UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

 

FORM 10-K

 

x		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for fiscal year ended April 30, 2014
		or
¨		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the transition period from               to

 

Commission file number. 001-15517

Nevada Gold & Casinos, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada	88-0142032
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)
133 E. Warm Springs Road, Suite 102, Las Vegas, Nevada	89119
(Address of principal executive offices)	(Zip Code)

 

Registrant’s telephone number, including area code: (702) 685-1000

 

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

 

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

 

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

 

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

¨ Yes x No

 

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

o Yes x No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

 

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

x Yes o No

 

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

 

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

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company x

 

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

o Yes x No

 

As of October 31, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price per share of $1.06, as reported on the NYSE MKT Stock Exchange, was $16,820,078.

 

As of July 10, 2014, the registrant had 16,210,267 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement for the registrant’s 2014 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year end of April 30, 2014 are incorporated by reference into Part III of this report.

 

 

NEVADA GOLD & CASINOS, INC.

TABLE OF CONTENTS

 

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

 

 

FORWARD-LOOKING STATEMENTS

Factors that May Affect Future Results

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

 

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

 

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

 

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

 

 

Part I

 

Item 1.

Business

 

Overview

 

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

 

Our current gaming facility operations are located in the United States of America (the “U.S.”), specifically in the states of Washington and South Dakota. In 2012 we sold our interest in the Colorado Grande Casino in Cripple Creek, Colorado.

 

We operate a portfolio of ten mini-casinos in Washington State (“Washington Gold”) which include restaurants, bars and approximately 140 table games. We acquired these operations in three separate transactions between 2009 and 2011. In 2012, we acquired all of the shares of A.G. Trucano, Son and Grandsons, Inc. (“South Dakota Gold”), a slot machine route operation in Deadwood, South Dakota consisting of approximately 775 slot machines in 16 locations.

 

We own approximately 268 acres of undeveloped land near Blackhawk, Colorado which is currently held for sale.

 

We sold the Colorado Grande Casino in 2012 for $3.1 million and have a note receivable from the buyer with a balance of $2.1 as of April 30, 2014.

 

We report our operations in four segments: Washington Gold, South Dakota Gold, Corporate and assets held for sale. For a summary of financial information concerning these four segments, please refer to the information provided in Note 12 to our Consolidated Financial Statements.

 

Objective and Strategies

 

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

 

-

enhancing the return from, and the value of, the gaming properties in which we own interests;

-

acquiring or developing additional gaming properties; and

-

assisting in finding financing, developing and/or managing of, or providing consulting services to, gaming projects and operating properties.

 

Current Casino Operations

 

Washington Gold – Washington State

 

On May 12, 2009, we acquired three mini-casinos in the state of Washington for $15.75 million. The transaction was funded with available cash and $4.0 million note issued to the Sellers. The three mini-casinos are Crazy Moose Casino in Pasco, Coyote Bob's Casino in Kennewick, and Crazy Moose Casino in Mountlake Terrace. We believe that Crazy Moose Casino in Mountlake Terrace attracts customers from the greater Seattle area whereas Crazy Moose Casino in Pasco and Coyote Bob’s Casino, located in the southeast region of Washington State, attract customers from Walla Walla, southeastern Washington State and northeastern Oregon.

 

On July 23, 2010, we acquired six additional mini-casinos and a related administrative center, for $11.07 million, which was funded with $6.0 million in cash and $5.07 million financed by the prior owner’s senior debt holder. These locations were acquired through bankruptcy proceedings. The six mini-casinos are Silver Dollar Casinos in SeaTac, Renton, and Bothell, Golden Nugget Casino in Tukwila, Club Hollywood Casino in Shoreline, and Royal Casino in Everett. All of the properties are located in the Seattle area, and we believe that these casinos attract customers from the greater Seattle area and western Washington State.

 

On July 18, 2011, we acquired the Red Dragon in Mountlake Terrace, Washington for $1.25 million. This transaction was financed with $400,000 in cash, $500,000 in our common stock and $350,000 in two promissory notes payable to the seller. We believe that this location attracts customers from the Seattle area and western Washington State.

 

With these three acquisitions we have become the largest operator of mini-casinos in the state of Washington with ten such facilities, which represents approximately 20% of the state's active mini-casinos. Each location includes a full service restaurant, a bar and a maximum of 15 table games. In addition to Player Banked Poker, the table games offered include Blackjack, Pai Gow poker, Baccarat, Spanish 21, Blackjack-Double Action, Ultimate Hold’em, Three and Four Card Poker and High Card Flush. New games are frequently introduced and traditional “pull tabs” are also allowed. Our combined Washington operations provide approximately 140 table games and employ approximately 1,200 people.

 

 

Collectively, our Washington operations are referred to herein as “Washington Gold” or “Washington Gold Casinos”. We own the land and building at Crazy Moose in Pasco, and Coyote Bob’s in Kennewick. Our other eight locations are operated in leased facilities. Please refer to the information provided in Note 16 to our Consolidated Financial Statements.

 

South Dakota Gold – Deadwood, South Dakota

 

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

 

South Dakota Gold is a slot machine route operator that has been in business since the legalization of gaming in South Dakota in 1989. We currently operate approximately 775 slot machines in approximately 16 locations in Deadwood, South Dakota, which represents about 22% of the total number of slot machines in that market. Deadwood is a town of 1,300 residents located in the Black Hills, South Dakota, in the southwest corner of the state. The town attracts over a million visitors each year and is a one hour drive from Mount Rushmore and 40-minute drive from Rapid City. Initiated in 1989, Deadwood was the third jurisdiction in the United States to host legalized gambling. Our South Dakota operations employ approximately 26 people.

 

Colorado Land

 

We own approximately 268 acres of undeveloped land near Black Hawk, Colorado which is currently held for sale. On April 8, 2013 we signed a one year option agreement, with two one year extensions, with Clear Creek County Development Company, LLC (“CCC”) to sell the land for an initial price of $1.1 million, increasing $118 per day after April 8, 2013. The option cost is equal to one-half of the annual property taxes of approximately $10,000. In April 2014, CCC exercised the first of their two extensions and paid the additional option cost.

 

Colorado Grande Casino – Cripple Creek, Colorado

 

On May 25, 2012, we sold substantially all assets, including any rights in the Colorado Grande name and gaming-related liabilities, of the Colorado Grande Casino to G Investments, LLC (“GI”). Under the terms of the agreement, the buyer agreed to pay us $3.1 million, of which $800,000 was paid in cash and $2.3 million will be paid through a five year, 6% interest rate promissory note (the “GI Note”). On May 29, 2012, we filed a Form 8-K which provides details regarding the transaction. Please see Note 4 of our consolidated financial statements.

 

Previous Projects

 

On an annual basis, we review each of our notes receivable to evaluate whether collection is still probable. In our analysis, we review the economic feasibility and the current financial, legislative and development status of the project. If our analysis indicates that the project is no longer economically feasible, the note receivable will be written down to its estimated fair value.

 

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

 

In 2005, we acquired a 20% interest in Buena Vista Development Company, LLC (“Buena Vista Development” or “BVD”) in exchange for an approximately $14.8 million loan and an equity investment of approximately $200,000. BVD is developing a casino for the Buena Vista Rancheria of Me-Wuk Indians, a Native American tribe in Amador County, California. Our initial 20% ownership interest in BVD increased by five percentage points at the end of every six-month period the loan remained outstanding, up to a maximum of an additional 20%, for a total of 40%. As of May 2007, we owned a 40% interest in BVD.

 

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

 

Given the prevailing very challenging capital market conditions and continued uncertainties surrounding this development project, and based upon our “Level 3” analysis, we recorded a $4.6 million valuation allowance for the total principal and interest in the fourth quarter of fiscal 2012.

 

At April 30, 2014 and April 30, 2013, our balance sheet reflects a net receivable of $0, net of a $4.6 million valuation allowance, related to the development of gaming/entertainment projects from BVO. Please see Note 4 of our Consolidated Financial Statements.

 

 

Big City Capital, LLC

 

In 2004 we advanced $3.2 million to Big City Capital, LLC (“BC”) for the development of gaming/entertainment projects. The principal of the project personally guaranteed $0.9 million of the notes. These notes have a maturity date of December 31, 2014. The principals are still pursuing involvement, on a limited basis, in a project in Irving, Texas. In 2008, we determined that our ability to collect the full amount of the notes had been impaired and we established a $1.5 million allowance. In 2012, our evaluation determined that the likelihood of collection of the remaining $1.7 million was remote, and we increased the valuation allowance to the full $3.2 million.

 

At April 30, 2014 and April 30, 2013, our balance sheet reflects a net receivable of $0, net of a $3.2 million valuation allowance, related to the BC note. Please see Note 4 of our Consolidated Financial Statements.

 

Speedway

 

Speedway is a to-be-built hotel and casino on a parcel adjacent to the Las Vegas Motor Speedway in North Las Vegas, Nevada. It is anticipated that, if completed, this project will include a hotel, casino and other amenities. The owner of the parcel, CML-NV Speedway, LLC, an affiliate of Rialto Capital Advisors, LLC (“Rialto”), foreclosed on the prior developer in August of 2011. On April 24, 2012, Rialto and Nevada Gold signed a non-binding Memorandum of Understanding, pursuant to which we were to be involved as the developer, manager, and minority equity holder. However, given the prevailing very challenging capital market conditions and continued uncertainties as to the economy, and based upon our “Level 3” analysis, as of October 31, 2012, we recorded a $0.2 million write-off of our capitalized costs invested in the project. In October 2012, we informed Rialto that we would no longer be involved in the project.

 

Regulation and Licensing

 

Washington

 

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

 

To operate our ten “mini-casinos” in Washington State, each of them is required to maintain a Public Card-room and Punch Board/Pull-Tab Commercial Stimulant license.  These licenses are renewable annually, subject to continued compliance with applicable gaming regulations.  In addition, the WA Gambling Commission requires, prior to the licenses being issued, each substantial interest holder in the licensees (including our officers, directors and owners of 5% percent or more of any class of our stock) to submit to the WA Gambling Commission certain disclosure forms and be subject to background investigations.  The failure or inability of our “mini-casinos” to maintain their respective licenses would have a material adverse effect on our operations.

 

Revised Code of Washington (“RCW”) 9.46.110 allows local governments (including cities, counties and towns) to prohibit any or all gambling activities for which licenses are required as well as tax such activities.  The maximum tax limitations imposed by law include 20% of gross receipts for public card-room games and either 5% of gross receipts or 10% of net receipt (as chosen by a local authority) for pull-tabs activities.  The current gaming tax rate for public card-room games in the cities of Pasco, Mountlake Terrace, Kennewick, SeaTac, Renton, Tukwila and Shoreline, as well as in Snohomish County, is 10% of table games gross receipts. The current gaming tax rate for pull-tabs in the city of Kennewick is 10% of pull-tabs net receipts, while in the cities of Pasco, Mountlake Terrace, SeaTac, Renton, Tukwila and Shoreline, as well as in Snohomish County, the tax rate is 5% of pull-tabs gross receipts.  In addition, Washington State charges a business and occupational tax in the amount of 1.63% of all gaming activities’ net receipts in order to promote responsible gaming. 

 

 

South Dakota

 

Gaming in South Dakota began in November 1989 and is presently authorized within the City of Deadwood. The gaming legislation is codified in Chapter 42-7B of the South Dakota Codified Laws as well as Article 20:18 of the South Dakota Legislature Administrative Rules (collectively, the “SD Regulations”) and is regulated by the South Dakota Commission on Gaming (the “SD Gaming Commission”). The SD Regulations allow gambling activities to be conducted at bars and taverns, including slot machines and limited card games, such as Blackjack and Poker. The SD Regulations limit each licensed location to have a maximum of 30 slot machines. The current tax rate is 9% of the adjusted gross gaming revenues in addition to an annual fee of $2,000 for each licensed gaming device located in a licensed location. In order to operate our slot route business in this state, we are required to hold Operator and Route Operator licenses issued by the SD Gaming Commission.

 

The SD Regulations require that every officer and director, as well as any stockholder holding 5% or greater ownership in a company involved with the conduct of gaming in the state to be a person of good moral character and must submit to a full background investigation conducted by the SD Gaming Commission. Our gaming licenses may be suspended or revoked for any cause which may have prevented their issuance, or for violation by us, or any of our officers, directors, agents, members or employees, of the SD Regulations or for conviction of a crime of moral turpitude or a felony. In addition to the revocation or suspension or in lieu of revocation or suspension, the SD Gaming Commission may impose a reprimand or a monetary penalty.

 

Colorado

 

Upon the sale of the Colorado Grande Casino to G Investments, LLC on May 25, 2012, we surrendered our license to operate the Colorado Grande Casino and are no longer subject to the provisions of the Act and the regulations promulgated thereunder.

 

Nevada

 

Upon the recommendation of the Nevada Gaming Control Board (the “NV Gaming Board”), on January 26, 2012, the Nevada Gaming Commission (the “NV Gaming Commission” and, collectively with the NV Gaming Board, the “NV Gaming Authorities”) approved our application for registration as a publicly-traded corporation submitted in connection with an acquisition of a 1% interest in The Nugget, a non-restricted gaming licensee located in Reno, NV, by our wholly-owned subsidiary, Nevada Gold Speedway, LLC (“NG Speedway”). Our acquisition of equity in the Nugget required us to file the application. In connection therewith, we, NG Speedway, and certain of our key employees and directors were found suitable by the NV Gaming Authorities. We took this action to accelerate future Nevada acquisitions or management contracts. In May 2013, as permitted by the agreement, the Heaney Trust exercised its right to repurchase our 1% ownership of The Nugget for $1,000. As a result we were licensed in Nevada and remain registered with the Nevada Gaming Control Board as a publicly traded corporation that has been found suitable.

