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EX-31.1 - CERTIFICATION - ROTATE BLACK INCrobk_ex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from              to             
 
Commission File Number 333-44315
 
Rotate Black, Inc.
(Exact name of registrant as specified in its charter)  
 
Nevada
 
75-3225181
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
932 Spring Street, Petoskey, Michigan  49770
(Address of principal executive offices)
 
(231) 347-0777
(Registrant’s telephone number, including area code)  
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ No  o
 
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 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ

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  
o
Accelerated filer  
o
Non-accelerated filer  
o
Smaller reporting company 
þ
(Do not check if a smaller reporting company) 
   
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 126.2 of the Exchange Act).    Yes  o    No  þ
 
The number of shares of common stock outstanding as of March 31, 2012 was 32,878,896 and as of November 19, 2012 the number of shares of common stock outstanding was 38,598,004.
 


 
 
 

 
 
ROTATE BLACK, INC. AND SUBSIDIARY
 
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
     
         
ITEM 1.
Financial Statements 
   
3
 
           
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
20
 
           
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
   
26
 
           
ITEM 4.
Controls and Procedures
   
26
 
           
PART II. OTHER INFORMATION
       
           
ITEM 1.
Legal Proceedings
   
27
 
           
ITEM 1A.
Risk Factors 
   
27
 
           
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
27
 
           
ITEM 3.
Defaults upon Senior Securities
   
27
 
           
ITEM 4.
Mine Safety Disclosures
   
27
 
           
ITEM 5.
Other Information
   
27
 
           
ITEM 6.
Exhibits
   
28
 
           
SIGNATURES
   
30
 

 
 
2

 

 
PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS
 
ROTATE BLACK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
 
   
March 31,
   
June 30,
 
   
2012
   
2011
 
   
(Unaudited)
         
ASSETS
               
                 
Current Assets
               
Cash
 
$
                2,686
   
$
                        -
 
Prepaid expenses
   
                   269
     
               23,641
 
                 
Total current assets
   
                2,955
     
               23,641
 
                 
Fixed assets - net
   
                3,728
     
               11,104
 
Land purchase deposit
   
        8,470,674
     
         8,470,674
 
Investment in RBMS
   
           186,181
     
               65,519
 
Deferred development cost
   
           138,507
     
               52,278
 
Security deposit
   
                3,600
     
                 3,600
 
                 
 TOTAL ASSETS
 
$
8,805,645
   
$
8,626,816
 
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities
               
Accounts payable and accrued expenses
 
$
1,139,052
   
$
950,250
 
Accrued salaries
   
867,519
     
351,137
 
Redeemable Preferred Series A Stock
   
           190,000
     
            190,000
 
Note payable - insurance
   
                       -
     
                 2,074
 
Loan payable - stockholder
   
              83,871
     
            792,455
 
Dividends payable
   
              28,383
     
                        -
 
Note payable - truck - current portion
   
                2,675
     
                 5,712
 
                 
Total current liabilities
   
        2,311,500
     
         2,291,628
 
                 
Mortgage payable - Big Easy vessel
   
        2,975,000
     
         2,975,000
 
Note payable - Big Easy vessel
   
           600,000
     
            600,000
 
Accrued interest on mortgage and note payable
   
        1,407,004
     
            642,576
 
Note payable - truck
   
                       -
     
                 2,539
 
                 
TOTAL LIABILITIES
   
        7,293,504
     
         6,511,743
 
                 
STOCKHOLDERS'  EQUITY
               
                 
Common stock, $0.001 par value, 75,000,000
               
    shares authorized; 32,878,896 and 22,138,849
               
    shares issued and outstanding as of
               
    March 31, 2012 and June 30, 2011,
               
     respectively
   
              32,879
     
               22,139
 
                 
Additional paid-in-capital
   
      21,203,364
     
       19,076,687
 
                 
Accumulated deficit
   
    (19,724,102
   
(16,983,753
)
                 
    TOTAL  STOCKHOLDERS' EQUITY
   
        1,512,141
     
         2,115,073
 
                 
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
8,805,645
   
$
8,626,816
 
 
See notes to financial statements
 
 
3

 
 
ROTATE BLACK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 
   
Three Months Ended March 31,
   
Nine Months Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenue
  $ 90,000     $ -     $ 120,000     $ 970,000  
                                 
Operating expenses
                               
Salary expense
    77,311       161,033       177,985       235,642  
Stock based compensation
    -       -       1,229,417       124,600  
Stock issued for interest
    -       -       -       26,000  
General and administrative expenses
    109,340       176,635       292,014       942,675  
Equity investment loss
    129,082       -       362,713       -  
Dividends on Redeemable Preferred Series A Stock
    8,550       -       22,683       -  
Interest expense
    399,044       186,093       775,537       349,554  
                                 
     Total expenses
    723,327       523,761       2,860,349       1,678,471  
                                 
     Net (Loss) Income
    (633,327 )     (523,761 )     (2,740,349 )     (708,471 )
                                 
Less: Income attributable to noncontrolling interest
    -       330       -       (22,938 )
                                 
      Net (loss) income attributable to controlling interest
  $ (633,327 )   $ (524,091 )   $ (2,740,349 )   $ (685,533 )
                                 
                                 
                                 
Basic and diluted net (loss) income per common share
                         
attributed to controlling interest
  $ (0.02 )     *     $ (0.11 )   $ (0.04 )
                                 
Basic and diluted average
                               
    common shares outstanding
    30,886,149       18,674,635       25,666,692       17,643,345  
                                 
* Less than $0.01, per share
                               

See notes to financial statements

 
4

 
 
ROTATE BLACK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
 CASH FLOWS FROM OPERATING ACTIVITIES
           
Net (loss) income
  $ (2,740,349 )   $ (685,533 )
Adjustments to reconcile net (loss) income to net cash
         
used in operating activities:
               
    Stock-based compensation
    1,229,417       124,600  
    Stock issued for accounts payable
    60,000          
    Stock issued for interest
    -       26,000  
    Depreciation and amortization
    7,376       176,455  
    Noncontrolling interest
    -       (22,938 )
Changes in assets and liabilities:
    -          
Prepaid expenses
    23,372       (58,157 )
Unbilled development advances
    -       (58,359 )
Accounts payable and accrued expenses
    1,497,995       969,926  
Due to affiliate
    -       (138,993 )
Derivative liability
    -       (167,127 )
Contingent liability
    -       90,000  
Deposits
    -       15,000  
                 
Net cash (used in) provided by operating activities
    77,811       270,874  
                 
 CASH FLOWS FROM INVESTING ACTIVITIES
               
 Investment In RBMS
    (120,662 )     (405,520 )
     Increase in deferred development costs
    (86,229 )     (32,385 )
                 
Net cash provided by (used in) investing activities
    (206,891 )     (437,905 )
                 
 CASH FLOWS FROM FINANCING ACTIVITIES
               
Increase (decrease) in loan payable - stockholder
    139,416       79,868  
Proceeds from sales of  common stock
    -       5,000  
Payment of note payable
    (2,074 )     (24,478 )
Increase in notes payable
    -       109,350  
Payments of note payable - truck
    (5,576 )     (3,924 )
                 
Net cash (used in)  provided by financing activities
    131,766       165,816  
                 
Net increase (decrease) in cash
    2,686       (1,215 )
                 
Cash, beginning of period
    -       1,226  
                 
Cash, end of period
  $ 2,686     $ 11  
                 
                 
 Noncash Transaction
               
                 
     Issuance of common stock for services billed to customer
  $ -     $ 150,000  
                 
     Issuance of common stock in payment of due to stockholder
  $ 880,000     $ 120,000  
                 
     Issuance of common stock in payment of accounts payable
  $ 60,000     $ 179,863  
                 
     Issuance of common stock in settlement of derivative liability
  $ -     $ 52,923  

 
See notes to financial statements
 
 
5

 
 
Rotate Black, Inc. and Subsidiary
Notes to Consolidated Financial Statements
 
1. ORGANIZATION AND OPERATIONS

Rotate Black, Inc. (Company) was incorporated in Nevada on August 2, 2006 to be the successor by merger of BevSystems International, Inc. and BevSystems International Ltd. (BevSystems).

The Company develops, operates and manages gaming and related properties. On April 1, 2010, the Company commenced operations under the Gulfport Project management agreement and was no longer a development stage company. (Note 6)

Gulfport Project

On May 28, 2010, the Company, Rotate Black, LLC (RBL), an entity under common control with the Company, and an officer of the Company formed Rotate Black MS, LLC (RBMS), a Mississippi limited liability company, to own, develop and manage the operations of a casino resort to be located in the property adjacent to the Gulfport, MS marina.  RBMS’s initial strategy was to secure an existing gaming vessel, move the vessel to the Gulfport site, and build land assets on that site to support the gaming vessel.  Subsequently, RBMS changed its strategy to an entirely land-based casino. In August 2012, the Company entered into an Indicative Summary of Terms and Conditions with debt and equity investors related to a proposed financing for the Gulfport Casino Hotel Project to be developed by RBMS (Borrower).  The proposed financing is for up to $101,800,000 for the development, design, construction, financing, ownership, operation and maintenance of an approximately 191,000 square foot land based, four star casino, including gaming, restaurant, bar and support space and an adjacent 205-room hotel in Gulfport, Mississippi.

Terms of the proposed financing call for senior secured term loans up to an aggregate of $80,900,000 to be provided in one tranche on the closing date, advanced at the rate of 94% of the principal.  Full repayment is expected to be October 2017.  Interest on the outstanding balance will be equal to the sum of the LIBOR rate applicable to the interest period, subject to a floor of 2%, and the applicable margin of 10.5%.

The equity investors shall fund the equity contribution to RBMS prior to the closing pursuant to the terms of an equity contribution agreement to be entered into by the equity investors, RBMS, and the Collateral Agent in the aggregate amount of $20,900,000.

Rotate Black Gaming

In October 2008, the Company acquired 75% of the outstanding common stock of Rotate Black Gaming, Inc., (Gaming), from RBL. Gaming is under contract to develop and manage a world-class destination casino resort in Sullivan County, New York. Gaming had acquired the property and completed all design layouts (Note 10).

Other Projects

On December 13, 2011, the Company formed a wholly-owned subsidiary, SlotOne, Inc., to provide slot machines on a participation basis in certain casino locations where the replacement of old equipment can enhance earnings for the gaming location and Rotate Black, Inc.

On January 11, 2011, the Company entered into a management agreement whereby a new to-be-formed wholly-owned subsidiary of the Company would act as manager for a proposed casino and entertainment destination on the Louis Bull Indian Reserve near Edmonton, Canada (Note 11).

In connection with the acquisition of Gaming, the Company also acquired the Dayton Project, a casino development project in Dayton, Nevada. The Dayton Project was cancelled as of June 30, 2009, and the Company had written-off the deferred expenses of $233,960 (Note 18).

Also in connection with the acquisition of Gaming, the Company acquired a 50% joint venture interest in Rotate Black India Pvt Ltd. (India), formed to develop a project in India. This project was cancelled as of December 31, 2009, and the Company had written-off the deferred expenses of $139,782

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the rules and regulations under Regulation S-X of the Securities and Exchange Commission for Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements presentation.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and cash flows for interim financial statements have been included.  These financial statements should be read in conjunction with the financial statements of the Company together with the Company’s management discussion and analysis in Item 2 of this report and in the Company’s Form 10-K for the year ended June 30, 2011.  Interim results are not necessarily indicative of the results for a full year.
 
