The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
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 July 31, 2018 and April 30, 2018, condensed consolidated statements of operations for the three months ended July 31,
2018 and 2017, and condensed consolidated statements of cash flows for the three months ended July 31, 2018 and 2017. 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, 2018 and the notes thereto
included in our Annual Report on Form 10-K. The results of operations for the three months ended July 31, 2018 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 operating income, net income, working capital or stockholders’ equity. As of July 27, 2018, Club Fortune met the
requirements for presentation as assets held for sale and discontinued operations under generally accepted accounting principles
(see Note 13). Accordingly, the operations of Club Fortune have been classified as discontinued operations and Club Fortune’s
assets and liabilities have been classified as held for sale for all periods presented.
Note 2.
Significant Accounting Policies
Revenue Recognition
During the current quarter,
we adopted Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers
(“ASC 606”) using
a modified retrospective approach as of the date of initial application, which was May 1, 2018. See Note 2, “New Accounting
Pronouncements and Legislation Issued,” for a discussion of the new revenue standard and its impact on our unaudited Condensed
Consolidated Financial Statements. Prior to the adoption of ASC 606, complimentary revenues pertaining to food and beverage and
other were included in gross revenues and excluded from net revenues through promotional allowances in the unaudited Condensed
Consolidated Statements of Operations. Subsequent to the adoption of ASC 606, complimentary revenues are included in food and beverage,
and other revenues, as appropriate, in the unaudited Condensed Consolidated Statements of Operations. Complimentary other revenues,
whether provided as nondiscretionary complimentaries or discretionary complimentaries, were as follows for continuing operations:
|
|
Three Months Ended
|
|
|
|
July 31, 2018
|
|
|
July 31, 2017
|
|
Food and beverage
|
|
$
|
937,446
|
|
|
$
|
979,734
|
|
Other
|
|
|
39,361
|
|
|
|
41,658
|
|
Total complimentries
|
|
$
|
976,807
|
|
|
$
|
1,021,392
|
|
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 for which we make our own assumptions about how market participants would
price the assets and liabilities.
The following describes the valuation
methodologies used by 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
Leases
In February 2016, the Financial
Accounting Standards Board (“FASB”) issued amended accounting guidance that changes the accounting for leases and requires
expanded disclosures about leasing activities. Under the new guidance, lessees will be required to recognize a right-of-use asset
and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months.
Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with
the lessee accounting model and with the updated revenue recognition guidance. Lessees and lessors must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. The amended guidance is effective for annual reporting periods (including interim periods within those
periods) beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the impact
this guidance will have on its financial position and results of operations.
Revenue Recognition
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
, which introduced a new standard
related to revenue recognition, ASC 606. Under ASC 606, recognition of revenue occurs when a customer obtains control of promised
goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods
or services. In addition, the new revenue standard requires disclosure of the nature, amount, timing, and uncertainty of revenue
and cash flows arising from customer contracts. In July 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers
- Deferral of the Effective Date
, which deferred the implementation of ASC 606 to be effective for fiscal years beginning after
December 15, 2017.
The Company adopted ASC 606 during
the first quarter 2019 using the modified retrospective approach to all contracts as of the date of initial application, which
was May 1, 2018. Adoption of the new revenue standard principally affected (1) how we measure the liability associated with our
loyalty program and (2) the classification and, as it related to the measurement of revenues and expenses between gaming; food
and beverage; and retail, and other. The modified retrospective approach required the Company to recognize the impact of adopting
ASC 606 as a cumulative effect adjustment to our beginning retained earnings, which was an decrease of $35,425 as of May 1, 2018.
The cumulative effect adjustment related exclusively to re-measuring the liability associated with the loyalty program from a cost
approach to an approach that reflects the estimated stand alone selling price (SSP) of the reward credits and certain tier benefits.
In addition, the modified retrospective approach required the Company to provide disclosures describing the financial statement
line items impacted by the new revenue standard (see below).
Prior to the adoption of ASC 606,
we determined our liability for loyalty reward credits based on the estimated costs of goods and services to be provided and estimated
redemption rates. Upon adoption of ASC 606, points awarded under our loyalty program constitute a material right and, as such,
represent a performance obligation associated with the gaming contracts. Therefore, ASC 606 required us to allocate the revenues
associated with the players’ activity between gaming revenue and the estimated SSP of the reward credits.