 

The ownership and operation of gaming establishments in the State of Nevada are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the “NGCA”). A finding of suitability is comparable to licensing and it requires submission of detailed personal and financial information followed by a thorough investigation. A finding of unsuitability with respect to any officer, director, employee, associate, lender or beneficial owner of a licensee or applicant may jeopardize an already issued license or applicant’s license application. Licenses may be conditioned upon termination of any relationship with unsuitable persons.

 

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

 

•

pay such a person any dividend or interest upon any of our voting securities;

•

allow such a person to exercise, directly or indirectly, any voting right conferred through securities held by that person;

•

pay remuneration in any form to such a person for services rendered or otherwise; or

•

fail to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value.

 

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

 

 

Because we are involved in gaming activities outside the State of Nevada, we are required to deposit with the NV Gaming Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay for the expenses of investigation by the NV Gaming Board of our participation in gaming in other jurisdictions. The revolving fund is subject to increase or decrease at the discretion of the NV Gaming Commission. Upon our registration and finding of suitability, we are also required to comply with certain other requirements imposed by the NGCA, including reporting requirements.

 

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

 

General Gaming Regulations in Other Jurisdictions

 

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

 

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

 

Other Assets

 

Gold Mountain Development. Through our wholly-owned subsidiary, Gold Mountain Development, LLC, we own approximately 268 acres of undeveloped land in the vicinity of Black Hawk and Central City, Colorado. Our evaluation of the carrying value of our long-lived assets for sale led us to conclude that there was an impairment of our vacant land asset adjacent to the city of Black Hawk, Colorado, and accordingly, we recorded a pre-tax non-cash charge of $2.3 million to our operating results during the period ended April 30, 2012. The $2.3 million expense was based on an appraisal of the land, which used a market approach, and other external data related to mineral rights, which in the aggregate estimated the value of the land at $1.1 million resulting from the general downturn in vacant Colorado land held for development. In November 2012, the land was reappraised for $1.1 million. This acreage is currently held for sale. On April 8, 2013, we signed a one year option agreement, with two one year extensions, with Clear Creek County Development Company, LLC (“CCC”) to sell the land for an initial sale price of $1.1 million plus $118 per day after April 8, 2013. The cost of the option is equal to one-half of the annual property taxes of approximately $10,000. In April 2014, CCC exercised their right to extend the option agreement for one additional year under the same terms, and has one additional option period remaining.

 

Employees

 

As of April 30, 2014, we employed approximately 1,240 people.

 

Available Information

 

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

 

Item 1A.

Risk Factors

 

The following is a description of those factors that we consider our key challenges and risks:

 

Financing future acquisitions may be difficult.

 

Our principal challenge is the necessity to obtain financing in order to expand gaming operations. There can be no assurance that such financing will be obtained.

 

 

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

 

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

 

Indebtedness could adversely affect our financial health.

 

On December 18, 2013, the Company and certain of its subsidiaries entered into a new $12,750,000 Reducing Revolving Credit Agreement with Mutual of Omaha Bank (the “Credit Facility”). The maturity date of the Credit Facility is December 10, 2018, and is secured by liens on substantially all of the real and personal property of the Company and its subsidiaries.

 

As of April 30, 2014, scheduled principal payments on the Credit Facility for each of the next five years and thereafter are as follows:

 

May 1, 2014 – April 30, 2015		$	1,625,000
May 1, 2015 – April 30, 2016		$	1,725,000
May 1, 2016 – April 30, 2017		$	1,825,000
May 1, 2017 – April 30, 2018		$	1,925,000
May 1, 2018 – December 10, 2018		$	5,250,000

 

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

 

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

 

·

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

·

limit our ability to fund future working capital, capital expenditures and other general operating requirements;

·

place us at a competitive disadvantage compared to our competitors that have less debt or greater resources; and

·

limit our ability to borrow additional funds.

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

We could fail to monetize recorded assets.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

Item 1B.

Unresolved Staff Comments

 

None.

 

Item 2.

Properties

 

As a result of acquiring facilities in Washington, we own the buildings for the Crazy Moose Casino in Pasco and Coyote Bob Casino’s in Kennewick. In addition we have real property leases as follows:

 

Washington Gold Casinos.

 

·

Crazy Moose Casino in Mountlake Terrace has a building lease which expires in May of 2016 with an option to renew for an additional term of five years. The annual rent for this lease is $157,000.

·

Crazy Moose Casino in Pasco has a parking lot lease which expired on December 31, 2013. Effective January 1, 2014, the parking lot is leased on a monthly basis.

·

Silver Dollar Casino in SeaTac has a building lease which expires in May of 2022 with an option to renew for an additional term of 10 years. The annual rent is $278,000, with escalation of 4% annually.

·

Silver Dollar Casino in Renton has a building lease which expires in April of 2019 with an option to renew for up to two additional terms of 10 years each. The annual rent is $517,000, with escalation of 8% every three years.

·

Silver Dollar Casino in Bothell has a building lease which expires in April of 2017 with an option to renew for an additional term of 5 years. The annual rent is $294,000.

·

Club Hollywood Casino in Shoreline has casino building and parking lot leases which expire in March of 2017 with options to renew for up to four additional five-year terms. The annual rentals are $759,000, with escalation of 3% annually.

·

Golden Nugget Casino in Tukwila has a building lease which expires in November of 2014 with an option to renew for an additional term of 10 years. The annual rent is $186,500, with escalation of 3% annually.

·

Royal Casino in Everett has a building lease which expires in January of 2016 with an option to renew for up to four additional five-year terms. The annual rent is $399,950, with escalation of 3% annually.

·

Administrative offices lease in Renton expires in October of 2018. The monthly rent for the first 22 months is $4,100 and then $4,250 for months 23-34; $4,425 for months 35-48 and; $4,595 for months 49-58.

·

Red Dragon Casino in Mountlake Terrace has a building lease which expires in October of 2016 with an option to renew for up to two additional five-year terms. The annual rent is $405,500, with escalation of 2% annually.

 

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

 

·

An administrative center lease which expires in January of 2017 with an option to renew for an additional five-year term. The annual rent is $55,200.

 

Gold Mountain Development. Through our wholly-owned subsidiary, Gold Mountain Development, LLC, we own approximately 268 acres of undeveloped land in the vicinity of Black Hawk, Colorado. In November 2012, the land was reappraised for $1.1 million. This acreage is currently held for sale.

 

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

 

Office Lease. We currently lease 3,131 square feet of office space for our corporate headquarters in Las Vegas, Nevada. The lease expires on January 15, 2015. The total annual rent, including mandatory common area maintenance (“CAM”) for this space is currently $49,400. The CAM contractually increases five percent effective each January 1.

 

 

Item 3.

Legal Proceedings

 

We are currently not involved in any material legal proceedings.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Part II

 

Item 5.

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

 

Market Information

 

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

 

		Fiscal Years Ended
		April 30, 2014								April 30, 2013
		High				Low				High				Low
First Quarter		$	1.30			$	0.86			$	1.34			$	1.03
Second Quarter			1.27				0.91				1.08				0.80
Third Quarter			1.50				0.92				0.91				0.74
Fourth Quarter			1.50				1.10				1.23				0.85

 

Holders of Common Stock

 

As of June 30, 2014, we had approximately 3,461 holders of our common stock, which includes the number of record holders and participants in security position listings.

 

Dividends

 

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

 

Equity Compensation Plan

 

The following table gives information about our shares of common stock that may be issued upon the exercise of options, warrants, and rights under all of our existing equity compensation plans as of April 30, 2014 including the 2009 Equity Incentive Plan and the 2010 Employee Stock Purchase Plan, as amended, as well as shares of our common stock that may be issued under individual compensation arrangements that were not approved by our stockholders.

 

Plan Category		Number of Securities To be Issued Upon Exercise of Outstanding Options, Warrants and Rights (A)				Weighted Average Exercise Price of Outstanding Options, Warrants and Rights				Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (A)
Equity Compensation Plans Approved by Security Holders			800,000			$	1.09				885,000
Equity Compensation Plans Not Approved by Security Holders			—			$	—				—
Total			800,000			$	1.09				885,000

 

 

Recent Sales of Unregistered Securities

 

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

 

Issuer Purchases of Equity Securities

 

During the years ended April 30, 2014 and April 30, 2013, we did not repurchase any shares.

 

Item 6.

Selected Financial Data

 

Not required for smaller reporting companies.

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and Notes thereto contained in Item 8 herein. Management is of the opinion that inflation and changing prices, including foreign exchange fluctuations, will have little, if any, effect on our consolidated financial position or results of our operations.

 

Critical Accounting Policies and Estimates

 

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

 

Principles of Consolidation

 

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

 

Capitalized Development Costs

 

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

 

 

Goodwill, Other Intangible Assets, and Other Long-Lived Assets

 

In connection with our acquisitions of the ten Washington mini-casinos from May 12, 2009 to July 18, 2011, and the acquisition of the South Dakota Gold slot route operation in South Dakota on January 27, 2012, we have goodwill and identifiable intangible assets of $21.9 million, net of amortization. Goodwill represents a significant portion of our total assets. We review goodwill for impairment annually or more frequently if certain impairment indicators arise under the provisions of authoritative guidance. We review goodwill at the reporting level unit, which is the same as our operating segments. We compare the carrying value of the net assets of each reporting unit to the estimated fair value of the reporting unit, based upon a multiple of estimated earnings. If the carrying value exceeds the estimated fair value of the reporting unit, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position or results of operations. All of our goodwill is attributable to reporting units within our gaming segment. 

 

We use earnings before interest, taxes, depreciation, amortization, non-cash goodwill and other long-lived asset impairment charges, litigation charges, and net losses/gains from asset dispositions (“EBITDA”) as the measure for future earnings in our impairment test. Management estimates future adjusted EBITDA based primarily on its projections of future revenues. We utilized comparable industry average multiples of adjusted EBITDA rates based on industry standards ranging from 4.5 to 7.5 times adjusted EBITDA for the estimated fair values of our operating facilities as of April 30, 2014.  

   

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

 

Allowance for Doubtful Accounts

 

We establish provisions for losses on accounts and notes receivable if we determine that we will not collect all or part of the outstanding balance. We regularly review collectability and establish or adjust our allowance as necessary using the specific identification method. We make advances to third parties under executed promissory notes for project costs related to the development of gaming and entertainment properties. Due diligence is conducted by our management with the assistance of legal counsel prior to entering into arrangements with third parties to provide financing in connection with their efforts to secure and develop the properties. Repayment terms are largely dependent upon the operating performance of each opportunity for which the funds have been loaned. Interest income is not accrued until it is reasonably assured that the project will be completed and that there will be sufficient profits from the facility to cover the interest to be earned under the respective note. If projected cash flows are not sufficient to recover amounts due, the note is evaluated to determine the appropriate discount to be recorded on the note for it to be considered a performing note. If the note is performing, interest is recorded using the effective interest method based on the value of the discounted note balance. See Note 4 of our Consolidated Financial Statements.

 

We review on an annual basis, or more frequently, each of our notes receivable to evaluate whether the collection of such note receivable is still probable. In our analysis, we review the economic feasibility and the current financial, legislative and development status of the project. If our analysis indicates that the project is no longer economically feasible, the note receivable would be written down to its estimated fair value.

 

Revenue Recognition

 

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

 

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

 

		Fiscal Year Ended
		April 30, 2014				April 30, 2013
Food and beverage		$	3,079,963			$	3,302,772
Other			142,350				147,185
Total cost of complimentary services		$	3,222,313			$	3,449,957

 

 

Accrued Jackpot Liability

 

We accrue slot jackpot liability as games are played under a matching concept of coin-in. In addition, as of April 30, 2014 and April 30, 2013, we also maintained approximately $1,389,000 and $1,306,500, respectively, in player-supported jackpot accrued liability. Player-supported jackpot is a progressive game of chance directly related to the play or outcome of an authorized non-house-banked card game separately funded by our patrons. Any jackpots hit in these card games are paid from such reserved funds.

 

Income Taxes

 

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

 

We recognize the impact of uncertain tax positions in our financial statements only if that position is more likely than not of not being sustained upon examination by the taxing authority. Should interest and penalty be incurred as a result of a review of our income tax returns, we will record the interest and penalty in accordance with applicable guidance.