 
 
 
6

 
 
Consolidated Financial Statements

The accompanying consolidated financial statements include all of the accounts of the Company and its subsidiary. As of July 6, 2010, the Company sold its interest in the subsidiary, Gaming, deconsolidated the entity (Note 10) and the balance sheet as of June 30, 2011 is not consolidated.  On December 14, 2011, the Company formed a wholly owned subsidiary, Rotate Black, OK, LLC. (OKL), and the balance sheet as of March 31, 2012 is consolidated.

The Company records adjustments to noncontrolling interest for the allocable portion of income or loss that the noncontrolling interest holders are entitled based upon their portion of certain of the subsidiaries that they own. Distributions to holders of noncontrolling interests are adjusted to the respective noncontrolling interest holders’ balance.

The Company suspends allocation of losses to noncontrolling interest holders when the noncontrolling interest balance for a particular noncontrolling interest holder is reduced to zero. Any excess loss above the noncontrolling interest holders’ balance is not charged to noncontrolling interest as the noncontrolling interest holders have no obligation to fund such losses.

Investments in 50% or less owned entities without controlling influence by the Company are accounted for using the equity method. Under the equity method, the Company recognizes its ownership share of the income and losses of the equity entity.

All significant intercompany accounts and transactions have been eliminated.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

Reclassifications

Certain amounts for prior periods have been reclassified to conform to 2012 financial statement presentation.

Financial Instruments

The Company considers the carrying amounts of financial instruments, including cash, accounts payable and accrued expenses to approximate their fair values because of their relatively short maturities.

Property and Equipment

Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method.

Maintenance and repairs are charged to operating expenses as they are incurred. Improvements and betterments, which extend the lives of the assets, are capitalized. The cost and accumulated depreciation of assets retired or otherwise disposed of are relieved from the appropriate accounts and any profit or loss on the sale or disposition of such assets is credited or charged to income.

Contract Rights and Intangible Assets

Contract rights and intangible assets are valued at cost and, if there is a finite life, will be amortized over their estimated useful lives of each asset as determined by management. Amortization will commence upon the placement of individual assets into service and the initial determination of the lives assigned to each. The Company expects this to occur for the Contract Rights upon the effective date of the Development Agreement. Contract Rights were valued based upon management’s forecast of expected future net cash flows, with revenues based on projected revenues under the Development and Management Agreements.  As of June 30, 2010, the Contract Rights had not commenced amortization and were sold as part of Gaming on July 6, 2010 (Note 10).
  
The Company will evaluate the carrying value of the intangible assets for impairment at least annually or upon the occurrence of an event, which may indicate that the carrying amount may be greater than its fair value. If impaired, the Company will write-down such impairment. In addition, the useful life of the intangible assets will be evaluated by management at least annually or upon the occurrence of an event which may indicate that the useful life may have been definitive and the Company would have commenced amortization over such useful life.

 
 
7

 
 
Revenue Recognition

Revenue is recognized when evidence of an arrangement exists, pricing is fixed and determinable, collection is reasonably assured and delivery or performance of service has occurred.

Development advances are the funds advanced by the Company for necessary costs in advance of the facility loan for the Seneca Nation, which include expenses for legal, engineering and architectural fees and have been capitalized. A development fee of 2.5% of total development costs was accrued by the Company for services rendered pursuant to the Development Agreement and is in addition to the amounts advanced to cover the development costs.

The development advances and the development fee had been deferred and were sold as part of Gaming (Note 10).

Management fees earned under contract to operate and manage casino projects are recognized pursuant to terms of the agreement.

Intra-entity transactions for revenue and expenses earned in connection with an equity investment are eliminated in accordance with guidance in ASC 323-10-35-5.

Share-Based Compensation

The Company recognizes compensation expense for all share-based payment awards made to employees, directors and others based on the estimated fair values on the date of the grant. Common stock equivalents are valued using the Black-Scholes Option-Pricing Model using the market price of our common stock on the date of valuation, an expected dividend yield of zero, the remaining period or maturity date of the common stock equivalent and the expected volatility of our common stock.

The Company determines the fair value of the share-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measureable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either the date at which a commitment for performance to earn the equity instrument is reached or the date the performance is complete.

The Company recognizes compensation expense for stock awards with service conditions on a straight-line basis over the requisite service period, which is included in operations.

Basic and Diluted Net Income (Loss) per Common Share

Basic net income (loss) per share (EPS) is calculated by dividing net income (loss) available to common stockholders (numerator) by the weighted-average number of common shares outstanding during each period (denominator). Diluted loss per share gives effect to all dilutive common shares outstanding using the treasury stock method and convertible preferred stock using the if-converted method.  In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants.  Although there were common stock equivalents outstanding as of March 31, 2012 and June 30, 2011, they were not included in the calculation of earnings per shares because their inclusion would have been considered anti-dilutive.  As of March 31, 2012 and June 30, 2011, there were 1,900,000 and 2,021,333, respectively, total common stock equivalents.

Basic loss per share has been retroactively restated to reflect the reverse stock split (Note 16).

Income Taxes

Deferred income taxes have been provided for temporary differences between financial statement and income tax reporting under the liability method, using expected tax rates and laws that are expected to be in effect when the differences are expected to reverse. A valuation allowance is provided when realization is not considered more likely than not.

The Company’s policy is to classify income tax assessments, if any, for interest in interest expense and for penalties in general and administrative expenses.

Leases

Rent expense is recognized on the straight-line basis over the term of the lease.

 
 
8

 

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08: “Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment”.  The amendments in this update are intended to reduce complexity and costs by allowing the reporting entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit.  The update includes examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted for annual and interim goodwill impairment tests performed as of a date prior to September 15, 2011 if the entity’s financial statements for the most recent annual or interim period have not yet been issued.  Adoption of ASU 2011-08 is not expected to have a significant impact on the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”.  The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between accounting principles generally accepted in the United States (GAAP) and International Financial Reporting Standards (IFRS).  While many of the amendments to GAAP are not expected to have a significant effect on practice, the new guidance changes some fair value measurement principles and disclosure requirements.  Adoption of ASU 2011-04 is effective for annual periods beginning after December 15, 2011 and is not expected to have a significant impact on the Company's financial statements.

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

3. GOING CONCERN

The financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred losses since inception, resulting in an accumulated deficit of $19,724,102 and negative working capital of $2,308,545, as of March 31, 2012 and further losses are anticipated. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Its ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations arising from normal business operations when they come due. These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue.

The Company’s plan is to resolve this issue with the commencement of management fees from the Gulfport Project Management Agreement and other future sources of revenue. Until these occur in sufficient amounts, the Company plans to sell registered and unregistered stock to accredited investors.

4.  PROPERTY AND EQUIPMENT

As of March 31, 2012 and June 30, 2011, property and equipment consisted of the following:
 
   
3/31/2012
   
06/30/2011
 
             
Gaming vessel
 
$
-
   
$
4,854,908
 
Truck
   
-
     
39,761
 
Furniture and fixtures
   
8,490
     
8,490
 
Office equipment
   
23,289
     
23,290
 
     
31,779
     
4,926,449
 
   Less accumulated depreciation
   
(28,051
)
   
(263,708
)
   Sale of Gaming Vessel
   
-
     
(4,651,637
)
   
$
3,728
   
$
11,104
 

 
 
 
9

 

On June 10, 2010, the Company purchased The Big Easy, a gaming vessel for an aggregate purchase price of $4,264,500, payable: (a) by issuance of a secured note payable to the seller of $2,975,000 (the Secured Note), (b) issuance of an unsecured note payable to the seller of $600,000 (Unsecured Note), fees of $414,500 and cash of $275,000. As of September 17, 2010, both notes were in default and the interest rate was increased to 20%, per annum. As of June 30, 2011, the Big Easy was sold at public auction at a loss of $4,191,891 (Note 9).

On December 1, 2011, the Company transferred ownership of the Company truck to an officer without consideration.  The vehicle had a net book value of $0 at the date of transfer.

For the nine months ended March 31, 2012 and 2011, depreciation expense was $7,376 and $176,455, respectively.

5.  ROTATE BLACK OK, LLC

On December 14, 2011, the Company formed a wholly-owned subsidiary, Rotate Black OK, LLC (OKL) and through the subsidiary, on December 12, 2011, the Company entered into an agreement to provide casino management services to an Oklahoma Native American Tribe Casino for a term of ninety days at $30,000, per month, inclusive of all personnel needed to provide the consulting services. The Company plans to leverage this agreement to generate additional Native American gaming consulting agreements.

6. RBMS MANAGEMENT AGREEMENT

On May 28, 2010, the Company, RBL and an officer of the Company formed RBMS, a Mississippi limited liability company, to own, develop and manage the operations of a dockside vessel-based casino in Gulfport, Mississippi. RBMS’s initial strategy was to secure an existing gaming vessel, move the vessel to a Gulfport site, and build land assets on that site to support the gaming vessel.

On October 27, 2010, RBMS and the Company, as manager, entered into a management agreement, effective as of April 1, 2010 for a period of 99 years.  The Company, as manager, would manage all of the operations of the gaming facility.  The management fee was payable;  (1) $200,000, per month, (2) then upon commencement of the gaming operations, $250,000, per month, and (3) then achieving certain earnings, as defined, $300,000, per month.  The Manager is entitled to appoint two directors of the five directors on the RBMS Board of Directors.

In response to the equity investor, RBMS changed its strategy toward the construction of an entirely land-based casino On June 20, 2011, the Company agreed to amend its management agreement with RBMS to facilitate a $15.0 million equity financing for the Gulfport Project.  Under the new terms of the proposed agreement, the Company will receive from the closing of the equity financing to the opening date of the casino, a management fee of $200,000, per month, not to exceed $1,000,000, in total, prior to the opening of the casino.
 
As of June 30, 2011, the Company, in conjunction with the sale of the Big Easy Gaming Vessel (Note 9) and commencement of the Gulfport Project, made an adjustment related to its investment in RBMS. The Company recognized 46.6% of the loss of RBMS as of June 30, 2011, reclassified the accrual of approximately seven months of management fees due from RBMS, and eliminated intra-entity revenues and expenses totaling $452,020.  As a result, the Company reported $517,980 in management revenue for the year ended June 30, 2011 and has restated revenue and net loss for the three and nine months ended March 31, 2011.
 
 For the three and nine months ended March 31, 2011, the effect on revenue was as follows:
 
   
Three Months
   
Nine Months
 
As originally reported
 
$
600,000
   
$
1,800,000
 
Adjustment
   
(600,000
)
   
(830,000
)
                 
As restated, March 31, 2011
 
$
      -
   
$
970,000
 
 
For the three and nine months ended March 31, 2011, the effect on net loss was as follows:
 
   
Three Months
   
Nine Months
 
As originally reported
 
$
75,909
   
$
144,467
 
Adjustment
   
(600,000
)
   
(830,000
)
                 
As restated, March 31, 2011
 
$
(524,091
)
 
$
(685,533
)
 
7. GULFPORT CASINO HOTEL PROJECT

In August 2012, the Company entered into an Indicative Summary of Terms and Conditions with an equity investor related to a proposed financing for the Gulfport Casino Hotel Project to be developed by RBMS (Borrower).  The proposed financing is for up to $101,800,000 for the development, design, construction, financing, ownership, operation and maintenance of an approximately 191,000 square foot land based four star casino, including gaming, restaurant, bar and support space and an adjacent 205-room hotel in Gulfport, Mississippi.
 