In addition to the above, prior
to the adoption of ASC 606, complimentary revenues pertaining to food and beverage and retail were included in gross revenues and
excluded from net revenues through promotional allowances in the unaudited Condensed Consolidated Statements of Operations and
the estimated costs of providing such complimentary goods and services were included as gaming expenses in the unaudited Condensed
Consolidated Statements of Operations. However, subsequent to the adoption of ASC 606, food and beverage, and other services furnished
to our guests on a complimentary basis is measured at the estimated SSP and included as revenues within food and beverage and other
as appropriate, in the unaudited Condensed Consolidated Statements of Operations, with a corresponding decrease in gaming revenues.
Additionally, subsequent to the adoption of ASC 606, the costs of providing such complimentary goods and services is included as
expenses within food and beverage and other as appropriate, in the unaudited Condensed Consolidated Statements of Operations.
The amount by which each line item
in continuing operations in our unaudited Condensed Consolidated Statement of Operations for the three months ended July 31, 2018
was affected by the new revenue standard as compared with the accounting guidance that was in effect before the change was as follows:
|
|
For the three months ended July 31, 2018
|
|
|
|
As Reported -
With Adoption of
ASC 606
|
|
|
As Adjusted -
Without Adoption
of ASC 606
|
|
|
Effect of Accounting
Change
Increase/(Decrease)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
12,012,719
|
|
|
$
|
12,985,848
|
|
|
$
|
(973,129
|
)
|
Food and beverage
|
|
|
2,489,377
|
|
|
|
2,489,377
|
|
|
|
-
|
|
Other
|
|
|
378,073
|
|
|
|
378,073
|
|
|
|
-
|
|
Gross revenues
|
|
|
14,880,169
|
|
|
|
15,853,298
|
|
|
|
(973,129
|
)
|
Less promotional allowances
|
|
|
-
|
|
|
|
(976,807
|
)
|
|
|
976,807
|
|
Net revenues
|
|
|
14,880,169
|
|
|
|
14,876,491
|
|
|
|
3,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
|
6,172,939
|
|
|
|
6,986,273
|
|
|
|
(813,334
|
)
|
Food and beverage
|
|
|
2,203,490
|
|
|
|
1,417,389
|
|
|
|
786,101
|
|
Other
|
|
|
58,779
|
|
|
|
27,868
|
|
|
|
30,911
|
|
Marketing and administrative
|
|
|
4,474,984
|
|
|
|
4,474,984
|
|
|
|
-
|
|
Facility
|
|
|
448,474
|
|
|
|
448,474
|
|
|
|
-
|
|
Corporate
|
|
|
1,231,729
|
|
|
|
1,231,729
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
130,439
|
|
|
|
130,439
|
|
|
|
-
|
|
Gain on sale of assets
|
|
|
(57,692
|
)
|
|
|
(57,692
|
)
|
|
|
-
|
|
Total operating expenses
|
|
|
14,663,142
|
|
|
|
14,659,464
|
|
|
|
3,678
|
|
Operating income
|
|
$
|
217,027
|
|
|
$
|
217,027
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(51,844
|
)
|
|
$
|
(51,844
|
)
|
|
$
|
-
|
|
Restricted Cash
In November 2016, the FASB issued
ASU No. 2016-18,
Statement of Cash Flows - Restricted Cash (Topic 230)
, which amends the existing guidance relating
to the disclosure of restricted cash and restricted cash equivalents on the statement of cash flows. The ASU requires that amounts
generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this guidance
on May 1, 2018 on a retrospective basis and the updated disclosures are reflected for the periods presented in the Condensed Consolidated
Statements of Cash Flows. For the three months ended July 31, 2017, the change in restricted cash of ($49,141) was previously
reported within net cash provided by (used in) operating activities.
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 consolidated financial statements.
Note 3. Restricted Cash
As of July 31, 2018 and April
30, 2018, we maintained $2,517,272 and $2,369,063, respectively, in restricted cash, which consists of player-supported jackpot
funds for our Washington operations.
Note 4. 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, we have goodwill and intangible assets of $16,366,658,
net of amortization for intangible assets with finite lives.
