 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 April 30, 2012. The $2.3 million expense was 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.   

 

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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 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 July 3, 2012 our balance sheet reflects notes receivable of $0, net of a $3.2 million allowance, related to the development of gaming/entertainment projects from Big City Capital. These notes receivable have a maturity date of December 31, 2014.  

 

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 16. Sale of Assets/Discontinued Operations

 

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 finalized 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. The promissory note matures on June 1, 2017, and is secured with all of the assets of the Colorado Grande Casino, pledge of the membership interest in GI, and a personal guaranty by GI’s principal. On May 29, 2012, we filed a Form 8-K with the SEC 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 the underlying assets.

 

The cash received from Colorado Grande Casino’s 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 sold are as follows:

 

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   As of
May 25, 2012
 
Goodwill  $2,154,932 
Net PP&E   960,165 
Inventory   33,601 
Deferred tax asset   - 
Total Assets  $3,148,698 
      
Accounts payable and accrued liabilities  $23,699 
Short term debt   - 
Total Liabilities  $23,699 
      
Consideration received (cash and note)  $3,125,000 
Net Gain   $1 

 

The amount shown as liabilities of discontinued operations, mostly gaming-based liabilities, will be subject to adjustment for working capital. The gain on sale was not material to our financial statements.

 

Note 17. 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 18. Subsequent Event

 

Effective as of September 6, 2012, Robert B. Sturges resigned as our Chief Executive Officer and a member of our Board of Directors for personal reasons. Mr. Sturges decision to resign from his position on our Board of Directors or from his position as an officer of the Company was not the result of any disagreement with the Company on any matters relating to our operations, policies or practices, or the result of any disagreement with our Board of Directors, management or our auditors.

 

Our Board of Directors has named Ernest E. East, former Senior Vice President and General Counsel, and a long-time counselor to our Board of Directors, as interim President. Mr. East will report to an oversight committee of our Board of Directors while we search for a permanent Chief Executive Officer.

 

On September 7, 2012, we filed a Form 8-K with the SEC which provides details regarding these events.

 

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

 

The following discussion and analysis (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report for the year ended April 30, 2012, filed on Form 10-K with the SEC on July 27, 2012.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with GAAP. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report for the year ended April 30, 2012, filed on Form 10-K with the SEC on July 27, 2012.

 

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Executive Overview

 

We were formed in 1977 and, since 1994, have primarily been a gaming company involved in financing, developing, owning and operating gaming properties. Our gaming facility operations are located in the United States of America (“U.S.”), specifically in the states of Washington and South Dakota. Our business strategy will continue to focus on owning and operating gaming establishments. If we are successful, our future revenues, costs and profitability can be expected to increase. However, there is no guarantee that we will be successful in implementing our business strategy in the future and, as such, no guarantee that our future revenues, costs and profitability will increase. Our net revenues were $16.8 million and $12.8 million for the three months ended July 31, 2012 and July 31, 2011, respectively.

 

When compared to the three months ended July 31, 2011, the three month period ended July 31, 2012 was impacted by the following items:

 

- Addition of one mini-casino in Washington State, effective July 18, 2011;

 

- Addition of a slot route operation in South Dakota, effective January 27, 2012;

 

- Increased drop at our Washington properties;

 

- A reduction of our table games hold percentage;

 

- Refinancing of our long-term debt on October 7, 2011; and

 

- Increased net interest expense.

 

COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2012 AND JULY 31, 2011

 

Net revenues. Net revenues increased 31.84%, to $16.8 million from $12.8 million, for the three-month period ended July 31, 2012, compared to the same period ended July 31, 2011. Casino revenues increased 35.2%, or $3.8 million, with the addition of the Washington III mini-casino and operations of South Dakota Gold. Food and beverage revenues remained consistent, and other revenues increased 29.7%, or $0.2 million, mainly as a result of additional commission revenue for ATMs, check cashing, vending as well as retail, pull tabs, and other revenues. Our promotional allowances decreased $0.1 million for the three month period ended July 31, 2012, compared to the same period ended July 31, 2011 as the Washington properties no longer charge complimentary revenue for soft drinks.