 
10

 
 
Terms of the proposed financing call for senior secured term loans up to an aggregate of $80,900,000 to be provided in one tranche on the closing date, advanced at the rate of 94% of the principal. Full repayment is expected to be October 2017. Interest on the outstanding balance will be equal to the sum of the LIBOR rate applicable to the interest period, subject to a floor of 2%, and the applicable margin of 10.5%

The equity investors shall fund the equity contribution to RBMS prior to the closing pursuant to the terms of an equity contribution agreement to be entered into by the equity investors, RBMS, and the Collateral Agent in the aggregate amount of $20,900,000.

RBMS shall enter into a warrant agreement with respect to the issuance of detachable warrants in favor of the lender to purchase 7.5% of the fully diluted membership interests of the RBMS at an exercise price of $0.01, per membership interest, with anti-dilution provisions.
 
8. INVESTMENT IN RBMS

Upon formation of RBMS and the commencement of the management agreement, the Company, RBL and an officer of the Company owned an aggregate 46.6% of the voting interests of RBMS and the remaining units were sold to outside investors. The Company has accounted for its investment in RBMS on the equity method in accordance with ASC 810-10; as it does not meet all the requirements of a variable interest entity to consolidate; the outside equity investors are not protected from the losses of the entity nor are they guaranteed a return by the legal entity; the outside equity investors expected residual returns are not capped by any arrangements or documents with other holders;  and the percent of ownership will be diluted by future financing of RBMS. 
 
In connection with the proposed terms of the funding of the Gulfport Casino Hotel Project (Note 7), holders of Class A Units of RBMS have agreed to convert their units into B Units to facilitate the financing of the Gulfport project.  Upon closing, the equity investor will own 60,000 B Units out of 100,000 authorized and 70,588 outstanding, or 85% of RBMS. In addition, upon closing, RBMS will issue 29,412 warrants at an exercise price of $0.01, to all other investors based on pre-negotiated percentages. Assuming all warrants are exercised, the equity investor will be diluted to a 60% ownership. The Company will own at closing, B units and warrants that represent approximately 10% of the fully diluted RBMS shares. Closing is anticipated to be on or before December 15, 2012.

As of March 31, 2012 and June 30, 2011, the condensed balance sheet of RBMS was as follows:
 
   
3/31/12
   
6/30/11
 
   
(Unaudited)
   
(Unaudited)
 
Prepaid expenses
 
$
6,233
   
$
7,500
 
Development costs
   
2,319,140
     
1,912,125
 
                 
Total Assets
 
$
2,325,373
   
$
1,919,625
 
                 
Current liabilities
 
$
731,313
   
$
405,583
 
Due to RBI
               
Members’ equity
   
1,594,060
     
1,514,042
 
                 
Total Liabilities and
               
   Members’ Equity
 
$
2,325,373
   
$
1,919,625
 
 
As of March 31, 2012 and June 30, 2011, the condensed income statement of RBMS was as follows:
 
   
Nine Months Ended 3/31/12
   
Twelve Months Ended
6/30/11
 
   
(Unaudited)
   
(Unaudited)
 
Revenue
 
$
-
   
$
-
 
Management fees
   
-
     
970,000
 
General & Administrative
               
    Expenses
   
723,286
     
179,994
 
Lease fees
   
55,070
     
70,000
 
                 
Total Expenses
    778,356      
1,219,994
 
                 
Net Loss
 
$
(778,356)
   
$
(1,219,994
)

For the year ended June 30, 2011, intra-entity management expense of $452,020 is included in the condensed income statement of RBMS and is eliminated in the financial statement presentation against the management income recorded by the Company.
 
 
11

 
 
As of June 30, 2011, the Company paid expenses of $435,036 in cash and $189,000 in stock on behalf of RBMS as a capital contribution and recorded an equity investment of $624,036.  The Company reduced its investment in RBMS by $568,517, 46.6% of the loss of the entity.

As of March 31, 2012, the Company sold $375,000 in additional equity in RBMS; paid $818,375 in expenses and issued 200,000 shares of common stock valued at $40,000 on behalf of RBMS. For the three and nine months ended March 31, 2012, the Company reduced its investment in RBMS by recording expense of $129,082 and  $362,713, respectively, 46.6% of the loss of the equity entity.
 
Ground Lease

Effective October 20, 2010, RBMS entered into a ground lease for the nine and a half acre site for the Gulfport Project.  The Preliminary Term, as defined, remains in effect until the earliest of the ninth month following the effective date or the date gaming operations begin on the leased property.  During the Preliminary Term, rent shall be equal to $20,000, per month with no payment required until the earlier of the date the Lessee commences construction on the premises or February 1, 2011. If RBMS does not receive approval to proceed with the development of the casino from the Mississippi Gaming Commission on or prior to March 1, 2011, then the lease terminates with no obligations due.

Due to delays, the lease was amended on October 21, 2011 for a term through October 31, 2069, with a fee payable of $25,000 to enter into the amended and restated lease and $50,000 as the initial base rent payment.  After the commencement of gaming operations, RBMS will pay an annual minimum base rent of $600,000, as defined. On March 13, 2012 this ground lease was amended and extends the date for RBMS to obtain approval to proceed to April 30, 2012.  In consideration of this extension, RBMS agreed to pay a fee of $50,000. An additional extension was entered into May 1, 2012 extending the approval date to August 31, 2012 and RBMS agreed to pay a fee for the extension of $20,000 for two thirty-day periods and $35,000 for each month thereafter.

On April 9, 2012, the Mississippi Gaming Commission granted to RBMS approval as a legal gaming site for a 9.5 acre site located in Gulfport Mississippi, however, on May 17, 2012 the Commission denied the application to proceed with construction of the casino resort.

On August 16, 2012, the Commission voted to grant RBMS approval to proceed with the Gulfport Project.
 
9. THE BIG EASY GAMING VESSEL

On June 10, 2010, the Company purchased The Big Easy, a gaming vessel for the Gulfport Project, for an aggregate purchase price of $4,264,500, payable: (a) by issuance of a secured note payable to the seller of $2,975,000 (the Secured Note), (b) issuance of an unsecured note payable to the seller of $600,000 (Unsecured Note), fees of $414,500 and cash of $275,000. The Secured Note is collateralized by the gaming vessel and both notes are guaranteed by an officer of the Company. The Secured Note is payable on June 11, 2011 and bears interest at 14.5%, per annum, payable $35,000, per month, commencing June 11, 2010. The Unsecured Note bears interest at 14.5%, per annum, and is payable monthly, in an amount equal to 2% of the monthly gross gaming revenue generated from operations, as defined, until June 2012 when all principal and interest are due. Since September 17, 2010, both notes have been in default and the interest rate was increased to 20%, per annum.

As of June 30, 2011, the due dates of both notes were extended in support of the Company’s current project in Gulfport, MS and the Trustee of the Cruise Holdings bankruptcy estate, holding the mortgage and promissory note payable has consented;  (1) to require no payments through June 30, 2012; (2) that the collection fees and accrued interest be paid on or before October 1, 2012; (3) extend the due date of the balance of the obligation for the principal and accrued interest to July 1, 2013.

In May 2011, the equity investor informed RBMS it would not move forward with the financing of the Gulfport Project unless the casino was land based.  As a result, it was decided the vessel be sold at a public auction, however, the public sale did not yield sufficient funds to eliminate the fees and mortgage debt.  The Company received $459,746 in the reduction of accounts payable from the public sale which was paid directly to vendors of the Company. As of June 30, 2011, the Company has recorded a loss of $4,191,891 on the sale of the gaming vessel.  The Company is currently in discussions with the mortgage holder and the trustee to reach an agreement to extinguish the mortgage of $2,975,000 and note payable of $600,000 through the issuance of equity.
 
10. ROTATE BLACK, GAMING, INC.

Development Agreement

On June 22, 2007, Gaming entered into a Development Agreement with the Seneca Nation of Indians (Nation), a Federally-recognized Indian tribal government, to act as the Developer to provide managerial expertise and financial resources to assist the Nation in acquiring land and developing and constructing a gaming facility (Facility). The purpose of the Facility for the Nation is to provide employment and improve the social, economic, education, and health needs of its members; to increase its revenues and to enhance the Nation’s economic self-sufficiency.
 
 
12

 
 
The Development Agreement commenced upon execution and continues through the date the Facility is open to the public and operational, until all obligations of the parties have expired, as defined, or until all obligations owed to the Company by the Nation have been satisfied, whichever is later; provided the agreement is not terminated by mutual agreement.

Under the terms of the Development Agreement, the Company is responsible for arranging a limited recourse loan or other arrangements to finance the Facility in an aggregate principal amount of up to $350,000,000. The proceeds of the loan are to be used exclusively for the development, design, construction, furnishing and equipping of the Facility, for start-up and working capital and reimbursing the Company for development advances. Development advances are the funds advanced by the Company for necessary costs in advance of the facility loan. In accordance with the Development Agreement, development costs include the costs of the design, construction, furnishing and equipping of the Facility and such other costs incurred by the Company or by the Nation to advance the conclusion of the project, including consultant and attorney fees and costs. According to the Agreement, funds advanced as development costs, together with the development fee, will constitute the initial principal of the development loan and the funds advanced by the Company as developer will be reimbursed from the proceeds of the Facility Loan.
 
The funds expended under the Development Loan are subject to authorization by a Business Board of the Nation and the financing will not exceed $350,000,000, exclusive of interest.

A development fee of 2.5% of total development costs will be paid to the Company for services rendered pursuant to the Development Agreement and are in addition to the amounts advanced to cover the development costs.

In October, 2007, as amended, Gaming acquired land from 3D Associates, LLC (3D) in exchange for $556,000, payable $288,000 in cash and the issuance of a note in the amount of $268,000, payable on August 15, 2009, as extended, with interest payable at 18%, per annum. The land was subsequently transferred to the Seneca Nation without compensation by Gaming and is included in the Contract Rights. On November 1, 2009, the Company issued 132,000 shares of common stock in full repayment of the note payable of $243,000 and accrued interest thereon of $87,000, $2.50, per share. The number of shares and price per share are subject to adjustment for stock splits, dividends, exchanges and consideration received by stockholders in the event of an acquisition of the Company by another entity, and dependent on the performance of the stock prices, as defined. In addition, for one year and under certain conditions, the Company could be liable for certain market loss on these shares, as defined.

Subsequent to the transfer of the Property to the Seneca Nation of Indians pursuant to its agreements with the Seneca Nation, 3D had filed a lawsuit against the Seneca Nation and the Company to recover the Property for the reason that the land was not yet developed which would have benefited other holdings of 3D.
 
On May 11, 2011, the Company entered into an agreement with 3D wherein 3D agreed to drop its lawsuit and forever waive any and all claims against the Company. In consideration for this, the Company agreed to pay 3D ten dollars ($10) and to grant 3D the right to buy the Property for $500,000, in the event that the Company is successful in re-acquiring the 3D Property from the Seneca Nation.

Management Agreement

On June 14, 2008, Gaming entered into a Management Agreement with the Nation for an exclusive right and obligation to manage, operate and maintain the gaming facility to be developed in Sullivan County, New York, commencing on the effective date, as defined, and continuing for a period of seven years after the date on which gaming commences in the facility. The term will be automatically extended for a period of seven years unless terminated under the provisions of the agreement.
 