The change in the carrying amount
of goodwill and other intangible assets for the three months ended July 31, 2018, is as follows:
|
|
Total
|
|
|
Goodwill
|
|
|
Other
Intangibles, net
|
|
Balance as of April 30, 2018
|
|
$
|
16,381,639
|
|
|
$
|
14,092,154
|
|
|
$
|
2,289,485
|
|
Current year amortization
|
|
|
(14,981
|
)
|
|
|
-
|
|
|
|
(14,981
|
)
|
Balance as of July 31, 2018
|
|
$
|
16,366,658
|
|
|
$
|
14,092,154
|
|
|
$
|
2,274,504
|
|
Goodwill and net intangibles assets
by segment as of July 31, 2018, are as follows:
|
|
Total
|
|
|
Goodwill
|
|
|
Other
Intangibles, net
|
|
Washington
|
|
$
|
15,954,154
|
|
|
$
|
14,092,154
|
|
|
$
|
1,862,000
|
|
Corporate
|
|
|
412,504
|
|
|
|
-
|
|
|
|
412,504
|
|
Total
|
|
$
|
16,366,658
|
|
|
$
|
14,092,154
|
|
|
$
|
2,274,504
|
|
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 July 31, 2018, are as follows:
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer relationships
|
|
$
|
6,753,321
|
|
|
$
|
(6,753,321
|
)
|
|
$
|
-
|
|
Non-compete agreements
|
|
|
1,018,000
|
|
|
|
(1,018,000
|
)
|
|
|
-
|
|
State gaming registration
|
|
|
412,504
|
|
|
|
-
|
|
|
|
412,504
|
|
Trade names
|
|
|
1,862,000
|
|
|
|
-
|
|
|
|
1,862,000
|
|
Total
|
|
$
|
10,045,825
|
|
|
$
|
(7,771,321
|
)
|
|
$
|
2,274,504
|
|
Goodwill represents the excess
of the purchase price over the fair market value of net assets acquired. Goodwill for our Nevada operations was $2.7 million as
of July 31, 2018 (see Note 13).
Note 5.
Property and Equipment
Property and equipment at July 31, 2018 and April 30, 2018, consist of the following:
|
|
July 31,
2018
|
|
|
April 30,
2018
|
|
|
Estimated
Service Life
in Years
|
Building and improvements
|
|
$
|
1,661,367
|
|
|
$
|
1,653,534
|
|
|
15-39
|
Gaming equipment
|
|
|
2,391,596
|
|
|
|
2,391,596
|
|
|
3-5
|
Furniture and office equipment
|
|
|
3,553,252
|
|
|
|
3,500,778
|
|
|
3-7
|
Land and improvements
|
|
|
87,750
|
|
|
|
87,750
|
|
|
n/a
|
Leasehold improvements
|
|
|
1,715,221
|
|
|
|
1,711,641
|
|
|
7-20
|
Construction in progress
|
|
|
70,570
|
|
|
|
57,916
|
|
|
|
|
|
|
9,479,756
|
|
|
|
9,403,215
|
|
|
|
Less accumulated depreciation
|
|
|
(6,264,305
|
)
|
|
|
(6,148,848
|
)
|
|
|
Property and equipment, net
|
|
$
|
3,215,451
|
|
|
$
|
3,254,367
|
|
|
|
Note 6.
Long-Term Debt
Our long-term financing obligations are as follows:
|
|
July 31,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2018
|
|
$23.0 million reducing revolving credit agreement, LIBOR plus an Applicable Margin, $625,000 quarterly reductions beginning January 31, 2016 through November 30, 2020, and the remaining principal due on the maturity date of November 30, 2020, net of accumulated debt issuance costs of $82,206 and $104,760 at July 31, 2018 and April 30, 2018, respectively.
|
|
$
|
6,817,794
|
|
|
$
|
7,895,240
|
|
Total long-term financing obligations
|
|
$
|
6,817,794
|
|
|
$
|
7,895,240
|
|
On November 30, 2015, the
Company amended its existing credit agreement with Mutual of Omaha Bank to increase the lending commitment to $23 million.
The Amended and Restated Credit Agreement (“Credit Facility”) matures 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, determined quarterly beginning April 1, 2016, based on the total leverage ratio for
the trailing twelve months. The interest rate on the balance as of July 31, 2018, is 4.58%. In addition, the Company was required
to fix the interest rate on at least 50% of the credit facility through a swap agreement.
As of July 31, 2018, principal
reductions due on the Credit Facility are as follows:
August 1, 2018 – July 31, 2019
|
|
$
|
-
|
|
August 1, 2019 – July 31, 2020
|
|
|
-
|
|
August 1, 2020 – November 30, 2020
|
|
|
6,900,000
|
|
Total payments
|
|
|
6,900,000
|
|
Unamortized debt discount
|
|
|
(82,206
|
)
|
Total long-term debt
|
|
$
|
6,817,794
|
|
The unamortized debt discount above
consists of debt costs paid directly to the lender. The discount is amortized using the effective interest method over the period
of the Credit Facility through interest expense.
