FORM 10-QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


[ X ]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013


OR


[   ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT

For the transition period from          to         


Commission file number 0-15415


GLOBAL CASINOS, INC.

(Exact Name of Small Business Issuer as Specified in its Charter)


               Utah               

     87-0340206     

(State or other jurisdiction

I.R.S. Employer

of incorporation or organization)

Identification number


1507 Pine Street, Boulder, CO  80302
(Address of Principal Executive Offices)

Issuer's telephone number:     (303) 449-2100

Former name, former address, and former fiscal year, if changed since last report

 

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes  [ X ]    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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):  

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 [   ]  No  [ X ].


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [  ]


As of May 13, 2013, the Registrant had 7,161,978 shares of its Common Stock outstanding.




1



INDEX

PART I -- FINANCIAL INFORMATION


Item 1.

Financial Statements

Page

 

 

 

 

Consolidated Balance Sheets as of March 31, 2013 (unaudited) and June 30, 2012  

4

 

 

 

 

Consolidated Statements of Operations for the three months ended

   March 31, 2013 and 2012 (unaudited)


6

 

 

 

 

Consolidated Statements of Operations for the nine months ended

   March 31, 2013 and 2012 (unaudited)


7

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the period July 1, 2011

   through March 31, 2013 (unaudited)


8

 

 

 

 

Consolidated Statements of Cash Flows for the nine month periods ended

   March 31, 2013 and 2012 (unaudited)


9

 

 

 

 

Notes to Consolidated Financial Statements

11

 

 

 

Item 2.

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

 

 

 

 

 

Overview

35

 

Results of Operations

37

 

Liquidity and Capital Resources

46

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

 

 

 

Item 4.

Controls & Procedures

51

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

52

Item 1A

Risk Factors

52

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

53

Item 3.

Defaults Upon Senior Securities

53

Item 4.

Removed and Reserved

53

Item 5.

Other Information

53

Item 6.

Exhibits

53

 

 

 




2



PART 1.  FINANCIAL INFORMATION


Item 1.

   Financial Statements


The consolidated financial statements included herein have been prepared by Global Casinos, Inc. (the Company), pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such SEC rules and regulations.  In the opinion of management of the Company the accompanying statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2013 (unaudited) and June 30, 2012, and its results of operations for the nine month periods ended March 31, 2013 and 2012 (unaudited), its statements of stockholders’ equity for the period July 1, 2011 through March 31, 2013 (unaudited), and its cash flows for the nine month periods ended March 31, 2013 and 2012 (unaudited).  The results for these interim periods are not necessarily indicative of the results for the entire year.  The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto filed as a part of the Company's annual report on Form 10-K.    





3





GLOBAL CASINOS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

March 31, 2013

 

June 30, 2012

 

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

 $                   463,258

 

 $                 492,199

 

Accrued gaming income

                      113,549

 

                    234,883

 

Inventory

                        23,023

 

                      24,481

 

Prepaid expenses and other current assets

                        82,341

 

                      51,835

 

 

 

Total current assets

                      682,171

 

                    803,398

 

 

 

 

 

 

 

 

Note receivable, West Paces Ferry Healthcare REIT

                      500,000

 

                    500,000

 

 

 

 

 

 

 

Land, building and improvements, and equipment:

 

 

 

 

Land

 

                      517,950

 

                    517,950

 

Building and improvements

                   4,138,220

 

                 4,138,220

 

Equipment

                   3,270,245

 

                 3,266,252

 

 

Total land, building and improvements, and equipment

                   7,926,415

 

                 7,922,422

 

Accumulated depreciation

                  (5,625,125)

 

               (5,379,369)

 

Land, building and improvements, and equipment, net

                   2,301,290

 

                 2,543,053

 

 

 

 

 

 

 

Goodwill

 

                                -   

 

                             -   

 

 

 

 

 

 

 

Total assets

 $                3,483,461

 

 $              3,846,451

 

 

 

 

 

 

 



CONTINUED ON FOLLOWING PAGE



See accompanying notes to these unaudited financial statements

4





CONTINUED FROM PREVIOUS PAGE


GLOBAL CASINOS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

March 31, 2013

 

June 30, 2012

 

 

 

 

(unaudited)

 

 


 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

Current liabilities:

 

 

 

 

Accounts payable, trade

 $                   172,361

 

 $                   94,002

 

Accounts payable, related parties

                          4,083

 

                      12,641

 

Accrued expenses

                      402,654

 

                    279,351

 

Accrued interest

                      108,651

 

                      64,817

 

Other current liabilities

                      111,091

 

                    125,147

 

Joint venture obligation

                        23,605

 

                      23,605

 

Current portion of long-term debt

                      547,338

 

                    861,999

 

Current portion of loan participation obligations

                        46,827

 

                    194,485

 

Current portion of convertible debt, 2013 5%

                        50,000

 

                             -   

      Current portion of convertible debt, 2013 8%, net of discount of

$235,520 and $-0-

                      614,480

 

                             -   

 

 

 

Total current liabilities

                   2,081,090

 

                 1,656,047

Long-term debt, less current portion

                                -   

 

                             -   

Loan participation obligations, less current portion

                      173,752

 

                             -   

Convertible debt, less current portion, 2013 5%

                                -   

 

                    120,000

Convertible debt, 2013 8%, less current portion, net of discount of $-0- and $526,633

                                -   

 

                    323,367

 

Total liabilities

                   2,254,842

 

                 2,099,414

Commitments and contingencies

 

 

 

Stockholders' equity:

 

 

 

 

Preferred stock: 10,000,000 shares authorized

 

 

 

         Series A - no dividends, $2.00 stated value, non-voting,2,000,000 shares authorized, 200,500 shares issued and outstanding

                      401,000

 

                    401,000

 

         Series B - 8% cumulative, convertible, $10.00 stated value, non-voting, 400,000 shares authorized, no shares issued and outstanding

                                -   

 

                             -   

 

        Series C - 7% cumulative, convertible, $1.20 stated value, voting

600,000 shares authorized, no shares issued and outstanding

                                -   

 

                             -   

 

        Series D - 8% cumulative, convertible, $1.00 stated value, non-voting

1,000,000 shares authorized, 700,000 shares issued and outstanding

                      700,000

 

                    700,000

 

        Series E - convertible, $0.25 stated value, non-voting 600,000 shares authorized, no shares issued and outstanding

                                -   

 

                             -   

 

        Common stock - $0.05 par value; 50,000,000 shares authorized; 7,161,978 and 6,851,488 shares issued and outstanding

                      358,100

 

                    342,575

 

 

Additional paid-in capital

                 15,215,533

 

               15,110,935

 

Accumulated deficit

                (15,446,014)

 

             (14,807,473)

Total equity

                   1,228,619

 

                 1,747,037

Total liabilities and stockholders' equity

 $                3,483,461

 

 $              3,846,451



See accompanying notes to these unaudited financial statements

5









GLOBAL CASINOS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

for the three months ended March 31, 2013 and 2012

(unaudited)

 

 

 

 

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Casino

 $        1,246,663

 

 $        1,332,590

 

 

Promotional allowances

              (66,627)

 

              (65,765)

 

 

 

Net Revenues

           1,180,036

 

           1,266,825

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Casino operations

           1,248,291

 

           1,288,857

 

 

Operating, general, and administrative

                23,632

 

                56,853

 

 

Gain on asset disposals

                       -   

 

                       -   

 

 

 

 

 

 

 

 

 

 

 

           1,271,923

 

           1,345,710

 

 

 

 

 

 

 

 

Income (loss) from operations

              (91,887)

 

              (78,885)

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest

            (123,504)

 

            (133,678)

 

 

Settlement of debt

                       -   

 

                       -   

 

Loss before provision for income taxes

            (215,391)

 

            (212,563)

 

 

Provision for income taxes

                       -   

 

                       -   

 

 

 

 

 

 

 

 

Net loss

            (215,391)

 

            (212,563)

 

 

 

 

 

 

 

 

Series D Preferred dividends

              (14,000)

 

              (14,156)

 

Net loss attributable to common shareholders

 $         (229,391)

 

 $         (226,719)

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

Basic and diluted

 $               (0.03)

 

 $               (0.03)

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic and diluted

           7,161,978

 

           6,826,444

 





See accompanying notes to these unaudited financial statements

6






GLOBAL CASINOS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

for the nine months ended March 31, 2013 and 2012

(unaudited)

 

 

 

 

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Casino

 $        3,851,724

 

 $        3,966,177

 

 

Promotional allowances

            (190,763)

 

            (152,910)

 

 

 

Net Revenues

           3,660,961

 

           3,813,267

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Casino operations

           3,770,487

 

           3,930,240

 

 

Operating, general, and administrative

              203,456

 

              364,352

 

 

(Gain) loss on asset disposals

                (2,369)

 

                  5,679

 

 

 

 

           3,971,574

 

           4,300,271

 

 

 

 

 

 

 

 

Income (loss) from operations

            (310,613)

 

            (487,004)

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest

            (380,973)

 

            (252,261)

 

 

Settlement of debt

                95,667

 

                       -   

 

Loss before provision for income taxes

            (595,919)

 

            (739,265)

 

 

Provision for income taxes

                       -   

 

                       -   

 

 

 

 

 

 

 

 

Net loss

            (595,919)

 

            (739,265)

 

 

 

 

 

 

 

 

Series D Preferred dividends

              (42,622)

 

              (42,778)

 

Net loss attributable to common shareholders

 $         (638,541)

 

 $         (782,043)

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

Basic and diluted

 $               (0.09)

 

 $               (0.11)

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic and diluted

           7,061,615

 

           6,807,739

 






See accompanying notes to these unaudited financial statements

7




GLOBAL CASINOS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

July 1, 2011 through March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SERIES A

 

SERIES D

 

 

 

 

 

 

 

 

 

 

 

 

PREFERRED STOCK

 

PREFERRED STOCK

 

COMMON STOCK

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

Amount

 

Number of Shares

 

Amount

 

Number of Shares

 

Amount

 

Additional Paid In Capital

 

Accumulated (Deficit)

 

Total

Balance as of June 30, 2011

 

    200,500

 

 $ 401,000

 

   700,000

 

 $ 700,000

 

 6,798,488

 

 $339,925

 

 $ 14,203,225

 

 $  (13,905,269)

 

 $      1,738,881

Allocation of beneficial conversion feature, 8% convertible debt

 

 

 

 

 

 

 

 

 

 

 

 

 

         410,800

 

 

 

            410,800

Allocation of common stock purchase warrants issued in private placement of 8% convertible debt

 

 

 

 

 

 

 

 

 

 

 

 

 

         475,800

 

 

 

            475,800

Common stock issued under loan participation agreement

 

 

 

 

 

 

 

 

 

      53,000

 

         2,650

 

          21,110

 

 

 

             23,760

Series D Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           (56,933)

 

            (56,933)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         (845,271)

 

           (845,271)

Balance as of June 30, 2012

 

    200,500

 

 $ 401,000

 

   700,000

 

 $ 700,000

 

  6,851,488

 

 $   342,575

 

 $ 15,110,935

 

 $  (14,807,473)

 

 $      1,747,037

Common stock issued upon conversion of 5% Notes

 

 

 

 

 

 

 

 

 

     310,490

 

       15,525

 

          62,098

 

 

 

             77,623

Common stock purchase warrants issued in connection with loan participation obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

          42,500

 

 

 

             42,500

Series D Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           (42,622)

 

            (42,622)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         (595,919)

 

           (595,919)

Balance as of March 31, 2013 (unaudited)

 

    200,500

 

 $ 401,000

 

   700,000

 

 $ 700,000

 

  7,161,978

 

 $   358,100

 

 $ 15,215,533

 

 $  (15,446,014)

 

 $      1,228,619





See accompanying notes to these unaudited financial statements

8





GLOBAL CASINOS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the nine months ended March 31, 2013 and 2012

(unaudited)

 

 

 

2013

 

2012

 

 CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 $         (595,919)

 

 $         (739,265)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

              552,081

 

              405,021

 

 

 

Warrants issued to loan participant for financing fee

                42,500

 

                       -   

 

 

 

Warrants issued to convertible debt placement agent

                       -   

 

              110,300

 

 

 

Loan participation fees paid with common stock

-

 

                23,760

 

 

 

(Gain) loss on disposals of fixed assets

                (2,368)

 

                  5,679

 

 

 

Gain on settlement of debt

              (95,667)

 

                       -   

 

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Accrued gaming income

              121,334

 

                47,512

 

 

 

Inventories

                  1,458

 

                (1,959)

 

 

 

Other current assets

              (30,506)

 

              (19,291)

 

 

 

Accounts payable and accrued expenses

              193,260

 

                12,539

 

 

 

Joint venture obligation

                       -   

 

                (2,145)

 

 

 

Accrued interest

                51,457

 

                28,677

 

 

 

Other current liabilities

              (14,056)

 

                65,916

 

 

 

  Net cash provided by operating activities

              223,574

 

              (63,256)

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of building improvements and equipment

              (18,037)

 

            (119,331)

 

 

Proceeds from sale of fixed assets

                  1,200

 

                       -   

 

 

 

Net cash used in investing activities

              (16,837)

 

            (119,331)

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds upon issuance of convertible debt

                       -   

 

              850,000

 

 

Principal payments on long-term debt

            (218,994)

 

            (128,640)

 

 

Proceeds upon issuance of loan participation

                55,000

 

                       -   

 

 

Payments on loan participation obligations

              (28,906)

 

              (22,753)

 

 

Payment of Series D preferred stock dividends

              (42,778)

 

              (42,778)

 

 

 

Net cash used in financing activities

            (235,678)

 

              655,829

 

Net increase in cash

              (28,941)

 

              473,242

 

Cash at beginning of period

              492,199

 

              531,208

 

Cash at end of period

 $           463,258

 

 $        1,004,450

 



CONTINUED ON FOLLOWING PAGE




See accompanying notes to these unaudited financial statements

9





CONTINUED FROM PREVIOUS PAGE


GLOBAL CASINOS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the nine months ended March 31, 2013 and 2012

(unaudited)

 

 

 

2013

 

2012



SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for interest

 $             64,798

 

 $             70,988

 

 

Cash paid for income taxes

 $                    -   

 

 $                    -   

 

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Accrued and unpaid dividends on Series D preferred stock

 $             14,000

 

 $             14,311

 

 

Conversion of 5% Notes and accrued interest

 $             77,622

 

 $                    -   

 

 

Allocation of fair value of warrants to convertible debt

 $                    -   

 

 $           365,500

 

 

Allocation of beneficial conversion feature to convertible debt

 $                    -   

 

 $           410,800

 




See accompanying notes to these unaudited financial statements

10



GLOBAL CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(unaudited)


1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


This summary of significant accounting policies of Global Casinos, Inc. (Company) is presented to assist in understanding the Company’s financial statements.  The financial statements and notes are representations of the Company’s management who is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.