 

Deferred tax assets and liabilities presented on the balance sheet are as follows:

 

		April 30, 2014				April 30, 2013
Current deferred tax asset		$	98,643			$	67,123
Non-current deferred tax asset			4,356,972				4,671,250
Net deferred tax asset		$	4,455,615			$	4,738,373

 

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

 

		April 30, 2014				April 30, 2013
Deferred tax assets:
Net operating loss carryforwards		$	1,355,917			$	954,742
Fixed assets			-				98,151
Tax credit carryforwards			215,155				-
Stock options			269,617				278,283
Impairment of notes receivable and land			3,417,478				3,417,478
Revenue not recognized for tax reporting and other			145,696				109,660
Capitalized acquisition costs			-				59,110
Prepaid expenses			-				194,789
Other			167,336				67,123
Total deferred tax assets			5,571,199				5,179,336
Deferred tax liabilities:
Amortization of intangibles			(833,731	)			(408,654	)
Fixed assets			(234,838	)			-
Prepaid expenses			(47,015	)			-
Total deferred tax liabilities			(1,115,584	)			(408,654	)
Net deferred tax assets before valuation allowance			4,455,615				4,770,682
Valuation allowance			-				(32,309	)
Net deferred tax assets		$	4,455,615			$	4,738,373

 

At April 30, 2014, we have gross federal net operating loss carryforwards of approximately $4.0 million. We also have deferred tax assets of approximately $0.2 million related to general business credits and $0.01 million related to Alternative Minimum Tax credits. The net operating losses and general business credits can be carried forward and applied to offset taxable income for 20 years; they will begin to expire in 2031. The Alternative Minimum Tax credit can be carried forward indefinitely and will offset future regular tax liabilities.

 

 

We have analyzed our income tax filing positions in all jurisdictions and believe our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments which will result in a material change to our financial position. As of the time of this filing, no income tax examinations are currently being undertaken by any jurisdiction.

 

Reconciliations between the statutory federal income tax expense rate of 34.0% in the fiscal years ended April 30, 2014 and April 30, 2013 and our effective income tax rate as a percentage of pre-tax book income is as follows:

 

		Years Ended
		April 30, 2014								April 30, 2013
		Percent				Dollars				Percent				Dollars
Income tax expense at statutory federal rate			34.0			$	248,452				34.0			$	186,921
Non-Deductible Expenses			3.3				24,639				—				—
Utilization of General Business Credits			(8.6	)			(63,075	)			—				—
Write-off of expired or forfeited stock options			—				—				78.4				431,124
Tax Return to Provision Adjustments			10.0				72,743				(19.1	)			(105,183	)
Effective income tax rate			38.7			$	282,759				93.3			$	512,862

 

Accrued Contingent Liability

 

We assess our exposure to loss contingencies including legal matters. If a potential loss is justified, probable, able to be quantified, and material, we will provide for the exposure. If the actual loss from a contingency differs from management’s estimate, operating results could be impacted. As of April 30, 2014 and 2013, we did not record any accrued litigation liability.

 

Fair Value

 

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

 

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

 

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

 

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

 

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

 

Real estate held for sale is recorded at fair value less selling costs.

 

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

 

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

 

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

 

Financial instruments that potentially subject us to concentrations of credit risk are primarily notes receivable, cash and cash equivalents, accounts receivable and payable, and long term debt. As of April 30, 2014 we had three notes receivable, as well as the BVD/BVO receivable, outstanding. Two of these notes were issued in connection with a potential gaming project and one is for the sale of the Colorado Grande Casino. Management performs periodic evaluations of the collectability of these notes. Our cash deposits are held with large, well-known financial institutions, and, at times, such deposits may be in excess of the federally insured limit. The recorded value of cash, accounts receivable and payable, approximate fair value based on their short term nature; the recorded value of long term debt approximates fair value as interest rates approximate current market rates.

 

Stock-Based Compensation

 

Compensation cost for stock options granted will be based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant and using the weighted-average assumptions of (i) expected volatility, (ii) expected term, (iii) expected dividend yield, (iv) risk-free interest rate and (v) forfeiture rate. Expected volatility is based on historical volatility of our stock. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award.

 

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

 

Executive Overview

 

We were formed in 1977 and, since 1994, have primarily been a gaming company involved in financing, developing, owning and operating gaming facilities. Our gaming facility operations are located in the United States of America (the “U.S.”), specifically in the states of Washington, South Dakota and, until recently, Colorado. On April 25, 2005, we acquired the Colorado Grande Casino in Cripple Creek, Colorado, which we sold on May 25, 2012. On May 12, 2009, we acquired three mini-casinos in Washington State. On July 23, 2010, we acquired six additional mini-casinos and, on July 18, 2011, we acquired one more mini-casino in Washington State. On January 27, 2012, we acquired all of the shares of A.G. Trucano, Son and Grandsons, Inc. (“South Dakota Gold”), a slot machine route operation in Deadwood, South Dakota. Our business strategy will continue to focus on gaming projects with a continued emphasis on owning and operating gaming establishments. If we are successful, both our future revenues and costs and our profitability can be expected to increase. Our net revenues from continuing operations were $62.8 million and $65.9 million for the fiscal years April 30, 2014 and 2013, respectively.

 

At times we hold investments in various development projects that we consolidate. As of April 30, 2014 and April 30, 2013, we had capitalized development costs of $0 and $56,959. In fiscal 2014, we determined that it would take an excessive period of time to recover the investment and we therefore wrote off the $56,959.

 

 

The following table sets forth our consolidated results of operations for the three months and fiscal years ended April 30, 2014, and April 30, 2013:

 

Consolidated Statements of Operations

 

		Three Months Ended								Twelve Months Ended
		April 30,				April 30,				April 30,				April 30,
		2014				2013				2014				2013
Revenues:
Casino		$	14,093,561			$	14,651,475			$	55,332,569			$	58,393,105
Food and beverage			2,577,761				2,510,539				10,053,883				10,103,913
Other			447,161				443,607				1,742,710				1,808,538
Gross revenues			17,118,483				17,605,621				67,129,162				70,305,556
Less promotional allowances			(1,085,552	)			(1,086,239	)			(4,321,768	)			(4,381,638	)
Net revenues			16,032,931				16,519,382				62,807,394				65,923,918
Expenses:
Casino			7,810,946				8,155,865				32,081,242				33,016,277
Food and beverage			1,292,352				1,270,391				5,114,077				4,838,447
Marketing and administrative			3,991,514				4,095,164				16,369,505				16,652,746
Facility			490,906				564,070				1,951,314				2,270,774
Corporate and legal expense			544,168				795,361				2,384,596				4,051,972
Depreciation and amortization			571,245				498,764				2,263,499				2,126,888
Write-off of project development costs			-				-				56,959				257,733
Loss on settlements - sale of assets			11,676				986				27,605				6,081
Other			59,775				82,525				263,052				310,411
Total operating expenses			14,772,582				15,463,126				60,511,849				63,531,329
Operating income from continuing operations			1,260,349				1,056,256				2,295,545				2,392,589
Non-operating income (expenses):
Interest income			31,677				34,398				133,404				120,349
Interest expense			(138,929	)			(345,512	)			(1,097,005	)			(1,494,989	)
Interest rate swap expense			(26,912	)			-				(26,912	)			-
Decrease in swap fair value			(58,352	)			-				(58,352	)			-
Amortization of loan issue costs			(22,505	)			(81,643	)			(232,391	)			(329,387	)
Loss on extinguishment of debt			-				-				(283,550	)			-
Income before income tax			1,045,328				663,499				730,739				688,562
Income tax expense			(399,239	)			(211,065	)			(282,758	)			(560,052	)
Net income from continuing operations			646,089				452,434				447,981				128,510
Net loss from operations held for sale, net of taxes			-				-				-				(91,603	)
Net income		$	646,089			$	452,434			$	447,981			$	36,907
Per share information:
Net income per common share - basic and diluted for continuing operations		$	0.04			$	0.03			$	0.03			$	0.01
Net loss per common share - basic and diluted for discontinued operations		$	-			$	-			$	-			$	(0.01	)
Basic weighted average number of shares outstanding			16,165,930				16,065,719				16,127,654				15,997,546
Diluted weighted average number of shares outstanding			16,366,283				16,110,304				16,294,487				16,020,789

 

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

 

 

Comparison of the Three Months Ended April 30, 2014 and April 30, 2013

 

Net revenues. Net revenues year over year decreased 2.9%, to $16.0 million from $16.5 million for the three month period ended April 30, 2014, compared to the same period ended April 30, 2013. Casino revenues declined 3.8% to $14.1 million from $14.7 million primarily resulting from a decrease in the number of gaming devices we operated at our South Dakota Gold properties. Food and beverage, other revenues and promotional allowances remained consistent year over year for the three month period ended April 30, 2014.

 

Total operating expenses. Total operating expenses decreased 3.9%, to $14.8 million from $15.5 million, for the three month period ended April 30, 2014, compared to the same period ended April 30, 2013. Casino expenses decreased $0.3 million, or 4.2%, primarily caused by decreased commissions, royalty fees and device taxes paid on our slot route. Food and beverage expenses, and other expenses remained consistent. Marketing and administrative expenses decreased $0.1 million, or 2.5%, primarily due to reduced promotions, events and giveaways. Facility expense decreased $0.1 million, or 13.0%, as a result of reduced operating supplies, payroll and related benefit costs. Corporate expenses decreased $0.3 million, or 31.6%, primarily resulting from a reduction in staff, reduced office rent due to our move from Houston to Las Vegas in March 2013, and concerted efforts to reduce other operating costs. Depreciation and amortization increased $0.1 million, or 14.5%, primarily related to fixed asset replacements at our South Dakota Gold operations.

 

Interest income (expense). Interest expense decreased 52.0%, or $0.2 million, for the three month period ended April 30, 2014, compared to the three month period ended April 30, 2013. The decrease resulted from the reduction of outstanding debt since April 30, 2013 and the refinancing of all remaining debt in December 2013 (See Notes 5 and 6 of our Consolidated Financial Statements). Interest income decreased $3,000 for the three month period ended April 30, 2014, compared to the three month period ended April 30, 2013, which was related to interest earned on notes receivables based on note terms. We recorded a $58,000 decrease of the fair value of the interest rate swap we were required to enter into as a result of refinancing our debt in December 2013, whereas we did not have any swaps during fiscal year 2013. Amortization of loan issue cost was $22,500 and $81,600 for the three month periods ended April 30, 2014 and April 30, 2013, respectively. The reduction resulted from the write-off of $283,550 of our debt refinancing loan issuance costs, offset by the addition of $450,000 of new loan issuance costs which is being amortized over the life of the new debt.

 

Income Taxes. For the three months ended April 30, 2014 and April 30, 2013, our overall effective income tax rates were 38.2% and 31.8%, respectively. The increase in the quarterly effective tax rate for the three months ended April 30, 2014 as compared to the same period of the prior year is primarily related to changes in the calculation of the FICA tip credit and prior year tax return to provision adjustments.

 

Net income. Net income from continuing operations was $646,100 compared to $452,400 for the three month periods ended April 30, 2014 and April 30, 2013, respectively. The increase is primarily a result of the $0.2 million increased operating income, a $0.2 million reduction of net interest expense offset by a $0.2 million increase in income tax expense.

 

Comparison of Fiscal Years Ended April 30, 2014 and April 30, 2013

 

Net revenues. Net revenues decreased 4.7%, to $62.8 million from $65.9 million, for the fiscal year ended April 30, 2014 compared to the fiscal year ended April 30, 2013. Casino revenues decreased 5.2%, or $3.1 million, primarily resulting from decreased drop at our Washington properties caused by abnormally dry weather conditions in the Seattle market during the first quarter of fiscal year 2014 compared to abnormally wet weather conditions during the first quarter of fiscal year 2013 and a decrease in the number of gaming devices we operated at our South Dakota Gold route operations caused by the closure of several gaming facilities in Deadwood, South Dakota. Food and beverage and other revenues each decreased $0.1 million, also caused by the Seattle weather conditions. In an effort to maintain revenues and market share promotional allowances only decreased $0.1 million.

 

Total operating expenses. Total operating expenses decreased 4.8% to $60.5 million from $63.5 million, for the fiscal year ended April 30, 2014, compared to the fiscal ended April 30, 2013. Casino expenses decreased $0.9 million, or 2.8%, primarily resulting from decreased commissions, royalty fees and device taxes paid on our slot route. Food and beverage increased $0.3 million, or 5.7%, primarily resulting from increased payroll benefit costs. Marketing and administrative expenses decreased $0.3 million, or 1.7%, primarily resulting from reduced promotions, events and giveaways. Facility expenses decreased $0.3 million, or 14.1%, primarily resulting from reduced operating supplies, payroll and related benefit costs. Corporate expenses decreased $1.7 million, or 41.1%, primarily as a result of a reduction in staff, reduced office rent due to our move from Houston to Las Vegas in March 2013, and concerted efforts to reduce operating costs whereas, in the prior year we recorded $0.7 million severance accrual for the former CEO and other Houston office employees. Depreciation and amortization increased $0.1 million, or 6.4%, primarily due to fixed asset replacements at our South Dakota Gold operations. Other expenses decreased $0.1 million, or 15.3%, due to concerted efforts to reduce operating costs. In the current fiscal year we wrote-off $0.1 million of project development costs compared to $0.3 million in the prior fiscal year.

 

Interest income (expense). Interest expense decreased 28.2%, or $0.5 million, for the fiscal year ended April 30, 2014 compared to the fiscal year ended April 30, 2013. The decrease is primarily related to the reduction of outstanding debt since April 30, 2013 and the refinancing of all remaining debt in December 2013 (See Note 5 of our Consolidated Financial Statements). We recorded a $58,000 decrease of the fair value of the interest rate swap we were required to enter into as a result of refinancing our debt in December 2013, whereas we did not have any swaps during fiscal year 2013. Amortization of loan issue costs was $232,000 and $329,000 for the fiscal years ended April 30, 2014 and April 30, 2013, respectively. The reduction resulted from our debt refinancing completed in December 2013 (See Note 5 of our Consolidated Financial Statements).