 

Total operating expenses. Total operating expenses increased 26.96%, to $16.1 million from $12.7 million, for the three-month period ended July 31, 2012, compared to the same period ended July 31, 2011. Casino expenses increased 51.5%, or $2.7 million, with the addition of South Dakota Gold and an entire quarter of activity in the Washington III mini-casino compared to thirteen days in the prior year. Marketing and administrative increased 11.9%, or $0.5 million, with the additions of the Washington III mini-casino, South Dakota Gold, and increased marketing expenses in proportion to the increased revenue. Food and beverage expenses increased $0.2 million and depreciation and amortization increased $0.1 million with the additional assets of the Washington III mini-casino and South Dakota Gold, offset by decreased corporate expenses of $0.2 million related to the decrease in stock option expense amortization.

 

Interest income (expense), net. Interest income (expense), net, consists of a net balance of interest expense, amortization of loan issue cost, and loss on extinguishment of debt, offset by interest income from our various notes receivable. Interest expense increased 1.5%, or $6,000, for the three month period ended July 31, 2012, compared to the three month period ended July 31, 2011. The increase is due to the 0.5% higher interest rate on the $4.0 million note, which resulted from refinancing our long-term debt. A decrease in interest income of $42,000 for the three month period ended July 31, 2012, compared to the three-month period ended July 31, 2011, was related to the impairment of the BVD/BVO receivable (See Note 4). Amortization of loan issue cost was $77,543 and $11,250 for the three-month periods ended July 31, 2012 and July 31, 2011, respectively. This increased amortization is due to refinancing our long-term debt.

 

Income Taxes. Our consolidated tax rate for the periods ending July 31, 2012 and July 31, 2011 were a 34.5% expense and a 33.8% benefit, respectively. For the period ended July 31, 2011, the 104.8%, or $283,927, reported tax rate shown for continuing operations is the result of a reclassification of $186,193 tax expense between operations held for sale and continuing operations due to reclassification of deferred tax assets related to the sale of the Colorado Grande Casino. The blended rate for the period ended July 31, 2011 is a 33.8% benefit.

 

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Net income (loss). Net income was $0.2 million compared to $0.2 million loss for the three month periods ended July 31, 2012 and July 31, 2011, respectively. The increase is primarily due to the $4.0 million increased revenues compared to the same period ended July 31, 2011. Operating income increased $0.6 million, to $0.7 million from $0.1 million. We had a $0.0 million loss from discontinued operations for the quarter ended July 31, 2012 compared to a $0.2 million loss from discontinued operations in July 2011.

 

Non-GAAP Financial Measures

 

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

 

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

 

The following table shows adjusted EBITDA by segment for the three months ended July 31, 2012 and July 31, 2011:

 

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

 

   For the three months ended July 31, 2011 
   Washington Gold    South Dakota
Gold  
   Corporate -
Other
    Total
Continuing
Operations  
 
Revenues:                    
Gross revenues  $14,029,543   $-   $-   $14,029,543 
Less promotional allowances   (1,279,073)   -    -    (1,279,073)
Net revenues   12,750,470    -    -    12,750,470 
Expenses:                    
Total operating expenses
(excludes depreciation, amortization, write downs, acquisition costs, stock option grants, deferred rent, and impairments)
   11,092,746    -    799,859    11,892,605 
                     
Adjusted EBITDA  $1,657,724   $-   $(799,859)  $857,865 

 

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The following table reconciles adjusted EBITDA to net income (loss) for the three months ended July 31, 2012 and July 31, 2011:

 

Adjusted EBITDA reconciliation to net income (loss):
   For the three months ended 
   July 31, 2012   July 31, 2011 
         
Net income (loss)  $168,125   $(191,859)
Add:          
Income tax expense (benefit)   88,689    (283,927)
Net interest expense   462,144    348,050 
Loss on sale of assets   1,245    314 
Depreciation and amortization   538,981    438,663 
Deferred rent   19,034    - 
Stock option and ESPP grants   4,077    289,838 
Loss on operations held for sale   321    204,841 
Acquisition expenses   -    51,945 
Adjusted EBITDA  $1,282,616   $857,865 

 

Liquidity and Capital Resources

 

Historical Cash Flows

 

The following table sets forth our consolidated net cash provided by (used in) operating, investing and financing activities for the three-month periods ended July 31, 2012 and July 31, 2011:

 

   July 31,   July 31, 
   2012   2011 
Net cash provided by (used in):          
Operating activities  $2,183,525   $808,558 
Investing activities   538,005    (1,060,989)
Financing activities   (1,656,582)   (50,059)

 

Operating activities. Net cash provided by operating activities during the three-month period ended July 31, 2012 increased by $1.4 million over the comparable period in the prior fiscal year. This increase mainly resulted from continued strong operating results in Washington State and the addition of South Dakota Gold.