Organization and Consolidation


Global Casinos, Inc. (the "Company or "Global"), a Utah corporation, has two subsidiaries that operate two gaming casinos.


As of March 31, 2013, the Company’s operating subsidiaries were Casinos USA, Inc. ("Casinos USA,” a Colorado corporation), which owns and operates the Bull Durham Saloon and Casino ("Bull Durham"), located in the limited stakes gaming district of Black Hawk, Colorado, and Doc Holliday Casino II, LLC (a Colorado limited liability company), which operates the Doc Holliday Casino (“Doc Holliday”), located in the limited stakes gaming district of Central City, Colorado.


The consolidated financial statements of the Company include the accounts of its wholly owned subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.


Basis of Presentation – Going Concern


The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Act of 1934, as amended for interim financial information.

 

The financial information as of June 30, 2012 is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K/A for the years ended June 30, 2012 and 2011. The unaudited interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K/A, which contains the audited financial statements and notes thereto, together with Management’s Discussion and Analysis, for the years ended June 30, 2012 and 2011.

 

Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes




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necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the three and nine months ended March 31, 2013 are not necessarily indicative of results for the full fiscal year.


The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has suffered significant losses primarily attributable to the Doc Holliday Casino operations since its purchase in 2008, and has working capital and shareholders’ deficits at March 31, 2013, that raise substantial doubt about its ability to continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and generate revenues and profits from operations.


The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.


Management’s plans addressing the going concern are discussed in Note 15 – Definitive Agreements.


Presentation and Comparability


Certain amounts from previously reported periods have been reclassified to conform to the current period presentations.


Use of Estimates and Assumptions


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Significant estimates included herein relate to the recoverability of assets, the value of long-lived assets and liabilities, the value of share based compensation transactions, the value of debt and equity instruments, the future obligations resulting from promotional activities, the long-term viability of the business, the future impact of gaming regulations, and future obligations under various tax statutes.  Actual results may differ from estimates.


Risk Considerations


The Company operates in a highly regulated environment subject to the political process.  Our retail gaming licenses are subject to annual renewal by the Colorado Division of Gaming.  Changes to existing statutes and regulations could have a negative effect on our operations.  The Colorado Gaming Commission requires that any beneficial owner of five percent or more of the Company’s



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securities, including holders of common stock, file an application for a finding of suitability. The gaming authority has the power to investigate an owner's suitability and the owner must pay all costs of the investigation. If the owner is found unsuitable, then the owner may be required by law to dispose of the securities.  The Colorado Division of Gaming is currently requiring certain of the Company’s shareholders to file an application for finding of suitability.  If they are found by the division to be unsuitable, they could be required to divest their share positions. A contingency exists with respect this matter, the ultimate resolution of which cannot presently be determined.


In addition, since the Company’s two gaming facilities are both located in the Central City and Black Hawk, Colorado geographic area, the potential for severe financial impact can result from negative effects of economic conditions within the market or geographic area.  This concentration results in an associated risk and uncertainty.


Concentrations of Credit Risk


Financial instruments that potentially subject the company to concentrations of credit risk consist principally of cash and cash equivalents, and accounts receivables.  At March 31, 2013, the Company had no cash or cash equivalents in financial institutions in excess of FDIC deposit insurance coverage.


Fair Value of Financial Instruments


Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management.  The Company's financial instruments include cash, accrued gaming income, notes receivable, accounts payable, accrued expenses, other current liabilities and long-term debt obligations.  Except for long-term debt obligations, the carrying value of financial instruments approximated fair value due to their short maturities.


The carrying value of all long-term debt obligations approximated fair value because interest rates on these instruments are similar to quoted rates for instruments with similar risks.


Cash and Cash Equivalents


Cash consists of demand deposits and vault cash used in casino operations.  The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.


Accrued Gaming Income


Gaming income represents the difference between the cash played by customers, and the cash paid out by the casino machines.  On a regular basis, the cash representing the casino’s revenue is pulled from the machines and deposited.  However, this process does not always occur at the end of the last business day of the month.  Accrued gaming income represents the amount of revenue (cash) in the machines that has not yet been pulled and deposited at the end of the reporting period.  At March 31, 2013 and June 30, 2012, $113,549 and $234,883 of income, respectively, was accrued and recorded as a current asset.

  



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Inventories


Inventories primarily consist of food and beverage supplies and are stated at the lower of cost or market. Cost is determined by the specific-cost method.  


Land, Building and Improvements, and Equipment


Land, building and improvements, and equipment are carried at cost.  Depreciation is computed using the straight-line method over the estimated useful lives.  The building is depreciated over 31 years, and improvements and equipment are depreciated over five to seven years.  Depreciation expense for the nine months ended March 31, 2013 and 2012 was $260,968 and $252,392, respectively.


Impairment of Long-Lived Assets


The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying value to future undiscounted cash flows expected to be generated by the asset.  If such assets are considered impaired, the impairment to be recognized is determined as the amount by which the carrying value exceeds the fair value of the assets.


Goodwill


Goodwill, which resulted from the purchase price in excess of the fair value of the underlying assets purchased and liabilities assumed in the acquisition of the Doc Holliday Casino (“reporting unit” or “casino”) in March 2008, was evaluated for impairment annually at the reporting unit level as of June 30, and whenever the occurrence of a significant event or a change in circumstances would suggest that the carrying value of the reporting unit including goodwill might be in excess of its fair value.  Such factors included, but were not limited to, adverse changes in the business climate, and significant and unexpected changes in the reporting unit’s cash flows. Goodwill was evaluated for impairment in a two-step process per ASC 350.  Step 1 required testing the recoverability of the reporting unit on a fair-value basis.  If the fair value of the reporting unit was less than the carrying value of the reporting unit including goodwill, Step 2 was performed by assigning the reporting unit’s fair value to its assets and liabilities in a manner similar to the allocation of purchase price in a business combination to determine the implied fair value of the goodwill.  If the carrying value of the reporting unit’s goodwill exceeded its implied fair value, goodwill was deemed impaired, and was written down to the extent of the difference.  The fair value of the reporting unit was determined from time-to-time using the discounted future cash flow method, the cost and market approach obtained by independent appraisal, or a combination thereof.


As of March 31, 2013 and June 30, 2012, all the goodwill resulting from the acquisition of the Doc Holliday Casino in March 2008, was deemed impaired.




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Casino Chips and Tokens


Gaming chips and tokens are accounted for from the time the casino receives them even though they may not yet be issued and are held in reserve.  The chip and token float is determined by the difference between the total amounts of chips and tokens placed in service and the actual inventory of chips and tokens held by the casino at any point in time. The chip and token float is included in other current liabilities.


Revenue Recognition


In accordance with gaming industry practice, the Company recognizes casino revenues as the net win from gaming activities, which is the difference between gaming wins and losses.  Anticipated payouts resulting from our customer loyalty program (Sharpshooter’s Club), in which registered customers are awarded cash based on the frequency and amounts of their gaming activities are included in promotional allowances.  In accordance with gaming industry practice, these promotional allowances are presented as a reduction of casino revenues.


Advertising Costs


The Company expenses all advertising costs as they are incurred.  Advertising costs were $13 and $270 for the nine months ended March 31, 2013 and 2012, respectively.


Consulting Expenses


From time-to-time the Company engages consultants to perform various professional and administrative functions including public relations and corporate marketing.  Expenses for consulting services are generally recognized when services are performed and billable by the consultant.  In the event an agreement requires payments in which the timing of the payments is not consistent with the performance of services, expense is recognized as either service events occur, or recognized evenly over the period of the consulting agreement where specific services performed under the agreement are not readily identifiable.  Consulting agreements in which compensation is contingent upon the successful occurrence of one or more events are only expensed when the contingency has been, or is reasonably assured, to be met.  The Company currently has no active consulting arrangements.


Income Taxes


The Company uses the liability method of accounting for income taxes.  Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates resulting from new legislation is recognized in income in the period of enactment.  A valuation allowance is established against deferred tax assets when management concludes that the "more likely than not" realization criteria has not been met.




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Earnings Per Common Share


Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period.  Diluted net loss per share is computed based on the weighted average number of common shares and potentially dilutive common shares outstanding. The calculation of diluted net income (loss) per share excludes potential common shares if the effect would be anti-dilutive. Potential common shares consist of incremental common shares issuable upon the exercise of stock options, warrants, and shares issuable upon the conversion of preferred stock.


Potentially dilutive shares of 4,555,000 were not included in the calculations of diluted earnings per share for the three and nine months ended March 31, 2013, as their inclusion would have been anti-dilutive due to the loss recorded for the period, and represent stock purchase warrants and shares issuable upon conversion of debt and preferred stock.  Potentially dilutive shares of 4,970,000 were not included in the calculations of diluted earnings per share for the three and nine months ended March 31, 2012, as their inclusion would have been anti-dilutive due to the loss recorded for the period, and represent out of the money stock options and stock purchase warrants, and shares issuable upon conversion of debt and preferred stock.


Stock-Based Compensation


Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”) Topic 718, “Stock Compensation,” establishes fair value as the measurement objective in accounting for share based payment arrangements, and requires all entities to apply a fair value based measurement method in accounting for share based payment transactions with employees.  Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the period during which the holder is required to provide services in exchange for the award, i.e., the vesting period.


Comprehensive Income


Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”) Topic 220, “Comprehensive Income,” provides guidance for reporting and display of comprehensive income, its components and accumulated balances.  For the three and nine months ended March 31, 2013 and 2012, there were no differences between reported net income and comprehensive income.


Derivative Instruments and Hedging Activities


We have adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”) Topic 815, “Derivatives and Hedging,” which provides guidance for disclosure of derivative instruments and hedging activities.


Segment Information


The Company currently operates in one business segment as determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”)



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Topic 280, “Segment reporting.”  The determination of reportable segments is based on the way management organizes financial information for making operating decisions and assessing performance.  All operations are located in the United States of America.


Recent Pronouncements

There were various accounting standards and interpretations issued during 2013 and 2012, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.


2.     NOTE RECEIVABLE


On June 22, 2012, the Company advanced a loan to Georgia Healthcare REIT, Inc., a Georgia corporation (“Georgia REIT”) in the original principal amount of $500,000 plus interest at the rate of 5% per annum, interest payable monthly, with the total outstanding principal balance due on June 30, 2013.  The Note is secured by a stock pledge agreement covering 100% of the issued and outstanding shares of membership interest of REIT.


On March 13, 2013 the Note was assumed by West Paces Ferry Healthcare REIT, Inc., a Georgia corporation (“West Paces”).  All rights and obligations under the Note were assumed by West Paces.   Further discussion of this transaction is included in Note 15 “Definitive Agreements.”


At March 31, 2013 a total of $19,298 representing unpaid accrued interest on the Note is included in other current assets.  Subsequent to March 31, 2013 the Company received $13,048 representing partial payment of the interest due on the Note.


3.     INVESTMENT IN IMAGEDOC USA, INC.

On July 19, 2010, the Company executed a Common Stock and Warrant Purchase Agreement (“Purchase Agreement”) with ImageDoc USA, Inc. (“ImageDoc”), a Colorado corporation wherein, the Company agreed to purchase, for an aggregate purchase price of up to $120,000, up to an aggregate of 2,566,000 shares of common stock and warrants exercisable to purchase an additional 400,000 shares of common stock of ImageDoc for a period of five years at an exercise price of $0.20 per share.  The investment represents less than 10% of all outstanding common stock and common stock equivalents of ImageDoc at the closing date.