Under the Management Agreement, the Nation will pay the Company a fee based on a percent of gaming revenues, as defined. As manager, the Company will conduct and direct all business and affairs in connection with the operation, management and maintenance of the Facility, including all commercial gaming business, sale of food, beverages, tobacco and gifts, hotels, parking, resorts, amusement or accommodation operations.

Contract Rights

Contract rights consisted of the various rights acquired under the Development and Management Agreements. It is composed of contract rights acquired by Rotate Black, LLC and draws from an asset-backed lending agreement used to finance the expenses associated with acquiring the Development and Management Agreements. In addition, $556,000 represents the cost of the land for the gambling facility, which was transferred to the Seneca Nation without compensation by Gaming. The Company has not amortized the contract rights as they were deemed to be inactive are not producing a cash flow.

With the financing of the gaming facility in place, the Development Advances and development fee will be billed and the contract rights will commence amortization over its useful life.

On February 2, 2011, Gaming filed a notice of breach of the Management and Development Agreements with the Nation in response to the notification to Catskill that the development in the region is premature until the United States imposed moratorium on the acquisition of lands in trust for new Indian gaming facilities has been lifted. Gaming has also commenced a binding arbitration proceeding under their Development and Management Agreements with the Nation, seeking $21 million in actual damages and $350 million in lost profits. The Company believes that it will recover its carrying value either through the arbitration or through the execution of the agreement.  On July 1, 2010, the Company sold Gaming to Catskill Gaming and Development, LLC (See Sale of Gaming).  In May, 2011 Catskills Gaming informed the Company that they will be moving forward with the project and therefore the Company couldn’t move forward with arbitration.
 
 
13

 
 
Sale of Gaming

On July 1, 2010, as amended, the Company and RBL entered into an agreement to sell 100% of the common stock of Gaming to Catskills Gaming and Development, LLC (Catskill) in exchange for an aggregate contingent consideration of $21,000,000 in cash and the assumption of indebtedness of approximately $6,300,000. According to the Agreement, the consideration is to be paid in installments as follow:
 
$15,000 at closing

$2 million on or before the first anniversary of the date of the opening for business to the public of a gaming facility under a management agreement between Catskills, as manager, and the Seneca Nation of Indians, in or near the Counties of Ulster and Sullivan in the State of New York (the “Opening Date”);
$2 million on the second anniversary of the Opening Date;

$3.4 million on the third anniversary of the Opening Date:

$3.4 million on the fourth anniversary of the Opening Date;

$3.4 million on the fifth anniversary of the Opening Date;

$3.4 million on the sixth anniversary of the Opening Date; and

$3.4 million on the seventh anniversary of the Opening Date.

As of June 30, 2011, the Company received the payment of $15,000 and, since the balance of the compensation is contingent upon the opening for business of a gaming facility under a management agreement between Catskills, as manager, and the Seneca Nation of Indians, the Company has not recorded a receivable for the balance of the sales agreement.

The Company has recorded the deconsolidation of Gaming in accordance with ASC 810-10-40 and has recorded a loss on the sale of Gaming of $6,843,246, by calculating the difference between the sum of the consideration received and the carrying amount of the noncontrolling interest and the carrying amount of the entity’s assets and liabilities as follows:
 
Intangible assets – Contract rights
 
$
6,323,884
 
Developer loan receivable
   
2,397,834
 
Noncontrolling interest
   
(1,363,608
)
Accounts payable & accrued expenses
   
(1,508,209
)
Accumulated deficit – noncontrolling entity
   
1,221,966
 
Deferred revenue
   
(49,621
)
Contingent liability
   
(164,000
)
   
$
6,858,246
 
Less consideration on sale:
   
(15,000
)
Loss on sale of Gaming
 
$
6,843,246
 

Land Purchase Deposit

On May 26, 2009, the Company entered into an agreement to acquire additional real property in Sullivan County, New York. The purchase price for the property was 1,409,828 shares of common stock of the Company, $1,750,000 in cash on escrow and $1,750,000 in cash upon closing. On May 11, 2009, the Company issued 630,735 shares of common stock and Rotate Black, LLC transferred, on behalf of the Company, 779,093 shares of the Company’s common stock to the seller, both being held in escrow, as a deposit under the agreement. The shares were valued at $7,049,142, $5.00, per share.

In October 2009, the Company issued 779,093 shares of common stock to Rotate Black, LLC as repayment of the advance.

On November 9, 2009, March 16, 2010 and May 21, 2010, the Company issued 70,000 (valued at $350,000, $5.00, per share), 208,613 (valued at $521,532, $2.5, per share) and 500,000 (valued at $550,000 $1.10, per share) shares of common stock in satisfaction of anti-dilution rights of the land purchase agreement.

The Company has evaluated the fair value of the land deposit and has determined that the fair value is in excess of its book value as of March 31, 2012.

This land purchase deposit was made by the Company and not part of Gaming and, therefore, was not included in the sale to Catskill.
 
 
14

 
 
11. EDMONTON PROJECT MANAGEMENT AGREEMENT

On January 11, 2011, the Company, through an officer of the Company, entered into a management agreement (Agreement), whereby a newly to-be-formed wholly-owned subsidiary of the Company would act as manager, with the Bear Hills Charitable Foundation, Bear Hills Casino Inc., the Louis Bull Tribe and 677626 Alberta Ltd. (Tribe Companies) for a proposed casino and entertainment destination on the Louis Bull Indian Reserve, near Edmonton, Canada. The term of the Agreement commences on the date the Tribe Companies receive a license for the proposed casino and all related necessary approvals from the Alberta Gaming and Liquor Commission and then shall continue for the greater of twenty years or until all monies advanced by the Company to the Tribe Companies relating directly or indirectly to the casino project are repaid or for such other term agreed.
 
The Company, as manager, will be entitled to receive thirty percent of the revenues distributed to the Tribe Companies from the operations of the slot revenue and live games. In addition, the Company is entitled to thirty percent of all profits from any other businesses or activities on the property provided by Tribe Companies and thirty of all profits on any amenities or services supporting or related directly or indirectly to the casino. As of March 31, 2012, the project is awaiting direction from Alberta Liquor and Gaming.
 
12. PANAMA PROJECT
 
On March 17, 2011, the Company entered into an agreement (Agreement) for a proposed joint venture (Blue Water Gaming and Entertainment S.A.) (Blue Water), with Ocean Point Development Corp. (Ocean Point) to develop and manage an approximately 52,000 square foot Las Vegas style casino at the Trump Ocean Club International Hotel and Tower, in Panama City, Panama (Trump Ocean Club).  As of June 30, 2011, due to the market conditions in Panama, the Company put this project on hold and wrote off deferred costs of $73,938.  The Company is now focusing its development efforts on its Gulfport Project and is no longer pursuing this development opportunity.

13.  LEASE

On August 8, 2008, the Company entered into a lease for office space, commencing on September 1, 2008 through August 31, 2011.  Rent is payable in advance, in annual installments.  The initial year’s rent was $46,200, increasing as defined.  The Company has an option to extend the lease for an additional three-year period.

An agreed Judgment was filed against the Company in the 57th Circuit Court, Judicial District, State of Michigan, in the amount of $38,668 on February 25, 2011 by the landlord of the real estate lease dated August 8, 2008.  Subsequently, a Real Estate Lease Addendum and Affirmation of Debt was agreed to and effective as of May 2, 2011 providing for a week-to-week lease commencing May 2, 2011, at $5,000, per week and to repay the debt owed of $40,373.11 by May 31, 2011.

As of June 30, 2011, the Company has commenced payment of the week-to-week lease and as of March 31, 2012, has a liability to the landlord of $53,176.


14.  LOAN PAYABLE – STOCKHOLDER

Loan payable –stockholder primarily consists of advances by RBL, the majority stockholder of the Company and is payable on demand, with interest at 12%.


15.  NOTE PAYABLE – TRUCK

On September 10, 2008, the Company borrowed $20,800 to purchase a truck. The note is payable in 48 equal installments of $520, including interest at 9.19%, per annum, through September 10, 2012.

On December 1, 2011, the title of the truck was transferred to an officer of the Company without consideration as the asset was fully depreciated.

 
16. COMMON STOCK

Reverse Stock-Split

On July 19, 2010, effective August 2, 2010, the Board of Directors authorized a one-for-five reverse stock-split by combining every five outstanding shares of common stock into one share of common stock, without a change to authorized shares or par value. All share and per share amounts have been retroactively restated.
 
Common and Preferred Shares
 
 
15

 
 
On April 20, 2011, the Stockholders authorized an increase the number of authorized common shares from 20,000,000 to 75,000,000, $0.001, par value, and authorized 5,000,000 preferred shares, $.01, par value.

For the year ended June 30, 2011, the Company issued an aggregate of 460,224 shares of common stock for legal services rendered, valued at $153,845, an average of $0.31, per share, the value of the service provided.

For the year ended June 30, 2011, the Company issued an aggregate of 779,526 shares of common stock for consulting services rendered under an extended contract, valued at $213,275, an average of $0.24, per share, the value of the service provided.
  
For the year ended June 30, 2011, the Company issued 40,000 shares of common stock to board members for services rendered, valued at $9,600, an average of $0.24, per share, the value of the service provided.

For the year ended June 30, 2011, the Company issued 1,600,000 shares of common stock as payment for loan payable - stockholder, valued at $320,000, $0.20, per share.

For the year ended June 30, 2011, the Company issued 139,270 shares of common stock as settlement of the derivative liability, valued at $52,923, $0.38, per share.

For the year ended June 30, 2011, the Company issued 50,000 shares of common stock in settlement of an account payable, valued at $11,012, $0.22, per share.

On June 10, 2011, in connection with the sale of the Series A Preferred stock, the Company issued 20,000 shares of common stock, valued at $4,000, $0.20, per share, to the investment banker.
 
In September 2011, the Company issued 7,900 shares of common stock for the cashless exercise of warrants.
 
In September 2011, the Company issued an aggregate of 400,000 shares of common stock for payment of loan payable – stockholder, valued at $80,000, $0.20, per share.

In November 2011, the Company issued 65,058 shares of common stock for the cashless exercise of warrants.

In December 2011, the Company issued an aggregate of 500,000 shares of common stock for payment of loan payable - stockholder, valued at $100,000, $0.20, per share.

In December 2011, the Company issued an aggregate of 5,847,089 shares of common stock as compensation to employees and consultants, valued at $1,169,417, $0.20, per share.
 
In December 2011, the Company issued 300,000 shares of common stock to board members for services rendered, valued at $60,000, $0.20, per share.

In February 2012, the Company issued an aggregate of 3,340,000 shares of common stock for payment of loan payable - stockholder, valued at $668,000, $0.20, per share.

In March 2012, the Company issued 200,000 shares of common stock as repayment of accounts payable on behalf of RBMS, valued at $40,000, $0.20, per share.

In March 2012. The Company issued 80,000 shares of common stock as payment for accounts payable valued at $20,000, $0.25, per share.

Stock Option Plan
 
On July 6, 2011, the Company’s stockholders approved the Rotate Black, Inc. Stock Option Plan (Plan) under which the Chief Executive Officer of the Company may grant incentive stock options to certain employees to purchase up to 25,000,000 shares of common stock of the Company. The option price shall be no less than the fair market value of the stock, as defined. The Plan shall terminate after ten years.  As March 31, 2012, no options were granted under the Plan.
 