During the quarter, we paid $1.1
million to reduce the outstanding balance of the Credit Facility. As of July 31, 2018, we have $9.2 million available to borrow
per the Credit Agreement.
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 of 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.
We are in compliance with the covenant requirements of the Credit Facility as of July 31, 2018.
Note 7.
Interest Rate Swap
We are required by the Credit
Facility to have a secured interest rate swap for at least 50% of the Credit Facility commitment. On December 28, 2015, 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 through the maturity date of the Credit Facility. As of July 31, 2018, the Company had one outstanding interest
rate swap with MOOB with a notional amount of $8,062,500 at a swap rate of 1.77%, which as of July 31, 2018, effectively converts
our floating-rate debt to a synthetic fixed rate of 4.27%. Under the terms of the swap agreement, the Company pays a fixed rate
of 1.77% and a 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 July 31, 2018 is set
at 2.08%.
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. 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. As a result of our evaluation of our interest rate swap
as of July 31, 2018, we recorded a $4,189 increase in our interest rate swap fair value for the three months ended July 31, 2018.
As of July 31, 2018 and April 30, 2018, our interest rate swap fair value is a $138,861 and $134,672 asset, which is included in
other assets as of July 31, 2018 and April 30, 2018 on the condensed consolidated balance sheets.
Note 8.
Equity
Transactions and Stock Option Plan
We have obligations under our 2009
Equity Incentive 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 2009 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.
During the quarter ended July 31,
2018, there were no stock grants issued, vested or forfeited. As of July 31, 2018, there were 69,200 unvested stock grants at a
weighted average $2.23 value per share, as well as $105,817 of unamortized compensation cost related to stock grants, which is
expected to be recognized over approximately 2.2 years.
A summary of stock option activity
under our share-based payment plan for the three months ended July 31, 2018 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (Year)
|
|
|
Value
|
|
Outstanding at April 30, 2018
|
|
|
676,000
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2018
|
|
|
676,000
|
|
|
$
|
1.10
|
|
|
|
4.0
|
|
|
$
|
626,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 31, 2018
|
|
|
676,000
|
|
|
$
|
1.10
|
|
|
|
4.0
|
|
|
$
|
626,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at July 31, 2018
|
|
|
507,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation cost for stock options
granted is based on the fair value of each award, measured by applying the Black-Scholes model. As of July 31, 2018, there was
no unamortized compensation cost related to stock options.
Treasury Stock
In July 2016, our board of directors
approved a $2.0 million stock repurchase program to purchase our common stock in the open market or in privately negotiated transactions
from time to time, in compliance with Rule 10b-18 of the Securities and Exchange Act of 1934, subject to market conditions,
applicable legal requirements, loan covenants and other factors. The repurchase plan does not obligate the Company to acquire any
specified number or value of common stock. During the three months ended July 31, 2018, the Company did not repurchase any
shares. As of July 31, 2018, $1.7 million remains available under the share repurchase authorization.
Note 9.
Computation
of Earnings Per Share
The following is presented as a
reconciliation of the numerators and denominators of basic and diluted earnings per share computations:
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
85,594
|
|
|
$
|
73,015
|
|
Net (loss) income from discontinued operations
|
|
$
|
(137,438
|
)
|
|
$
|
50,987
|
|
Net (loss) income
|
|
$
|
(51,844
|
)
|
|
$
|
124,002
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
|
|
16,848,182
|
|
|
|
17,425,581
|
|
Dilutive effect of common stock options and warrants
|
|
|
331,741
|
|
|
|
359,333
|
|
Diluted weighted average number of common shares outstanding
|
|
|
17,179,923
|
|
|
|
17,784,914
|
|
|
|
|
|
|
|
|
|
|
Per share information:
|
|
|
|
|
|
|
|
|
Net income from continuing operations per common share - basic
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Net income from continuing operations per common share - diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Net (loss) income from discontinued operations per common share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
Net (loss) income per common share - basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
Securities that could potentially dilute basic earnings
per share were not included in the computation of diluted earnings per share because to do so would have been antidilutive for
the periods presented.
Note 10.
Commitments
and Contingencies
We are party to contracts in the
ordinary course of business, including leases for real property and operating leases for equipment.