Also effective July 19, 2010 the Company and ImageDoc entered into a Registration Rights Agreement establishing the terms by which ImageDoc shall prepare and file a Registration Statement covering the spin-off to Global equity holders of the ImageDoc shares, which are the subject of the aforementioned Purchase Agreement.  The Company completed the purchase of all 2,566,000 shares of common stock and warrants exercisable to purchase an additional 400,000 shares of common stock of ImageDoc.  As of March 31, 2013 the warrants have not been exercised. No record date has been established for the spin-off of those shares and the distribution will not occur until such time a Registration Statement has been declared effective by the Securities Exchange Commission.



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During the quarter ended June 30, 2011, the Company determined that ImageDoc’s expected and realized cash flows were significantly less than initial expectations, which has delayed the preparation and filing of its Registration Statement as discussed above.  This raised substantial doubt regarding the current value of the investment.  As such, the Company recorded an impairment charge equal to the original investment at June 30, 2011.


4.     GOODWILL


The Company’s goodwill as recorded in our Doc Holliday Casino reporting unit is comprised of the following:


Total Goodwill

 $         1,898,496

 

Impairment charges

           (1,898,496)

Total Goodwill as of March 31, 2013

 $                       -



Goodwill was evaluated for impairment annually at the reporting unit level as of June 30, and whenever the occurrence of an event or a change in circumstances would suggest that the carrying value of the reporting unit including goodwill might be in excess of its fair value.  Such factors included, but were not limited to, adverse changes in the business climate, and significant and unexpected changes in the reporting unit’s cash flows.  As of June 30, 2011 all the goodwill recorded upon the purchase of the Doc Holliday Casino reporting unit in March 2008, was fully impaired.  Impairment charges of $890,000 and $1,008,496 were recorded during the quarters ended March 31, 2010 and June 30, 2011, respectively.


5.     NOTES PAYABLE AND LONG-TERM DEBT


Effective September 19, 2009, all of the secured obligations of Casinos, USA, Inc., a wholly-owned subsidiary of Global Casinos, Inc. matured and became due and payable.  The secured obligations are collateralized by deeds of trust encumbering the Bull Durham casino property located in Blackhawk, Colorado.  Until their maturity, all payments required under the notes had been made in a timely fashion.  We have since purchased the senior loan and deed of trust and negotiated extensions of the second priority loan and deed of trust and a portion of the junior loans and deed of trust. We intend to continue to make payments under the notes pending our efforts to renegotiate their maturity dates.


On March 22, 2010 the Company consummated an Allonge and Modification Agreement with the holder of a junior deed of trust note on the Bull Durham Casino.  Immediately prior to the modification the Note had a principal balance of $176,540.  The agreement extended the maturity date to April 1, 2013, established an interest rate of 8% per annum, and requires monthly principal and interest payments of $1,911.  At March 31, 2013 the balance of the Note was $146,786.  As of the date of this report, the Note has not been paid or further modified and is considered to be in default.




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On December 30, 2009 the Company consummated an Allonge and Modification Agreement with the holder of a second deed of trust note on the Bull Durham Casino.  Immediately prior to the modification the Note had a principal balance of $616,988.  The agreement required a principal pay down of $100,000, monthly principal and interest payments of $5,596 beginning on January 1, 2010, and extended the maturity date of the Note to December 31, 2010.  Additional annual pay downs of $50,000 due on or before December 31st, 2010, 2011 and 2012 would extend the maturity date one year from the pay down due date.  The Company made the $50,000 pay downs in 2010 and 2011, thereby extending the maturity date to December 31, 2012.  Effective November 9, 2012 a Second Allonge and Modification Agreement was consummated which waived the $50,000 principal pay down due on or before December 31, 2012 under the first Allonge and Modification Agreement, and established an annual $50,000 principal pay down due on or before December 31, 2013 and each year thereafter until the Note is paid in full.  Providing that the annual principal reductions are made and that the Note or Second Deed of Trust are not in default, the maturity date of the Note shall be extended to December 31, 2014 and thereafter shall be extended to December 31st each succeeding year automatically until all principal and accrued interest is paid in full.  At March 31, 2013 the balance of the Note was $302,619.


On November 30, 2009 the Company consummated a Loan Document Purchase and Assignment Agreement with the holder of the senior mortgage of the Bull Durham Casino in which the Company obtained all of the rights, title and interest in and to the Note and Loan Agreement.  The total amount of consideration paid to the holder was $730,710 which included principal of $721,021, interest accrued to the purchase date of $5,689, and a fee of $4,000 to cover legal and administrative costs of the holder.  Also on November 30, 2009 the Company executed a Loan Participation Agreement whereby the Company assigned to an unaffiliated third party an undivided 34.7% interest in the Note for total consideration of $250,000 and a loan participation fee of 50,000 shares of the Company’s common stock valued at $0.38 per share.  And on December 30, 2009 the Company executed a Loan Participation Agreement whereby the Company assigned to a director an undivided 2.08% interest in the Note for total consideration of $15,000 and a loan participation fee of 3,000 shares of the Company’s common stock valued at $0.39 per share.  The remaining undivided 63.22% interest in the Note is owned by the Company and is eliminated in consolidation as the debtor is a wholly owned operating subsidiary.  The Note has not been modified and continues to be in technical default.  Effective October 11, 2012 the Company consummated an Amended and Restated Allonge and Loan Participation Agreement.  These transactions are further discussed in Note 6 “Loan Participation Obligations.”


A note payable to the seller of Doc Holliday Casino acquired in March 2008, matured on March 31, 2009.  The note did not bear interest, however upon its maturity a default interest rate of 8% with interest payments due monthly became effective.  In October 2012 the note holder agreed to accept a lump sum payment in full satisfaction of the obligation, and on October 15, 2012 the Company paid the note holder $95,000 to extinguish this obligation which had a balance of $190,667 at the time of the settlement.  The resulting gain on the settlement of the note of $95,667 is included in the consolidated statements of operations for the three and nine months ended March 31, 2013.




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At March 31, 2013, notes payable and long-term debt, exclusive of the Loan Participations discussed in Note 6, and convertible debt discussed in Note 7, consisted of the following:

 

 

Junior mortgage payable to private lender, collateralized by real estate, interest at 8%, monthly payments of $5,596, maturing December 31, 2013.



            $   302,619


Junior mortgage payable to private lender, collateralized by real estate, interest at 8%, monthly payments of $1,911, maturing April 1, 2013.


Junior mortgages payable to private lenders, collateralized by real estate, interest at 4%, monthly payments of $605.  Notes matured September 19, 2009.



146,786 




                     97,933


Total notes payable and long-term debt


547,338 

Less current portion

   (547,338)

Long-term debt, net

$             - 


6.     LOAN PARTICIPATION OBLIGATIONS


As discussed in Note 5: “Notes Payable and Long Term Debt,” on November 30, 2009 the Company consummated a Loan Document Purchase and Assignment Agreement with the holder of the senior mortgage of the Bull Durham Casino in which the Company obtained all of the rights, title and interest in and to the Note and Loan Agreement.  Then, and also on November 30, 2009 the Company executed a Loan Participation Agreement (“Agreement”) whereby the Company assigned to an unaffiliated third party an undivided 34.7% interest in the Note for total consideration of $250,000 and a loan participation fee of 50,000 shares of the Company’s common stock valued at $0.38 per share.  The Company is considered the Loan Servicing Agent under the Agreement.  Monthly principal and interest payments began on January 1, 2010, and are based on a seven-year amortization at 12% annual interest.  The obligation matured on December 31, 2012.  In addition, the participant is entitled to an additional 1% per year in year one, 2% per year in year 2, and 3% in year 3, as well as additional loan participation fees on the first and second annual anniversaries of 50,000 shares of the Company’s common stock, provided that on each issue date there remains outstanding and unpaid any amount due and owing under the participant interest.  The first anniversary shares were issued in February 2011, at a value of $0.12 per share, the closing price of the Company’s common stock on November 30, 2010.  The second anniversary shares were issued in February 2012, at a value of $0.45 per share, the closing price of the Company’s common stock on November 30, 2011.


On December 30, 2009 the Company executed an additional Loan Participation Agreement whereby the Company assigned to a director an undivided 2.08% interest in the Note for total consideration of $15,000 and a loan participation fee of 3,000 shares of the Company’s common stock valued at $0.39 per share.  The Company is considered the Loan Servicing Agent under the Agreement.  Monthly principal and interest payments began on January 1, 2010, and are based on a seven year amortization at 12% annual interest.  The obligation matured on December 31, 2012.  In addition,



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the participant is entitled to an additional 1% per year in year one, 2% per year in year 2, and 3% in year 3, as well as additional loan participation fees on the first and second annual anniversaries of 3,000 shares of the Company’s common stock, provided that on each issue date there remains outstanding and unpaid any amount due and owing under the participant interest.  The first anniversary shares were issued in February 2011, at a value of $0.09 per share, the closing price of the Company’s common stock on December 30, 2010.  The second anniversary shares were issued in February 2012, at a value of $0.42 per share, the closing price of the Company’s common stock on December 30, 2011.


The remaining undivided interest in the Note is owned by the Company and is eliminated in consolidation as the debtor is a wholly owned operating subsidiary.  The Note has not been modified and continues to be in technical default.


Effective October 11, 2012, the Company and the participants consummated an Amended and Restated Allonge and Loan Participation Agreement.  The amended agreement provided for an additional $55,000 of borrowing from the primary participant, which amount was added to the existing loan participation interest.  At the time the amendment was consummated the balances and participating interests in the Note were as follows:


 

Amount

 

% Interest

Global Casinos, Inc.

 $482,138

 

66.91%

Primary participant

 227,834

 

31.62%

Pete Bloomquist - Director

 10,538

 

1.47%

Balance of Note

 $720,510

 

100.00%


As consideration for the additional funding, the participant received common stock purchase warrants exercisable for five years to acquire up to 60,000 shares of the Company’s common stock at an exercise price of $1.25 per share.  The estimated fair value of the warrants issued was $42,500 and is included in general and administrative expenses as a non-cash financing charge, and was determined using the following assumptions:


Expected volatility

121%

Contractual term

5 years

Risk free interest rate

0.65%

Expected dividend rate

0%



The amended agreement also extended the maturity dates of the participants’ interests to December 31, 2015, and established a 13% interest rate on the participation obligations.



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At March 31, 2013, loan participation obligations consisted of the following:

 

 


Participation obligation payable to unaffiliated third party with an undivided 31.6% interest in senior mortgage secured by real estate, monthly principal and interest payments of $5,800, due December 31, 2015.




$      210,811


Participation obligation payable to director with and undivided 2.08% interest in senior mortgage secured by real estate, monthly principal and interest payments of $265, due December 31, 2015.




       9,768


Total loan participation obligations

Less current portion       


220,579

 (46,827)

 

 

Loan participations, long-term

    $ 173,752


7.     CONVERTIBLE DEBT


5% Notes due 2013: On July 16, 2010, the Company’s board of directors approved a private offering of its securities consisting of up to $120,000 in 5% Unsecured Convertible Debentures (“Debentures”).  All $120,000 of debentures was sold in July and August 2010, and will mature and be due and payable in July and August 2013.  The principal amount of the Debentures accrue interest at the rate of 5% per annum and will be payable at the maturity date. The Debentures are convertible, at the option of the investor, at any time, into shares of the Company’s Series E Convertible Preferred Stock at a conversion price equal to $0.25 per share of Series E Preferred, which is in turn convertible into shares of common stock at the same price.  At the time of issuance and based on the Company’s common stock trading activity, the Company determined that no beneficial conversion feature was associated with the Debentures.  The Debentures will automatically convert into shares of Series E Preferred Stock under certain circumstances.


On October 31, 2012 a total of $45,000 of 5% Convertible Notes together with $5,119 of accrued interest was converted into shares of the Company’s common stock.  As a result, 200,476 shares of the Company’s common stock were issued to the investors.


On July 24, 2012 an investor converted $25,000 of principal plus $2,503 of accrued interest, into shares of the Company’s common stock.  As a result, 110,014 shares of common stock were issued to the investor.


8% Notes due 2013 and Stock Purchase Warrants: On September 26, 2011 the Company’s Board of Directors approved a private offering of units of the Company’s securities of up to $720,000.  On February 2, 2012, the Company’s Board of Directors approved an increase of the private offering of up to $850,000.


Each unit consisted of an 8% Convertible Note and one Class A Warrant for each $1.00 in Note purchased.  The Class A Warrants are exercisable into shares of the Company’s common stock for a



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period of three years at an exercise price of $0.50 per share.  The price of the offering was the principal amount of the Note.  The Convertible Notes accrue interest at 8% per year, mature two years from the date of issuance with all principal and interest due at maturity.  At the option of the holder, the Note principal and accrued interest are convertible to shares of the Company’s common stock at a conversion price of $0.50 per share.  In addition, for every $1.00 in Note principal converted, the holder will receive one additional share of Common Stock and two Class B Warrants, each exercisable for a period of three years at an exercise price of $0.75 per share.  As of March 31, 2013 none of the Notes have been converted.


All $850,000 of units were sold during the year ended June 30, 2012.  Of this amount, $703,500 mature on October 31, 2013, and $146,500 mature on February 7, 2014.  We applied the provisions of ASC 470-20 “Debt With Conversions and Other Options” in which the fair value of the warrants are allocated to stockholders’ equity and considered as a discount to the face amount of the Note principal.  The resulting discount to the Notes is amortized to interest expense over the life of the Notes.  Should a Note be converted or paid prior to the maturity date, the related discount would be charged off, pro-rata, to interest expense.