 
16

 
 
Warrants
 
On May 28, 2010, the Company granted a warrant to purchase 100,000 shares of the Company's common stock to a consultant for services rendered. The warrant is exercisable at $0.17 and was valued at $11,610 using a Black-Scholes Option Pricing Model with the stock price on day of grant, $0.19, the risk free interest rate, 2.10% and the expected volatility of 69.81%. 7,900 shares of stock were issued pursuant to a cashless exercise of the warrant on December 31, 2011.
 
On June 23, 2011, in connection with the sale of Series A Preferred Stock, the Company granted a five-year warrant to purchase 158,000 shares of the Company’s common stock to the investment banker.  The warrant was exercisable at $0.10, per share and was valued at $22,658 using a Black-Scholes Option

Pricing Model with the stock price on day of grant, $0.19, per share, the risk free interest rate of 1.48% and the expected volatility of 81.13%. 65,058 shares were subsequently issued pursuant to a cashless exercise of the warrant on November 14, 2011.


Class A 12% Preferred Stock

On June 10, 2011, the Board of Directors designated 500 shares of Class A 12% Preferred stock (Series A), stated value of $1,000, per share. Each share is convertible at any time from and after the issue date into shares of common stock determined by dividing the stated value of the shares of Series A by the conversion price of $.10, as defined. Holders of the Series A are entitled to receive cumulative dividends at 12%, per annum, payable quarterly, subject to periodic increases, as defined, and a late fee of 18%, per annum. The Series A have certain anti-dilution rights, as defined. In addition, upon the occurrence of any triggering event, as defined, the holder of the Series A shall have the right to: (A) require the Company to redeem all of the Series A held by the holder for a redemption price, in cash, equal to the an amount as defined, or (B) redeem all of the Series A held by the holder for a redemption price, in shares of common stock of the Company, equal to a number of shares equal to the redemption amount, as defined. Upon liquidation of the Company, the Series A holders are entitled to receive an amount equal to the stated value, plus accrued and unpaid dividends. The Series A have no voting rights.
  
On June 10, 2011, the Company entered into a Securities Purchase Agreement to sell up to an aggregate of 500 shares of Preferred Stock with an aggregate value of $500,000.
 
As of June 30, 2011 the Company sold 190 Series A shares with 950,000 warrants to purchase common stock for an aggregate of $190,000. Each warrant is exercisable at $0.40, per share, for five years. As of March 31, 2012, none of the warrants have been exercised.
 
The fair value of the 950,000 detachable warrants sold with the Series A for an aggregate of $190,000, was valued at $91,500 and recorded as additional paid-in capital using a Black Scholes Option Pricing Model using the stock price on day of grant, $0.19, per share, the risk free interest rate of 1.48% and the expected volatility of 81.13%.
 
Since the Series A embodies an obligation to repurchase the issuer’s equity shares in response to a triggering event, as defined, the Company has re-classified the Series A Preferred Stock as a liability in accordance with guidance under ASC 480-10-65 and has recorded an expense of $91,500 to adjust the fair value of the Series A Preferred Stock as a liability to $190,000.
 
As of March 31, 2012, dividends on the Series A Preferred Stock of $28,383 were accrued.
 
In connection with the sale of the Series A Preferred Stock, the Company paid fees of $15,200, issued 20,000 shares of common stock, valued at $4,000, $0.20, per share, and granted warrants to purchase 158,000 shares of common stock, valued at $22,658, to the investment banker.

 
17. INCOME TAXES

The Company and its subsidiary file separate tax returns as they are unable to file consolidated tax returns. The Company and its subsidiary have not filed income tax returns for the years ended June 30, 2012, 2011, 2010 and 2009 and anticipate no significant income tax expenses as a result of these filings.

On July 1, 2010, as amended, the Company and RBL entered into an agreement to sell 100% of the common stock of Gaming to Catskills Gaming and Development, LLC (Catskill).  As a result, the Company has recorded the deconsolidation of Gaming and recorded a loss of $6,843,246.

As of March 31, 2012, management has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.
 

18. COMMITMENTS AND CONTINGENCIES
 
The Company has guaranteed certain notes payable of RBL in the amount to $250,000. (Note 9)

 
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On March 15, 2011, the Company entered into a non-exclusive agreement with an investment banker, financial advisor and consultant.  The agreement becomes exclusive for 14 days following execution and then non-exclusive for a term of six months.  As compensation, the Company issued  20,000 shares of common stock and agreed to pay to the investment banker a cash placement fee of 8% of the total purchase price of the Company’s securities sold, adjusted by the exercise of any investor warrants, in connection with a placement resulting from the investment banker’s introduction.  In addition, the banker shall receive warrants to purchase common shares of the Company equal to 8% of the funds raised, as defined.  If the investment banker introduces the Company during the term to a transaction which becomes a merger, acquisition, joint venture or similar transaction, the Company shall pay the banker a fee in combination of stock and cash that reflects the exact percentage of stock and or cash used for the transaction, as defined.
 
 
Financing Agreement
 
On August 31, 2010, the Company entered into an agreement to engage Citadel Securities, LLC (Citadel) as its non-exclusive financial advisor to provide certain financial advisory services in connection with the financing of its Gulfport, Mississippi casino development project.  The Company will pay fees to Citadel, as follows:
 
           4.00% of the gross proceeds of any equity financing received by the Company or its affiliates in connection with the development project introduced to the Company by Citadel;

           3.00% of the gross proceeds of any debt financing received by the Company or its affiliates in connection with the development project introduced to the Company by Citadel;
 
           2.00% of the gross proceeds of any equity or debt financing received by the Company or its affiliates in connection with the development project introduced to Citadel by the Company as not defined by the agreement;
 
           1.00% of the gross proceeds of any equity financing received by the Company or its affiliates in connection with the development project introduced to Citadel by the Company as defined by the agreement.
 
On August 31, 2011, the Company agreed to an assignment of this engagement to Wells Fargo Securities, LLC.
 
Litigation
 
On October 25, 2010, a Complaint was filed in the United States District Court for the Western District of Michigan by The Sandesh Limited, a company incorporated in the Republic of India, against the Company, RBL and a former employee. The Plaintiff alleges that as a condition to their purchase of 1,200,000 shares of the common stock of the Company, the Plaintiff had the right to require the Defendants to repurchase all or any portion of the shares. Plaintiffs also allege that a subsequent agreement was entered into with RBL, whereby RBL would purchase the Plaintiff’s 1,200,000 shares of common stock.  Plaintiff further alleges that this repurchase also did not occur and that the Defendants breached other terms of the agreements. Plaintiffs are seeking the return of $1,200,000 and additional unspecified amounts as compensatory, actual and punitive and/or exemplary damages, restitution for unjust enrichment, prejudgment interest, attorney’s fees and costs and other relief as the court deems appropriate.
 
On November 23, 2011, a settlement agreement was entered into dismissing the litigation and ordering that RBL pay Sandesh $1,500,000 as settlement, in payments of $35,000, per month, as defined, with interest at 8%, per annum. Sandesh is holding 480,000 common shares of the Company’s stock owned by RBL as collateral and is entitled to receive 350 units of RBMS from RBI.

On February 23, 2010, a Complaint was filed in the Third Judicial District Court of the State of Nevada in and For the County of Lyon against the Company, RBL, and others in the amount of $5,000,000 pursuant to the termination of a development agreement for the Dayton Project.  On July 16, 2010, the Company and Defendants filed an answer and counterclaim. A default Judgment was filed in the Third Judicial District Court of the State of Nevada In and For the County of Lyon on August 8, 2011 against the Company, Rotate Black, LLC, two officers of the Company, and others in the amount of $9,674,057 for exemplary and punitive damages.    In connection with this matter, a Request for Enrollment of Foreign Judgment was filed in the Circuit Court of Harrison County, Mississippi, First Judicial District on December 23, 2011.  On June 6, 2012, the Company filed a Motion for Leave to Seek District Court’s Correction of Clerical Error Appearing on the Face of the Judgment, Subject Matter of Current Appeal in the Supreme Court of the State of Nevada.  On June 7, 2012 the company was notified that its appeals to the default judgment will be heard by the Nevada Supreme Court. The Company will vigorously defend this action but can provide no assurance as to the likelihood of the outcome of the matter.
 
19. SUBSEQUENT EVENTS
 
Common stock

In April 2012, the Company issued 150,000 shares of common stock as repayment of loans on behalf of RBMS, valued at $30,000, $0.20, per share.

In July 2012, the Company issued an aggregate of 1,200,000 shares of common stock at $0.20, per share, for legal services.

In July and August 2012, the Company converted an aggregate of 40 shares of Series A Preferred stock to 526,253 shares of common stock at a conversion rate of $.10, per share, including accrued dividends, penalty and interest.
 
 
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In October 2012, the Company converted 100 preferred shares of stock to 2,780,602 shares of common stock at a conversion rate of $0.05, per share, including accrued dividends, penalty and interest, pursuant to an agreement with the investor.

On October 15, 2012, the Company issued 500,000 shares of common stock at $0.20, per share, for legal services pursuant to an agreement dated April 23, 2012.

In October, 2012, the Company issued an aggregate of 62,253 shares of common stock at $0.30, per share, to the investment banker in connection with financings.

On November 8, 2012, the Company issued 100,000 shares of common stock at $0.15, per share, in settlement of accounts payable.
   
Convertible Note and Warrant

On May 1, 2012, the Company issued a two-year, 10% convertible promissory note in the amount of $150,000.  121 days from the issue date, the holder can convert any unpaid principal and accrued interest into common shares of the Company. Between 121 days and 150 days from the issue date, the conversion price per share shall be $0.25; from 151 days to 180 days from the issue date, the conversion price shall be $0.20; anytime thereafter the conversion price shall be $0.15, subject to adjustment as defined. . The investor also was issued a five year common stock purchase warrant for the purchase of up to 480,000 shares of the Company’s common stock, at a price per share of $0.40, that permits a cashless exercise in the event that the underlying shares of common stock to be issued upon exercise are not registered pursuant to an effective registration statement at the time of the exercise.  The Company received net proceeds of $127,000 after payment of expenses incurred in connection with such transaction.  In connection with this financing, the investment banker received 40,000 shares of the Company’s common stock.

On July 17, 2012 and October 15, 2012, the Company sold an additional $56,000 and $41,000, respectively, of the 10% convertible promissory notes.  Warrants to purchase an aggregate of 272,530 shares of the Company’s common stock were issued in conjunction with these financings. In connection with these financings, the investment banker received 22,253 shares of the Company’s common stock.
 
Commitments

On April 16, 2012 the Company entered into a non-exclusive agreement with an investment banker, financial advisor and consultant for a term of six months.  The investment banker is entitled to a cash placement fee of 8% of the total purchase price of the Company’s securities sold, adjusted by the exercise of any investor warrants, in connection with a placement resulting from the investment banker’s introduction.  In addition, the banker shall receive common shares of the Company equal to 8% of the funds raised, as defined. If the investment banker introduces the Company during the term to a transaction which becomes a merger, acquisition, joint venture or similar transaction, the Company shall pay the banker a fee in combination of stock and cash that reflects the exact percentage of stock and or cash used for the transaction, as defined.

On April 25, 2012, the Company engaged a law firm to represent the Company in connection with a financing with an investment banker at a flat rate of $10,000, payable from the proceeds of the closing or within 30 days from the date of closing.  In addition, the firm will represent the Company for a period of three months through the end of July 2012 in connection with legal services in exchange for 300,000 shares of the Company’s common stock, as defined.

