UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended October 31, 2015

 

¨

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

 

For the transition period from_______________________ to ___________________________

 

Commission File Number 1-15517

 

 

Nevada Gold & Casinos, Inc.

 

(Exact name of registrant as specified in its charter)

 

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

 

133 E. Warm Springs Road
Suite 102
Las Vegas, Nevada		89119
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number including area code:

(702) 685-1000

 

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

 

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

x Yes ¨ No

 

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

 

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller Reporting Company x

 

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

 

¨ Yes   x No

 

The number of common shares, $0.12 par value per share, issued and outstanding, was 17,737,179 as of December 1, 2015.

 

 

TABLE OF CONTENTS

 

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – October 31, 2015 (unaudited) and April 30, 2015	2
	Condensed Consolidated Statements of Operations – Three and six months ended October 31, 2015 (unaudited) and October 31, 2014 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows – Six months ended October 31, 2015 (unaudited) and October 31, 2014 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4.	Controls and Procedures	19
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	20

 

 

FORWARD-LOOKING STATEMENTS

 

Factors that May Affect Future Results

 

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

 

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us or our representatives) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or other words or expressions of similar meaning, may identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. Forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations, intentions with respect to the financial condition, results of operations, future performance and the business of us, including statements relating to our business strategy and our current and future development plans. These statements may also involve other factors which are detailed in the “Risk Factors” and other sections of our Annual Report on Form 10-K for the year ended April 30, 2015 and other filings with the Securities and Exchange Commission.

 

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

 

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

 

 

Part I. Financial Information

Item 1. Financial Statements

Nevada Gold & Casinos, Inc.

Condensed Consolidated Balance Sheets

 

		October  31,				April 30,
		2015				2015
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	8,513,482			$	8,541,670
Restricted cash			1,441,007				1,724,439
Accounts receivable, net of allowances			639,219				297,316
Prepaid expenses			1,109,355				845,505
Deferred tax asset, current portion			267,594				863,366
Notes receivable, current portion			301,221				384,464
Inventory and other current assets			330,264				377,625
Total current assets			12,602,142				13,034,385
Real estate held for sale			1,100,000				1,100,000
Notes receivable, net of current portion			1,107,670				1,314,467
Goodwill			16,028,625				16,103,583
Identifiable intangible assets, net of accumulated amortization of $7,372,751 and $6,811,799 at October 31, 2015 and April 30, 2015, respectively			4,077,359				4,561,377
Property and equipment, net of accumulated depreciation of $4,715,093 and $4,451,553 at October 31, 2015 and April 30, 2015, respectively			3,794,401				3,990,791
Deferred tax asset, net of current portion			2,773,568				2,706,430
Other assets			1,925,690				331,980
Total assets		$	43,409,455			$	43,143,013
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	1,172,598			$	1,222,139
Accrued payroll and related			1,613,286				1,581,557
Accrued player's club points and progressive jackpots			1,530,605				1,993,537
Total current liabilities			4,316,489				4,797,233
Long-term debt			6,740,000				7,350,000
Other long-term  liabilities			556,993				570,717
Total liabilities			11,613,482				12,717,950
Stockholders' equity:
Common stock, $0.12 par value per share; 50,000,000 shares authorized; 17,307,706 and 17,134,928 shares issued and 16,524,869 and 16,352,091 shares outstanding at October 31, 2015, and April 30, 2015, respectively			2,076,933				2,056,200
Additional paid-in capital			25,119,286				24,845,094
Retained earnings			11,531,789				10,455,804
Treasury stock, 782,837 shares at October 31, 2015 and April 30, 2015, respectively, at cost			(6,932,035	)			(6,932,035	)
Total stockholders' equity			31,795,973				30,425,063
Total liabilities and stockholders' equity		$	43,409,455			$	43,143,013

 

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

 

 

Nevada Gold & Casinos, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

		Three Months Ended								Six Months Ended
		October 31,				October 31,				October 31,				October 31,
		2015				2014				2015				2014
Revenues:
Casino		$	14,262,197			$	14,427,144			$	28,360,893			$	28,579,135
Food and beverage			2,479,077				2,559,929				4,922,187				4,928,870
Other			455,212				461,780				907,884				901,886
Gross revenues			17,196,486				17,448,853				34,190,964				34,409,891
Less promotional allowances			(1,062,273	)			(1,089,023	)			(2,113,975	)			(2,128,747	)
Net revenues			16,134,213				16,359,830				32,076,989				32,281,144
Expenses:
Casino			8,001,698				8,333,307				16,048,910				16,543,443
Food and beverage			1,295,320				1,371,296				2,608,717				2,642,019
Other			63,000				76,117				128,660				143,927
Marketing and administrative			4,042,140				4,132,066				8,183,095				8,251,038
Facility			492,066				532,848				985,221				1,016,514
Corporate			738,995				551,953				1,488,462				1,138,401
Depreciation and amortization			488,709				544,620				999,503				1,089,655
Loss (gain) on sale of assets			2,050				25,120				(161,430	)			17,087
Total operating expenses			15,123,978				15,567,327				30,281,138				30,842,084
Operating income			1,010,235				792,503				1,795,851				1,439,060
Non-operating income (expenses):
Interest income			24,749				30,362				50,630				61,517
Interest expense and amortization of loan issue costs			(94,027	)			(158,538	)			(213,620	)			(326,301	)
Interest rate swap expense			(12,714	)			(20,265	)			(30,326	)			(41,465	)
Change in swap fair value			(9,133	)			(20,654	)			2,084				(2,346	)
Write-off of marketable securities			-				(7,539	)			-				(7,539	)
Income before income tax expense			919,110				615,869				1,604,619				1,122,926
Income tax expense			(301,122	)			(199,802	)			(528,634	)			(352,830	)
Net income		$	617,988			$	416,067			$	1,075,985			$	770,096
Per share information:
Net income per common share - basic and diluted		$	0.04			$	0.03			$	0.07			$	0.05