The estimated fair value of the investor warrants issued from the sale of $703,500 of convertible notes on October 31, 2011 was $322,000, and was determined using the following assumptions:


Expected volatility

139%

Contractual term

3 years

Risk free interest rate

0.48%

Expected dividend rate

0%


The estimated fair value of the investor warrants issued from the sale of $146,500 of convertible notes on February 7, 2012 was $43,500, and was determined using the following assumptions:


Expected volatility

138%

Contractual term

3 years

Risk free interest rate

0.35%

Expected dividend rate

0%


In addition, based on the trading price of the Company’s common stock on the date of issue of these Notes, in accordance with ASC 470 the conversion terms were considered a beneficial conversion features.  The beneficial conversion feature for the $703,500 notes sold on October 31, 2011, representing the intrinsic value of the difference between the fair value of underlying common stock on the issue date and the terms of the conversion was calculated to be approximately $520,000.  However, ASC 470-20-30-8 limits the amount of the beneficial conversion feature to be allocated to the proceeds of the debt, after the allocation of the fair value of the warrants, to the total proceeds of the debt.  Therefore, $381,500 relating to the beneficial conversion features was allocated to stockholders’ equity and is reflected as a discount to the amount of the notes and is being amortized to interest expense over the term of the notes.  An additional $29,300 relating to the beneficial conversion features of the $146,500 in convertible notes sold on February 7, 2012 was allocated to stockholders’ equity and is reflected as a discount to the amount of the notes and is being amortized



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to interest expense over the term of the notes.  Should a Note be converted or paid prior to the maturity date, the related discount would be charged off, pro-rata, to interest expense.  


For the three and nine months ended March 31, 2013, interest expense relating to the amortization of the debt discount for the fair value of the warrants and the beneficial conversion feature were $97,038 and $291,113, respectively.  For the three and nine months ended March 31, 2012, interest expense relating to the amortization of the debt discount for the fair value of the warrants and the beneficial conversion feature were $94,004 and $152,629, respectively.


The Company engaged the services of a broker-dealer as a selling agent to assist in this offering of securities.  On sales involving the assistance of the selling agent, the Company paid the selling agent a fee equal to 5% of the price of the securities, and 10% common stock and warrant coverage on all shares of common stock underlying the securities sold by the selling agent.  Through completion of the private offering in 2012 the Company had paid to the agent a total of $42,500.


With respect to the sale of $703,500 of convertible notes on October 31, 2011, in addition to the agent’s cash fees, the agent was entitled to 211,050 Class A warrants for sales of units involving the agent’s assistance.  The estimated fair value of the warrants in the amount of $97,200 has been allocated to stockholders’ equity and charged to the Company’s operations as financing costs for the year ended June 30, 2012.  The estimated fair value of the warrants was determined using the following assumptions:


Expected volatility

139%

Contractual term

3 years

Risk free interest rate

0.48%

Expected dividend rate

0%


With respect to the sale of $146,500 of convertible notes on February 7, 2012, in addition to the agent’s cash fees, the agent was entitled to 43,950 Class A warrants for sales of units involving the agent’s assistance.  The estimated fair value of the warrants in the amount of $13,100 has been allocated to stockholders’ equity and charged to the Company’s operations as financing costs for the year ended June 30, 2012.  The estimated fair value of the warrants was determined using the following assumptions:


Expected volatility

138%

Contractual term

3 years

Risk free interest rate

0.35%

Expected dividend rate

0%



In addition to the cash fees and warrant coverage for selling agent assisted sales, for each $100 of Notes converted, the agent would be entitled to an additional 10 shares of the company’s common stock and 20 Class B Warrants.  Each Class B Warrant is exercisable for a period of three years at an exercise price of $0.75 per share.  A contingency exists for this feature, the outcome of which cannot be determined.




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8.     STOCKHOLDERS' EQUITY


Preferred Stock


The Company has authorized 10,000,000 shares of preferred stock.  These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors.


Series A Convertible Redeemable Preferred Stock


The Company's Board of Directors has authorized 2,000,000 shares of $2.00 stated value, Series A Preferred Stock.  The preferred stock has a senior liquidation preference value of $2.00 per share.  It does not bear dividends. The conversion privileges originally included with the stock have expired.  The preferred stock originally contained a mandatory redemption feature that required the Company to redeem the outstanding stock on May 31, 1995 at a rate of $2.00 per share.  On May 31, 1995, a majority of the preferred stockholders agreed to waive the mandatory redemption in consideration for a lower conversion price into common shares at $1.125 per share.  Subsequently, holders of 1,205,750 shares of Series A preferred stock converted their holdings into common stock.  The remaining 200,500 outstanding shares of Series A preferred stock are held by owners who chose not to participate in the revised offer and remain outstanding at December 31, 2012.  During the year ended June 30, 2005, the Company determined that the mandatory redemption feature expired due to the statute of limitations.  Accordingly, the Series A preferred stock was reclassified from current liabilities to stockholders' equity.


Series B Convertible Redeemable Preferred Stock


The Company's Board of Directors has authorized 400,000 shares of $10.00 stated value, Series B Convertible Preferred Stock.  Each share of Series B preferred stock is convertible into one share of the Company's common stock or may be redeemed at an exercise price of $10.00 per share.  In addition, the Series B shares have a junior liquidation preference of $10.00 per share.  Holders of the Series B preferred stocks are entitled to receive an annual dividend payable at the rate of 8% per annum, which is cumulative, and unpaid dividends bear interest at an annual rate of 12%.  As of March 31, 2013 there were no shares outstanding.


Series C Convertible Preferred Stock


In January 1999, the Board of Directors of the Company ratified the issuance of Series C preferred stock. The Company has authorized 600,000 Series C shares with a stated value of $1.20 per share.  Series C shares are convertible into common stock at a rate of $1.20 per share.  Holders of Series C preferred stock are entitled to vote and to receive dividends at the annual rate of 7% based on the stated value per share.  In addition, the holders of Series C preferred stock are entitled to participate, pro rata, in dividends paid on outstanding shares of common stock.  The dividends are cumulative and unpaid dividends bear interest at an annual rate of 10%.  As of March 31, 2013 there were no shares outstanding.




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Series D Convertible Preferred Stock


In February 2008, the Board of Directors of the Company established a series of the class of preferred stock designated “Series D Convertible Preferred Stock” (Series D preferred stock) and authorized an aggregate of 1,000,000 non-voting shares with a stated value of $1.00 per share.  Holders of the Series D preferred stock are entitled to receive dividends at the annual rate of eight percent (8%) based on the stated value per share computed on the basis of a 360 day year and twelve 30 day months.  Dividends are cumulative, shall be declared quarterly, and are calculated from the date of issue and payable on the fifteenth day of April, July, October and January.  The dividends may be paid, at the option of the holder either in cash or by the issuance of shares of the Company’s common stock valued at the market price on the dividend record date.  Shares of the Series D preferred stock are redeemable at the Company’s option.  At the option of the holder shares of the Series D preferred stock plus any declared and unpaid dividends are convertible to shares of the Company’s common stock at a conversion rate of $1.00 per share.


In March 2008, the Company completed a private offering of 700,000 shares of Series D Preferred stock.  The $700,000 proceeds from the private offering were used as partial payment to the seller of Doc Holliday at the acquisition closing on March 18, 2008.


Dividends of $14,000 were declared on March 31, 2013.  All quarterly dividends previously declared had been paid.


Series E Convertible Preferred Stock


On July 12, 2010, the Company’s Board of Directors approved an Amendment to the Articles of Incorporation of the Company to authorize a new series of preferred stock designated Series E Convertible Preferred Stock (“Preferred Stock”).  The Amended and Restated Certificate of Designations, Preferences and Rights of Series E Convertible Preferred Stock authorized six hundred thousand (600,000) shares of the Company’s authorized Preferred Stock to be designated as Series E Convertible Preferred Stock, having a stated value of $0.25 per share.  Holders of the Preferred Stock shall have no voting rights, but shall be entitled to receive dividends when, as and if declared by the Board of Directors, in its sole discretion.  In addition, the holders of the Preferred Stock shall be entitled to participate, pro rata, in dividends paid on outstanding shares of common stock.  The Preferred Stock is redeemable by the Company at its sole option and discretion at any time after six months from the initial issue date, at the Preferred Stock’s stated value plus any accrued and unpaid dividends, if any, and may be paid in cash or in shares of common stock valued at 75% of the volume weighted-average price of the common stock for the ten trading days immediately prior to the date of the redemption notice.  In addition, at any time prior to redemption, but after the earlier of ninety days from the date of issuance, or the effective date of a Registration Statement registering for sale the shares of the common stock issuable upon such conversion, holders of the Preferred Stock shall have the right to convert their shares into common stock, at a conversion rate of $0.25 per share plus any accrued or unpaid dividends.  As of March 31, 2013, no shares of Series E Convertible Preferred Stock were outstanding.




26





Common Stock


The Company has authorized 50,000,000 shares of $0.05 par value common stock.


On October 31, 2012 a total of $45,000 of 5% Convertible Notes together with $5,119 of accrued interest was converted into shares of the Company’s common stock.  As a result, 200,476 shares of the Company’s common stock were issued to the investors.


On July 24, 2012 an investor converted $25,000 of principal plus $2,503 of accrued interest on our 5% Convertible Notes, into shares of the Company’s common stock.  As a result, 110,014 shares of common stock were issued to the investor.


As discussed in Loan Participation Obligations, in November 2009 the Company issued 50,000 shares of the Company’s common stock valued at $0.38 per share determined by market trading activity on and around the settlement date, as a participation fee to an unaffiliated third party.  The participant was also entitled to 50,000 shares of the Company’s common stock on the first and second annual anniversaries, provided that on each issue date there remains outstanding and unpaid any amount due and owing under the participant interest.  The first anniversary shares were issued in February 2011, at a value of $0.12 per share, the closing price of the Company’s common stock on November 30, 2010.  The second anniversary shares were issued in February 2012, at a value of $0.45 per share, the closing price of the Company’s common stock on November 30, 2011.


Also as discussed in Loan Participation Obligations, in December 2009 the Company issued 3,000 shares of the Company’s common stock valued at $0.39 per share determined by market trading activity on and around the settlement date, as a participation fee to a director.  The participant was also entitled to 3,000 shares of the Company’s common stock on the first and second annual anniversaries, provided that on each issue date there remains outstanding and unpaid any amount due and owing under the participant interest.  The first anniversary shares were issued in February 2011, at a value of $0.09 per share, the closing price of the Company’s common stock on December 30, 2010.  The second anniversary shares were issued in February 2012, at a value of $0.42 per share, the closing price of the Company’s common stock on December 30, 2011.


On January 5, 2007, the stockholders approved a proposal to adopt and approve a reverse split of up to a ratio of one-for-five of the issued and outstanding shares of our common stock, and issued and outstanding options, warrants and other rights convertible into shares of our common stock, all at the discretion of our Board of Directors to be implemented in the future as and when determined by our Board of Directors. That reverse split has not been implemented.


9.     COMMITMENTS AND CONTINGENCIES


Leases


The Doc Holliday Casino currently leases approximately 13,000 square feet of space used for its gaming activities, supporting offices and storage space for $25,362 per month under an operating lease that terminates in July 2015.  The lease requires the Casino to pay for all building expenses until the landlord secures additional tenants to occupy the remaining building space.  If the building



27





is fully leased the Casino’s proportionate share will be equal to 32% of the total building expense burden.  The lease also provides for a credit against future monthly rent payments to the extent the total building expenses paid by the casino increase by more than 3% over a 2004 base year calculation (“floor”).  The total amount of building expenses expected to be in excess of the floor is estimated and capitalized on a monthly basis and reconciled to the actual allowable excess annual expenses in April each year.  The actual excess expenses are available for credit against rent payments beginning the following July each year under the lease.  At March 31, 2013 the total credit available to apply against future rent payments was approximately $51,000, and is included in prepaid expenses and other current assets at March 31, 2013.  Rent expense for each of the three months ended March 31, 2013 and 2012, net of applied monthly expense credits, was $58,822.  Rent expense for each of the nine months ended March 31, 2013 and 2012, net of applied monthly expense credits was $176,466.  


On January 29, 2010 the landlord of the Doc Holliday Casino property agreed to a rent abatement in the total aggregate amount of $40,000 prorated over a six month term in the amount of $6,667 per month beginning in February, 2010 and continuing through July 2010.  In consideration of the rent abatement the Company agreed to replace all carpeting on the first floor of the premises, which was completed in February 2010, at a cost of approximately $29,000.  The amount of the rent abatement in excess of the cost of the carpet replacement, or approximately $11,000, was recorded as deferred rent and is being amortized to rent expense over the remaining life of the lease.


On December 31, 2010 the Company and the landlord of the Doc Holliday Casino property agreed to amend the lease agreement noted above.  As a result, for the period commencing January 1, 2011 and ending December 31, 2011 the base rent was adjusted to $250,000, payable at a rate of $20,833 per month.  The amendment resulted in a monthly reduction of the base rent of approximately $4,500 per month during the abatement period.  The total rent abatement under the agreement of approximately $54,000 was recorded as deferred rent and is being amortized to rent expense over the remaining life of the lease.  All existing agreements with respect to triple net expenses and the cap on the Company’s liability for annual increases in such expenses remained in effect for the lease period.  In consideration of the rent abatement, the Company agreed that the digital surveillance system installed on the premises would be deemed the sole and separate property of the landlord upon termination of the lease.  At March 31, 2013 the system had a net book value of approximately $24,000.