The expected remaining future annual
minimum lease payments as of July 31, 2018, are as follows:
Period
|
|
Total
|
|
August 2018 - July 2019
|
|
$
|
3,298,251
|
|
August 2019 - July 2020
|
|
|
3,226,007
|
|
August 2020 - July 2021
|
|
|
3,086,663
|
|
August 2021 - July 2022
|
|
|
1,910,944
|
|
Thereafter
|
|
|
1,290,752
|
|
|
|
$
|
12,812,617
|
|
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 11. Income Taxes
The Tax Cuts and Jobs Act (“Tax
Act”) was enacted on December 22, 2017. The Tax Act reduces the US federal corporate tax rate from 35% to 21%. At July 31,2018,
we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below,
we have made a reasonable estimate of the effects on our existing deferred tax balances. For any amounts we have not been able
to make a reasonable estimate, we will continue to account for those items based on our existing accounting under ASC 740, Income
Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. In all cases, we will continue to
make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain
a more thorough understanding of the tax law.
Given the significance of the legislation,
the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No.
118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar
to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the
registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period,
impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made,
and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed. SAB 118 summarizes
a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change
in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of
the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate
cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Act.
Several provisions of the Tax Act
have significant impact on our U.S. tax attributes, generally consisting of credits, loss carry-forwards, and reserved notes. Although
we have made a reasonable estimate of the gross amounts of the attributes disclosed, the Company is continuing to analyze certain
aspects of the Tax Act and is refining its calculations which could potentially affect the measurements of these balances or potentially
give rise to new deferred tax amounts. Other significant provisions that are not yet effective, but may impact income taxes in
future years, include: limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable
income and a limitation of net operating losses generated after December 31, 2017 to 80 percent of taxable income.
For the three months ended July
31, 2018 and 2017, our effective tax rates were 22% and 33%, respectively. The difference between the federal statutory rate of
21% and the 2018 year to date’s effective tax rate is primarily due to nondeductible expenses. The difference between the
2017 federal statutory rate of 34.0% and the 2017 fiscal year to date effective tax rate was primarily due to utilization of general
business credits.
At July 31, 2018, we have $0.7
million in net deferred tax assets, which is primarily a result of net operating losses. We believe that it is more-likely-than-not
that the deferred tax assets will 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. All of the Company’s
tax positions are considered more likely than not to be sustained upon an IRS examination.
Note 12.
Segment
Reporting
We have three business segments:
(i) Washington, (ii) South Dakota and (iii) Nevada, as well as the Company’s corporate location. For the three months ended
July 31, 2018, the Washington segment consists of the Washington mini-casinos, the South Dakota segment consists of our slot route
operation in South Dakota, the Nevada segment consists of Club Fortune casino and the Corporate column includes the vacant land
in Colorado and its taxes and maintenance expenses. As discussed in Note 13, in the three months ended July 31, 2018, the Nevada
reportable segment met the requirements to be classified as a discontinued operation. As a result, the operations of Nevada have
been excluded from the segment reporting below. See Note 13 for information related to the Nevada segment. The Corporate column
also includes corporate-related items, results of insignificant operations, and income and expenses not allocated to other reportable
segments.
Summarized financial information for our reportable
segments from continuing operations is shown in the following table:
|
|
As of, and for the Three Months Ended, July 31, 2018
|
|
|
|
Washington
|
|
|
South Dakota
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
14,051,615
|
|
|
$
|
828,554
|
|
|
$
|
-
|
|
|
$
|
14,880,169
|
|
Casino and food and beverage expense
|
|
|
7,438,269
|
|
|
|
938,160
|
|
|
|
-
|
|
|
|
8,376,429
|
|
Marketing, administrative and corporate expense
|
|
|
4,343,704
|
|
|
|
131,280
|
|
|
|
1,231,729
|
|
|
|
5,706,713
|
|
Facility and other expenses
|
|
|
490,530
|
|
|
|
16,723
|
|
|
|
-
|
|
|
|
507,253
|
|
Depreciation and amortization
|
|
|
124,180
|
|
|
|
-
|
|
|
|
6,259
|
|
|
|
130,439
|
|
Operating income (loss)
|
|
|
1,654,932
|
|
|
|
(199,917
|
)
|
|
|
(1,237,988
|
)
|
|
|
217,027
|
|
|
|
As of, and for the Three Months Ended, July 31, 2017
|
|
|
|
Washington
|
|
|
South Dakota
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
13,128,992
|
|
|
$
|
1,872,938
|
|
|
$
|
-
|
|
|
$
|
15,001,930
|
|
Casino and food and beverage expense
|
|
|
7,313,487
|
|
|
|
1,645,090
|
|
|
|
-
|
|
|
|
8,958,577
|
|
Marketing, administrative and corporate expense
|
|
|
4,245,081
|
|
|
|
114,350
|
|
|
|
639,384
|
|
|
|
4,998,815
|
|
Facility and other expenses
|
|
|
422,905
|
|
|
|
22,747
|
|
|
|
-
|
|
|
|
445,652
|
|
Depreciation and amortization
|
|
|
232,979
|
|
|
|
98,285
|
|
|
|
6,674
|
|
|
|
337,938
|
|
Operating income (loss)
|
|
|
914,540
|
|
|
|
(7,534
|
)
|
|
|
(646,058
|
)
|
|
|
260,948
|
|
Segment assets at July 31, 2018 were: Washington
$28,486,842; South Dakota $51,194; Corporate $3,741,782. Segment assets at July 31, 2017 were: Washington $27,057,107; South Dakota
$2,360,534; Corporate $4,444,938.