 

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

 

 

Nevada Gold & Casinos, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		Six Months Ended
		October 31,				October 31,
		2015				2014
Cash flows from operating activities:
Net income		$	1,075,985			$	770,096
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			999,503				1,089,655
Change in deferred income taxes			528,634				352,830
Amortization of deferred loan issuance costs			85,041				45,054
Stock-based compensation			110,495				42,557
(Gain) loss on sale of assets			(161,430	)			17,087
Write-off of marketable securities			-				7,539
Amortization of deferred rent			12,863				2,197
Change in swap fair value			(2,084	)			2,346
Other			869				(457	)
Changes in operating assets and liabilities:
Restricted cash			283,432				(122,326	)
Receivables and other assets			(587,200	)			(401,250	)
Accounts payable and accrued liabilities			(529,995	)			751,392
Net cash provided by operating activities			1,816,113				2,556,720
Cash flows from investing activities:
Purchase of property and equipment			(277,485	)			(580,805	)
Collections on notes receivable			290,040				178,989
Deposit paid for casino acquisition			(1,500,000	)			-
Capitalized licensing costs			(76,934	)			-
Proceeds from the sale of assets			300,520				9,125
Net cash used in investing activities			(1,263,859	)			(392,691	)
Cash flows from financing activities:
Repayment of credit facilities			(2,110,000	)			(2,150,000	)
Employee stock plan purchases			28,280				26,188
Repayment of capital lease			(25,372	)			(7,402	)
Proceeds from credit facilities			1,500,000				-
Payment of loan costs			(149,500	)			-
Cash proceeds from exercise of stock options			176,150				-
Net cash used in financing activities			(580,442	)			(2,131,214	)
Net (decrease) increase in cash and cash equivalents			(28,188	)			32,815
Cash and cash equivalents at beginning of period			8,541,670				7,738,985
Cash and cash equivalents at end of period		$	8,513,482			$	7,771,800
Supplemental cash flow information:
Cash paid for interest		$	162,566			$	328,168
Non-cash investing and financing activities:
Acquisition of equipment via capital lease		$	-			$	38,282

 

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

 

 

Nevada Gold & Casinos, Inc.

 

Notes to Condensed Consolidated Financial Statements

 

Note 1.   Basis of Presentation

 

The interim financial information included herein is unaudited. However, the accompanying condensed consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly our condensed consolidated balance sheets at October 31, 2015 and April 30, 2015, condensed consolidated statements of operations for the three and six months ended October 31, 2015 and 2014, and condensed consolidated statements of cash flows for the six months ended October 31, 2015 and 2014. Although we believe the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended April 30, 2015 and the notes thereto included in our Annual Report on Form 10-K. The results of operations for the three and six months ended October 31, 2015 are not necessarily indicative of the results expected for the full year.

 

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

 

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

 

Note 2.   Critical Accounting Policies

 

Revenue Recognition

 

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

 

		Three Months Ended								Six Months Ended
		October 31,				October 31,				October 31,				October 31,
		2015				2014				2015				2014
Food and beverage		$	845,540			$	813,404			$	1,692,093			$	1,592,749
Other			32,933				30,323				65,357				67,124
Total cost of complimentary services		$	878,473			$	843,727			$	1,757,450			$	1,659,873

 

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 discounted future cash flows.

 

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

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk are primarily notes receivable, cash and cash equivalents, accounts receivable and payable, and long term debt. Management performs periodic evaluations of the collectability of these notes and accounts receivable. Our cash deposits are held with large, well-known financial institutions, and, at times, such deposits may be in excess of the federally insured limit. The recorded value of cash, accounts receivable and payable, approximate fair value based on their short term nature; the recorded value of long term debt approximates fair value as interest rates approximate current market rates.

 

New Accounting Pronouncements and Legislation Issued

 

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

 

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

 

In May 2014, the FASB issued a new accounting standard for revenue recognition which requires entities to recognize revenue when it transfers promised goods or services to customers, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard supersedes the existing accounting guidance for revenue recognition, including industry-specific guidance, and amends certain accounting guidance for recognition of gains and losses on the transfer of non-financial assets. For public companies, the new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016 (including interim periods within those periods). Upon adoption, financial statement issuers may elect to apply the new standard either retrospectively to each prior reporting period presented, or using a modified retrospective approach by recognizing the cumulative effect of initial application and providing certain additional disclosures. The Company will adopt this guidance in the first quarter of 2018. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations, and has not yet determined which adoption method it will elect.