Beginning January 1, 2012, the Company has continued to pay rent at the modified rate agreed to in 2011, with the acquiescence of the landlord but without a formal agreement extending the modification.




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Future minimum lease payments considering the rent abatement but before application of rent credits for the fiscal years ending June 30 are as follows:


2013

 

$         76,086

2014

 

        304,344

2015

 

        304,344

2016

 

25,362

Total

                 $

       710,136


10.     INCOME TAXES


The Company and its subsidiaries are subject to income taxes on income arising in, or derived from, the tax jurisdictions in which they operate.  The Company is current with all its federal and state tax filings, and no periods have been subjected to IRS examination.


Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are comprised entirely of net operating loss carry-forwards.


For the years ended June 30, 2012 and 2011, the reconciliation between the statutory tax rate and the effective tax rate as a percentage is as follows:

 

 

 

2012

2011

 

Statutory federal income tax rate

Statutory state income tax rate

 

34%

    4%

34%

    4%

 

Effect of net operating loss carry-forward

 

  (38)

  (38)

 

 

 

    -%

    -%

At June 30, 2012, the Company had net operating loss carry forwards of approximately $7,031,000 available to reduce future taxable income.  The net operating loss carry forwards expire in the years ending June 30 as follows:


 

2016

 

$  897,000

 

2017

 

518,000

 

2018

 

790,000

 

2019

 

1,985,000

 

2020

 

316,000

 

2021

 

985,000

 

2022

 

    82,000

 

2029

 

     30,000

 

2030

 

198,000

 

2031

 

     327,000

 

2032

 

   903,000

 

 

 

$7,031,000


When more than a 50% change in ownership occurs, over a three-year period, as defined, the Tax Reform Act of 1986 limits the utilization of net operating loss (NOL) carry forwards in the years



29





following the change in ownership.  Therefore, the Company's utilization of its NOL carry forwards may be partially reduced as a result of changes in stock ownership.  No determination has been made as of June 30, 2012, as to what implications, if any, there will be in the net operating loss carry forwards of the Company.  In addition, the Company has a limited history of earnings, and there is no guarantee of future earnings to offset the net operating loss carry forwards. The deferred tax asset resulting from the net operating loss carry forwards of approximately $2,390,000 is offset by a valuation allowance due to the uncertainty of the realization of the net operating loss carry forwards.  The net increase in the valuation allowance was approximately $307,000 from June 30, 2011 to June 30, 2012, and primarily results from the operating loss for the year ended June 30, 2012.


11.     STOCK INCENTIVE PLAN


The Company has a Stock Incentive Plan (the "Incentive Plan"), that allows the Company to grant incentive stock options and/or purchase rights (collectively "Rights") to officers, employees, former employees and consultants of the Company and its subsidiaries.  

       

A summary of stock option activity is as follows:

 

 

 

 

Number of Shares

 

Weighted average Exercise Price

Balance at June 30, 2011

        135,000

 

 $             1.00

 

Granted

                -   

 

 

 

Exercised

      -

 

 

 

Expired

      -

 

 

Balance at June 30, 2012

        135,000

 

 $             1.00

 

Granted

                -   

 

 

 

Exercised

                -   

 

 

 

Expired

                135,000   

 

$             1.00

Balance at March 31, 2013

        -

 

           



The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based on historical volatility as well as expected trends for any known or expected events that might affect the volatility of our future stock prices. Because of the lack of historical forfeiture data, no adjustments to the expected option life were made for expected forfeitures.  The expected life represents an estimate of the time options are expected to remain outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield in effect at the time of grant.




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For the three and nine months ended March 31, 2013 and 2012, no options or warrants to purchase common stock were granted under the stock incentive plan, and as such we recorded no compensation expense under the requirements as discussed above.


12.     CONSULTING AGREEMENTS


The Company had no significant consulting agreements at March 31, 2013.


13.     RELATED PARTIES


An officer and director operates a law firm that provides legal services to the Company.  During the nine months ended March 31, 2013 and 2012, his billings to the Company totaled $62,118 and $73,301, respectively.  At March 31 and June 30 2012, amounts due to him were $1,358 and $7,891, respectively, and are included in accounts payable, related parties.


The Company contracts with an officer to provide management and accounting services to the Company.  During the nine months ended March 31, 2013 and 2012, his billings to the company for services were $26,000 and $24,750, respectively.  At March 31, 2013 and June 30, 2012, amounts due him were $2,725 and $4,750, respectively, and are included in accounts payable, related parties.


On December 30, 2009 the Company executed an Allonge and Loan Participation Agreement whereby the Company assigned to a director for an undivided 2.08% interest in a mortgage note receivable from the Bull Durham Casino for total consideration of $15,000 and a loan participation fee of 3,000 shares of the Company’s common stock valued at $0.39 per share.  As discussed above, the participant is also entitled to 3,000 shares of the Company’s common stock on the first and second annual anniversaries, provided that on each issue date there remains outstanding and unpaid any amount due and owing under the participant interest.  The first anniversary shares were issued in February 2011, at a value of $0.09 per share, the closing price of the Company’s common stock on the anniversary date.  The second anniversary shares were issued in February 2012, at a value of $0.42 per share, the closing price of the Company’s common stock on December 30, 2011.  This transaction is further discussed in footnote titled “Loan Participation Obligations.”  


14.     JOINT VENTURE OBLIGATION


On February 28, 2006, the Company entered into an Organization Agreement with a certain individual to form a for-profit limited liability company under the name of Global Gaming Technologies, LLC (“GGT”).  Under the terms of the Agreement, the individual contributed to GGT all of his intellectual property rights related to two games of poker. The Company agreed to make an initial cash capital contribution to GGT of $100,000, for which it received a 25% equity interest in GGT.  At the Company’s election, it may make an additional $100,000 cash capital contribution to GGT for which it will receive an additional 25% equity interest.  


As of March 31, 2013 the further development of the two games had been suspended.  Through March 31, 2013, the Company had made cash payments directly to or on behalf of GGT of $76,395 as part of the initial $100,000 cash capital payments required under the Agreement.  The remaining



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$23,605 obligation is recorded as a current liability pending the determination of any future activity of this joint venture.  As of March 31, 2013, GGT had no revenues.



15.     DEFINITIVE AGREEMENTS



Background


The Company previously announced that effective June 1, 2012, it entered into two material definitive agreements:


1) A Split-Off Agreement with Gemini Gaming, LLC (“Gemini”) to sell all of its gaming properties, interests and operations (the “Split-Off Agreement”).  Gemini is controlled by Clifford Neuman, the Company’s President and Director, Pete Bloomquist, a Director, and Doug James, the General Manager of the Company’s two casinos: Bull Durham Casino and Doc Holliday Casino.


2) A Stock Purchase Agreement to acquire 100% of the outstanding equity securities of Georgia Healthcare REIT, Inc. (“Ga. REIT”) from its sole stockholder, Christopher Brogdon. (the “Ga REIT SPA”).


Consummation of the Split-Off Agreement and Ga REIT SPA was subject to numerous conditions precedent, including the approval of the Colorado Gaming Commission and the approval of the Split-Off by the shareholders of the Company.


Subsequent to the execution of the Split-Off Agreement and Ga REIT SPA, Ga REIT consummated the acquisition of a skilled nursing facility called the Middle Georgia Nursing Home located in Eastman, Georgia. (“Middle Georgia”) 


In July 2012, the Company filed with the Securities Exchange Commission (“SEC”) its Information Statement on Schedule 14C (the “14C”) reflecting that it had obtained shareholder approval of the Split-Off Agreement by the written consent of the holders of a majority of its outstanding voting securities. At the time of filing the 14C, Ga REIT had only acquired Middle Georgia, but did not include any audited financial statements of the historical operator of Middle Georgia based on its analysis that such acquisition did not constitute a “business acquisition” within the meaning of Regulation S-X.   In response to the filing of the 14C, the Company was advised by the SEC staff that it took the view that Section 2340 of the Financial Reporting Manual required the inclusion of audited financial statements of any “significant lessee”; which in their view included the historical operator of Middle Georgia.


In response to the SEC position, Ga REIT undertook the audit of the financial statements of the historical operator of Middle Georgia.


However, concurrently with completing the audit of the Middle Georgia operator audit, Ga REIT consummated a second acquisition of a skilled nursing facility located in Scottsburg, Indiana (“Scottsburg”).  Noting the SEC position regarding the need to include audited financial statements of any significant lessee, Ga REIT began the task of auditing the financial statements of the historical operator of Scottsburg.  Notwithstanding diligent and protracted effort, Ga REIT has been unable to obtain the information necessary to complete an audit of the Scottsburg historical operator, and the



32





process of completing the Split-Off and Ga REIT SPA has been thwarted.


Restructure of Material Agreements


Recognizing the obstacles in completing the Split-Off and Ga REIT SPA due to the inability to complete an audit of the Scottsburg historical operator, the Company and Brogdon agreed in principle to restructure their agreements to provide the following:


1) Brogdon would create a “Newco”, which he did under the name “West Paces Ferry Healthcare REIT, Inc. (“West Paces”);


2) Ga REIT would transfer all of its interest in Middle Georgia to West Paces in consideration of West Paces assuming Ga REIT’s obligation to repay the $500,000 note owed to the Company;


3) The Company would enter into a new stock purchase agreement with the shareholders of West Paces having identical provisions to the Ga REIT SPA;


4) The Company and Brogdon would agree to terminate the GA REIT SPA; and,


5) The Company and Gemini would amend the Split-Off Agreement to extend the closing date to December 31, 2013.



In accordance with the foregoing, the Company has entered into the following material agreements:


Termination Agreement with Ga REIT


This Agreement terminated the Ga REIT SPA and released all parties from any further liability thereunder.


Amendment No. 1 to Split-Off Agreement


This Amendment extends the termination date of the Split-Off Agreement to December 31, 2013.  It is the belief that this gives the parties sufficient time to satisfy the numerous conditions precedent to consummating the Split-Off.


Stock Purchase Agreement with West Paces


The West Paces SPA is identical in terms and conditions to the former Ga REIT SPA.



Consummation of the Split-Off and West Paces SPA continue to be subject to numerous conditions precedent, including the approvals of the Colorado Gaming Commission and the shareholders of the Company.  No prediction can be made when such conditions can be satisfied.





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16.     SUBSEQUENT EVENTS


Effective May 2, 2013, the Company and Gemini Gaming, LLC, executed an Amended and Restated Split-Off Agreement, which supercedes the initial Split-Off Agreement and Amendment No. 1 thereto.


The Company has evaluated subsequent events through the time of issuance of the financial statements.








34






 

 


ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical facts are forward-looking statements such as statements relating to future operating results, existing and expected competition, financing and refinancing sources and availability and plans for future development or expansion activities and capital expenditures.  Such forward-looking statements involve a number of risks and uncertainties that may significantly affect our liquidity and results in the future and, accordingly, actual results may differ materially from those expressed in any forward-looking statements.  Such risks and uncertainties include, but are not limited to, those related to effects of competition, leverage and debt service financing and refinancing efforts, general economic conditions, changes in gaming laws or regulations (including the legalization of gaming in various jurisdictions) and risks related to development and construction activities.  The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report.


Overview


We operate in the domestic gaming industry.  We were organized as a holding company for the purpose of acquiring and operating casinos, gaming properties and other related interests.


As of March 31, 2013, our operating subsidiaries were Casinos USA, Inc. ("Casinos USA,” a Colorado corporation), which owns and operates the Bull Durham Saloon and Casino ("Bull Durham"), located in the limited stakes gaming district of Black Hawk, Colorado, and Doc Holliday Casino II, LLC (a Colorado limited liability company), which operates the Doc Holliday Casino (“Doc Holliday”), located in the limited stakes gaming district of Central City, Colorado.


Our operations are seasonal.  Our casinos typically experience a significant increase in business during the summer tourist season.


We operate in a highly regulated environment subject to the political process.  Our retail gaming licenses are subject to annual renewal by the Colorado Division of Gaming.  Changes to existing statutes and regulations could have a negative effect on our operations.


Definitive Agreements


Background


The Company previously announced that effective June 1, 2012, it entered into two material definitive agreements:


1) A Split-Off Agreement with Gemini Gaming, LLC (“Gemini”) to sell all of its gaming properties,



35





interests and operations (the “Split-Off Agreement”).  Gemini is controlled by Clifford Neuman, the Company’s President and Director, Pete Bloomquist, a Director, and Doug James, the General Manager of the Company’s two casinos: Bull Durham Casino and Doc Holliday Casino.


2) A Stock Purchase Agreement to acquire 100% of the outstanding equity securities of Georgia Healthcare REIT, Inc. (“Ga. REIT”) from its sole stockholder, Christopher Brogdon. (the “Ga REIT SPA”).


Consummation of the Split-Off Agreement and Ga REIT SPA was subject to numerous conditions precedent, including the approval of the Colorado Gaming Commission and the approval of the Split-Off by the shareholders of the Company.