Note 13.
Discontinued
Operations
On June 27, 2018, the Company entered
into a definitive agreement to sell its Club Fortune casino property in Henderson, Nevada, for $14.6 million, subject to certain
adjustments, including a working capital adjustment. The transaction is expected to be completed in late December 2018, subject
to Nevada Gaming Control Board approval and other customary closing conditions.
As of July 27, 2018, Club Fortune
met the requirements for presentation as assets held for sale and discontinued operation under generally accepted accounting principles.
As a result of Club Fortune meeting the criteria to be classified as held for sale, the Company recorded a goodwill impairment
of $115,128 and a loss on reclassification as held for sale of $84,872, which primarily represented the estimated cost to sell
Club Fortune. The operations of Club Fortune have been classified as discontinued operations and as assets held for sale for all
periods presented.
The results of discontinued operations
are summarized as follows:
|
|
Three months ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Gross revenues
|
|
$
|
3,219,413
|
|
|
$
|
3,996,962
|
|
Less promotional allowances
|
|
|
-
|
|
|
|
(571,318
|
)
|
Net revenues
|
|
|
3,219,413
|
|
|
|
3,425,644
|
|
|
|
|
|
|
|
|
|
|
Casino and food and beverage expense
|
|
|
2,070,588
|
|
|
|
2,036,789
|
|
Marketing and administrative
|
|
|
813,069
|
|
|
|
866,341
|
|
Facility and other expenses
|
|
|
91,320
|
|
|
|
73,616
|
|
Depreciation and amortization
|
|
|
220,531
|
|
|
|
373,497
|
|
Goodwill impairment
|
|
|
115,128
|
|
|
|
-
|
|
Loss on reclassification as held for sale
|
|
|
84,872
|
|
|
|
-
|
|
Income tax (benefit) expense
|
|
|
(38,658
|
)
|
|
|
24,414
|
|
(Loss) income from discontinued operations, net of tax
|
|
$
|
(137,438
|
)
|
|
$
|
50,987
|
|
The assets and liabilities held for sale
related to Club Fortune were as follows:
|
|
July 31,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
63,588
|
|
|
$
|
140,370
|
|
Prepaid expenses and other assets
|
|
|
351,220
|
|
|
|
377,811
|
|
Inventory
|
|
|
90,175
|
|
|
|
88,998
|
|
Goodwill
|
|
|
2,716,306
|
|
|
|
2,831,434
|
|
Intangible assets, net
|
|
|
1,182,659
|
|
|
|
1,208,294
|
|
Property and equipment, net
|
|
|
9,387,401
|
|
|
|
9,558,045
|
|
Total assets held for sale
|
|
$
|
13,791,349
|
|
|
$
|
14,204,952
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
349,120
|
|
|
$
|
345,231
|
|
Accrued payroll and related
|
|
|
153,085
|
|
|
|
238,688
|
|
Accrued player’s club points and progressive jackpots
|
|
|
351,516
|
|
|
|
318,801
|
|
Total liabilities held for sale
|
|
$
|
853,721
|
|
|
$
|
902,720
|
|
On June 30, 2018, the Company sold
its South Dakota route operations to Michael J. Trucano. The sale included all fixtures, equipment, trade names, and operating
agreements used in connection with the business, but excluded necessary operating cash used in the business. Because this sale
did not represent a strategic shift that would have a major effect on the Company’s operations, the sale was recorded as
a sale of assets and not as discontinued operations.