 

Investing activities. Net cash provided by investing activities during the three-month period ended July 31, 2012 increased to $0.5 million compared to net cash used of $1.1 million for the comparable period in the prior fiscal year. The increase of funds provided is primarily due to the $0.8 million proceeds from the Colorado Grande Casino sale and no acquisitions in this fiscal year compared to the acquisition of the Washington III mini-casino in July of 2011.

 

Financing activities. Net cash used in financing activities during the three-month period ended July 31, 2012 increased $1.6 million from the comparable period in the prior fiscal year. The increase is attributable to the $1.7 million repayment of debt, which includes a $0.8 million repayment on the $4 million note.

 

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 acquisitions;

- new management contracts;

- working capital requirements;

- obtaining funds via long-term debt instruments;

- debt service requirements; and

- disposition of non-gaming related assets.

 

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At July 31, 2012, outstanding indebtedness was $16.6 million, of which $2.5 million is due by July 31, 2013. On October 7, 2011, we closed on an $11.0 million loan with Wells Fargo Gaming Capital, LLC. The proceeds were used to refinance debt and pay fees associated with the loan.

 

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

 

On July 31, 2012, excluding restricted cash of $2.0 million, we had cash and cash equivalents of $6.3 million. The restricted cash consists of approximately $2.0 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 3.0 for healthy businesses. If a company’s current ratio is in this range, then it generally indicates good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management. The table below shows that, as of July 31, 2012, we have a 1.4 ratio, which is sufficient to service debt and maintain operations.

 

      Current Ratio as of 7/31/2012 
Current Ratio  Current Assets  $11,149,305    1.4 
  Current Liabilities  $7,897,144      

 

South Dakota Gold – Stock Purchase Agreement

 

On January 27, 2012, we closed the purchase of all of the shares of South Dakota Gold for $5.1 million. South Dakota Gold is a slot route operator in Deadwood, South Dakota that has been in business since gaming was legalized in South Dakota in 1989. South Dakota Gold currently operates over 900 slot machines at approximately 20 locations which represent approximately 24% of the slots in Deadwood. The transaction was financed by cash on hand generated from our registered direct offering (See Note 17), stock, and seller paper. We have imputed 6% interest on two of these notes that had a stated 0% interest rate.

 

Off-Balance Sheet Arrangements

 

None.

 

Subsequent Events

 

Effective as of September 6, 2012, Robert B. Sturges resigned as our Chief Executive Officer and a member of our Board of Directors for personal reasons. Mr. Sturges decision to resign from his position on our Board of Directors or from his position as an officer of the Company was not the result of any disagreement with the Company on any matters relating to our operations, policies or practices, or the result of any disagreement with our Board of Directors, management or our auditors.

 

Our Board of Directors has named Ernest E. East, former Senior Vice President and General Counsel, and a long-time counselor to our Board of Directors, as interim President. Mr. East will report to an oversight committee of our Board of Directors while we search for a permanent Chief Executive Officer.

 

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On September 7, 2012, we filed a Form 8-K with the SEC which provides details regarding these events.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4.   Controls and Procedures

 

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

 

In accordance with Rules 13a-15 and 15d-15 of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our President and CFO, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. As a result of our evaluation, they concluded that our disclosure controls and procedures were effective as of July 31, 2012.

 

Changes in internal controls over financial reporting. There have not been any changes in our control over financial reporting during the three months ended July 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1.   Legal Proceedings

 

We are not currently involved in any material legal proceedings.

 

Item 1A. Risk Factors

 

There have been no material changes in our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012, filed with the SEC on July 27, 2012.

 

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

 

None.

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information

 

None.

 

Item 6.   Exhibits

 

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

 

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INDEX TO EXHIBITS

 

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

 

* Filed or furnished herewith.

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

 

** Pursuant to Rule 405(a)(2) of Regulation S-T, the registrant is relying upon the applicable 30-day grace period for the initial filing of its first Interactive Data File required to contain detail-tagged footnotes or schedules. The registrant intends to file the required detail-tagged footnotes or schedules by the filing of an amendment to this Quarterly Report on Form 10-Q within the 30-day period.

 

- 25 -
 

 

SIGNATURES

 

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

 

Date: September 12, 2012

 

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

 

- 26 -

XASE:UWN Nevada Gold & Casinos Inc Quarterly Report 10-Q Filling

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XASE:UWN Nevada Gold & Casinos Inc Quarterly Report 10-Q Filing - 7/31/2012
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