 

 

Income taxes. The effective tax rates for the years ended April 30, 2014 and April 30, 2013, were 38.7% and 93.3%, respectively. The decrease in the year-to-date tax rate as of April 30, 2014, as compared to the same period of the prior year is primarily related to changes in the calculation of the FICA tip credit and prior year tax return to provision adjustments.

 

Operations held for sale. For the year ended April 30, 2013, we recorded a net loss of $0.1 million primarily related to the completion of tax related matters associated with our May 2012 sale of the Colorado Grande Casino.

 

Net income. Net income was $448,000 and $36,900 for the fiscal years ended April 30, 2014 and April 30, 2013, respectively. The improvement of $0.4 million is primarily a result of the $0.3 million decreased tax expense, the $3.0 million reduction of operating expenses, the $0.5 million reduction of net interest expense and the recording of a $0.1 million write-off of project development costs in the current year compared a $0.3 million write-off in the prior year, offset by, the $3.1 million decline in net revenues, $0.1 million decrease in swap fair value and the $0.3 million write-off of loan issuance costs recorded in the current year.

 

Non-GAAP Financial Measures

 

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

 

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

 

 

The following table shows adjusted EBITDA by operating unit for the three months ended April 30, 2014 and April 30, 2013:

 

		For the three months ended April 30, 2014
														Total
						South Dakota				Corporate -				Continuing
		Washington Gold				Gold				Other				Operations
Revenues:
Gross revenues		$	15,218,306			$	1,898,935			$	1,242			$	17,118,483
Less promotional allowances			(1,087,935	)			2,383				-				(1,085,552	)
Net revenues			14,130,371				1,901,318				1,242				16,032,931
Expenses:
Total operating expenses (excludes depreciation, amortization, write downs, acquisition costs, stock grants, employee stock purchase plan discounts and impairments)			11,826,904				1,818,074				533,209				14,178,187
Adjusted EBITDA		$	2,303,467			$	83,244			$	(531,967	)		$	1,854,744

 

		For the three months ended April 30, 2013
		Washington Gold				South Dakota Gold				Corporate - Other				Total Continuing Operations
Revenues:
Gross revenues		$	15,205,564			$	2,400,057			$	-			$	17,605,621
Less promotional allowances			(1,038,030	)			(48,209	)			-				(1,086,239	)
Net revenues			14,167,534				2,351,848				-				16,519,382
Expenses:
Total operating expenses (excludes depreciation, amortization, write downs, acquisition costs, stock grants, employee stock purchase plan discounts and impairments)			11,922,206				2,204,817				676,670				14,803,693
Adjusted EBITDA		$	2,245,328			$	147,031			$	(676,670	)		$	1,715,689

 

The following table shows adjusted EBITDA by operating unit for the twelve months ended April 30, 2014 and April 30, 2013:

 

		For the twelve months ended April 30, 2014
		Washington Gold				South Dakota Gold				Corporate - Other				Total Continuing Operations
Revenues:
Gross revenues		$	57,925,748			$	9,195,102			$	8,312			$	67,129,162
Less promotional allowances			(4,261,796	)			(59,972	)			-				(4,321,768	)
Net revenues			53,663,952				9,135,130				8,312				62,807,394
Expenses:
Total operating expenses (excludes depreciation, amortization, write downs, acquisition costs, stock grants, employee stock purchase plan discounts and impairments)			47,389,477				8,358,993				2,338,917				58,087,387
Adjusted EBITDA		$	6,274,475			$	776,137			$	(2,330,605	)		$	4,720,007

 

		For the twelve months ended April 30, 2013
		Washington Gold				South Dakota Gold				Corporate - Other				Total Continuing Operations
Revenues:
Gross revenues		$	59,807,753			$	10,497,803			$	-			$	70,305,556
Less promotional allowances			(4,313,644	)			(67,994	)			-				(4,381,638	)
Net revenues			55,494,109				10,429,809				-				65,923,918
Expenses:
Total operating expenses (excludes depreciation, amortization, write downs, acquisition costs, stock grants, employee stock purchase plan discounts and impairments)			47,623,120				9,357,269				3,181,347				60,161,736
Adjusted EBITDA		$	7,870,989			$	1,072,540			$	(3,181,347	)		$	5,762,182

 

Adjusted EBITDA reconciliation for the three months and fiscal years ended April 30, 2014 and April 30, 2013:

 

Adjusted EBITDA reconciliation to net income:

		For the quarter ended (unaudited)
		April 30, 2014				April 30, 2013
Net Income		$	646,089			$	452,434
Add:
Income tax expense			399,239				211,065
Net interest expense			156,669				392,757
Decrease in swap fair value			58,352				-
Loss on settlements-sale of assets			11,676				986
Stock options amortization			13,620				13,620
Employee stock purchase discount			1,391				-
Relocation expenses			-				127,029
Depreciation and amortization			571,245				498,764
Deferred rent escalation			(3,537	)			19,034
Adjusted EBITDA		$	1,854,744			$	1,715,689

 

Adjusted EBITDA reconciliation to net income:

		For the fiscal year ended
		April 30, 2014				April 30, 2013
Net Income		$	447,981			$	36,907
Add:
Income tax expense			282,758				560,052
Net interest expense			1,222,904				1,704,027
Decrease in swap fair value			58,352				-
Loss on extinguishment of debt			283,550				-
Loss on settlements-sale of assets			27,605				6,081
Severance expenses			-				637,868
Relocation expenses			-				127,029
Stock options amortization			54,479				137,858
Employee stock purchase discount			7,384				-
Net loss on operations held for sale, net of taxes			-				91,603
Depreciation and amortization			2,263,499				2,126,888
Deferred rent escalation			14,536				76,136
Write-off of project development costs			56,959				257,733
Adjusted EBITDA		$	4,720,007			$	5,762,182

 

Liquidity and Capital Resources

 

Historical Cash Flows

 

The following table sets forth our consolidated net cash provided by (used in) operating, investing and financing activities for the fiscal years ended April 30, 2014 and April 30, 2013:

 

		Fiscal Years Ended
		April 30, 2014				April 30, 2013
Cash provided by (used in):
Operating activities		$	3,343,316			$	3,499,787
Investing activities		$	(110,360	)		$	223,613
Financing activities		$	(2,217,890	)		$	(2,199,642	)

 

 

Operating activities. Net cash provided by operating activities during the fiscal year ended April 30, 2014 decreased $0.2 million compared to the same period in the fiscal year ended April 30, 2013. This decrease resulted primarily from a $0.4 million increase in net income and a net increase of $0.2 million to operating assets and liabilities offset by a $0.2 million decrease of net deferred income tax assets and a $0.6 million increase in the changes to restricted cash.

 

Investing activities. Net cash used in investing activities during the fiscal year ended April 30, 2014 increased $0.3 million compared to the same period in the fiscal year ended April 30, 2013. The increase of funds used primarily resulted from a net $0.3 million decrease of property and equipment purchases, a $0.2 million increase in the collections of the G Investments note receivable, offset by the collection of $0.8 million from the sale of operations held for sale in the fiscal year ended April 30, 2013.

 

Financing activities. Net cash used in financing activities was $2.2 million for fiscal year ended April 30, 2014 and April 30, 2013, respectively. The activity for the year ended April 30, 2014 is primarily attributable to $0.5 million prepayment of deferred loan issue costs, $16.1 million net repayment of credit facilities offset by $14.3 million net proceeds from borrowed funds and $0.1 million proceeds from employee stock purchases and exercise of stock options.

 

Future Sources and Uses of Cash

 

We expect that our future liquidity and capital requirements will be affected by:

 

-

capital requirements related to future acquisitions;

-

cash flow from operations;

-

new management contracts;

-

working capital requirements;

-

obtaining debt financing; and

-

debt service requirements.

 

At April 30, 2014, outstanding indebtedness was $12,350,000, of which $1,625,000 million is due by April 30, 2015.

 

As of April 30, 2014, scheduled principal payments on the Credit Facility for each of the next five years and thereafter are as follows:

 

May 1, 2014 – April 30, 2015		$	1,625,000
May 1, 2015 – April 30, 2016		$	1,725,000
May 1, 2016 – April 30, 2017		$	1,825,000
May 1, 2017 – April 30, 2018		$	1,925,000
May 1, 2018 – December 10, 2018		$	5,250,000

 

On April 30, 2014, excluding restricted cash of $1,389,000, we had cash and cash equivalents of $7,739,000. The restricted cash consists of approximately $1,389,000 of player supported jackpots.

 

Our Consolidated Financial Statements have been prepared assuming that we will have adequate availability of cash resources to satisfy our liabilities in the normal course of business. We have made arrangements to ensure that we have sufficient working capital to fund our obligations as they come due. We believe that funds from operations will provide sufficient working capital for us to meet our obligations as they come due; however, there can be no assurance that we will be successful. Should cash resources not be sufficient to meet our current obligations as they come due, repay or refinance our long-term debt, and acquire operations that generate positive cash flow, we would be required to curtail our activities and maintain, or grow, at a pace that cash resources could support.

 

Liquidity

 

The current ratio is an indication of a company's market liquidity and ability to meet creditor's demands. Acceptable current ratios vary from industry to industry and are generally between 1.25 and 3 for healthy businesses. If a company's current ratio is in this range, then it generally indicates good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management. The table below shows as of April 30, 2014, we have a 2.09 ratio, sufficient to service debt and maintain operations.

 

				Current Ratio as of April 30, 2014
Current Ratio		Current Assets		$	10,986,014				2.09
		Current Liabilities		$	5,267,797

 

 

Indebtedness

 

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

 

As of April 30, 2014, scheduled principal payments on the Credit Facility for each of the next five years and thereafter are as follows:

 

May 1, 2014 – April 30, 2015		$	1,625,000
May 1, 2015 – April 30, 2016		$	1,725,000
May 1, 2016 – April 30, 2017		$	1,825,000
May 1, 2017 – April 30, 2018		$	1,925,000
May 1, 2018 – December 10, 2018		$	5,250,000

 

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

 

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

 

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

 

On January 17, 2014, the Company entered into a swap transaction with Mutual of Omaha Bank (“MOOB”), which has a calculation period as of the tenth day of each month beginning with February 10, 2014 until the maturity date of the Credit Facility. As of April 30, 2014, the Company had one outstanding interest rate swap with MOOB with a notional amount of $6,175,000 at a swap rate of 1.52%, which as of April 30, 2014, effectively converts $6,175,000 of our floating-rate debt to a synthetic fixed rate of 6.02%. Under the terms of the swap agreement, the Company pays a fixed rate of 1.52% and receives variable rate based on one-month LIBOR as of the first day of each floating-rate calculation period. Under the ISDA Confirmation, the initial floating index as of April 30, 2014 is set at 0.151%.

 

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

 

As required by ASC 815, on a quarterly basis, the Company will assess whether any changes to the hedge instrument, or underlying debt agreement, have occurred which would alter the original designation of the hedge instrument. Each quarter, the Company receives fair value statements from the counterparty, MOOB. The fair value of the interest rate swap is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. To comply with the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. As a result of our evaluation of our interest rate swap as of April 30, 2014, we recorded a decrease in our interest rate swap fair value for the three or twelve months ended April 30, 2014.

 

 

Off-Balance Sheet Arrangements

 

None.

 

New Accounting Pronouncements and Legislation Issued

 

Since the filing of our Form 10-K for the fiscal year ended April 30, 2013, there are no new accounting standards effective which are material to our financial statements or that are required to be adopted by the Company.

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting companies.

 

Item 8.

Financial Statements and Supplementary Data

 

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

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.

Controls and Procedures

 

(a)

Disclosure Controls and Procedures.

 

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

 

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

 

(b)

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

 

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

 

1.

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

2.

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

3.

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

 

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

 

 

Management assessed the effectiveness of our internal control over financial reporting as of April 30, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992). Management, including our CEO and CFO, has concluded that the internal control over financial reporting was effective as of April 30, 2014.

 

(c)

Changes in Internal Control Over Financial Reporting.

 

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

 

(d)

Report of Independent Registered Public Accounting Firm.

 

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

 

Item 9B.

Other Information

 

None.

 

Part III

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

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

 

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

 

Item 11.

Executive Compensation

 

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

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

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

 

Item 13.

Certain Relationships and Related Party Transactions and Director Independence

 

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

 

Item 14.

Principal Accountant Fees and Services

 

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

 

 

Part IV

 

Item 15.

Exhibits, Financial Statement Schedules

 

(a)(1) Financial Statements.

 

Included in Part II, Item 8 of this Report:

 

Consolidated Financial Statements of Nevada Gold & Casinos, Inc.

 

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets as of April 30, 2014 and April 30, 2013

Consolidated Statements of Operations for fiscal years ended April 30, 2014 and April 30, 2013

Consolidated Statements of Stockholders’ Equity for fiscal years ended April 30, 2014 and April 30, 2013

Consolidated Statements of Cash Flows for fiscal years ended April 30, 2014 and April 30, 2013

Notes to Consolidated Financial Statements

 

(a)(2) Financial Statement Schedules.