 

 
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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
FORWARD LOOKING STATEMENTS

This Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, relating to our financial condition, profitability, liquidity, resources, business outlook, market forces, corporate strategies, contractual commitments, legal matters, capital requirements and other matters.  We note that many factors could cause our actual results and experience to change significantly from the anticipated results or expectations expressed in our forward-looking statements.  When words and expressions such as: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “believes,” “estimates,” “projects” or similar words or expressions are used in this Form 10-Q, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance can be given,” or “there is no way to anticipate with certainty,” forward-looking statements are being made and these words or phrases or similar expressions should be interpreted as intended to identify these forward-looking statements.

In addition to the risks discussed in Item 1A “Risk Factors”, of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on August 14, 2012, various other risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to change significantly from those set forth in our forward-looking statements, including the following factors:

●  
our growth strategies;
  
our development and potential acquisition of new facilities;

  
risks related to development and construction activities;
  
anticipated trends in the gaming industries;

  
patron demographics;
  
general market and economic conditions;

  
access to capital and credit, including our ability to finance future business requirements;
  
the availability of adequate levels of insurance;

  
changes in federal, state, and local laws and regulations, including environmental and gaming license legislation and regulations;
  
regulatory approvals;

  
competitive environment; and
  
risks, uncertainties and other factors described from time to time in this and our other SEC filings and reports.

These statements are subject to risks and uncertainties beyond our reasonable control that could cause our actual business and results of operations to differ materially from those reflected in our forward-looking statements.  Forward-looking statements are not guarantees of future performance. Our forward-looking statements are based on trends which we anticipate in our industry and our good faith estimate of the effect on these trends of such factors as industry capacity, product demand and product pricing.  The inclusion of projections and other forward-looking statements should not be regarded a representation by us or any other person that we will realize our projections or that any of the forward-looking statements contained in this prospectus will prove to be accurate.
We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions.  New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements.
 
MANAGEMENT’S ANALYSIS OF BUSINESS

As used herein the terms “we”, “us”, “our,” the “Registrant,” and the “Company” means, Rotate Black, Inc., a Nevada corporation.

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included in this report.
 
 
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GENERAL OVERVIEW OF BUSINESS
 
Rotate Black, Inc. (the Company), was incorporated in Nevada on August 2, 2006, to be the successor by merger of BevSystems International, Inc. and BevSystems International Ltd. (“BevSystems”). On August 15, 2008, the Company commenced operations and all activity prior thereto has been charged to operations. Presently, the Company develops, operates and manages casino resorts.

The Company’s primary focus is the management of a casino resort in Gulfport, Mississippi (the “Gulfport Project”) under the Gulfport Project Management Agreement (Note 6) with the Company’s affiliate, Rotate Black MS, LLC (RBMS), a Mississippi limited liability company.

On May 28, 2010, the Company, Rotate Black, LLC (“RBL”), an entity under common control with the Company, and an officer of the Company formed RBMS (Note 6) to own, develop and manage the operations of a dockside vessel-based casino in Gulfport, Mississippi. The initial strategy was to secure an existing gaming vessel, move the vessel to the Company’s Gulfport site, and build land assets on that site to support the gaming vessel. Subsequently, the strategy was changed to developing an entirely land-based casino.

The Gulfport Project is being developed on approximately nine-and-a-half acres of the last gaming-eligible sites in Gulfport, Mississippi. The Gulfport Project is adjacent to the $625+ million redevelopment of the Marina, Port and downtown Gulfport areas.

Gulfport, the second largest city in Mississippi, is approximately 12 miles west of Biloxi. The Gulfport Project is expected to open February, 2014 following the completion of a fourteen-month development period. Upon completion, the casino will feature 1,188 slot machines and 22 table games. The Gulfport Project’s non-gaming amenities will include a four-star 205 room hotel, pool, spa, cabanas, steakhouse, buffet, snack bar and two feature bars.

The Company believes that various factors will drive the success of the Gulfport Project and its competitive position including favorable population demographics in the regional area, an established and stable existing gaming market, easy accessibility, and location as part of the renewed Gulfport Marina and Port areas.

The Gulfport Project will be located approximately 65 miles northeast from New Orleans, Louisiana; 70 miles south of Hattiesburg, Mississippi; 65 miles southwest from Mobile, Alabama; and, 105 miles from Pensacola, Florida. In total, the approximately five million people living within 150 miles generate approximately 17 million visits to the Gulf Coast market each year.

In addition, the project site is just south of downtown Gulfport, four miles from the Gulfport-Biloxi International Airport and adjacent to Mississippi’s third busiest intersection with an estimated 34,000 cars passing by daily.

Catskills Gaming Project
 
In October 2008, the Company acquired 75% of the outstanding common stock of Rotate Black Gaming, Inc., (“Gaming”), from RBL.  Gaming was under contract to develop and manage a world-class destination casino resort in Sullivan County, New York.  Gaming acquired the property and completed all design layouts (Note 10).

Pursuant to the RBL acquisition agreement, the Company acquired a seventy five percent (75%) ownership in RBL’s wholly owned affiliate Gaming, a Nevada corporation.  In accordance with a December 2009 Executive Order issued by the President of the Seneca Nation of Indians (Nation), Gaming was the Presidential Representative to pursue the development of a Class III world-class casino resort tentatively scheduled to be named “the Seneca Catskills Resort and Casino” consistent with the terms of Development and Management Agreements previously entered into with the Nation.  Gaming has completed the overall plans for the three phased development, acquired property and transferred the property to the Nation.

On July 1, 2010, the Company entered into an agreement with Catskill Gaming and Development, LLC (“Catskill”), pursuant to which the Company and its affiliate RBL, agreed to sell to Catskill shares of stock constituting 100% of the ownership of Gaming, for aggregate consideration of $21 million in cash (as amended, the “Agreement”).  According to the Agreement, the cash consideration is $15,000 paid at closing and the balance to be paid in installments as follows:

a.  
$2 million on or before the first anniversary of the date of the opening for business to the public of a gaming facility under a management agreement between Catskills, as manager, and the Seneca Nation of Indians, in or near the Counties of Ulster and Sullivan in the State of New York (the “Opening Date”);
b.  
$2 million on the second anniversary;

c.  
$3.4 million on the third anniversary;
d.  
$3.4 million on the fourth anniversary;

e.  
$3.4 million on the fifth anniversary;
f.  
$3.4 million on the sixth anniversary; and

g.  
$3.4 million on the seventh anniversary.
 
 
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In connection with the transaction, Catskill has agreed to assume indebtedness of approximately $6.3 million.

On July 7, 2010, the company received $15,000 upon closing and, given the long-term nature and political processes involved with obtaining a gaming eligible site in New York State, the Company cannot predict the timing of and the potential for the balance of the income from this transaction.

Gulfport Project

On February 2, 2010, Rotate Black, Inc. entered into a purchase agreement with the Chapter 11 Trustee of Cruise Holding II, LLC to purchase the gaming vessel “The Big Easy” for $3,250,000, as amended. Pursuant to the Purchase Agreement, the Company paid a deposit of $125,000 and issued a note in the amount of $125,000, which was personally guaranteed by the Company’s Chief Executive Officer, John Paulsen. The Purchase Agreement provides for a closing no later than March 15, 2010, subject to a single extension of no more than 30 days, at the election of the Company upon a payment to the Trustee of an additional cash deposit of $50,000. The Purchase Agreement also provides that the $250,000 deposit shall be forfeited as liquidated damages in the event that the Company defaults, breaches the terms of the offer, or breaches the terms of any sale order that may be entered by the U.S. Bankruptcy Court for the Southern District of Florida.

On February 8, 2010, the US Bankruptcy Court for the Southern District of Florida approved the Private Sale of the M/V Big Easy free and clear of liens, claims and encumbrances to us. The Court ordered that any party in interest objecting to the sale order may file a motion for reconsideration within ten calendar days, so long as the objecting party enters into a binding Asset Purchase Agreement with the Trustee at a cost higher than $3,525,000 and tenders a cash deposit in the amount of $525,000. Then if the Court agrees to vacate the Company’s sale order, Rotate Black would be entitled to receive a break-up fee of $250,000 and a refund of its cash deposit along with the cancellation of the promissory note and personal guaranty. At the time of this filing no one had objected to the Court’s approved sale order.

On June 10, 2010, the Company entered into an Offer to Purchase and Sales Agreement (the “Purchase Agreement”) with the seller of The Big Easy, Cruise Holdings II, LLC (“Seller”). Pursuant to the Purchase Agreement, the Company purchased The Big Easy, a gaming vessel for an aggregate purchase price of $4,264,500, payable: (a) by issuance of a secured note payable to the seller of $2,975,000 (the Secured Note), (b) issuance of an unsecured note payable to the seller of $600,000 (Unsecured Note), fees of 414,500 and cash of $275,000. The gaming vessel collateralizes the Secured Note and both notes are guaranteed by an officer of the Company. The Secured Note is payable on June 11, 2011 and bears interest at 14.5%, per annum, payable $35,000, per month, commencing June 11, 2010. The Unsecured Note bears interest at 14.5%, per annum, and is payable monthly, in an amount equal to 2% of the monthly gross gaming revenue generated from operations, as defined, until June 2012 when all principal and interest are due. As of September 17, 2010, both notes are in deferment and the default interest rate of 20% per annum is maintained. (See Note 9).

On October 21, 2010, RBMS, as Lessee, entered into a Ninety-Nine (99) year ground lease with Lessors.  The Private Lease provides RBMS with approximately five (5) acres of land in Gulfport, Mississippi located in the Bert Jones Yacht Basin. These five (5) acres of land coupled with approximately four and half (4.5) acres of adjacent and contiguous land being provided pursuant to the ground lease with the Gulfport Redevelopment Commission (discussed in detail below) allows RBMS to control more than the minimum seven (7) acres of contiguous land required to have a gaming eligible site in Gulfport, Mississippi.

The term of the Private Lease commenced as of October 20, 2010 and terminates at 11:59 p.m. October 19, 2109.  Pursuant to the terms of the Private Lease, RBMS will pay monthly rent equal to $20,000 (the “Preliminary Rent”) until the earlier of: (1) 11.59 p.m. on the last day of the ninth (9th) month following the Effective Date; or (ii) the date RBMS commences its initial temporary gaming operations on the leased premises. The Preliminary Rent accrues and RBMS is under no obligation to make any Preliminary Rent Payments until the earlier of: (i) the date RBMS commences any construction on the leased premises; or (ii) February 1, 2011. If RBMS does not receive an approval to proceed with the development of a casino on the leased premises from the Mississippi Gaming Commission on or prior to March 1, 2011, then the Private Lease is immediately terminable.

Upon the expiration of the Preliminary Term, the primary term (the “Primary Term”) of the Private Lease commences. The rent payable during the primary term is a percentage rent with a minimum rent guarantee. The percentage rent is equal to four percent (4%) of the gross gaming revenues (as defined in the Private Lease). The minimum rent guarantee is $50,000 per month for the first (1st) six (6) months of the Primary Term; $75,000 per month beginning on the first (1st) day of the seventh (7th) month of the Primary Term; and $110,000 per month beginning the first (1st) day of the seventh (7th) month following the commencement of gaming operations at the permanent gaming facility, with an annual consumer price index adjustment of the minimum rent on the annual anniversary of the minimum rent reaching $110,000. Permanent gaming facility means the land-based gaming facility developed by RBMS subsequent to the initial gaming operations.