 

 

In April 2014, the FASB issued amended accounting guidance that changes the criteria for reporting discontinued operations and expands the related disclosure requirements. This guidance is effective in the first quarter of our fiscal year 2016. The Company adopted this guidance during the first quarter of fiscal year 2016 with no material impact on our financial position or results of operations. The Golden Nugget casino was not considered a significant component of the Company and therefore the sale was not treated as discontinued operations. See Goodwill and Intangible Assets footnote.

 

A variety of proposed or otherwise potential accounting guidance is currently under study by standard-setting organizations and certain regulatory agencies. Due to the tentative and preliminary nature of such proposed accounting guidance, the Company has not yet determined the effect, if any, that the implementation of such proposed accounting guidance would have on its condensed consolidated financial statements.

 

Note 3. Restricted Cash

 

As of October 31, 2015 and April 30, 2015, we maintained $1,441,007 and $1,724,439, respectively, in restricted cash, which consists of player-supported jackpot funds for our Washington operations.

 

Note 4.   Notes Receivable

 

As of October 31, 2015 and April 30, 2015, we had net notes receivable of $1,408,891 and $1,698,931, respectively. We record revenues from interest on notes receivable on the accrual basis as earned. The dates on which payments are collected may vary depending upon the term of the contracts or note receivable agreements. Interest income related to notes receivable is recorded when earned and its collectability is reasonably certain.

 

G Investments, LLC

 

Upon completion of the sale of the Colorado Grande Casino on May 25, 2012, we recorded a $2,325,000 note receivable. This note bears interest at 6% per annum through the maturity date of June 1, 2017 and is secured with all of the assets of the Colorado Grande Casino, pledge of membership interest in G Investments, LLC (“GI”), and a personal guaranty by GI’s principal.

 

As of October 31, 2015, the remaining principal and interest payments are scheduled to be made as follows:

 

·

Beginning November 1, 2015, nineteen monthly installments of principal and accrued interest of $40,000; and

·

A final installment of $797,705 which is due on the maturity date of June 1, 2017.

 

Through October 31, 2015, GI has timely made required principal and interest payments, including a prepayment of $100,000 in October, 2015.

 

Note 5. Goodwill and Intangible Assets

 

In connection with our acquisitions of the Washington mini-casinos on May 12, 2009, July 23, 2010 and July 18, 2011, as well as the South Dakota Gold slot route on January 27, 2012, we have goodwill and intangible assets of $20,105,984, net of amortization for intangible assets with finite lives. As a result of the sale of the Golden Nugget, Washington Gold’s goodwill was reduced by $74,958 during the six months ended October 31, 2015.

 

The change in the carrying amount of goodwill and other intangible assets for the six months ended October 31, 2015 is as follows:

 

		Total				Goodwill				Other intangible assets, net
Balance as of April 30, 2015		$	20,664,960			$	16,103,583			$	4,561,377
Current year amortization			(560,952	)			-				(560,952	)
Gaming license			76,934				-				76,934
Sale of Golden Nugget			(74,958	)			(74,958	)			-
Balance as of October 31, 2015		$	20,105,984			$	16,028,625			$	4,077,359

 

 

Goodwill and net other intangible assets by segment as of October 31, 2015 are as follows:

 

		Total				Goodwill				Other intangible assets, net
Washington Gold		$	17,193,010			$	14,092,154			$	3,100,856
South Dakota Gold			2,447,185				1,936,471				510,714
Corporate			465,789				-				465,789
Balance as of October 31, 2015		$	20,105,984			$	16,028,625			$	4,077,359

 

Intangible assets are generally amortized on a straight line basis over the useful lives of the assets.  State gaming registration and trade names are not amortizable. A summary of intangible assets and accumulated amortization as of October 31, 2015 are as follows:

 

		Gross Carrying Amount				Accumulated Amortization				Net
Customer relationships		$	7,853,321			$	(6,103,751	)		$	1,749,570
Non-compete agreements			1,269,000				(1,269,000	)			-
State gaming registration			465,789				-				465,789
Trade names			1,862,000				-				1,862,000
Total		$	11,450,110			$	(7,372,751	)		$	4,077,359

 

The useful lives of acquired intangibles related to customer relationships is 7.0 years. The estimated future annual amortization of intangible assets, which excludes trade names and state gaming registration, is as follows:

 

Period		Amount
November 2015-October 2016		$	928,683
November 2016-October 2017			579,515
November 2017-October 2018			202,086
November 2018-October 2019			39,286
Total		$	1,749,570

 

Note 6.   Other Assets 

 

Other assets consisted of the following:

 

		October 31, 2015				April 30, 2015
Deferred loan issue cost, net		$	355,033			$	261,323
Club Fortune deposit			1,500,000				-
Other			70,657				70,657
Other assets		$	1,925,690			$	331,980

 

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

 

On May 22, 2015, the Company announced that, through a wholly-owned subsidiary, it had entered into a definitive agreement with Gaming Ventures of Las Vegas, Inc. to acquire the assets of the Club Fortune Casino in Henderson, Nevada for a purchase price of $14.2 million in cash and approximately 1.2 million shares of the Company’s common stock. As of the quarter ended October 31, 2015, the Company had capitalized an additional $178,751 in deferred loan issue costs incurred for loan commitment fees from Mutual of Omaha bank to finance the acquisition through an expansion of the Company’s existing credit facility. In May of 2015, the Company paid a $1.5 million deposit towards the acquisition. See the Subsequent Event footnote for further information.