 

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

 

(a)(3) Exhibits

 

 

INDEX TO EXHIBITS

EXHIBIT NUMBER		DESCRIPTION
3.1A		Amended and Restated Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit A to the Company's definitive proxy statement filed on Schedule 14A on July 30, 2001 and incorporated herein by reference).
3.1B		Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 4.2 to the Company’s Form S-8 filed October 11, 2002 and incorporated herein by reference).
3.1C		Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 3.3 to the Company’s Form 10-Q filed November 9, 2004 and incorporated herein by reference).
3.1D		Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 3.1 to the Company’s Form 8-K filed October 17, 2007 and incorporated herein by reference).
3.2		Amended and Restated Bylaws of Nevada Gold & Casinos, Inc., effective July 24, 2007 (filed previously as Exhibit 3.2 to the Company’s Form 8-K filed July 27, 2007 and incorporated herein by reference).
4.1		Common Stock Certificate of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 4.1 to the Company’s Form S-8/A filed June 4, 1999, file no. 333-79867, and incorporated herein by reference).
4.2		Second Amended and Restated Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed previously as Exhibit 4.6 to the Company’s Form S-8 filed June 22, 2005, file no. 333-126027, and incorporated herein by reference).
4.3		Nevada Gold & Casinos, Inc.’s 2009 Equity Incentive Plan (filed previously as Exhibit 10.1 to the Company’s Form S-8 filed on April 14, 2009, file no. 333-158576, and incorporated herein by reference).
4.4		Nevada Gold & Casinos, Inc.’s 2010 Employee Stock Purchase Plan (filed previously as Exhibit 10.1 to the Company’s Form S-8 filed on October 12, 2010, file no. 333-169892, and incorporated herein by reference).
10.1		First Amendment to Asset Purchase Agreement between Colorado Grande Enterprises, Inc., as seller, and G Investments, LLC, as purchaser (filed previously as Exhibits 10.1 to the Company’s Form 8-K filed May 29, 2012).
10.2		Third Amended and Restated Promissory Note dated May 25, 2012 issued by Nevada Gold & Casinos, Inc. to Louise H. Rogers, as her separate property (filed previously as Exhibits 10.1 to the Company’s Form 8-K filed June 1, 2012).
10.3		May 2012 Amended and Restated Security Agreement dated May 25, 2012 between Nevada Gold & Casinos, Inc. and Louise H. Rogers, as her separate property (filed previously as Exhibits 10.2 to the Company’s Form 8-K filed June 1, 2012).
10.4		Credit Agreement dated June 27, 2012 by and among Wells Fargo Gaming Capital, LLC, as administrative agent, the Lenders that are parties thereto, Nevada Gold & Casinos, Inc., as parent, and A.G. Trucano, Son & Grandsons, Inc., as borrower (filed previously as Exhibits 10.1 to the Company’s Form 8-K filed July 3, 2012).
10.5		Guaranty and Security Agreement dated June 27, 2012 among Nevada Gold & Casinos, Inc., certain Grantors listed on the signature page and Wells Fargo Gaming Capital, LLC, in capacity as administrative agent (filed previously as Exhibits 10.2 to the Company’s Form 8-K filed July 3, 2012).
10.6		Intercompany Subordination Agreement dated June 27, 2012 by and among certain Obligors listed on the signature page in favor of Wells Fargo Gaming Capital, LLC, in capacity as administrative agent (filed previously as Exhibits 10.3 to the Company’s Form 8-K filed July 3, 2012).
10.7		Amendment Number Two to Credit Agreement dated October 7, 2011 by and among Wells Fargo Gaming Capital, LLC, in capacity as administrative agent and lender, Nevada Gold & Casinos, Inc., as parent, and NG Washington, LLC, NG Washington II, LLC and NG Washington III, LLC, as borrowers (filed previously as Exhibits 10.4 to the Company’s Form 8-K filed July 3, 2012).
10.8		Intercreditor Agreement and Subordination dated June 27, 2012 by and between Wells Fargo Gaming Capital, LLC, as administrative agent, and Michael J. Trucano, as sellers’ representative (filed previously as Exhibits 10.5 to the Company’s Form 8-K filed July 3, 2012).

 

 

10.9		Credit Agreement dated December 10, 2013 by and among Mutual of Omaha Bank, as the Lender, Nevada Gold & Casinos, Inc., as parent, and Restricted Subsidiaries, as borrower (filed previously as Exhibits 10.9 to the Company’s Form 10-Q filed December 23, 2013).
10.10(+)		Employment Agreement dated December 12, 2012 by and between Michael P. Shaunnessy and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed November 13, 2012 and incorporated herein by reference).
10.11(+)		Employment Agreement dated February 27, 2013 by and between James J. Kohn and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed March 1, 2013 and incorporated herein by reference).
10.12(+)		Employment Agreement dated May 1, 2013 by and between Victor H. Mena and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed May 3, 2013 and incorporated herein by reference).
10.13(+)		Employment Agreement dated April 14, 2011 by and between Ernest E. East and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed April 14, 2011 and incorporated herein by reference).
23.1(*)		Consent of Independent Registered Public Accounting Firm.
23.2(*)		Consent of Independent Registered Public Accounting Firm
31.1(*)		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2(*)		Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(*)		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(*)		Certification Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS(†)		XBRL Instance Document
101.SCH(†)		XBRL Taxonomy Schema
101.CAL(†)		XBRL Taxonomy Calculation Linkbase
101.DEF(†)		XBRL Taxonomy Definition Linkbase
101.LAB(†)		XBRL Taxonomy Label Linkbase
101.PRE(†)		XBRL Taxonomy Presentation Linkbase

_________________

+ Management contract or compensatory plan, or arrangement.

* Filed herewith.

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

 

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

 

 

SIGNATURES

 

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

 

	Nevada Gold & Casinos, Inc.
	By:	/s/ James J. Kohn
	James J. Kohn
	Chief Financial Officer (Duly Authorized officer and Principal Financial and Accounting Officer)
	Date: July 29, 2014

 

 

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

 

Signature		Title		Date
/s /WILLIAM J. SHERLOCK
William J. Sherlock		Chairman of the Board of Directors		July 29, 2014
/s/ WILLIAM G. JAYROE
William G. Jayroe		Director		July 29, 2014
/s/ FRANK CATANIA
Frank Catania		Director		July 29, 2014
/s/ FRANCIS M. RICCI
Francis M. Ricci		Director		July 29, 2014
/s/ WAYNE H. WHITE
Wayne H. White		Director		July 29, 2014
/s/ MICHAEL P. SHAUNNESSY		President and Chief Executive Officer (Principal
Michael P. Shaunnessy		Executive Officer)		July 29, 2014
/s/ JAMES J. KOHN		EVP and Chief Financial Officer (Principal
James J. Kohn		Financial and Accounting Officer)		July 29, 2014

 

 

Index to Consolidated Financial Statements

Consolidated Financial Statements of Nevada Gold & Casinos, Inc.

 

	Page
Reports of Independent Registered Public Accounting Firms	30
Consolidated Balance Sheets as of April 30, 2014 and April 30, 2013	32
Consolidated Statements of Operations for fiscal years ended April 30, 2014 and April 30, 2013	33
Consolidated Statements of Stockholders’ Equity for fiscal years ended April 30, 2014 and April 30, 2013	34
Consolidated Statements of Cash Flows for fiscal years ended April 30, 2014 and April 30, 2013	35
Notes to Consolidated Financial Statements	36

 

 

Report of Independent Registered Public Accounting Firm

  

To the Board of Directors and Stockholders of

Nevada Gold & Casinos, Inc.:

 

We have audited the accompanying consolidated balance sheet of Nevada Gold & Casinos, Inc. as of April 30, 2014, and the related consolidated statement of operations, statement of stockholders’ equity and statement of cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides for a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nevada Gold & Casinos, Inc. at April 30, 2014, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

 

/s/ Ernst & Young LLP

Las Vegas, Nevada

July 29, 2014

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Nevada Gold & Casinos, Inc.

 

We have audited the accompanying consolidated balance sheet of Nevada Gold & Casinos, Inc. and Subsidiaries as of April 30, 2013 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nevada Gold & Casinos, Inc. and Subsidiaries as of April 30, 2013 and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

 

/s/ Pannell Kerr Forster of Texas, P.C.
Houston, Texas
July 28, 2013

 

 

Nevada Gold & Casinos, Inc.

Consolidated Balance Sheets

 

		2014				2013
ASSETS
Current assets:
Cash and cash equivalents		$	7,738,985			$	6,723,919
Restricted cash			1,388,995				1,306,487
Accounts receivable			252,504				445,481
Prepaid expenses			829,228				854,092
Deferred tax asset, current portion			98,643				67,123
Notes receivable, current portion			332,973				216,596
Inventory and other current assets			344,686				373,923
Total current assets			10,986,014				9,987,621
Investments in development projects			-				56,959
Real estate held for sale			1,100,000				1,100,000
Notes receivable, net of current portion			1,730,246				2,082,853
Goodwill			16,103,583				16,103,583
Identifiable intangible assets, net of accumulated amortization of $5,619,009 and $4,413,439 at April 30, 2014 and April 30, 2013, respectively			5,754,167				6,959,738
Property and equipment, net of accumulated depreciation of $3,632,349 and $2,599,940 at April 30, 2014 and April 30, 2013, respectively			4,289,178				5,028,122
Deferred tax asset, net of current portion			4,356,972				4,671,250
Other assets			486,466				533,860
Total assets		$	44,806,626			$	46,523,986
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	1,427,010			$	2,024,465
Accrued interest payable			37,470				34,393
Other accrued liabilities			2,178,317				2,127,140
Long-term debt, current portion			1,625,000				1,280,000
Total current liabilities			5,267,797				5,465,998
Long-term debt, net of current portion			10,725,000				12,930,000
Other long term  liabilities			486,870				421,253
Total liabilities			16,479,667				18,817,251
Stockholders' equity:
Common stock, $0.12 par value per share; 50,000,000 shares authorized; 16,980,676 and 16,864,122 shares issued and 16,197,839 and 16,081,285 shares outstanding at April 30, 2014, and April 30, 2013, respectively			2,037,689				2,023,705
Additional paid-in capital			24,578,117				24,419,858
Retained earnings			8,648,727				8,200,746
Treasury stock, 782,837 shares at April 30, 2014 and April 30, 2013, at cost			(6,932,035	)			(6,932,035	)
Accumulated other comprehensive loss			(5,539	)			(5,539	)
Total stockholders' equity			28,326,959				27,706,735
Total liabilities and stockholders' equity		$	44,806,626			$	46,523,986

 

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

 

 

Nevada Gold & Casinos, Inc.

Consolidated Statements of Operations

 

		Twelve Months Ended
		April 30,				April 30,
		2014				2013
Revenues:
Casino		$	55,332,569			$	58,393,105
Food and beverage			10,053,883				10,103,913
Other			1,742,710				1,808,538
Gross revenues			67,129,162				70,305,556
Less promotional allowances			(4,321,768	)			(4,381,638	)
Net revenues			62,807,394				65,923,918
Expenses:
Casino			32,081,242				33,016,277
Food and beverage			5,114,077				4,838,447
Marketing and administrative			16,369,505				16,652,746
Facility			1,951,314				2,270,774
Corporate			2,384,596				4,051,972
Depreciation and amortization			2,263,499				2,126,888
Other			263,052				310,411
Loss on settlements - sale of assets			27,605				6,081
Write-off of project development costs			56,959				257,733
Total operating expenses			60,511,849				63,531,329
Operating income from continuing operations			2,295,545				2,392,589
Non-operating income (expenses):
Interest income			133,404				120,349
Interest expense			(1,097,005	)			(1,494,989	)
Interest rate swap expense			(26,912	)			-
Decrease in swap fair value			(58,352	)			-
Amortization of loan issue costs			(232,391	)			(329,387	)
Loss on extinguishment of debt			(283,550	)			-
Income before income tax			730,739				688,562
Income tax expense			(282,758	)			(560,052	)
Net income from continuing operations			447,981				128,510
Net loss from operations held for sale, net of taxes			-				(91,603	)
Net income		$	447,981			$	36,907
Per share information:
Net income per common share - basic and diluted for continuing operations		$	0.03			$	0.01
Net loss per common share - basic and diluted for discontinued operations		$	-			$	(0.01	)
Basic weighted average number of shares outstanding			16,127,654				15,997,546
Diluted weighted average number of share outstanding			16,294,487				16,020,789

 

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

 

 

Nevada Gold & Casinos, Inc.

Consolidated Statements of Stockholders' Equity

  

																						Accumulated
										Additional												Other				Total
		Common Stock								Paid-in				Retained				Treasury				Comprehensive				Stockholders'
		Shares				Amount				Capital				Earnings				Stock				Income				Equity
Balance at April 30, 2012			16,707,205			$	2,004,865			$	24,155,158			$	8,163,839			$	(6,932,035	)		$	(5,539	)		$	27,386,288
Net Income			-				-				-				36,907				-				-				36,907
Stock options exercised			10,000				1,200				5,900				-				-				-				7,100
Employee stock plan purchases			146,917				17,640				120,942				-				-				-				138,582
Stock based compensation			-				-				137,858				-				-				-				137,858
Balance at April 30, 2013			16,864,122			$	2,023,705			$	24,419,858			$	8,200,746			$	(6,932,035	)		$	(5,539	)		$	27,706,735
Net Income			-				-				-				447,981				-				-				447,981
Stock options exercised			55,000				6,600				43,250				-				-				-				49,850
Employee stock plan purchases			61,553				7,384				60,530				-				-				-				67,914
Stock based compensation			-				-				54,479				-				-				-				54,479
Balance at April 30, 2014			16,980,675			$	2,037,689			$	24,578,117			$	8,648,727			$	(6,932,035	)		$	(5,539	)		$	28,326,959

 

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

 

 

Nevada Gold & Casinos, Inc.