Subsequent to the execution of the Split-Off Agreement and Ga REIT SPA, Ga REIT consummated the acquisition of a skilled nursing facility called the Middle Georgia Nursing Home located in Eastman, Georgia. (“Middle Georgia”) 


In July 2012, the Company filed with the Securities Exchange Commission (“SEC”) its Information Statement on Schedule 14C (the “14C”) reflecting that it had obtained shareholder approval of the Split-Off Agreement by the written consent of the holders of a majority of its outstanding voting securities. At the time of filing the 14C, Ga REIT had only acquired Middle Georgia, but did not include any audited financial statements of the historical operator of Middle Georgia based on its analysis that such acquisition did not constitute a “business acquisition” within the meaning of Regulation S-X.   In response to the filing of the 14C, the Company was advised by the SEC staff that it took the view that Section 2340 of the Financial Reporting Manual required the inclusion of audited financial statements of any “significant lessee”; which in their view included the historical operator of Middle Georgia.


In response to the SEC position, Ga REIT undertook the audit of the financial statements of the historical operator of Middle Georgia.


However, concurrently with completing the audit of the Middle Georgia operator audit, Ga REIT consummated a second acquisition of a skilled nursing facility located in Scottsburg, Indiana (“Scottsburg”).  Noting the SEC position regarding the need to include audited financial statements of any significant lessee, Ga REIT began the task of auditing the financial statements of the historical operator of Scottsburg.  Notwithstanding diligent and protracted effort, Ga REIT has been unable to obtain the information necessary to complete an audit of the Scottsburg historical operator, and the process of completing the Split-Off and Ga REIT SPA has been thwarted.


Restructure of Material Agreements


Recognizing the obstacles in completing the Split-Off and Ga REIT SPA due to the inability to complete an audit of the Scottsburg historical operator, the Company and Brogdon agreed in principle to restructure their agreements to provide the following:


1) Brogdon would create a “Newco”, which he did under the name “West Paces Ferry Healthcare REIT, Inc. (“West Paces”);


2) Ga REIT would transfer all of its interest in Middle Georgia to West Paces in consideration of West Paces assuming Ga REIT’s obligation to repay the $500,000 note owed to the Company;



36






3) The Company would enter into a new stock purchase agreement with the shareholders of West Paces having identical provisions to the Ga REIT SPA;


4) The Company and Brogdon would agree to terminate the GA REIT SPA; and,


5) The Company and Gemini would amend the Split-Off Agreement to extend the closing date to December 31, 2013.



In accordance with the foregoing, the Company has entered into the following material agreements:


Termination Agreement with Ga REIT


This Agreement terminated the Ga REIT SPA and released all parties from any further liability thereunder.


Amendment No. 1 to Split-Off Agreement


This Amendment extends the termination date of the Split-Off Agreement to December 31, 2013.  It is the belief that this gives the parties sufficient time to satisfy the numerous conditions precedent to consummating the Split-Off.


Stock Purchase Agreement with West Paces


The West Paces SPA is identical in terms and conditions to the former Ga REIT SPA.


Effective May 2, 2013, the Company and Gemini Gaming, LLC, executed an Amended and Restated Split-Off Agreement, which supercedes the initial Split-Off Agreement and Amendment No. 1 thereto.


Consummation of the Split-Off and West Paces SPA continue to be subject to numerous conditions precedent, including the approvals of the Colorado Gaming Commission and the shareholders of the Company.  No prediction can be made when such conditions can be satisfied.



Results of Operations – Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012


We recognized a net loss attributable to common shareholders after $14,000 of dividends on our Series D preferred stock of $(229,391) ($(0.03) per share) for the three months ended March 31, 2013, compared to a net loss attributable to common shareholders after dividends of $14,156, of $(226,719) ($(0.03) per share) for the three months ended March 31, 2012.


Revenues


Casino revenues for the three months ended March 31, 2013 were $1,246,663 compared to $1,332,590 for the three months ended March 31, 2012, a decrease of $(85,927) or (6.4)%.  Total



37





casino revenues for the Bull Durham were $878,492 and $867,792 for the three months ended March 31, 2013 and 2012, respectively, an increase of $10,700 or 1.2%.  Total casino revenues for Doc Holliday were $368,171 and $464,798 for the three months ended March 31, 2013 and 2012, respectively, a decrease of $(96,627) or (20.8)%.  Total casino coin-in was down 11.9% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.  However, we experienced an increase of 0.43% in our hold percentage for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.


Promotional allowances primarily include anticipated redemptions associated with the Bull Durham Casino’s Sharpshooter’s Club which awards customers with cash payouts dependent upon the frequency and amount of their gaming activities on our slot machines.  The total allowances increased by $862 from $65,765 to $66,627, for the three months ended March 31, 2012 and 2013, respectively.


Operating Expenses


Casino operations:  Includes all expenses associated with the operations of the Bull Durham Casino and the Doc Holliday Casino for the three months ended March 31, 2013 and 2012.  The following table summarizes such expenses for comparison and discussion purposes:


 

 

For the three months ended

 

 

 

 

 

 

March 31, 2013

March 31, 2012

$ Change

 

% Change

Labor & Benefits

 

 $464,684

 

 $492,228

 

 $(27,544)

 

-5.6%

Marketing & Advertising

 

 257,166

 

 298,108

 

 (40,942)

 

-13.7%

Depreciation & Amortization

 84,724

 

 82,990

 

 1,734

 

2.1%

Food & Beverage

 

 62,342

 

 74,247

 

 (11,905)

 

-16.0%

Repair, Maintenance & Supplies

 107,176

 

 66,642

 

 40,534

 

60.8%

Device fees

 

 103,117

 

 107,085

 

 (3,968)

 

-3.7%

Professional fees

 

 11,700

 

 11,700

 

 -   

 

0.0%

Insurance, Taxes & Licenses

 47,380

 

 51,889

 

 (4,509)

 

-8.7%

Utilities & Telephone

 

 39,096

 

 37,294

 

 1,802

 

4.8%

Occupancy

 

 58,822

 

 58,822

 

 -   

 

0.0%

Other casino expenses

 

 12,084

 

 7,852

 

 4,232

 

53.9%

 

 

 $1,248,291

 

 $1,288,857

 

 $(40,566)

 

-3.1%



38









Labor & Benefits: Includes all salary and contract labor costs associated with the operations of the casinos, payroll taxes, as well as costs associated with the casinos’ employee benefit and health insurance plans.  The (5.6)% decrease is primarily attributable to adjustments to casino labor based on casino gaming activity.  Total labor and benefits as a percentage of casino revenues increased from 36.9% to 37.3% for the three months ended March 31, 2012 and 2013, respectively.


Marketing & Advertising: Includes all costs associated with our advertising and marketing efforts including promotional activities designed to drive customers to our casinos, and programs designed to foster customer loyalty.  The $(40,942) year-over-year decrease is primarily attributed to decreases in our monthly customer mailings and charter bus activities.


Depreciation & Amortization: Primarily includes depreciation on our gaming equipment, casino building improvements, furniture and fixtures, as well as amortization on our customer tracking software.  The year-over-year increase of $1,734 is primarily attributable to a new ticket system installed in the Bull Durham Casino in fiscal 2012.  Our efforts to upgrade existing slot machines versus purchasing of new machines due to capital constraints is ongoing.   Dependent upon the availability of capital, we are continuing our efforts to upgrade and maintain the quality and appearance of the machines in both casinos as part of our strategy to provide the best customer experience possible to enhance customer loyalty.


Food & Beverage: Includes all costs associated with our bar and limited menu food services.  Total food and beverage costs as a percentage of casino revenues were 5.0% and 5.6% for the three months ended March 31, 2013 and 2012, respectively.


Repair, Maintenance & Supplies: Includes costs associated with the general upkeep of the facility, as well as parts and repair efforts to maintain the quality of our slot machines.  It also includes costs associated with gaming machine leasing plans with suppliers of the Doc Holliday Casino to provide certain gaming equipment with payments dependent upon the machine’s activity, which was the primary driver of the increased costs in this category.  Total repair, maintenance and supplies costs as a percentage of casino revenues were 8.6% and 5.0% for the three months ended March 31, 2013 and 2012.


Device Fees: Includes fees paid to the local jurisdictions of the casinos based on the number of slot machines in operation.


Professional Fees: Includes all costs and fees associated with the casinos’ legal services, accounting and auditing services, and the Board of Directors of Casinos USA (d/b/a The Bull Durham Saloon & Casino).  


Insurance, Taxes & Licenses: Includes all non-payroll taxes, liability and property insurance, and licenses associated with the operation of the casinos.  Total insurance, taxes and licenses as a percentage of casino revenues were 3.8% and 3.9% for the three months ended March 31, 2013 and 2012, respectively.




39





Utilities & Telephone: Includes all costs associated with the casinos’ telephone systems, cell phone usage, and utility costs.  Total utilities and telephone expenses as a percentage of revenues were 3.1% and 2.8% for the three months ended March 31, 2013 and 2012, respectively.


Occupancy: Includes lease costs of the Doc Holliday Casino, which leases approximately 13,000 square feet of space used for its gaming activities, supporting offices and storage space under an operating lease that terminates in July 2015.  The lease requires the Casino to pay for a portion of the building expenses until the landlord secures additional tenants to occupy the remaining building space.  To the extent the Casino pays total building expenses in excess of the Casino’s portion as defined by the lease, any excess amounts paid are credited to the following lease year’s rent payments.  As of March 31, 2013, prepaid rent credits available to offset future rent payments was approximately $51,000 and are recorded as prepaid expenses and other current assets.  The difference between the amount recorded as occupancy expense and the scheduled rent payments is due to the amortization of available prepaid rent credits resulting from certain prior payments of building expenses as discussed above.


On January 29, 2010 the landlord of the Doc Holliday Casino property agreed to rent abatement in the total aggregate amount of $40,000 prorated over a six-month term in the amount of $6,667 per month beginning in February 2010, and continued through July 2010.  In consideration of the rent abatement the Company we replaced all carpeting on the first floor of the premises, which was completed in February 2010, at a cost of approximately $29,000.  The amount of the rent abatement in excess of the cost of the carpet replacement, or approximately $11,000, was recorded as deferred rent and is being amortized to rent expense over the remaining life of the lease.


On December 31, 2010 the landlord of the Doc Holliday Casino property agreed to further amend the lease agreement.  As a result, for the period commencing January 1, 2011 and ending December 31, 2011 the base rent was $250,000, payable at a rate of $20,833 per month.  The amendment resulted in a monthly reduction of the base rent of approximately $4,500 per month during the abatement period.  The total rent abatement under the agreement of approximately $54,000 was recorded as deferred rent and is being amortized to rent expense over the remaining life of the lease.  All existing agreements with respect to triple net expenses and the cap on the Company’s liability for annual increases in such expenses remain in effect for the lease period.  In consideration of the rent abatement, the Company agreed that the digital surveillance system installed on the premises would be deemed the sole and separate property of the landlord upon termination of the lease.  At March 31, 2013 the system had a net book value of approximately $24,000.  Beginning January 1, 2012, the Company has continued to pay rent at the modified rate agreed to for 2011 with the landlord’s acquiescence but without a formal extension agreement.


Other Casino Expenses: Includes all other costs of the casino operations not included in the above categories, including travel, armored car services, postage, casino entertainment, employee education programs, bank and other financing fees, and lease costs associated with certain gaming equipment and off-site storage units.  Total other casino expenses as a percentage of revenues were 1.0% and 0.6% for the three months ended March 31, 2013 and 2012, respectively.

 




40





Operating, general, and administrative expenses:  Generally includes all expenses associated with the operations of the parent entity, Global Casinos, Inc., including legal and executive services provided by the company’s principal executive officer, accounting services provided by the company’s principal accounting officer, as well as clerical and bookkeeping services, corporate marketing and financing, and stock-based compensation costs relating to the company’s executive officers, directors, and subsidiary management.  


Total operating, general, and administrative costs were $23,632, as compared to $56,853 for the three months ended March 31, 2013 and 2012, respectively, a decrease of $(33,221), or (58.4)%.  The net decrease is primary attributable to financing costs incurred during February 2012 for common stock purchase warrants valued at $13,100 issued to the selling agent as commission for services performed in connection with our offering of 8% Convertible Debt securities completed in February 2012.  In addition, the selling agent is entitled to a fee equal to 5% of the price of the securities sold, and as such we also paid the agent a total of $9,825.  Furthermore, we also realized a decrease in legal and accounting fees of approximately $8,800 for the three months ended March 31, 2013 as compared to the same 2012 period primarily the result of additional legal and accounting services associated with the debt securities offerings during 2012.


Interest Expense


Net interest expense was $123,504 for the three months ended March 31, 2013 compared to $133,678 for the three months ended March 31, 2012, and includes regularly scheduled payments on various mortgages collateralized by the Bull Durham Saloon and Casino real estate and interest on our loan participation obligations and convertible debt.


In addition to regular interest associated with the instruments above, the 8% Convertible debt sold during the second and third quarters of fiscal year ended June 30, 2012 included detachable warrants.  The estimated fair value of the warrants was $439,200, which was allocated to stockholders’ equity and recorded as a discount to the face value of the convertible notes.  This amount is being amortized to interest expense over the two-year life of the debt.  During the three months ended March 31, 2013 and 2012, $45,688 and $43,875, respectively, of the discount was amortized representing a non-cash charge to interest expense.  Furthermore, the conversion terms of the 8% Convertible debt also included a beneficial conversion feature totaling $410,800.  This amount is also being amortized to interest expense over the two-year life of the debt.  During the three months ended March 31, 2013 and 2012, $51,350 and $50,129, respectively, of the discount was amortized representing a non-cash charge to interest expense.  