 

Note 7.   Long-Term Debt  

 

Our long-term financing obligations are as follows:

 

		October 31,				April 30,
		2015				2015
$12.75 million reducing revolving credit agreement, LIBOR plus an Applicable Margin, increasing quarterly reductions beginning March 31, 2014 through September 30, 2018, and the remaining $4,250,000 principal due on the maturity date of December 10, 2018		$	6,740,000			$	7,350,000
Less: current portion			-				-
Total long-term financing obligations		$	6,740,000			$	7,350,000

 

 

The interest rate on the borrowing is based on LIBOR plus an Applicable Margin, which is determined quarterly, based on the total leverage ratio for the trailing twelve month period. The interest rate on the balance as of October 31, 2015, is 3.194%. In addition, the Company was required to fix the interest rate on at least 50% of the borrowing through a swap agreement. For the six months ended October 31, 2015, we have paid $1,260,000 more than the scheduled principal reductions.

 

The Credit Facility contains customary covenants for a facility of this nature, including, but not limited to, covenants requiring the preservation and maintenance of the Company’s assets and covenants restricting our ability to merge, transfer ownership, incur additional indebtedness, encumber assets and make certain investments.  The Credit Facility also contains covenants requiring the Company to maintain certain financial ratios including a maximum total leverage ratio and lease adjusted fixed charge coverage ratio. We are in compliance with the covenant requirements of the Credit Facility as of October 31, 2015.

 

In connection with the refinancing transaction in the third quarter of fiscal 2014, the Company paid $450,000 in fees and other costs which have been capitalized and included in other assets on the condensed consolidated balance sheet. As of the six months ended October 31, 2015, the Company capitalized $178,751 in deferred loan issue costs incurred for loan commitment fees from Mutual of Omaha bank to finance the Club Fortune acquisition through an expansion of the Company’s existing credit facility. See the Subsequent Events footnote for further information.

 

Note 8.   Interest Rate Swap

 

We are required by the Credit Facility to have a secured interest rate swap for at least 50% of the remaining Credit Facility principal balance. As of October 31, 2015, the Company had one outstanding interest rate swap with MOOB with a notional amount of $4,937,500 at a swap rate of 1.52%, which as of October 31, 2015, effectively converts $4,937,500 of our floating-rate debt to a synthetic fixed rate of 4.52%. 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 October 31, 2015 is set at 0.19685%.

 

The Company did not designate the interest rate swap as a cash flow hedge and the interest rate swap did not qualify for hedge accounting under ASC Topic 815. Changes in our interest rate swap fair value are recorded in our condensed consolidated statements of operations. 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. As a result of our evaluation of our interest rate swap as of October 31, 2015, we recorded a $9,133 decrease in our interest rate swap fair value for the three months ended October 31, 2015. As of October 31, 2015, our interest rate swap fair value is a $66,867 liability which is included in other long-term liabilities on the condensed consolidated balance sheet.

 

Note 9.  Equity Transactions and Stock Option Plans 

 

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

 

The 2009 Plan

 

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

 

·

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

·

Options not intended to qualify as ISOs,

·

Stock Appreciation Rights, and

·

Restricted Stock Grants.

 

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

 

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

 

 

A summary of stock option activity under our share-based payment plans for the six months ended October 31, 2015 is presented below:

 

 

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Options				Price				Term (Year)				Value
Outstanding at April 30, 2015			895,000			$	1.08
Granted			-
Exercised			(135,000	)		$	1.33
Forfeited or expired			-
Outstanding at October 31, 2015			760,000			$	1.09				6.69			$	500,400
Exercisable at October 31, 2015			610,000			$	1.05				6.14			$	422,400
Available for grant at October 31, 2015			642,815

 

There were 135,000 stock options exercised during the six months ended October 31, 2015. As of October 31, 2015, there was a total of $99,380 of unamortized compensation cost related to stock options, which is expected to be recognized over a weighted-average of approximately 0.9 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 October 31, 2015, approximately 424,027 shares were issued under the 2010 Plan.

 

Note 10. Stock Offering and Warrants

 

On November 7, 2011, we closed on the sale of 2,625,652 shares of our common stock at a price of $1.65 per share to certain investors through a registered direct offering for the total proceeds of approximately $4,300,000, net of offering costs of approximately $444,000. In addition, for each share of our common stock purchased by an investor, we issued to such investor a warrant to purchase 0.75 shares of our common stock. The warrants have an exercise price of $2.18 per share and are exercisable for five years from the initial exercise date, which date is six months from the date of their issuance. The warrants expire on May 7, 2017. The proceeds of the offering were used to assist us in the $5,100,000 acquisition of South Dakota Gold.