Consolidated Statements of Cash Flows

 

		Twelve Months Ended
		April 30,				April 30,
		2014				2013
Cash flows from operating activities:
Net income		$	447,981			$	36,907
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,263,499				2,126,888
Write-off of project development costs			56,959				257,733
Stock based compensation			54,479				137,858
Amortization of deferred loan issuance costs			232,391				329,387
Amortization of deferred rent			14,536				76,134
Loss on sale/settlement of assets			27,605				6,081
Changes to resticted cash			(82,508	)			480,581
Change in swap fair value			58,352				-
Loss on extinguishment of debt			283,550				-
Changes in deferred income taxes			282,758				512,863
Changes in operating assets and liabilities:
Receivables and other assets			254,186				279,039
Accounts payable and accrued liabilities			(550,472	)			(743,684	)
Net cash provided by operating activities			3,343,316				3,499,787
Cash flows from investing activities:
Capitalized development costs			-				(59,337	)
Collections on notes receivable			236,230				46,151
Purchase of property and equipment			(346,590	)			(626,362	)
Proceeds from the sale of discontinued operations			-				800,000
Proceeds from the sale of assets			-				63,161
Net cash (used in) provided by investing activities			(110,360	)			223,613
Cash flows from financing activities:
Employee stock plan purchases			67,914				138,582
Proceeds from credit facilities			14,250,000				1,700,000
Repayment of credit facilities			(16,110,000	)			(4,045,324	)
Deferred loan issuance costs			(475,654	)			-
Cash proceeds from exercise of stock options			49,850				7,100
Net cash used in financing activities			(2,217,890	)			(2,199,642	)
Net increase in cash and cash equivalents			1,015,066				1,523,758
Cash and cash equivalents at beginning of period			6,723,919				5,200,161
Cash and cash equivalents at end of period		$	7,738,985			$	6,723,919
Supplemental cash flow information:
Cash paid for interest		$	1,120,840			$	1,522,772
Non-cash investing and financing activities:
Issuance of note receivable to purchasers of wholly-owned subsidiary		$	-			$	2,325,000

 

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

 

 

Nevada Gold & Casinos, Inc.

Notes to Consolidated Financial Statements

 

Note 1.

Background and Basis of Presentation

 

Background

 

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

 

Basis of Presentation

 

Our consolidated financial statements include the accounts of all majority-owned and controlled subsidiaries after the elimination of all significant intercompany accounts and transactions.

 

Certain reclassifications have been made to conform prior year financial information to the current period presentation. Those reclassifications did not impact working capital, total assets, total liabilities, net income or stockholders’ equity. We have revised certain statement of cash flow amounts for the twelve months ended April 30, 2013 from the amounts previously reported in our Form 10-K annual report for the annual period ended April 30, 2013.  We corrected the classification of changes to restricted cash that we had previously reported as cash flow from investing activities rather than as cash flow from operating activities.  Refer to Note 3 for the nature of restricted cash. This correction decreased previously reported net cash provided by investing activities by $480,581 for the twelve months ended April 30, 2013, and it increased previously reported net cash provided by operating activities by an equal amount.  We assessed the materiality of the correction and concluded that the correction was not material to any of our previously issued financial statements.  The correction did not affect net revenues, operating income, income before income tax, or working capital for any period.

 

Comprehensive Income

 

In 2012, we adopted applicable guidance that requires presenting the total of comprehensive income, the components of net income and other comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements. We applied the guidance retrospectively and elected to present the total of comprehensive income in a single continuous statement. The adoption of the guidance did not have an impact on our financial position or results of operations.

 

Note 2.

Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

Fair Value

 

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

 

 

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

 

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

 

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

 

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

 

Real estate held for sale is recorded at fair value less selling costs.

 

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

 

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

 

Cash and Cash Equivalents

 

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

 

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

 

Allowance for Doubtful Accounts

 

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

 

Each reporting period we review each of our receivables to evaluate whether the collection of such receivable is still probable. In our analysis, we review the economic feasibility and the current financial, legislative and development status of the project. If our analysis indicates that the project is no longer economically feasible then the receivable would be written down to its estimated fair value.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk are primarily notes receivable, cash and cash equivalents, accounts receivable and payable, and long term debt. At April 30, 2014 and April 30, 2013, we had three notes receivable, as well as the BVD/BVO receivable, outstanding. Two of these notes were issued in connection with a potential gaming project and the third was to the investors who purchased the Colorado Grande Casino from us. Management performs periodic evaluations of the collectability of these notes. Our cash deposits are held with large, well-known financial institutions, and, at times, such deposits may be in excess of the federally insured limit. The recorded value of cash, accounts receivable and payable, approximate fair value based on their short term nature; the recorded value of long term debt approximates fair value as interest rates approximate current market rates.

 

 

Capitalized Development Cost

 

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

 

Real Estate Held for Sale

 

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

 

Property and Equipment

 

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

 

Property and equipment at April 30, 2014 and April 30, 2013 consist of the following:

										Estimated
		April 30,				April 30,				Service Life
		2014				2013				in Years
Leasehold improvements		$	1,305,423			$	1,260,932			7-25
Gaming equipment			2,279,515				2,229,562			3-5
Furniture and office equipment			2,621,658				2,418,408			3-7
Building and improvements			1,612,250				1,612,250			15-30
Land			87,750				87,750
Construction in Progress			14,931				19,161
			7,921,527				7,628,062
Less accumulated depreciation			(3,632,349	)			(2,599,940	)
Property and equipment, net		$	4,289,178			$	5,028,122

 

Deferred Loan Issuance Costs

 

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

 

Goodwill and Other Intangible Assets

 

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

 

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

 

We use earnings before interest, taxes, depreciation, amortization, non-cash goodwill and other long-lived asset impairment charges, litigation charges, and net losses/gains from asset dispositions (“EBITDA”) as the measure for future earnings in our impairment test. Management estimates future adjusted EBITDA based primarily on its projections of future revenues. We utilized comparable industry average multiples of adjusted EBITDA rates based on industry standards ranging from 4.5 to 7.5 times adjusted EBITDA for the estimated fair values of our operating facilities as of April 30, 2014.

 

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

 

 

Slot Club Awards

 

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

 

Advertising Costs

 

We expense advertising costs as incurred. Advertising expense related primarily to our casino operations and for the years ended April 30, 2014 and April 30, 2013 was approximately $2,097,000 and $2,067,000, respectively. These costs are included in marketing and administrative on our Consolidated Statements of Operations.

 

Revenue Recognition

 

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

 

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

 

		Fiscal Year Ended				Fiscal Year Ended
		April 30, 2014				April 30, 2013
Food and beverage		$	3,079,963			$	3,302,772
Other			142,350				147,185
Total cost of complimentary services		$	3,222,313			$	3,449,957

 

Accrued Jackpot Liability

 

We accrue slot jackpot liability as games are played under a matching concept of coin-in. We also maintain accrued player-supported jackpot liabilities. Player-supported jackpot is a progressive game of chance, allowed in Washington State, directly related to the play or outcome of an authorized non-house-banked card game separately funded by our patrons. Any jackpots hit in these card games are paid from such reserved funds.

 

Income Taxes

 

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

 

We recognize the impact of uncertain tax positions in our financial statements only if that position is more likely than not of being sustained upon examination by the taxing authority. Should interest and penalty be incurred as a result of a review of our income tax returns, we will record the interest and penalty in accordance with applicable guidance.

 

Our federal tax returns for years after 2010, which pertains to fiscal year 2011, remain subject to examination.

 

 

Stock-Based Compensation

 

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

 

The compensation cost related to these share-based awards is recognized over the requisite service period. The requisite service period is generally the period during which an employee is required to provide service in exchange for the award. Total stock-based compensation for the years ended April 30, 2014 and April 30, 2013 was $54,479 and $137,858, respectively.

 

Earnings Per Share

 

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

 

Accrued Contingent Liabilities

 

We assess our exposure to loss contingencies including legal matters. If a potential loss is justified, probable, able to be quantified, and material, we will provide for the exposure. If the actual loss from a contingency differs from management’s estimate, operating results could be impacted. As of April 30, 2014 and April 30, 2013, we did not record any accrued contingent liabilities.

 

Derivative Financial Instruments

 

We have managed our market risk, including interest rate risk associated with variable rate borrowings, through balancing fixed-rate and variable-rate borrowings with the use of derivative financial instruments. The fair value of derivative financial instruments are recognized as assets or liabilities at each balance sheet date, with changes in fair value affecting net income (loss). The Company’s interest rate swap did not qualify for hedge accounting. Accordingly, change in the fair value of the interest rate swap is presented as an increase (decrease) in fair value of swaps in the accompanying Consolidated Statements of Operations.

 

New Accounting Pronouncements

 

Since the filing of our Form 10-K for the fiscal year ended April 30, 2013, there are no new accounting standards effective which are material to our financial statements or that are required to be adopted by the Company.

 

Note 3.

Restricted Cash

 

As of April 30, 2014 and 2013, we maintained approximately $1,388,995 and $1,306,487, respectively, in restricted cash, which consists of player-supported jackpot funds.

 

Note 4.

Notes and BVD/BVO Receivable

 

Notes Receivable

 

As of April 30, 2014 and April 30, 2013, we had net notes receivable of $2,063,219 and $2,299,449, respectively. The schedule below reflects the face amount and valuation allowance of each note receivable as of April 30, 2014:

 

		Face Amount				Valuation				Net Receivable
G Investments, LLC		$	2,063,219				—			$	2,063,219
Big City Capital, LLC			3,200,000				(3,200,000	)			—
BVD/BVO			4,672,087				(4,672,087	)			—
		$	9,935,306				(7,872,087	)		$	2,063,219

 

G Investments, LLC

 

Upon completion of the sale of the Colorado Grande Casino on May 25, 2012, we recorded a $2.3 million note receivable. This note bears interest at 6% per annum through the maturity date of June 1, 2017 and is secured with all of the assets of the Colorado Grande Casino, pledge of membership interest in G Investments, LLC (“GI”), and a personal guaranty by GI’s principal.

 

Principal and interest payments are scheduled to be made as follows:

 

·

No monthly installments of principal and accrued interest shall be due and payable for three months following the sale date of May 25, 2012;

·

One monthly installment of principal and accrued interest of $5,000 on September 1, 2012;

 

 

·

Beginning October 1, 2012, eight monthly installments of principal and accrued interest of $20,000;

·

Beginning June 1, 2013, twelve monthly installments of principal and accrued interest of $30,000;

·

Beginning June 1, 2014, thirty six monthly installments of principal and accrued interest of $40,000; and

·

A final installment of $907,061 which is due on the maturity date of June 1, 2017.

 

Since the inception of this note we have collected $525,000 which consists of $261,781 of principal plus $263,219 of interest.

 

Big City Capital, LLC

 

At April 30, 2014 and April 30, 2013, our balance sheet reflects net notes receivable of $0, net of a $3,200,000 valuation allowance, related to the development of gaming/entertainment projects from Big City Capital, LLC (“Big City Capital”). These two notes receivable have a maturity date of December 31, 2014. On an annual basis, we review each of our notes receivable to evaluate whether collection is still probable. During prior fiscal years we determined that our ability to collect these notes receivable and related accrued interest had been impaired. As a result, given the prevailing very challenging capital market conditions and continued uncertainties as to the economy, and based upon our “Level 3” analysis, we recorded $3,200,000 of valuation allowances and wrote off the accrued interest.

 

BVD/BVO Receivable

 

At April 30, 2014 and April 30, 2013, our balance sheet reflects a net receivable of $0, net of a $4,575,000 valuation allowance, related to the development of gaming/entertainment projects from B. V. Oro, LLC (“BVO”). On an annual basis, we review each of our receivables to evaluate whether collection is still probable. During a prior fiscal year we determined that our ability to collect this receivable and related accrued interest had been impaired. As a result, given the prevailing very challenging capital market conditions and continued uncertainties as to the economy, and based upon our “Level 3” analysis, we recorded a $4,575,000 valuation allowance for the total principal and interest due.

 

Note 5.