Interest expense is partially offset by interest income earned on certain cash balances maintained at financial institutions.


Results of Operations – Nine Months Ended March 31, 2013 Compared to the Nine Months Ended March 31, 2012


We recognized a net loss attributable to common shareholders after $42,622 of dividends on our Series D preferred stock of $(638,541) ($(0.09) per share) for the nine months ended March 31,



41





2013, compared to a net loss attributable to common shareholders after dividends of $42,778, of $(782,043) ($(0.11) per share) for the nine months ended March 31, 2012.


Revenues


Casino revenues for the nine months ended March 31, 2013 were $3,851,724 compared to $3,966,177 for the nine months ended March 31, 2012, a decrease of $(114,453) or (2.9)%.  Total casino revenues for the Bull Durham were $2,516,544 and $2,503,821 for the nine months ended March 31, 2013 and 2012, respectively, a slight decrease of $12,723 or 0.5%.  Total casino revenues for Doc Holliday were $1,335,180 and $1,462,356 for the nine months ended March 31, 2013 and 2012, respectively, a decrease of $(127,176) or (8.7)%.  Total casino coin-in was down (8.5)% for the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012.  The decline in casino coin-in was partially offset by an increase of 0.42% in our hold percentage for the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012.


Promotional allowances primarily include anticipated redemptions associated with the Bull Durham Casino’s Sharpshooter’s Club which awards customers with cash payouts dependent upon the frequency and amount of their gaming activities on our slot machines.  The total allowances increased by $37,853 from $152,910 to $190,763, for the nine months ended March 31, 2013 and 2012, respectively.


Operating Expenses


Casino operations:  Includes all expenses associated with the operations of the Bull Durham Casino and the Doc Holliday Casino for the nine months ended March 31, 2013 and 2012.  The following table summarizes such expenses for comparison and discussion purposes:


 

 

For the nine months ended

 

 

 

 

 

 

March 31, 2013

March 31, 2012

$ Change

 

% Change

Labor & Benefits

 

 $1,405,121

 

 $1,447,920

 

 $(42,799)

 

-3.0%

Marketing & Advertising

 

 821,051

 

 930,914

 

 (109,863)

 

-11.8%

Depreciation & Amortization

 260,968

 

 252,392

 

 8,576

 

3.4%

Food & Beverage

 

 207,280

 

 230,672

 

 (23,392)

 

-10.1%

Repair, Maintenance & Supplies

 272,740

 

 191,445

 

 81,295

 

42.5%

Device fees

 

 307,924

 

 317,529

 

 (9,605)

 

-3.0%

Professional fees

 

 35,100

 

 85,100

 

 (50,000)

 

-58.8%

Insurance, Taxes & Licenses

 141,512

 

 144,220

 

 (2,708)

 

-1.9%

Utilities & Telephone

 

 111,997

 

 120,270

 

 (8,273)

 

-6.9%

Occupancy

 

 176,466

 

 176,466

 

 -   

 

0.0%

Other casino expenses

 

 30,328

 

 33,312

 

 (2,984)

 

-9.0%

 

 

 $3,770,487

 

 $3,930,240

 

 $(159,753)

 

-4.1%



42









Labor & Benefits: Includes all salary and contract labor costs associated with the operations of the casinos, payroll taxes, as well as costs associated with the casinos’ employee benefit and health insurance plans.  The (3.0)% decrease is primarily attributable to adjustments to casino labor based on casino gaming activity, particularly at the Doc Holliday Casino that realized a decrease in total labor and benefits of (5.8)%.  Total labor and benefits as a percentage of casino revenues was 36.5% for the each of the nine months ended March 31, 2013 and 2012, respectively.


Marketing & Advertising: Includes all costs associated with our advertising and marketing efforts including promotional activities designed to drive customers to our casinos, and programs designed to foster customer loyalty.  The $(109,863) year-over-year decrease is primarily attributed to decreases in our monthly customer mailings and charter bus activities.


Depreciation & Amortization: Primarily includes depreciation on our gaming equipment, casino building improvements, furniture and fixtures, as well as amortization on our customer tracking software.  The year-over-year increase of $8,576 is primarily attributable to a new ticket system installed in the Bull Durham Casino in fiscal 2012.  Our efforts to upgrade existing slot machines versus purchasing of new machines due to capital constraints is ongoing.   Dependent upon the availability of capital, we are continuing our efforts to upgrade and maintain the quality and appearance of the machines in both casinos as part of our strategy to provide the best customer experience possible to enhance customer loyalty.


Food & Beverage: Includes all costs associated with our bar and limited menu food services.  Total food and beverage costs as a percentage of casino revenues were 5.4% and 5.8% for the nine months ended March 31, 2013 and 2012, respectively.


Repair, Maintenance & Supplies: Includes costs associated with the general upkeep of the facility, as well as parts and repair efforts to maintain the quality of our slot machines.  It also includes costs associated with gaming machine leasing plans with suppliers of the Doc Holliday Casino to provide certain gaming equipment with payments dependent upon the machine’s activity, which was the primary driver of the increased costs in this category.  Total repair, maintenance and supplies costs as a percentage of casino revenues were 7.1% and 4.8% for the nine months ended March 31, 2013 and 2012.


Device Fees: Includes fees paid to the local jurisdictions of the casinos based on the number of slot machines in operation.


Professional Fees: Includes all costs and fees associated with the casinos’ legal services, accounting and auditing services, and the Board of Directors of Casinos USA (d/b/a The Bull Durham Saloon & Casino).  The year-over-year decrease is attributable to the settlement of a sexual harassment claim during the nine months ended March 31, 2012 brought by certain former employees of the Doc Holliday Casino.


Insurance, Taxes & Licenses: Includes all non-payroll taxes, liability and property insurance, and licenses associated with the operation of the casinos.  Total insurance, taxes and licenses as a



43





percentage of casino revenues were 3.7% and 3.6% for the nine months ended March 31, 2013 and 2012, respectively.


Utilities & Telephone: Includes all costs associated with the casinos’ telephone systems, cell phone usage, and utility costs.  Total utilities and telephone expenses as a percentage of revenues were 2.9% and 3.0% for the nine months ended March 31, 2013 and 2012, respectively.


Occupancy: Includes lease costs of the Doc Holliday Casino, which leases approximately 13,000 square feet of space used for its gaming activities, supporting offices and storage space under an operating lease that terminates in July 2015.  The lease requires the Casino to pay for a portion of the building expenses until the landlord secures additional tenants to occupy the remaining building space.  To the extent the Casino pays total building expenses in excess of the Casino’s portion as defined by the lease, any excess amounts paid are credited to the following lease year’s rent payments.  As of March 31, 2013, prepaid rent credits available to offset future rent payments was approximately $51,000 and are recorded as prepaid expenses and other current assets.  The difference between the amount recorded as occupancy expense and the scheduled rent payments is due to the amortization of available prepaid rent credits resulting from certain prior payments of building expenses as discussed above.


On January 29, 2010 the landlord of the Doc Holliday Casino property agreed to rent abatement in the total aggregate amount of $40,000 prorated over a six-month term in the amount of $6,667 per month beginning in February 2010, and continued through July 2010.  In consideration of the rent abatement the Company we replaced all carpeting on the first floor of the premises, which was completed in February 2010, at a cost of approximately $29,000.  The amount of the rent abatement in excess of the cost of the carpet replacement, or approximately $11,000, was recorded as deferred rent and is being amortized to rent expense over the remaining life of the lease.


On December 31, 2010 the landlord of the Doc Holliday Casino property agreed to further amend the lease agreement.  As a result, for the period commencing January 1, 2011 and ending December 31, 2011 the base rent was $250,000, payable at a rate of $20,833 per month.  The amendment resulted in a monthly reduction of the base rent of approximately $4,500 per month during the abatement period.  The total rent abatement under the agreement of approximately $54,000 was recorded as deferred rent and is being amortized to rent expense over the remaining life of the lease.  All existing agreements with respect to triple net expenses and the cap on the Company’s liability for annual increases in such expenses remain in effect for the lease period.  In consideration of the rent abatement, the Company agreed that the digital surveillance system installed on the premises would be deemed the sole and separate property of the landlord upon termination of the lease.  At March 31, 2013 the system had a net book value of approximately $24,000.  Beginning January 1, 2012, the Company has continued to pay rent at the modified rate agreed to for 2011 with the landlord’s acquiescence but without a formal extension agreement.


Other Casino Expenses: Includes all other costs of the casino operations not included in the above categories, including travel, armored car services, postage, casino entertainment, employee education programs, bank and other financing fees, and lease costs associated with certain gaming equipment and off-site storage units.  Total other casino expenses as a percentage of revenues were 0.8% for each of the nine months ended March 31, 2013 and 2012, respectively.



44





 

Operating, general, and administrative expenses:  Generally includes all expenses associated with the operations of the parent entity, Global Casinos, Inc., including legal and executive services provided by the company’s principal executive officer, accounting services provided by the company’s principal accounting officer, as well as clerical and bookkeeping services, corporate marketing and financing, and stock-based compensation costs relating to the company’s executive officers, directors, and subsidiary management.  


Total operating, general, and administrative costs were $203,456, as compared to $364,652 for the nine months ended March 31, 2013 and 2012, respectively, a decrease of $(160,896), or (44.2)%.  The net decrease is primary attributable to financing costs incurred during October 2011 and February 2012 for common stock purchase warrants valued at $110,300 issued to the placement agent as commission for services performed in connection with our offering of 8% Convertible Debt securities completed in October 2011 and February 2012.  In addition, during the nine months ended March 31, 2012 we incurred approximately $16,000 of costs associated with the renewal of our Colorado gaming license.


Gain (loss) on asset disposals


During the nine months ended March 31, 2013 we disposed and exchanged certain casino equipment with a remaining book value of $881.  We received proceeds of $1,200 and determined the value of the exchange to be $2,049.  The resulting $2,369 gain was recorded as a gain on asset disposals during the nine months ended March 31, 2013.


During the nine months ended March 31, 2012 we disposed certain casino equipment with a remaining book value of $5,679.  There were no proceeds received regarding these disposals.  The resulting $5,679 loss was recorded as a loss on asset disposals during the nine months ended March 31, 2012.


Interest Expense


Net interest expense was $380,973 for the nine months ended March 31, 2013 compared to $252,261 for the nine months ended March 31, 2012, and primarily represents regularly scheduled payments on various mortgages collateralized by the Bull Durham Saloon and Casino real estate, certain debt incurred to facilitate the acquisition of the Doc Holliday Casino in March 2008, and interest on our loan participation obligations and convertible debt.


In addition to regular interest associated with the instruments above, the 8% Convertible debt sold during the second and third quarters of fiscal year ended June 30, 2012 included detachable warrants.  The estimated fair value of the warrants was $439,200, which was allocated to stockholders’ equity and recorded as a discount to the face value of the convertible notes.  This amount is being amortized to interest expense over the two-year life of the debt.  During the nine months ended March 31, 2013 and 2012, $137,063 and $70,708, respectively, of the discount was amortized representing a non-cash charge to interest expense.  Furthermore, the conversion terms of the 8% Convertible debt also included a beneficial conversion feature totaling $410,800.  This amount is also being amortized to interest expense over the two-year life of the debt.  During the nine months ended March 31, 2013



45





and 2012, $154,050 and $81,921, respectively, of the discount was amortized representing a non-cash charge to interest expense.  


Interest expense is partially offset by interest income earned on certain cash balances maintained at financial institutions.


Other


Series D Preferred Stock: Holders of our Series D Preferred Stock are entitled to receive dividends at the rate of 8% per year, declared quarterly and payable the 15th day of April, July, October and January of each year.  For the nine months ended March 31, 2012 and 2011, dividends of $46,622 and $42,778 were declared on the Series D Preferred Stock.  Dividends declared on March 31, 2013 were subsequently paid in April 2013.


Net Operating Loss Carryover: For federal income tax purposes, Global has a net operating loss carryover (NOL) approximating $6,805,000, which can be used to offset future taxable income, if any.  Under the Tax Reform Act of 1986, the amounts of and the benefits from NOL's are subject to certain limitations including restrictions imposed when there is a loss of business continuity or when ownership changes in excess of 50% of outstanding shares, under certain circumstances.  There is no guarantee that Global will be able to utilize its NOL before it expires and accordingly, no potential benefit has been recorded in the financial statements.


Inflation did not have a material impact on the Company's operations for the period.


Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company's results of operations.


Liquidity and Capital Resources


Our primary source of cash is internally generated through operations.  As of March 31, 2013, neither the Company nor its subsidiaries have commercial bank credit facilities.  Consequently, we believe that cash necessary for future operations must be internally generated though our casino operations.  Cash flow at one of the Company’s operating subsidiaries, Bull Durham, has been sufficient to fund operations and we believe that cash flow will be sufficient during the next twelve months to continue our operations.  Cash flows from our other operating subsidiary, Doc Holliday, have not been sufficient to fund its operations and necessary capital improvements.  From time to time, we have depended on funds received through debt and equity financing to address operating shortfalls and capital requirements.  We have also relied, from time to time, upon loans from affiliates to meet immediate cash demands.  There can be no assurance that these affiliates or other related parties will continue to provide funds to us in the future if necessary, as there is no legal obligation on these parties to provide such loans.