 

 

Note 11.   Computation of Earnings Per Share

 

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

 

		Three Months Ended								Six Months Ended
		October 31,				October 31,				October 31,				October 31,
		2015				2014				2015				2014
Numerator:
Basic and Diluted:
Net income available to common shareholders		$	617,988			$	416,067			$	1,075,985			$	770,096
Denominator:
Basic weighted average number of common shares outstanding			16,489,409				16,213,307				16,453,307				16,206,721
Dilutive effect of common stock options and warrants			206,291				167,787				197,849				175,438
Diluted weighted average number of common shares outstanding			16,695,700				16,381,094				16,651,156				16,382,159
Net income per common share - basic		$	0.04			$	0.03			$	0.07			$	0.05
Net income per common share - diluted		$	0.04			$	0.03			$	0.07			$	0.05

 

Note 12.   Commitments and Contingencies  

 

As a result of acquiring facilities in Washington and South Dakota and our commitment to lease office space for our corporate headquarters in Las Vegas, Nevada, as of October 31, 2015, we have future annual minimum lease payments as follows:

 

Period		Corporate Office				Washington Gold				South Dakota Gold				Total
November 2015-October 2016		$	51,779			$	2,568,395			$	55,200			$	2,675,374
November 2016-October 2017			8,646				1,985,205				13,800				2,007,651
November 2017-October 2018			-				2,034,401				-				2,034,401
November 2018-October 2019			-				1,746,950				-				1,746,950
November 2019-October 2020			-				1,508,827				-				1,508,827
Thereafter			-				2,232,104				-				2,232,104
		$	60,425			$	12,075,882			$	69,000			$	12,205,307

 

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 13. Income Taxes 

 

For the three months ended October 31, 2015 and 2014, our effective income tax rates were a 33% and 32%, respectively. For the six months ended October 31, 2015 and 2014, our effective income tax rates were a 33% expense and 32%, respectively. The difference between the federal statutory rate of 34% and the effective tax rate is due to general business credits.

 

At October 31, 2015, we have $3.0 million in net deferred tax assets, which is primarily a result of the $7.8 million in receivables that have been fully reserved for book purposes. We believe that it is more-likely-than-not that the deferred tax assets will eventually be realized prior to any expiration and therefore we have not applied a valuation allowance on our deferred tax assets.

 

We filed income tax returns in the United States federal jurisdiction. No jurisdiction is currently examining our tax filings for any tax years.

 

Note 14.   Segment Reporting  

 

We have three business segments (i) Washington Gold, (ii) South Dakota Gold, and (iii) Corporate. For the three and six month periods ended October 31, 2015, the Washington Gold segment consists of the Washington mini-casinos, the South Dakota Gold segment consists of our slot route operation in South Dakota, and 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 loss and income and expenses not allocated to other reportable segments.

 

 

		As of and for the Three Months Ended  October 31, 2015
		Washington Gold				South Dakota Gold				Corporate				Total
Net revenue		$	13,727,547			$	2,406,666			$	-			$	16,134,213
Casino and food and beverage expense			7,226,799				2,070,219				-				9,297,018
Marketing and administrative expense			3,986,862				55,278				-				4,042,140
Facility, corporate and other expenses			523,218				29,201				741,642				1,294,061
Depreciation and amortization			332,251				153,362				3,096				488,709
Operating income (loss)			1,657,937				97,036				(744,738	)			1,010,235
Assets			22,102,034				1,615,510				19,691,911				43,409,455
Additions to property and equipment			102,533				58,739				-				161,272

 

		As of and for the Three Months Ended October 31, 2014
		Washington Gold				South Dakota Gold				Corporate				Total
Net revenue		$	13,718,817			$	2,640,397			$	616			$	16,359,830
Casino and food and beverage expense			7,470,038				2,234,565				-				9,704,603
Marketing and administrative expense			4,074,923				57,143				-				4,132,066
Facility, corporate and other expenses			570,233				35,536				555,149				1,160,918
Depreciation and amortization			369,110				172,225				3,285				544,620
Operating income (loss)			1,234,514				116,335				(558,346	)			792,503
Assets			16,392,191				2,072,793				25,822,837				44,287,821
Additions to property and equipment			157,050				236,941				43,598				437,589

 

 

		As of and for the Six Months Ended  October 31, 2015
		Washington Gold				South Dakota Gold				Corporate				Total
Net revenue		$	27,491,292			$	4,585,697			$	-			$	32,076,989
Casino and food and beverage expense			14,676,317				3,981,310				-				18,657,627
Marketing and administrative expense			8,053,695				129,400				-				8,183,095
Facility, corporate and other expenses			1,046,043				65,191				1,491,109				2,602,343
Depreciation and amortization			688,429				304,882				6,192				999,503
Segment operating income (loss)			3,192,695				100,457				(1,497,301	)			1,795,851
Segment assets			22,102,034				1,615,510				19,691,911				43,409,455
Additions to property and equipment			198,930				78,555				-				277,485

 

		As of and for the Six Months Ended October 31, 2014
		Washington Gold				South Dakota Gold				Corporate				Total
Net revenue		$	27,060,855			$	5,218,441			$	1,848			$	32,281,144
Casino and food and beverage expense			14,723,455				4,462,007				-				19,185,462
Marketing and administrative expense			8,109,727				141,311				-				8,251,038
Facility, corporate and other expenses			1,084,934				45,531				1,168,376				2,298,842
Depreciation and amortization			739,792				344,891				4,972				1,089,655
Segment operating income (loss)			2,401,979				209,109				(1,172,028	)			1,439,060
Segment assets			16,392,191				2,072,793				25,822,837				44,287,821
Additions to property and equipment			283,503				291,986				43,598				619,087