Long-Term Debt

 

Long-Term Financing Obligations

 

Our long-term financing obligations for the fiscal years ended April 30, 2014 and April 30, 2013 are as follows:

 

		April 30,				April 30,
		2014				2013
$12.75 million reducing revolving credit agreement, LIBOR plus an Applicable Margin, increasing quarterly payments beginning March 31, 2014 through September 30, 2018, and the remaining $4,250,000 principal due on the maturity date of December 10, 2018		$	12,350,000			$	-
$11.0 million note payable, LIBOR, with 0.25% floor, plus 9.50% interest, principal payments of $250,000 due each quarter and remainder due at maturity of October 7, 2014			-				9,500,000
$4.0 million note payable, 11.5% interest until maturity at June 30, 2015			-				3,055,000
$250,000 note payable, 6% interest, to be paid in two annual installments of $100,000 plus accrued interest and the final payment of $50,000 plus accured interest at the maturity date of December 15, 2013			-				50,000
$100,000 note payable, 6% imputed interest, to be paid in thirty equal monthly installments, beginning August 5, 2011, maturing January 18, 2014			-				30,000
$1.4 million promissory note, 6% interest, payable in fifty nine monthly installments of $10,000 plus all accrued interest, and the remaining principle at the maturity date of January 27, 2017			-				1,275,000
$400,000 note payable, 6% imputed interest, to be paid in sixty equal monthly installments, beginning February 27, 2012, maturing January 27, 2017			-				300,000
Total			12,350,000				14,210,000
Less: current portion			(1,625,000	)			(1,280,000	)
Total long-term financing obligations		$	10,725,000			$	12,930,000

 

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

 

 

As of April 30, 2014, scheduled principal payments on the Credit Facility for each of the next five years and thereafter are as follows:

 

May 1, 2014 – April 30, 2015		$	1,625,000
May 1, 2015 – April 30, 2016		$	1,725,000
May 1, 2016 – April 30, 2017		$	1,825,000
May 1, 2017 – April 30, 2018		$	1,925,000
May 1, 2018 – December 10, 2018		$	5,250,000

 

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

 

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

 

Note 6.   Interest Rate Swap

 

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

 

On January 17, 2014, the Company entered into a swap transaction with Mutual of Omaha Bank (“MOOB”), which has a calculation period as of the tenth day of each month beginning with February 10, 2014 until the maturity date of the Credit Facility. As of April 30, 2014, the Company had one outstanding interest rate swap with MOOB with a notional amount of $6,175,000 at a swap rate of 1.52%, which as of April 30, 2014, effectively converts $6,175,000 of our floating-rate debt to a synthetic fixed rate of 6.02%. Under the terms of the swap agreement, the Company pays a fixed rate of 1.52% and receives variable rate based on one-month LIBOR as of the first day of each floating-rate calculation period. Under the International Swap Dealers Association, Inc. (“ISDA”) confirmation, the floating index as of April 30, 2014 is set at 0.151%.

 

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

 

As required by ASC 815, on a quarterly basis, the Company will assess whether any changes to the hedge instrument, or underlying debt agreement, have occurred which would alter the original designation of the hedge instrument. Each quarter, the Company receives fair value statements from the counterparty, MOOB. The fair value of the interest rate swap is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. To comply with the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. As a result of our evaluation of our interest rate swap as of April 30, 2014, we recorded a $58,352 decrease in our interest rate swap fair value for the three and twelve months ended April 30, 2014.

 

Note 7. Goodwill and Intangible Assets

 

In connection with our acquisitions of the of the Washington mini-casinos on May 12, 2009, July 23, 2010 and July 18, 2011, as well as the South Dakota Gold slot route on January 27, 2012, we have goodwill and intangible assets of $21,857,750, net of amortization for intangible assets with finite lives.

 

 

During the fiscal year ended April 30, 2014 we reclassified $388,855, from other assets to intangible assets with indefinite lives. This asset with a carrying value of $388,855, relates to the costs of being registered with the Nevada Gaming Control Board as a publically traded corporation. The change in the carrying amount of goodwill and other intangibles for the fiscal year ended April 30, 2014 is as follows:

 

		Total				Goodwill				Other Intangibles
Balance as of April 30, 2013		$	22,674,465			$	16,103,583			$	6,570,882
Reclassification during the year			388,855				-				388,855
Current year amortization			(1,205,570	)			-				(1,205,570	)
Balance as of April 30, 2014		$	21,857,750			$	16,103,583			$	5,754,167

 

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

 

Goodwill and net intangibles assets by segment as of April 30, 2014 are as follows:

 

		Total				Goodwill				Other Intangibles, net
Washington Gold		$	18,723,246			$	14,167,112			$	4,556,134
South Dakota Gold			2,745,649				1,936,471				809,178
Corporate			388,855				-				388,855
Balance as of April 30, 2014		$	21,857,750			$	16,103,583			$	5,754,167

 

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

 

		As of April 30, 2014
		Gross Carrying Amount				Accumulated Amortization				Net
Customer relationships		$	7,853,321			$	(4,420,897	)		$	3,432,424
Non-compete agreements			1,269,000				(1,198,112	)			70,888
State gaming registration			388,855				-				388,855
Trade names			1,862,000				-				1,862,000
Total		$	11,373,176			$	(5,619,009	)		$	5,754,167

 

The estimated future annual amortization of intangible assets, which excludes Trade Names and State gaming registration, is as follows. The weighted average useful lives of acquired intangibles related to customer relationships and non-compete agreements are 7.0 years and 3.0 years, respectively.  The weighted average useful life of amortizable intangible assets in total is 5.5 years.

 

For the fiscal year		Amount
2015		$	1,177,681
2016			1,121,903
2017			735,463
2018			337,883
2019			130,382
Thereafter			—
Total		$	3,503,312

 

 

Note 8.

Income Taxes

 

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

 

We recognize the impact of uncertain tax positions in our financial statements only if that position is more likely than not of not being sustained upon examination by the taxing authority. Should interest and penalty be incurred as a result of a review of our income tax returns, we will record the interest and penalty in accordance with applicable guidance.

 

Deferred tax assets and liabilities presented on the balance sheet are as follows:

 

		April 30, 2014				April 30, 2013
Current deferred tax asset		$	98,643			$	67,123
Non-current deferred tax asset			4,356,972				4,671,250
Net deferred tax asset		$	4,455,615			$	4,738,373

 

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

 

		April 30, 2014				April 30, 2013
Deferred tax assets:
Net operating loss carryforwards		$	1,355,917			$	954,742
Fixed assets			-				98,151
Tax credit carryforwards			215,155				-
Stock options			269,617				278,283
Impairment of notes receivable and land			3,417,478				3,417,478
Revenue not recognized for tax reporting and other			145,696				109,660
Capitalized acquisition costs			-				59,110
Prepaid expenses			-				194,789
Other			167,336				67,123
Total deferred tax assets			5,571,199				5,179,336
Deferred tax liabilities:
Amortization of intangibles			(833,731	)			(408,654	)
Fixed assets			(234,838	)			-
Prepaid expenses			(47,015	)			-
Total deferred tax liabilities			(1,115,584	)			(408,654	)
Net deferred tax assets before valuation allowance			4,455,615				4,770,682
Valuation allowance			-				(32,309	)
Net deferred tax assets		$	4,455,615			$	4,738,373

 

At April 30, 2014, we have gross federal net operating loss carryforwards of approximately $4.0 million. We also have deferred tax assets of approximately $0.2 million related to general business credits and $0.01 million related to Alternative Minimum Tax credits. The net operating losses and general business credits can be carried forward and applied to offset taxable income for 20 years; they will begin to expire in 2031. The Alternative Minimum Tax credit can be carried forward indefinitely and will offset future regular tax liabilities.

 

We have analyzed our income tax filing positions in all jurisdictions and believe our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments which will result in a material change to our financial position. As of the time of this filing, no income tax examinations are currently being undertaken by any jurisdiction.

 

Reconciliations between the statutory federal income tax expense rate of 34.0% in the fiscal years ended April 30, 2014 and April 30, 2013 and our effective income tax rate as a percentage of pre-tax book income is as follows:

 

 

		Years Ended
		April 30, 2014								April 30, 2013
		Percent				Dollars				Percent				Dollars
Income tax expense at statutory federal rate			34.0			$	248,452				34.0			$	186,921
Non-Deductible Expenses			3.3				24,639				—				—
Utilization of General Business Credits			(8.6	)			(63,075	)			—				—
Write-off of expired or forfeited stock options			—				—				78.4				431,124
Tax Return to Provision Adjustments			10.0				72,743				(19.1	)			(105,183	)
Effective income tax rate			38.7			$	282,759				93.3			$	512,862

 

Note 9.

Equity Transactions and Stock Option Plans

 

Information about our share-based plans

 

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

 

The 2009 Plan

 

On April 14, 2009, our shareholders approved the 2009 Plan providing for the granting of awards to our directors, officers, employees and independent contractors. The number of common stock shares reserved for issuance under the 2009 Plan is 1,750,000 shares. The plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors. The Committee has complete discretion under the plan regarding the vesting and service requirements, exercise price and other conditions. Under the 2009 Plan, the Committee is authorized to grant the following types of awards:

 

·

Stock Options including Incentive Stock Options (“ISO”),

·

Options not intended to qualify as ISOs,

·

Stock Appreciation Rights, and

·

Restricted Stock Grants.

 

To date, the Committee has only awarded stock options for stock-based compensation. Our practice has been to issue new or treasury shares upon the exercise of stock options. Stock option rights granted under the 2009 Plan generally have 5 or 10 year terms and vest in two or three equal annual installments, with some options grants providing for immediate vesting for a portion of the grant.

 

A summary of activity under our share-based payment plans for the years ended April 30, 2014 and April 30, 2013 is presented below:

 

 

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term (Year)				Value
Outstanding at April 30, 2012			1,865,000			$	1.57
Granted			320,000				0.82
Exercised			(10,000	)			0.71
Forfeited or expired			(1,310,000	)			1.72
Outstanding at April 30, 2013			865,000			$	1.08				7.93			$	95,150
Exercisable at April 30, 2013			731,667			$	1.13				7.62			$	65,850
Outstanding at April 30, 2013			865,000			$	1.08
Granted			-				-
Exercised			(55,000	)			0.91
Forfeited or expired			(10,000	)			1.57
Outstanding at April 30, 2014			800,000			$	1.09				7.09			$	124,000
Exercisable at April 30, 2014			733,333			$	1.11				6.95			$	102,667
Available for grant at April 30, 2014			885,000

 

The weighted-average grant-date fair value of options granted during the year ended April 30, 2013 was $0.82. There were 55,000 and 10,000 of stock options exercised during the years ended April 30, 2014 and April 30, 2013. The intrinsic value of the options exercised in the fiscal years ended April 30, 2014 and April 30, 2013 were approximately $17,150 and $1,200, respectively. As of April 30, 2014, there was a total of $40,860 of unamortized compensation cost related to stock options, which cost is expected to be recognized over a weighted-average of approximately 0.75 years.

 

Compensation cost for stock options granted will be based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant and using the weighted-average assumptions of (i) expected volatility, (ii) expected term, (iii) expected dividend yield, (iv) risk-free interest rate and (v) forfeiture rate. Expected volatility is based on historical volatility of our stock. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award.

 

The 2010 Plan

 

On October 11, 2010, our shareholders approved the 2010 Plan which permits all our eligible employees, including employees of certain of our subsidiaries, to purchase shares of our common stock through payroll deductions at a purchase price not to be less than 90% of the fair market value of the shares on each purchase date. The number of shares available for issuance under the 2010 Plan is a total of 500,000 shares.  On November 30, 2010, our Board of Directors amended the 2010 Plan, effective December 1, 2010, to allow its participants to contribute up to a maximum of twenty (20%) percent of their paid compensation. The 2010 Plan became available for employee participation on January 1, 2011, employee payroll deductions began in January of 2011, and shares are to be purchased at the end of each calendar quarter. As of April 30, 2014, approximately 355,000 shares were issued to 140 participants under the 2010 Plan.

 

Treasury Stock

 

During the fiscal years ended April 30, 2014 and April 30, 2013, we did not issue any treasury stock.

 

 

Note 10. Earnings Per Share

 

The following is presented as a reconciliation of the numerators and denominators of basic and diluted earnings per share computations, in accordance with Accounting Standards Update 260, Earnings Per Share:

 

		Fiscal Year Ended
		April 30, 2014				April 30, 2013
Numerator:
Basic:
Net income available to common stockholders for continuing operations		$	447,981			$	128,510
Diluted:
Net income available to common stockholders for continuing operations		$	447,981			$	128,510
Denominator:
Basic weighted average number of common shares
Outstanding			16,127,654				15,997,546
Diluted weighted average number of common shares
Outstanding			16,294,487				16,020,789
Income per share for continuing operations:
Net income per common share – basic		$	.03			$	.01
Net income per common share - diluted		$	.03			$	.01

 

For the fiscal years ended April 30, 2014 and April 30, 2013, potential dilutive common shares issuable under options of 633,000 and 730,000, respectively, were not included in the calculation of diluted earnings per share as they were anti-dilutive.

 

Note 11.

Other Assets

 

Other assets consisted of the following at April 30, 2014 and April 30, 2013:

 

		April 30, 2014				April 30, 2013
Other assets		$	73,279			$	93,553
Deferred loan issue cost, net			413,187				440,307
Other assets		$	486,466			$	533,860

 

Note 12.

Segment Reporting

 

We have three reporting segments (i) Washington Gold, (ii) South Dakota Gold, and (iii) Corporate. For the twelve month periods ended April 30, 2014 and April 30, 2013, the Washington Gold segment consists of the Washington mini-casinos, the South Dakota Gold segment consists of our slot route operation in South Dakota, the Corporate column includes the vacant land in Colorado and its taxes and maintenance expenses.