The report of the independent accountant that audited the Company's financial statements for the year ended June 30, 2012 includes a qualification that the Company may not continue as a going concern.  In that event, the Company might be liquidated and its assets sold to satisfy any claims of



46





creditors.  See Note 1 to the financial statements attached to this report for a more complete description of this contingency.


Effective September 19, 2009, all of the secured obligations of Casinos, USA, Inc., a wholly-owned subsidiary of Global Casinos, Inc. had matured and became due and payable.  The secured obligations are secured by deeds of trust encumbering the Bull Durham Casino property located in Blackhawk, Colorado.


On November 30, 2009 we consummated a Loan Document Purchase and Assignment Agreement with the holder of the senior mortgage of the Bull Durham Casino in which the Company obtained all of the rights, title and interest in and to the Note and Loan Agreement.  The total amount of consideration paid to the holder was $730,710 which included principal of $721,021, interest accrued to the purchase date of $5,689, and a fee of $4,000 to cover legal and administrative costs of the holder.  Also on November 30, 2009 we executed a Loan Participation Agreement whereby the Company assigned to an unaffiliated third party an undivided 34.7% interest in the Note for total consideration of $250,000 and a loan participation fee of 50,000 shares of the Company’s common stock valued at $0.38 per share.  And on December 30, 2009 the Company executed a Loan Participation Agreement whereby the Company assigned to a director an undivided 2.08% interest in the Note for total consideration of $15,000 and a loan participation fee of 3,000 shares of the Company’s common stock valued at $0.39 per share.  The remaining undivided 63.22% interest in the Note was owned by the Company and is eliminated in consolidation as the debtor is a wholly owned operating subsidiary.  The Note has not been modified and continues to be in technical default.


Effective October 11, 2012, the Company and the participants consummated an Amended and Restated Allonge and Loan Participation Agreement.  The amended agreement provided for an additional $55,000 of borrowing from the primary participant, which amount was added to the existing loan participation interest.  At the time the amendment was consummated the balances and participating interests in the Note were as follows:


 

Amount

 

% Interest

Global Casinos, Inc.

 $482,138

 

66.91%

Primary participant

 227,834

 

31.62%

Pete Bloomquist - Director

 10,538

 

1.47%

Balance of Note

 $720,510

 

100.00%


As consideration for the additional funding, the participant received common stock purchase warrants exercisable for five years to acquire up to 60,000 shares of the Company’s common stock at an exercise price of $1.25 per share.  The estimated fair value of the warrants issued was $42,500 and is included in general and administrative expenses as a non-cash financing charge, and was determined using the following assumptions:


Expected volatility

121%

Contractual term

5 years



47





Risk free interest rate

0.65%

Expected dividend rate

0%


The amended agreement also extended the maturity dates of the participants’ interests to December 31, 2015, and established a 13% interest rate on the participation obligations.


On December 30, 2009 we consummated an Allonge and Modification Agreement with the holder of a second deed of trust note on the Bull Durham Casino.  Immediately prior to the modification the Note had a principal balance of $616,988.  The agreement required a principal pay down of $100,000, monthly principal and interest payments of $5,596 beginning on January 1, 2010, and extended the maturity date of the Note to December 31, 2010.  In December 2010, the Company exercised its option to extend the maturity date of this Note to December 31, 2011 by an additional $50,000 principal pay down of the Note. In December 2011, the Company exercised its option to extend the maturity date of this Note to December 31, 2012 by an additional $50,000 principal pay down of the Note.


On November 9, 2012 a Second Allonge and Modification Agreement was consummated which waived the $50,000 principal pay down due on or before December 31, 2012 under the first Allonge and Modification Agreement, and established an annual $50,000 principal pay down due on or before December 31, 2013 and each year thereafter until the Note is paid in full.  Providing that the annual principal reductions are made and that the Note or Second Deed of Trust are not in default, the maturity date of the Note shall be extended to December 31, 2014 and thereafter shall be extended to December 31st each succeeding year automatically until all principal and accrued interest is paid in full.  At March 31, 2013 the balance of the Note was $302,619.


On March 22, 2010, we consummated an Allonge and Modification Agreement with the holder of a junior deed of trust note on the Bull Durham Casino.  Immediately prior to the modification the Note had a principal balance of $176,540.  The agreement requires monthly principal and interest payments of $1,911 beginning on April 1, 2010, and extended the maturity date of the Note to April 1, 2013.  As of March 31, 2013 the balance of the Note was $146,786.  As of the date of this report, the Note has not been paid or further modified and is considered to be in default.


While no additional agreements have been reached as of the date of this report, we have been in communication with the remaining junior mortgage note holders concerning the need to extend the maturity dates of the notes.  Until their maturity, all payments required under the notes had been made in a timely fashion, and we intend to continue to make payments under the notes pending our efforts to renegotiate their maturity dates.


A note payable to the seller of Doc Holliday Casino acquired in March 2008, matured on March 31, 2009.  The note did not bear interest, however upon its maturity a default interest rate of 8% with interest payments due monthly became effective.  In October 2012 the note holder agreed to accept a lump sum payment in full satisfaction of the obligation, and on October 15, 2012 the Company paid the note holder $95,000 to extinguish this obligation which had a balance of $190,667 at the time of the settlement.  The resulting gain on the settlement of the note of $95,667 is included in the consolidated statements of operations for the three and nine months ended March 31, 2013.




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At March 31, 2013 the Company had cash and cash equivalents of $463,258, which is primarily utilized in our casino operations.  Pursuant to state gaming regulations, the casinos are required to maintain cash balances sufficient to pay potential jackpot awards.  Our cash balances at March 31, 2013 were in excess of funds required by gaming regulations.

   

Our working capital deficit increased by $546,270 to a working capital deficit of $(1,398,919) at March 31, 2013 from a working capital deficit of $(852,649) at June 30, 2012.  The working capital deficit is primarily due to mortgage debt associated with the Bull Durham casino now due or maturing within one year as discussed above, the 8% convertible debt maturing in October 2013 and February 2014, the 5% convertible debt maturing in July and August 2013, and the short-term portion of our loan participation obligations.


Cash provided by operating activities was $223,574 for the nine months ended March 31, 2013.  For the nine months ended March 31, 2012, $(63,256) was used in operating activities, and primarily reflects the greater loss incurred during the nine months ended March 31, 2012 over the same period ended March 31, 2013.


Cash used in investing activities was $(16,837) for the nine months ended March 31, 2013, and represents purchases of improvements and gaming assets net of $1,200 in proceeds realized on the sale of gaming equipment.  For the nine months ended March 31, 2012 a total of $(119,331) was used and represents purchases of gaming assets.


Cash used in financing activities was $(235,678) for the nine months ended March 31, 2013, and generally represents payments on our debt and loan participation obligations, as well as dividend payments on our Series D Preferred stock.  In addition, we received $55,000 of additional funding associated with our loan participation obligation as discussed above.  For the nine months ended March 31, 2012 cash provided from financing activities was $655,829, and generally represents proceeds from the sale of 8% Convertible debt, principal payments on our long-term debt and participation obligations, as well as dividend payments on our Series D Preferred Stock.


Due to capital constraints, we have no plans to acquire additional gaming equipment for the year ended June 30, 2013.  We intend to continue to focus on upgrading our current gaming equipment, as well as work with our equipment suppliers to provide new equipment with limited cash outlays.  However, should those capital restraints ease we will reassess our gaming equipment plans.


In March 2008, we completed a private offering of 700,000 shares of Series D Preferred stock with a stated value of $1.00 per share.  The preferred stock is redeemable at any time only at the option of the Company.  At the option of the holder, each preferred share is convertible to one share of the Company’s common stock.  Holders of our Series D Preferred Stock are entitled to receive dividends at the rate of 8% per year, declared quarterly and payable the 15th day of April, July, October and January of each year.  Dividends of $14,000 declared on March 31, 2013 were subsequently paid in April 2013 and are included in accrued expenses on the accompanying consolidated balance sheet at March 31, 2013.  All other dividends declared have been paid.


Effective January 1, 2010, Casinos USA entered into a Credit Agreement with Doc Holliday Casino II, LLC pursuant to which Casinos USA agreed to make available to Doc Holliday a revolving line of



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credit with a maximum loan balance of $500,000.  The Credit Agreement is secured by a UCC security interest in all of the assets of Doc Holliday.  The obligation under the Credit Agreement is eliminated in consolidation.


During the year ended June 30, 2011 we completed a private offering of securities consisting of $120,000 in 5% Unsecured Convertible Debentures.   Any Debentures not converted will mature and be due and payable in July and August 2013.  The principal amount of the Debentures accrue interest at the rate of 5% per annum and will be payable at the maturity date. As of March 31, 2013 a total of $6,025 of interest has been accrued on these notes and is included in accrued interest on the accompanying consolidated balance sheet.  The Debentures are convertible, at anytime at the option of the investor, into shares of the Company’s Series E Convertible Preferred Stock at a conversion price equal to $0.25 per share of Series E Preferred.  The Debentures will automatically convert into shares of Series E Preferred Stock under certain circumstances.  On July 24, 2012 an investor converted $25,000 of principal plus $2,503 of accrued interest, into shares of the Company’s common stock.  As a result, 110,014 shares of common stock were issued to the investor.  Then, on October 31, 2012 a total of $45,000 of 5% Convertible Notes together with $5,119 of accrued interest was converted into shares of the Company’s common stock.  As a result, 200,476 shares of the Company’s common stock were issued to the investors.


Off-Balance Sheet Arrangements


We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission regulation S-K.


Use of Estimates and Assumptions


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Significant estimates included herein relate to the recoverability of assets, the value of long-lived assets and liabilities, including estimates of liabilities incurred under customer rewards programs, the value of share based compensation transactions, the value of common stock purchase warrants, the long-term viability of the business, the future impact of gaming regulations, and future obligations under various tax statutes.  Actual results may differ from estimates.


Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company's liquidity and capital resources.






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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short-term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.



ITEM  4.

CONTROLS AND PROCEDURES


a.  Disclosure Controls and Procedures


The Company's Principal Executive Officer and Principal Financial Officer have established and are currently maintaining disclosure controls and procedures for the Company.  The disclosure controls and procedures have been designed to provide reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.


The Principal Executive Officer and Principal Financial Officer conducted a review and evaluation of the effectiveness of the Company's disclosure controls and procedures and have concluded, based on their evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures are not effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that the information required to be disclosed by the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.     


b.  Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  Due to incorrect interpretation of the placement agent agreement associated with the private offerings of 8% Convertible Debt completed in October 2011 and February 2012, we determined the agent was due additional Class A warrants in excess of our initial calculations.  This error resulted in the restatement of our financial results for the quarters ended December 31, 2011 and March 31, 2012, as well as the year ended June 30, 2012.  This error was identified as a material weakness during the quarter ended December 31, 2012.




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c. Limitations of any Internal Control Design


Our principal executive and financial officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive and financial officer have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.



PART II

OTHER INFORMATION


Item 1.

Legal Proceedings


None, except as previously disclosed.


Item 1A.

Risk Factors


The following is an additional risk factor concerning our business as a result of current economic conditions in the United States.

 

Current difficult conditions in the financial services markets may materially and adversely impact our business 


Dramatic declines in the values of, among other things, various derivative instruments, credit default swaps and the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks.  Many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions.  This market turmoil and tightening of credit have also led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and possibly a general reduction of business activity.  A continuation of these conditions could have, among other things, the following potential negative effects:


1)

A reduction in discretionary spending by consumers could significantly impact the customer traffic and revenues of our casino operations; and,



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2)

While we do not depend on credit from the financial markets to finance our operations, all our long-term debt matured during 2009.  The financial markets have experienced disruptions that have had a dramatic impact on the availability and cost of capital and credit.  Our ability to re-finance our matured long-term debt is affected by the current financial market conditions.  If we are successful in obtaining financing of our long-term debt, there can be no assurance that we will be able to negotiate rates and terms similar to those we currently have, and such negotiated rates could be significantly higher than those currently existing on our matured long-term debt. 


Item 2

Unregistered Sales of Equity Securities and Use of Proceeds


None, except as previously disclosed.


Item 3.

Defaults Upon Senior Securities


None, except as previously disclosed.


Item 4.

Removed and Reserved


Item 5.

Other Information


None, except as previously disclosed.


Item 6.

Exhibits


31.

Certification

32.

Certification pursuant to 18 U.S.C. Section 1350

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Schema Document

101.CAL

 

XBRL Calculation Linkbase Document

101.LAB

 

XBRL Label Linkbase Document

101.PRE

 

XBRL Presentation Linkbase Document

101.DEF

 

XBRL Definition Linkbase Document




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SIGNATURES


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


 

GLOBAL CASINOS, INC.

 

 

Date:     May 20, 2013

By /s/ Clifford L. Neuman                  

 

     Clifford L. Neuman

      President


 

GLOBAL CASINOS, INC.

 

 

Date:    May 20, 2013

By: /s/ Todd Huss                              

 

     Todd Huss,

      Chief Financial Officer






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