 

Note 15.   Subsequent Event  

 

The Company, through a wholly-owned subsidiary, acquired the assets of the Club Fortune Casino in Henderson, Nevada for a purchase price of $14,159,623 in cash and 1,190,476 restricted shares of the Company’s common stock. The December 1, 2015 acquisition was financed through an expansion of the Company’s existing credit facility to $23.0 million. The amended facility is scheduled to mature on November 30, 2020 and is secured by liens on substantially all of the real and personal property of the Company and its subsidiaries. The interest rate on the borrowing is based on LIBOR plus an Applicable Margin, which is determined quarterly, based on the total leverage ratio for the trailing twelve month period. The initial Applicable Margin is 4.00% until the first rate adjustment on April 1, 2016. In addition, the Company is required to fix the interest rate for 50% of the facility by December 30, 2015 through a swap agreement. Quarterly commitment reductions of $625,000 begin January 31, 2016. The Company’s debt balance after the acquisition was $20.7 million leaving $2.3 million in availability and no principal payments required until October 2016.

 

The Amended Credit Facility contains customary covenants for a facility of this nature, including, but not limited to, covenants requiring the preservation and maintenance of the Company’s assets and covenants restricting our ability to merge, transfer ownership, incur additional indebtedness, encumber assets and make certain investments.  The Credit Facility also contains covenants requiring the Company to maintain certain financial ratios including a maximum total leverage ratio ranging from 3.00 to 1.00 through January 31, 2017, 2.75 to 1.00 from February 1, 2017 through January 31, 2018, and 2.50 to 1.00 from February 1, 2018 until maturity; and lease adjusted fixed charge coverage ratio of no less than 1.15 to 1.00.

 

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

 

The following discussion and analysis (“MD&A”) should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report for the year ended April 30, 2015, filed on Form 10-K with the SEC on July 27, 2015.

 

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements. We prepare these financial statements in conformity with GAAP. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report for the year ended April 30, 2015, filed on Form 10-K with the SEC on July 27, 2015.

 

Executive Overview

 

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

 

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

 

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2015 AND OCTOBER 31, 2014

 

Net revenues. Net revenues were $16.1 million for the three month period ended October 31, 2015, and $16.4 million for the same period ended October 31, 2014. Washington revenues were even at $13.7 million for the quarter in the current and prior year in spite of the impact of selling the Golden Nugget property at the end of June 2015, which generated $0.7 million in net revenue during the prior year’s quarter. South Dakota revenues decreased $0.2 million, or 9%, due to lower handle as a result of 45 fewer units in operation. Overall, consolidated casino revenue decreased by $0.2 million.

 

Total operating expenses. Total operating expenses decreased $0.4 million to $15.1 million for the three month period ended October 31, 2015, compared to the same period ended October 31, 2014. Casino expenses decreased $0.3 million, or 4%, when compared to the same period last year primarily due to the sale of the Golden Nugget property and lower revenue driven commissions and gaming taxes in South Dakota, partially offset by increased employee insurance cost. Corporate expenses increased $0.2 million, or 34%, when compared to the same period last year primarily due to acquisition related expenses of $0.1 million and board of director’s stock compensation. Marketing and administration, facilities, food and beverage, depreciation and amortization and other expenses remained relatively steady when compared to the same period last year on a same property basis.

 

Non-operating income (expense). Net interest expense decreased $0.1 million, or 45%, for the three month period ended October 31, 2015, compared to the three month period ended October 31, 2014. The decrease resulted primarily from the $3.5 million reduction of outstanding debt since October 31, 2014.

 

Income Taxes. For the three months ended October 31, 2015, our effective income tax rate was 33% compared to 32% in the prior year’s quarter ended October 31, 2014. The difference between the federal statutory rate of 34% and the effective tax rate for the quarter is due to the utilization of general business credits.

 

COMPARISON OF THE SIX MONTHS ENDED OCTOBER 31, 2015 AND OCTOBER 31, 2014

 

Net revenues. Net revenues were $32.1 million for the six month period ended October 31, 2015, and $32.3 million for the same period ended October 31, 2014. Washington revenues were $27.5 million this year compared to $27.1 million in the prior year period. Washington ‘same property’ revenues increased $1.3 million over prior year considering our June 30, 2015 sale of the Golden Nugget property, which generated net revenue of $0.9 million in the July through October period last year. South Dakota revenues decreased $0.6 million, or 12%, due to lower handle as a result of fewer units in operation. Overall, consolidated casino revenue decreased by $0.2 million.

 

Total operating expenses. Total operating expenses decreased $0.6 million to $30.3 million for the six month period ended October 31, 2015, compared to the same period ended October 31, 2014. Casino expenses decreased $0.5 million, or 3%, when compared to the same period last year primarily due to the sale of the Golden Nugget property and lower revenue driven commissions and gaming taxes in South Dakota, partially offset by increased employee insurance cost. Corporate expenses increased $0.4 million, or 31%, when compared to the same period last year primarily due to acquisition related expenses of $0.3 million and employee and director compensation. Marketing and administration, facilities, food and beverage, depreciation and amortization and other expenses remained relatively steady when compared to the same period last year on a same property basis.