 

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

 

 

		As of the Twelve Months Ended  April 30, 2014
		Washington Gold				South Dakota Gold				Corporate				Total Continuing Operations				Assets of Operations Held for Sale				Totals
Net revenue		$	53,663,952			$	9,135,130			$	8,312			$	62,807,394			$	-			$	62,807,394
Casino and food and beverage expense			29,214,079				7,981,240				-				37,195,319				-				37,195,319
Marketing and administrative expense			16,113,107				256,398				-				16,369,505				-				16,369,505
Facility and other expenses			2,076,827				121,354				2,457,740				4,655,921				-				4,655,921
Depreciation and amortization			1,575,458				682,168				5,873				2,263,499				-				2,263,499
Segment operating income (loss)			4,684,481				93,970				(2,455,301	)			2,323,150				-				2,323,150
Segment assets			6,493,965				993,376				23,735,690				31,223,031				-				31,223,032
Additions to property and equipment			254,853				85,745				16,619				357,217				-				357,217

 

		As of the Twelve Months Ended April 30, 2013
		Washington Gold				South Dakota Gold				Corporate				Total Continuing Operations				Assets of Operations Held for Sale				Totals
Net revenue		$	55,494,109			$	10,429,809			$	-			$	65,923,918			$	-			$	65,923,918
Casino and food and beverage expense			28,903,177				8,951,547				-				37,854,724				4,269				37,858,993
Marketing and administrative expense			16,359,720				293,026				-				16,652,746				1,024				16,653,770
Facility and other expenses			2,436,357				112,696				4,341,837				6,890,890				133,500				7,024,390
Depreciation and amortization			1,532,480				583,262				11,146				2,126,888				-				2,126,888
Segment operating income (loss)			6,262,375				489,278				(4,352,983	)			2,398,670				(138,793	)			2,259,877
Segment assets			22,234,165				4,830,439				6,690,603				33,755,207				-				33,755,207
Additions to property and equipment			310,301				300,823				15,238				626,362				-				626,362

 

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

 

		April 30,
		2014
Total assets for reportable segments		$	31,223,031
Cash and restricted cash not allocated to segments			9,127,980
Deferred tax asset			4,455,615
Total assets		$	44,806,626

 

Note 13.

401(k) Plan

 

Following our acquisition of all the shares of South Dakota Gold, we assumed a 401(k) Profit Sharing Plan, a qualified retirement plan, covering all of the employees of South Dakota Gold who had completed one year of employment and were age 21 or older. Under the plan, South Dakota Gold made annual discretionary contributions on behalf of each participant. Other than qualified rollover contributions, participants were not allowed to make contributions into the plan. Participants were always fully vested in their rollover contributions; however, vesting in South Dakota Gold’s profit sharing contribution was based on years of service, with a participant fully vested after six years. Since our acquisition, South Dakota Gold made no discretionary profit sharing contributions to the 401(k) Profit Sharing Plan. This plan was dissolved effective January 9, 2013, at which time all vested funds were distributed to the participants.

 

Following our acquisition of all the shares of South Dakota Gold, we also assumed a 401(k) Savings Plan, a qualified retirement plan, covering all of the employees of South Dakota Gold who had completed one year of employment and were age 21 or older. Under the plan, participants were permitted to defer up to 10% of their compensation up to the maximum limit determined by law. Participants were always fully vested in their respective rollover and elective contributions while vesting in matching contributions was based on years of service, with a participant fully vested after six years. The discretionary match was a maximum of 3%. For the years ended April 30, 2014 and April 30, 2013 the discretionary match was $6,213 and $9,846, respectively. This plan was terminated effective December 31, 2013 and replaced with the Nevada Gold & Casinos 401(k) plan (“NG 401k Plan”) described below. Participants in the South Dakota Gold 401(k) plans were given the option to rollover their investment balance into the NG 401k Plan.

 

 

Effective January 1, 2014, we initiated the NG 401k Plan. The NG 401k Plan covers all employees who have completed six months of service and are at least 21 years of age or were employed with the company as of January 1, 2014. Employees have the choice of making contributions to a traditional pre-tax plan or a Roth after-tax plan. Participants have various investment options available to choose from. They may contribute up to 100% of their compensation up to the maximum permitted by the Internal Revenue Code. Participants are always fully vested in their elective contributions. Under the plan, the Company may make discretionary contributions to the plan. For the years ended April 30, 2014 and April 30, 2013, the Company did not make any discretionary contributions to the NG 401k Plan. Employer contributions and earnings will be subject to the following vesting schedule:

 

Years of Service		Vesting Percentage
1			33	%
2			67	%
3 or more			100	%

 

Note 14.

Employee Savings Plan

 

Effective May 1, 2012, we initiated the Nevada Gold Employee Savings Plan (“ESP”) for key employees of our corporate office and the operations in Washington State. We discontinued the ESP in December 2012. As of April 30, 2014 and 2013, we have no accrued ESP match contributions.

 

Note 15.

Related Party Transactions

 

During the fiscal years ended April 30, 2014 and April 30, 2013, we engaged the law firm of Catania & Ehrlich, P.C., of which one of our board members is a partner. The firm was engaged to locate assets pertaining to a settlement agreement for a judgment awarded to us, to assist us with the licensing process before the Nevada Gaming Control Board as well as legal advice regarding social gaming. We paid the firm approximately $1,350 and $4,200 during the fiscal years ended April 30, 2014 and April 30, 2013, respectively.

 

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

 

Note 16.

Commitments and Contingencies

 

We currently lease 3,131 square feet of office space for our corporate headquarters in Las Vegas, Nevada. The lease expires on January 15, 2015. The total annual rent, including mandatory common area maintenance (“CAM”) for this space is currently $49,400. The CAM contractually increases five percent effective each January 1. We previously rented office space in Houston, Texas under a non-cancelable operating lease which expired on March 31, 2013. The annual rent for the Houston office space was $88,800.

 

As a result of acquiring facilities in Washington, we own the buildings for the Crazy Moose Casino in Pasco and Coyote Bob Casino’s in Kennewick. In addition we have real property leases as follows:

 

·

Crazy Moose Casino in Mountlake Terrace has a building lease which expires on May 31, 2016 with an option to renew for an additional term of five years. The annual rent for this lease is $157,000.

·

Crazy Moose Casino in Pasco has a parking lot lease which expired on December 31, 2013. Effective January 1, 2014, the parking lot is leased on a monthly basis.

·

Silver Dollar Casino in SeaTac has a building lease which expires in May of 2022 with an option to renew for an additional term of 10 years. The annual rent is $278,000, with escalation of 4% annually.

·

Silver Dollar Casino in Renton has a building lease which expires in April of 2019 with an option to renew for up to two additional terms of 10 years each. The annual rent is $517,000, with escalation of 8% every three years.

·

Silver Dollar Casino in Bothell has a building lease which expires in April of 2017 with an option to renew for an additional term of 5 years. The annual rent is $294,000.

·

Club Hollywood Casino in Shoreline has casino building and parking lot leases which expire in March of 2017 with options to renew for up to four additional five-year terms. The annual rentals are $759,000, with escalation of 3% annually.

·

Golden Nugget Casino in Tukwila has a building lease which expires in November of 2014 with an option to renew for an additional term of 10 years. The annual rent is $186,500, with escalation of 3% annually.

·

Royal Casino in Everett has a building lease which expires in January of 2016 with an option to renew for up to four additional five-year terms. The annual rent is $399,950, with escalation of 3% annually.

·

Administrative offices lease in Renton expires in October of 2018. The monthly rent for the first 22 months is $4,100 and then $4,250 for months 23-34; $4,425 for months 35-48 and; $4,595 for months 49-58.

 

 

·

Red Dragon Casino in Mountlake Terrace has a building lease which expires in October of 2016 with an option to renew for up to two additional five-year terms. The annual rent is $405,500, with escalation of 2% annually.

 

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

 

·

An administrative center lease which expires in January of 2017 with an option to renew for an additional five-year term. The annual rent is $55,200.

 

The expected remaining future annual minimum lease payments as of April 30, 2014 are as follows:

 

Fiscal Years		Corporate Office Lease Payment				Washington Gold Lease Payment				South Dakota Gold				Total Lease Payment
2015		$	37,102			$	2,967,603			$	55,200			$	3,059,905
2016			—				2,955,882				55,200				3,011,082
2017			—				2,252,851				41,400				2,294,251
2018			—				922,776				—				922,776
2019			—				922,985				—				922,985
Thereafter			—				1,085,177				—				1,085,177
		$	37,102			$	11,107,274			$	151,800			$	11,296,176

 

Rent expense for our corporate offices in Las Vegas, Nevada and Houston, Texas, for the fiscal years ended April 30, 2014 and April 30, 2013 was $49,031 and $139,268, respectively. Rent expense for the Washington mini-casinos for the fiscal years ended April 30, 2014 and April 30, 2013 was $3,203,448 and $3,248,275, respectively. Rent expense for the South Dakota Gold slot route for the fiscal years ended April 30, 2014 and April 30, 2013 was $ 69,155 and $109,000, respectively. The above schedule does not include rent expense of our former Las Vegas office, which was on a month-to-month basis at a cost of approximately $1,000 per month. We terminated that arrangement as of January 31, 2013.

 

For scheduled rent escalation clauses for the lease terms for the Washington properties, we recorded approximately $14,000 and $76,000 of amortization of deferred rent escalation for the years ended April 30, 2014 and April 30, 2013, respectively. These escalations are recorded on the balance sheet in other long term liabilities.

 

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

 

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

 

Note 17. Legal Proceedings

 

We are not currently involved in any material legal proceedings.

 

 

Note 18. Quarterly Financial Information (Unaudited)

 

The following table sets forth certain quarterly financial information for each of the fiscal quarters during the years ended April 30, 2014 and April 30, 2013.

 

						Income				Net income				Diluted
						(loss) before				(loss) applicable				income (loss)
						tax (expense)				to common				per common
		Net revenues				benefit				stockholders				share (a)
		(in thousands, except per share amounts)
Consolidated Statements of Operations:
Continuing Operations
Fiscal Year ended April 30, 2014
Quarter ended July 31, 2013		$	15,691			$	(374	)		$	(216	)		$	(0.01	)
Quarter ended October 31, 2013			16,349				335				221				0.01
Quarter ended January 31, 2014			14,761				(276	)			(203	)			(0.01	)
Quarter ended April 30, 2014			16,033				1,045				646				0.04
Fiscal Year ended April 30, 2013
Quarter ended July 31, 2012		$	16,811			$	257			$	168			$	0.01
Quarter ended October 31, 2012			16,384				(789	)			(681	)			(0.04	)
Quarter ended January 31, 2013			16,210				557				188				0.01
Quarter ended April 30, 2013			16,423				664				452				0.03

 

(a)      Due to the fact that income per share amounts are calculated using the weighted average number of common and dilutive common equivalent shares outstanding during each quarter, the sum of the per share amounts for the four quarters may not equal the total income per share amounts for the year.

 

Note 19. Impairment of Assets

 

Long-lived assets, including property, plant and equipment and amortizable intangible assets, comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets if impairment indicators are present or if other circumstances indicate that impairment may exist under authoritative guidance. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. Our evaluation of the carrying value of our long-lived assets for sale indicates that we have no further impairment. This fair value measurement uses level 3 inputs under the fair value hierarchy.

 

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

 

At April 30, 2014 and April 30, 2013, our balance sheet reflects notes receivable related to Big City Capital of $0, net of a $3.2 million allowance related to the development of gaming/entertainment projects from Big City Capital. During fiscal year ended April 30, 2008, we determined that our ability to collect $859,000 of accrued interest and $1.5 million of the original $3.2 million notes receivable from Big City Capital, LLC (“Big City Capital”) had been impaired. As a result we wrote down the notes receivable to $1.7 million, by establishing a $1.5 million allowance, and we wrote off the accrued interest. At April 30, 2012, we determined our ability to collect the remaining $1.7 million is doubtful and therefore increased the valuation allowance to $3.2 million. These notes receivable have a maturity date of December 31, 2014.

 

At April 30, 2014 and April 30, 2013, our balance sheet reflects a receivable related to BVD/BVO of $0, net of a $4,575,000 allowance. In the period ending April 30, 2012, we determined our ability to collect the BVD/BVO Receivable and its accrued interest was doubtful. Therefore we established a $4,575,000 valuation allowance against its principal and interest due.

 

Note 20. Stock Offering and Warrants

 

On November 7, 2011, we closed on the sale of 2,625,652 shares of our common stock at a price of $1.65 per share to certain investors through a registered direct offering for the total proceeds of approximately $4.3 million, net of offering costs of approximately $444,000. In addition, for each share of our common stock purchased by an investor, we issued to such investor a warrant to purchase 0.75 shares of our common stock. The warrants have an exercise price of $2.18 per share and are exercisable for five years from the initial exercise date, which date is six months from the date of their issuance. The warrants expire on May 7, 2017. The proceeds of the offering were used to assist us in the $5.1 million acquisition of South Dakota Gold.

 

 

Note 21. Sale of Assets/Asset Held for Sale

 

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

 

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

 

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

 

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

 

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

 

		April 30, 2012
Goodwill		$	2,154,932
Net PP&E			960,165
Inventory			33,601
Deferred tax asset			-
Total Assets		$	3,148,698
Accounts payable and accrued liabilities		$	23,699
Short term debt			-
Total Liabilities		$	23,699
Working capital adjustment			134,589
Consideration received		$	3,125,000
Net loss on sale, pre-tax		$	(134,588	)

 

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

 

Note 22. Subsequent Event

 

Effective July 1, 2014, the Company renewed its annual licenses for 750 slot units for its South Dakota Gold slot route. The annual device fee registration of $2,000 per slot machine is shared by the Company and the route location owners in proportion to their respective revenue share agreements. On June 27, 2014, the Company funded $1,315,400 from free cash flow for the annual device fee registration, which represents its respective share of $522,800 as well as an additional $792,600 to fund location owners’ shares. The $792,600 advance to the location owners will be repaid from future revenues generated from the slot machines. In prior years, the Company borrowed the necessary funds to pay the annual license fees in South Dakota.