 
 
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On October 22, 2010, RBMS, as Lessee, entered into a Fifty-Nine (59) year ground lease with GRC. The lease is dated October 20, 1010 and effective as of October 28, 2010 (the “GRC Lease Effective Date”). The GRC lease provides RBMS with approximately four and a half (4.5) acres of land adjacent and contiguous to the land leased under the Private Lease.

The term of the GRC Lease commences as of the Effective Date and terminates at 11:59 p.m. on October 31, 2069. Pursuant to the terms of the GRC Lease, RBMS will pay an initial one-time base rent of $50,000 to the GRC upon commencement of construction of the initial gaming operations. After commencement of the gaming operations, the rent payable to the GRC is a percentage rent with a minimum rent guarantee. The percentage rent is equal to one percent (1%) of the gross gaming revenues (as defined in the GRC Lease).  The minimum rent guarantee is $600,000 per annum. For the first lease year, RBMS shall be entitled to a $50,000 credit. Beginning with the sixth (6th) lease year, there is an annual 2% minimum rent guarantee increase. After the earlier of: (i) commencement of the permanent land-based casino or (ii) October 15, 2015, the GRC is entitled to additional rent in an amount equal to 25 bps of Adjusted EBITDA (as defined in the GRC Lease) generated by RBMS on the entire 9.5 acre parcel. This additional rent shall increase by 25 bps each lease year for the three immediately subsequent lease years. In the event Adjusted EBITDA exceeds $75 million in any lease year, RBMS shall pay the GRC an additional 25 bps of the amount of Adjusted EBITDA in excess of $75 million.

In May of 2011 RBMS informed Gaming that it would move forward with the financing of the Gulfport transaction solely on the basis that the casino resort be land based.  Given this decision it was decided that the vessel should be sold at a public auction to mitigate vessel cost and the Company entered into negotiations with the trustee to extinguish the notes through a conversion into equity, which negotiations remain ongoing.

On April 19, 2012, the Mississippi Gaming Commission (the "Commission") granted to RBMS approval as a legal gaming site for RBMS’s approximately nine and a half (9.5) acre site located at the Bert Jones Yacht Basin in Gulfport Mississippi.
 
Based upon feedback from the Commission, RBMS modified its plans for the first phase construction of its gaming project proposed for the site.  Modifications included the increase of the hotel size to 205 rooms, addition of pool, spa and cabanas and increased the gaming floor to offer 1,188 slots and 26 table games.  On August 16, 2012 the Commission voted unanimously to grant RBMS Approval to Proceed with its Gulfport Project.

The Company is currently in the final stages of closing on its financing to proceed with the construction of the Gulfport Project.  The Company anticipates such closing of financing before December 31, 2012.
 
Edmonton Project Management Agreement

On January 11, 2011, the Company, through an officer of the Company, entered into a management agreement (Agreement), whereby a newly to-be-formed wholly-owned subsidiary of the Company would act as manager, with the Bear Hills Charitable Foundation, Bear Hills Casino Inc., the Louis Bull Tribe and 677626 Alberta Ltd. (Tribe Companies) for a proposed casino and entertainment destination on the Louis Bull Indian Reserve, near Edmonton, Canada. The term of the Agreement commences on the date the Tribe Companies receive a license for the proposed casino and all related necessary approvals from the Alberta Gaming and Liquor Commission and then shall continue for the greater of twenty years or until all monies advanced by the Company to the Tribe Companies relating directly or indirectly to the casino project are repaid or for such other term agreed.

The Company, as manager, will be entitled to receive thirty percent of the revenues distributed to the Tribe Companies from the operations of the slot revenue and live games. In addition, the Company is entitled to thirty percent of all profits from any other businesses or activities on the property provided by Tribe Companies and thirty of all profits on any amenities or services supporting or related directly or indirectly to the casino. As of March 31, 2012, the project is awaiting direction from Alberta Liquor and Gaming.

Oklahoma Native American Tribe Casino Management

In December 2011, the Company formed a wholly-owned subsidiary, Rotate Black OK, LLC (“OKL”) and through the subsidiary, entered into a consulting agreement with an Oklahoma Native American Tribe in December 2011.  The purpose of this consulting agreement is to provide to the Tribe best practices related to two of its casinos in Oklahoma.  The Company intends to leverage the success of this engagement to generate additional Native American gaming consulting agreements.

SlotOne, Inc.

In December 2011, the Company formed a wholly-owned subsidiary, SlotOne, Inc., to provide slot machines on a participation basis in certain casino locations where the replacement of old equipment can enhance earnings for the gaming location and Rotate Black, Inc.

 
 
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Gaming and Other Developments Terminated or On Hold

Dayton. On July 9, 2009, the Company entered into a cancelable development agreement with RBL associated with Schaller Development’s “Traditions Casino Resort” to be developed and located in Dayton, Nevada. Pursuant to Rotate Black’s current negotiations with Schaller Development (“Schaller”) Rotate Black would contribute $5.0 million of working capital into a newly formed subsidiary, Rotate Black Dayton, Inc., upon Schaller’s contribution of $6.5 million of land and carrying all approvals and entitlements for gaming. The purchase price of Dayton of $219,154 was allocated to deferred expenses and included the predevelopment expenses as of the date acquired. As of June 30, 2009, the Dayton casino development project was terminated and the Company has written-off deferred expenses of $233,960. The Company has pending litigation with regard to this project and seeking to recover damages. (See Note 18)

Panama. On March 17, 2011, the Company entered into an agreement for a proposed joint venture (Blue Water Gaming and Entertainment S.A.), with Ocean Point Development Corp. to develop and manage an approximately 52,000 square foot Las Vegas style casino at the Trump Ocean Club International Hotel and Tower, in Panama City, Panama.  As of June 30, 2011, due to the market conditions in Panama, the Company has put this project on hold and has written off deferred costs of $73,938. The Company is now focusing its development efforts on its Gulfport Project and is no longer pursuing this development opportunity.
 
Financial Position and Future Capital Needs – Going Concern

We were a development stage company through March 31, 2010 when the Gulfport Project management agreement became effective. We have a limited history in the casino and gaming business. Since inception, a majority of our operating and development expenses have been funded by private placement offerings and a loan from one of our stockholders, RBL.

Due to the development nature of its business, the Company has incurred losses since inception. For the years ended June 30, 2011 and 2010 we had revenues of $517,980 and $600,000, respectively. All revenues were related to the Gulfport Project management agreement as discussed previously.    Revenues for the nine months ended March 31, 2012 were $120,000, related to the OKL casino management agreement.   Future management fees will commence on opening of the casino and are capped at $300,000 per month.

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of March 31, 2012, we had an accumulated deficit of $19,724,102 negative working capital of $2,308,545, and had a net loss of $2,740,349 for the nine months ended March 31, 2012.

The Company’s ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations arising from normal business operations when they come due.

We intend to engage in private placement offerings from time to time to provide the Company with working capital to pay down certain debt obligations, for other general corporate and operations uses, and to enable us to pursue our strategy to develop and acquire and operate gaming business opportunities. The Company plans to make sales of its common stock in private transactions or to borrow funds as needed to raise sufficient capital to fund the development of business, projected operating expenses and commitments. However, there can be no assurance that we will be able to obtain sufficient funding to develop our current business plan. In the event that we cannot obtain additional funds when needed, we may be forced to renegotiate some or all of our debt and curtail or cease some or all of our activities.
 
Although we believe we will be successful with our plans, due to market factors and economic conditions, no assurance can be given that financing will be available to the Company on favorable terms or at all.

The financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

 
24

 
 
Results of Operations

Three months ended March 31, 2012 compared to three months ended March 31, 2011:

Revenue

For the three-month periods ended March 31, 2012 and 2011, we had revenues of $90,000 and none, respectively. Revenues consist of management fees and, will commence again upon the closing of the financing related to the Catskills casino hotel project. (Note 6).
 
Expenses

Our total operating expenses for the three months ended March 31, 2012, were $723,327 as compared to $523,761 for the comparable prior year period. The increase of $199,566, approximately 38%, can be attributed primarily to an increase in equity investment loss and interest expense, offset by a decreases salary and general and administrative expenses.

General and administrative expenses for the three months ended March 31, 2012, were $109,340 as compared to $176,635 for the prior year period. The decrease of $67,295, approximately 38% is mainly attributable to decreases in outside services, and travel and entertainment, in addition to a decrease in the expenses related to the Big Easy Vessel, which was sold as of June 30, 2011, of insurance and depreciation expense.

Our net loss from operations for the three months ended March 31, 2012, was $633,327 as compared to $524,091 for the prior year period. The increase in loss of $109,236, approximately 21%, is primarily attributable to the $90,000 in management fees earned in the 2012 period. (Note 6)
 
Nine months ended March 31, 2012 compared to nine months ended March 31, 2011:

Revenue

For the nine-month periods ended March 31, 2012 and 2011, we had revenues of $120,000 and $970,000, respectively. Revenues consist of management fees and, will commence again upon the closing of the financing related to the Catskills casino hotel project. (Note 6)
 
Expenses

Our total operating expenses for the nine months ended March 31, 2012, were $2,860,349 as compared to $1,678,471 for the comparable prior year period. The increase of $1,181,878, approximately 70%, can be attributed primarily to increases in stock based compensation, interest expense and equity investment loss, offset by decreases in salary and general and administrative expenses.

General and administrative expenses for the nine months ended March 31, 2012, were $292,014 as compared to $942,675 for the prior year period. The decrease of $650,661 approximately 69% is mainly attributable to decreases in outside services, and travel and entertainment, in addition to a decrease in the expenses related to the Big Easy Vessel, which was sold as of June 30, 2011, of insurance and depreciation expense.

Our net loss from operations for the nine months ended March 31, 2012, was $2,740,349 as compared to $685,533 for the prior year period. The increase in loss of $2,054,816 is primarily attributable to the $970,000 in management fees earned in the 2011 period as compared to $120,000 in the 2012 period. (Note 6)

Liquidity and Capital Resources

As of March 31, 2012, we had negative working capital of $2,308,545 compared to negative working capital of $2,267,987 as of June 30, 2011, an accumulated deficit of $19,724,102 as of March 31, 2012, and further losses are anticipated.

We do not have sufficient funds to continue our operating activities. Future operating activities are expected to be funded by sales of common stock and to a limited extent, debt financing until such time that operations will generate sufficient funds.

These factors raise doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations arising from normal business operations when they come due. These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts of and classification of liabilities that might be necessary in the event we cannot continue.

 
 
25

 
 
Cash (Used in) Provided by Investing Activities

Cash flows used in investing activities for the nine months ended March 31, 2012 was $206,891 as compared to cash flow used in investing activities of $437,905 for the comparable 2011 period. This decrease in cash used resulted primarily from investments in the equity entity.

Cash (Used in) Provided by Financing Activities

Cash flows from financing activities for the nine months ended March 31, 2012 were $131,766 as compared to $165,816 for the nine months ended March 31, 2011.  This decrease consisted primarily of decreases in loan payable and proceeds in the sale of common stock.

Contractual Obligations
 
Not applicable as we are a smaller reporting company.

Off-balance Sheet Arrangements
 
The Company has no off-balance sheet arrangements.
 