 

 

Non-operating income (expense). Net interest expense decreased $0.1 million, or 37%, for the six month period ended October 31, 2015, compared to the six month period ended October 31, 2014. The decrease resulted primarily from the $3.5 million reduction of outstanding debt since October 31, 2014.

 

Income Taxes. For the six months ended October 31, 2015, our effective income tax rate was 33% compared to 31% in the prior year’s six months ended October 31, 2014. The difference between the federal statutory rate of 34% and the year to date effective tax rate is due to the utilization of general business credits.

 

Non-GAAP Financial Measures

 

The term “adjusted EBITDA” is used by us in presentations, quarterly earnings calls, and other instances as appropriate. Adjusted EBITDA is defined as net income before interest, income taxes, depreciation and amortization, non-cash goodwill and other long-lived asset impairment charges, write-offs of project development costs, acquisition costs, litigation charges, non-cash stock grants, non-cash employee stock purchase plan discounts, exclusion of net income or loss from assets held for sale, and net losses/gains from asset dispositions. Adjusted EBITDA 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 segment for the three months ended October 31, 2015 and October 31, 2014:

 

		For the three months ended October 31, 2015
		Washington Gold				South Dakota Gold				Corporate - Other				Total
Revenues:
Gross revenues		$	14,784,720			$	2,411,766			$	-			$	17,196,486
Less promotional allowances			(1,057,173	)			(5,100	)			-				(1,062,273	)
Net revenues			13,727,547				2,406,666				-				16,134,213
Adjusted EBITDA		$	1,995,624			$	251,968			$	(580,686	)		$	1,666,906

 

		For the three months ended October 31, 2014
		Washington Gold				South Dakota Gold				Corporate - Other				Total
Revenues:
Gross revenues		$	14,803,690			$	2,644,547			$	616			$	17,448,853
Less promotional allowances			(1,084,873	)			(4,150	)			-				(1,089,023	)
Net revenues			13,718,817				2,640,397				616				16,359,830
Adjusted EBITDA		$	1,604,721			$	313,154			$	(524,253	)		$	1,393,622

 

 

The following table shows adjusted EBITDA by segment for the six months ended October 31, 2015 and October 31, 2014:

 

		For the six months ended October 31, 2015
		Washington Gold				South Dakota Gold				Corporate - Other				Total
Revenues:
Gross revenues		$	29,594,722			$	4,596,242			$	-			$	34,190,964
Less promotional allowances			(2,103,430	)			(10,545	)			-				(2,113,975	)
Net revenues			27,491,292				4,585,697				-				32,076,989
Adjusted EBITDA		$	3,728,103			$	409,795			$	(1,119,836	)		$	3,018,062

 

		For the six months ended October 31, 2014
		Washington Gold				South Dakota Gold				Corporate - Other				Total
Revenues:
Gross revenues		$	29,179,101			$	5,228,942			$	1,848			$	34,409,891
Less promotional allowances			(2,118,247	)			(10,500	)			-				(2,128,747	)
Net revenues			27,060,854				5,218,442				1,848				32,281,144
Adjusted EBITDA		$	3,120,637			$	570,562			$	(1,098,055	)		$	2,593,144

 

Adjusted EBITDA reconciliation to net income:
		For the three months ended
		October 31, 2015				October 31, 2014
Net income		$	617,988			$	416,067
Adjustments:
Net interest expense and change in swap fair value			91,125				169,095
Income tax expense			301,122				199,802
Depreciation and amortization			488,709				544,620
Acquisition expenses			80,660				-
Stock compensation and employee stock purchases			80,300				30,281
Loss on sale of assets			2,050				25,120
Write off of marketable securities			-				7,539
Deferred rent amortization			4,952				1,098
Adjusted EBITDA		$	1,666,906			$	1,393,622

 

		For the six months ended
		October 31, 2015				October 31, 2014
Net income		$	1,075,985			$	770,096
Adjustments:
Net interest expense and change in swap fair value			191,232				308,595
Income tax expense			528,634				352,830
Depreciation and amortization			999,503				1,089,655
Acquisition expenses			260,780				-
Stock compensation and employee stock purchases			110,495				45,145
Loss (gain) on sale of assets			(161,430	)			17,087
Write off of marketable securities			-				7,539
Deferred rent amortization			12,863				2,197
Adjusted EBITDA		$	3,018,062			$	2,593,144

 

 

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 six month periods ended October 31, 2015 and October 31, 2014:

 

		Six Months Ended
		October 31,				October 31,
		2015				2014
Net cash provided by (used in):
Operating activities		$	1,816,113			$	2,556,720
Investing activities		$	(1,263,859	)		$	(392,691	)
Financing activities		$	(580,442	)		$	(2,131,214	)

 

Operating activities. Net cash provided by operating activities during the six month period ended October 31, 2015, decreased by $740,607 over the comparable period in the prior fiscal year. This decrease mainly resulted from the timing of current liability payments and the payouts of accrued gaming progressives.