Impact of Inflation

We believe that inflation has not had a material impact on our results of operations for the three months ended March 31, 2012. We cannot be assured that future inflation will not have an adverse impact on our operating results and financial condition.

Climate Change
 
Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material adverse effect on our operations.
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable as we are a smaller reporting company.
 
ITEM 4.    CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures  

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer, we have concluded that our disclosure controls and procedures were not effective as of March 31, 2012, based on their evaluation of these controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have identified certain matters that constitute deficiencies (as defined under the Public Company Accounting Oversight Board Auditing Standard No. 2) in our internal controls over financial reporting. The deficiencies that we have identified relate to the fact that that our overall financial reporting structure, internal accounting information systems and current staffing levels are not sufficient to support our financial reporting requirements. We are working to remedy our deficiencies.
 
Changes in internal control over financial reporting
 
There were no changes in our internal control over financial reporting that occurred during the quarter ending March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
26

 
 
PART II. OTHER INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS
 
On February 23, 2010, a complaint was filed in the Third Judicial Court of the State of Nevada by SMC Construction Co., Inc. and others against the Company, RBL and others in the amount of $5,000,000 arising out of the termination of a development agreement for Dayton. On July 16, 2010, the Company and other defendants filed an answer and a counterclaim. A default Judgment was filed in the Third Judicial District Court of the State of Nevada In and For the County of Lyon on August 8, 2011 against the Company, Rotate Black, LLC, two officers of the Company, and others in the amount of $9,674,057 for exemplary and punitive damages.    In connection with this matter, a Request for Enrollment of Foreign Judgment was filed in the Circuit Court of Harrison County, Mississippi, First Judicial District on December 23, 2011.  On June 6, 2012, the Company filed a Motion for Leave to Seek District Court’s Correction of Clerical Error Appearing on the Face of the Judgment, Subject Matter of Current Appeal in the Supreme Court of the State of Nevada.  On June 7, 2012 the company was notified that its appeals to the default judgment will be heard by the Nevada Supreme Court. The Company will vigorously defend this action but can provide no assurance as to the likelihood of the outcome of the matter.

On October 25, 2010, an action was filed in the United States District Court, Western District of  New York by The Sandesh Limited, the Plaintiff, against Rotate Black, Inc., Rotate Black LLC and a former employee, collectively, the Defendants. The Plaintiff alleges that as a condition to their purchase of 1,200,000 shares of our common stock, the Plaintiff had the right to require the Defendants to repurchase all or any portion of the shares. Plaintiffs also allege that a subsequent agreement was entered into with Rotate Black, LLC, whereby Rotate Black, LLC would purchase the Plaintiff’s 1,200,000 shares of common stock.  Plaintiff further alleges that this repurchase also did not occur and that the Defendants breached other terms of the agreements. Plaintiffs are seeking the return of $1,200,000 and additional unspecified amounts as compensatory, actual and punitive and/or exemplary damages, restitution for unjust enrichment, prejudgment interest, attorney’s fees and costs and other relief as the court deems appropriate. The Company has filed an answer and a counterclaim. On November 23, 2011, a settlement agreement was entered into dismissing the litigation and ordering that RBL pay Sandesh $1,500,000 as settlement, in payments of $35,000, per month, as defined, with interest at 8%, per annum. Sandesh is holding 480,000 common shares of the Company’s common stock and 350 units of RBMS held by RBL as collateral.
 
ITEM 1A. RISK FACTORS

N/A.
 
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.

 
 
27

 
 
ITEM 6.   EXHIBITS                                                              
                                                       
Exhibit No.: 
 
Exhibit
     
3.1
 
Articles of Incorporation and amendments of BevSystems International Inc., incorporated by reference to Exhibit 3.1 to registrant’s annual report on Form 10-K, filed with the SEC on September 10, 2003.
     
3.2
 
By-Laws of BevSystems International, Inc., incorporated by reference to Exhibit 3.2 to registrant’s annual report on Form 10-K, filed with the SEC on September 10, 2003.
     
3.3
 
Equity Sale/Purchase Agreement with Rotate Black, Inc. dated October 7, 2008, incorporated by reference to Exhibit 99.1 to registrant’s current report on Form 8-K, filed with the SEC on October 8, 2008.
     
3.4
 
Asset Sale Agreement with Rotate Black, Inc. dated October 7, 2008, incorporated by reference to Exhibit 99.2 to registrant’s current report on Form 8-K, filed with the SEC on October 8, 2008.
 
3.5
 
Stock Purchase Agreement with Rotate Black, Inc. dated October 7, 2008, incorporated by reference to Exhibit 99.3 to registrant’s current report on Form 8-K, filed with the SEC on October 8, 2008.
     
4.1
 
Rotate Black, Inc. Stock Option Plan dated July 6, 2011, incorporated by reference to Exhibit 20.1 to registrant’s Form 10-Q, filed with the SEC on August 11, 2011.
     
10.1
 
Development Agreement between the Seneca Nation of Indians and Solstice International, Inc., dated June 22, 2007, incorporated by reference to Exhibit to registrant’s Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on 2010.
     
10.2
 
Management Agreement between the Seneca Nation of Indians and Solstice International, Inc., dated June 22, 2007.*
     
10.3
 
Agreement between Rotate Black Gaming, Inc. and 3D LLC dated November 1, 2009.*
     
10.4
 
Accepted Offer to Purchase between Rotate Black, Inc. and Mark Calvert, Chapter 11 Trustee of Cruise Holdings II, LLC (the “Trustee”), dated January 29, 2010,  incorporated by reference from Exhibit 10.1 of Form 8-K filed on February 8, 2010.
     
10.5
 
Promissory Note from Rotate Black, Inc. to the Trustee, dated January 28, 2010, incorporated by reference from Exhibit 10.2 of Form 10-K filed on February 8, 2010.
     
10.6
 
Unconditional Guarantee from John Paulsen to the Trustee, dated January 28, 2010, incorporated by reference from Exhibit 10.3 of Form 8-K filed on February 8, 2010.
     
10.7
 
Letter Agreement between Rotate Black, Inc. and the Trustee, dated April 16, 2010, incorporated by reference from Exhibit 10.1 of Form 8-K filed on April 27, 2010.
     
10.8
 
Offer to Purchase and Sale Agreement between Rotate Black, Inc. and Cruise Holdings II, LLC, dated June 10, 2010, incorporated by reference from Exhibit 10.1 of Form 8-K filed on June 16, 2010.
     
10.9
 
Secured Promissory Note issued by Rotate Black, Inc. in favor of Cruise Holdings II, LLC, dated June 10, 2010, incorporated by reference from Exhibit 10.2 of Form 8-K filed on June 16, 2010.
     
10.10
 
Preferred Mortgage issued by Rotate Black, Inc. in favor of Cruise Holdings II, LLC, dated June 10, 2010, incorporated by reference from Exhibit 10.3 of Form 8-K filed on June 16, 2010.
 
10.11
 
 Unsecured Promissory Note issued by Rotate Black, Inc. in favor of Cruise Holdings II, LLC, dated June 10, 2010, incorporated by reference from Exhibit 10.4 of Form 8-K filed on June 16, 2010.
     
10.12
 
Unconditional Guaranty from John Paulsen in favor of Cruise Holdings II, LLC, dated June 11, 2010, incorporated by reference from Exhibit 10.5 of Form 8-K filed on June 16, 2010.
     
10.13
 
Agreement with Catskills Gaming and Development, LLC, dated July 1, 2010, incorporated by reference from Form 8-K filed on July 9, 2009.

10.14
 
Placement Agreement between Capstone Investments and Rotate Black, Inc., dated October 26, 2009, dated July 1, 2010, incorporated by reference to Exhibit 10.14 to Form 10-K filed on August 14, 2012.

10.15
 
Placement Agreement between CRT Capital Corp, LLC and Solstice International, Inc., dated February 12, 200,8 incorporated by reference to Exhibit 10.15 to Form 10-K filed on August 14, 2012.
     
10.16
 
Consulting Agreement with Mark J. Ross, dated April 23, 2010, incorporated by reference to Exhibit 10.1 to registration statement on Form S-8, filed with the SEC on June 23, 2010.
     
10.17
 
Consulting Agreement with Rajat Shah, dated June 1, 2010, incorporated by reference to Exhibit 10.2 to registration statement on Form S-8, filed with the SEC on June 23, 2010.
     
10.18
 
Agreement with Catskills Gaming and Development, dated July 1, 2010, incorporated by reference to Exhibit 10.6 to registrant’s current report on Form 8-K, filed with the SEC on July 9, 2010.
 
 
28

 
 
     
10.19
 
Ground Lease among Marine Life Ventures, LLC and MC Marine, LLC, as lessors, and Rotate Black MS, LLC, as lessee, entered into on October 21, 2010, incorporated by reference to Exhibit 10.1 to registrant’s current report on Form 8-K,. filed with the SEC on October 26, 2010.
     
10.20
 
Ground Lease between Gulfport Redevelopment Commission, as lessor, and Rotate Black MS, LLC, as lessee, entered into on October 21, 2010, incorporated by reference to Exhibit 10.2 to registrant’s current report on Form 8-K, filed with the SEC on October 26, 2010.
     
10.21
 
Management Agreement for casino on Louis Bull Indian Reserve in Canada, dated January 12, 2011, incorporated by reference to Exhibit 10.1 to registrant’s current report on Form 8-K, filed with the SEC on January 18, 2011.
     
10.22
 
Securities Purchase Agreement, dated May 1, 2012, between Rotate Black, Inc. and purchasers signatory thereto, incorporated by reference to Exhibit 10.22 to Form 10-K filed on August 14, 2012.
     
10.23
 
Form of 10% Convertible Promissory Note, dated May 1, 2012, issued by Rotate Black, Inc. to the purchasers signatory to the Securities Purchase Agreement referred to in Ex. 10.22, incorporated by reference to Exhibit 10.23 to Form 10-K filed on August 14, 2012.
     
10.24
 
Form of Common Stock Purchase Warrant, dated May 1, 2012, issued by Rotate Black, Inc. to the purchasers signatory to the Securities Purchase Agreement referred to in Ex. 10.22, incorporated by reference to Exhibit 10.24 to Form 10-K filed on August 14, 2012.
 
21.1
Principal Subsidiaries, incorporated by reference to Exhibit 21.1 to Form 10-K filed on August 14, 2012.

Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934*

Certification of the Chief Financial Officer (principal financial and accounting officer) pursuant to Rule 13a-14 of the Securities Exchange Act of 1934*

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350*

Certification of the Chief Financial Officer (principal financial and accounting officer) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350*

EX-101.INS
XBRL INSTANCE DOCUMENT+
   
EX-101.SCH
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT+
   
EX-101.CAL
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE+
   
EX-101.DEF
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE+
   
EX-101.LAB
XBRL TAXONOMY EXTENSION LABELS LINKBASE+
   
EX-101.PRE
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE+

*filed herewith
 +submitted herewith
 
 
29

 

SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
ROTATE BLACK, INC.
(Registrant)
     
Date: December 6, 2012
By:
/s/ John Paulsen
 
   
John Paulsen
   
Chief Executive Officer
(Authorized Officer, Principal Executive Officer
     
     
 Date: December 6, 2012 
By:  
 /s/ Jeff Bacigalupi
 
   
Jeff Bacigalupi,
   
Chief Financial Officer
Principal Financial and Accounting Officer
 

30