 

Investing activities. Net cash used in investing activities during the six month period ended October 31, 2015 increased by $871,168 over the comparable period in the prior fiscal year primarily due to the $1.5 million deposit paid toward the Club Fortune Casino acquisition, partially offset by the $0.3 million proceeds from the asset sale of the Golden Nugget casino and $0.3 million decrease in purchases of property and equipment.

 

Financing activities. Net cash used by financing activities during the six month period ended October 31, 2015 decreased $1,550,772 over the comparable period in the prior fiscal year. The increase mainly resulted from the additional draw down of the Company’s credit agreement to fund the $1.5 million Club Fortune deposit.

 

Future Sources and Uses of Cash

 

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

 

- capital requirements related to future acquisitions;

- cash flow from operations;

- working capital requirements;

- obtaining debt financing; and

- debt service requirements.

 

The Company, through a wholly-owned subsidiary, acquired the assets of the Club Fortune Casino in Henderson, Nevada for a purchase price of $14,159,623 in cash and 1,190,476 restricted shares of the Company’s common stock. The December 1, 2015 acquisition was financed through an expansion of the Company’s existing credit facility to $23.0 million. The amended facility is scheduled to mature on November 30, 2020 and is secured by liens on substantially all of the real and personal property of the Company and its subsidiaries. The interest rate on the borrowing is based on LIBOR plus an Applicable Margin, which is determined quarterly, based on the total leverage ratio for the trailing twelve month period. The initial Applicable Margin is 4.00% until the first rate adjustment on April 1, 2016. In addition, the Company is required to fix the interest rate for 50% of the facility by December 30, 2015 through a swap agreement. Quarterly commitment reductions of $625,000 begin January 31, 2016. The Company’s debt balance after the acquisition was $20.7 million leaving $2.3 million in availability and no principal payments required until October 2016.

 

The Club Fortune Casino includes a 35,000 square foot building and 8 acres of land. The casino floor has approximately 25,000 square feet of gaming space, over 500 slot machines and 7 table games including a poker room. The facility also has a restaurant, two bars, an entertainment lounge, snack bar and gift shop.

 

 

On October 31, 2015, excluding restricted cash of $1,441,007, we had cash and cash equivalents of $8,513,482. The restricted cash consists of funds for player supported jackpots.

 

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

 

Liquidity

 

The current ratio is an indication of a company’s market liquidity and ability to meet creditor’s demands. Acceptable current ratios vary from industry to industry and are generally between 1.25 and 3.0 for healthy businesses. If a company’s current ratio is in this range, then it generally indicates good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. As of October 31, 2015, we have a 2.9 ratio, which is sufficient to service debt and maintain operations.

 

Off-Balance Sheet Arrangements

 

None.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4.   Controls and Procedures

 

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

 

In accordance with Rules 13a-15 and 15d-15 of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our President and CFO, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. As a result of our evaluation, they concluded that our disclosure controls and procedures were effective as of October 31, 2015.

 

Changes in internal controls over financial reporting. There have not been any changes in our control over financial reporting during the three months ended October 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1.   Legal Proceedings

 

We are not currently involved in any material legal proceedings.

 

Item 1A. Risk Factors

 

There have been no material changes in our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2015, filed with the SEC on July 27, 2015.

 

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

 

None.

 

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information

 

None.

 

Item 6.   Exhibits

 

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

 

INDEX TO EXHIBITS

 

EXHIBIT NUMBER		DESCRIPTION
10.1		First Amendment to Asset Purchase Agreement between Colorado Grande Enterprises, Inc., as seller, and G Investments, LLC, as purchaser (filed previously as Exhibits 10.1 to the Company’s Form 8-K filed May 29, 2012).
10.2		Credit Agreement dated December 10, 2013 by and among Mutual of Omaha Bank, as the Lender, Nevada Gold & Casinos, Inc., as parent, and Restricted Subsidiaries, as borrower (filed previously as Exhibits 10.9 to the Company’s Form 10-Q filed December 23, 2013).
10.3		Amended and Restated Credit Agreement dated November 30, 2015 by and among Mutual of Omaha Bank, as the Lender, Nevada Gold & Casinos, Inc., as parent, and Restricted Subsidiaries, as borrower (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed December 3, 2015).
10.4		Asset Purchase Agreement between Gaming Ventures of Las Vegas, Inc., as seller, and Nevada Gold & Casinos LV, LLC, as buyer (filed previously as Exhibit 10.1 to the Company’s Form 8-K filed May 22, 2015).
31.1(*)		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2(*)		Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(*)		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(*)		Certification Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema
101.CAL		XBRL Taxonomy Calculation Linkbase
101.DEF		XBRL Taxonomy Definition Linkbase
101.LAB		XBRL Taxonomy Label Linkbase
101.PRE		XBRL Taxonomy Presentation Linkbase

 

* Filed herewith.

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

 

 

SIGNATURES

 

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

 

Date: December 15, 2015

 

	Nevada Gold & Casinos, Inc.
	By:	/s/ James D. Meier
	James D. Meier
	Chief Financial Officer
	(Principal Financial Officer)