UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to ______________________.

Commission file number 000-54784

KINBASHA GAMING INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

3753 Howard Hughes Parkway

Suite 200

Las Vegas, Nevada

(Address of Principal Executive Offices)

(805) 435-1803

(Registrant’s Telephone Number, Including Area Code)

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

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

Indicate by checkmark 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).   x Yes   ¨ No

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes   x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 12,263,801 shares outstanding as of August 12, 2013.

KINBASHA GAMING INTERNATIONAL, INC.

INDEX TO FORM 10-Q

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

Item 2.

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

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

Item 4.

Controls and Procedures

18

PART II.

OTHER INFORMATION

18

Item 1.

Legal Proceedings

18

Item 1A.

Risk Factors

18

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

18

Item 3.

Defaults upon Senior Securities

18

Item 4.

Mine Safety Disclosures

18

Item 5.

Other Information

19

Item 6.

Exhibits

19

Signatures

20

References in this registration statement to the “Company,” “we,” “us” or “our” refer to Kinbasha Gaming International, Inc. (“Kinbasha”) and its consolidated subsidiaries, including its 98% owned Japanese operating subsidiary Kinbasha Co., Ltd. (“Kinbasha Japan”).

Cautionary Note Regarding Forward-Looking Information

This report contains forward-looking statements.  All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements.  The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”  In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements.

These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to management.  Management believes that these forward-looking statements are reasonable as and when made.  However, readers should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.  We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.  In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experience and our present expectations or projections.  These risks and uncertainties include, but are not limited to, those described in “Item 7-- “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Factors that May Affect Future Operating Results and Certain Investment Considerations” in our Form 10-K for the fiscal year ended March 31, 2013 and those described from time to time in our future reports which we will file with the Securities and Exchange Commission.  You should read this report and the documents that we have filed as exhibits to this report completely.

Currencies

Unless indicated otherwise, in this registration statement all references to $ or dollars refer to United States dollars and references to yen mean the lawful currency of Japan.  

Reverse Stock Split

Kinbasha completed a 1 for 12 reverse stock split of its common stock on March 12, 2012.  Unless otherwise indicated, in this report all references to numbers of shares and share prices reflect this reverse stock split.

2

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Kinbasha Gaming International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

See accompanying notes to condensed consolidated financial statements.

3

Kinbasha Gaming International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share amounts)

See accompanying notes to condensed consolidated financial statements.

4

Kinbasha Gaming International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

5

Kinbasha Gaming International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

6

Note 1 – Organization and Business

Kinbasha Gaming International, Inc. ("Kinbasha" or the “Company”) owns and operates retail gaming centers, commonly called "pachinko parlors," in Japan.  These parlors, which resemble Western style casinos, offer customers the opportunity to play the games of chance known as pachinko and pachislo.  Pachinko gaming is one of the largest entertainment business segments in Japan.

These operations are conducted predominately through Kinbasha's 98% owned Japanese subsidiary, Kinbasha Co. Ltd. ("Kinbasha Japan").  Kinbasha Japan has been in this business since 1954.  As of June 30, 2013, the Company operated 21 pachinko parlors, of which 18 were in the Japanese prefecture of Ibaraki, two were in the Tokyo metropolis, and one was in the Chiba prefecture.  

In addition to revenues from its gaming operations, the Company receives income from cigarettes, non-alcoholic beverages and sundry items sold in its pachinko parlors.

Note 2 – Summary of Significant Accounting Policies

Liquidity

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has incurred a net loss during fiscal year 2012, and as of June 30, 2013 and March 31, 2013 had working capital and shareholders’ deficits.  Starting in 2006, the Company had begun experiencing financial problems, which has caused it to become delinquent in repayment of a large portion of its debt.  The Company does not have the financial resources or liquidity to repay the debt that is in default.  Most of this debt has been in default for more than six years.  The Company has worked with its lenders and in many cases has obtained forbearances and loan modifications that have allowed it to effectively extend the maturity of its debt through interest only and/or reduced principal payments, generally negotiated on a six month or annual basis.  Lenders with whom the Company has not negotiated forbearances or loan modifications have accepted lower payments without bringing legal action or foreclosing on their security.

Assuming the Company’s lenders continue to accept payments at levels comparable to the payment levels during the past several years and do not initiate other collection or foreclosure actions, and assuming there is no material adverse change in the pachinko industry generally, the Company believes its business will generate sufficient cash from operations to pay its expenses when due for the next twelve months.  However, at current levels, the Company is not generating sufficient cash flows to make any substantial reduction in its outstanding debt.  The Company will attempt to renegotiate a substantial part of its debt to obtain the forgiveness of some amount of principal and accrued interest (including default interest) and/or the material extension of the maturity dates of the debt.  The Company can provide no assurance that its lenders will agree to any of these changes or will not seek to collect their loans through litigation or foreclosure actions.

There are no assurances that management will be successful in achieving sufficient cash flows to fund the Company’s working capital needs, or whether the Company will be able to refinance or renegotiate its obligations when they become due or raise additional capital through future debt or equity.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  No adjustments have been made to the carrying value of assets or liabilities as a result of this uncertainty.

7

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Article 8 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes of the Company for the years ended March 31, 2013 and 2012.  The condensed consolidated financial statements as of June 30, 2013 and for the three months ended June 30, 2013 and 2012 are unaudited; however, in the opinion of management these condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented.  The results of operations for the periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year.

The preparation of condensed consolidated financial statements in conformity with GAAP 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Reclassifications

Prior period financial statements have been reclassified to confirm to current period presentation.

Foreign Currency Translation and Transaction Gains and Losses

The Company records foreign currency translation adjustments and transaction gains and losses in accordance with ASC 830, Foreign Currency Matters.  The functional currency of the Company and its subsidiaries is the Japanese yen.  Gains and losses resulting from the translation of the functional currency into United States dollars for the condensed consolidated financial statement presentation are not included in determining net income (loss), but are included in determining comprehensive income (loss). The accumulated foreign currency translation adjustment account is also included as a separate component of shareholders’ deficit.  Transaction gains and losses, if any, in foreign currencies are reflected in operations.  During the three months ended June 30, 2013 and 2012, no foreign currency transaction gains or losses were experienced.

The exchange rate as of June 30, 2013 was 99.10 yen to 1 dollar and the average rate was 98.75 yen to 1 dollar for the three months then ended.  The exchange rate as of June 30, 2012 was 79.53 yen to 1 dollar and the average rate was 80.11 yen to 1 dollar for the three months then ended.

Recently issued Accounting Pronouncements

The Company is not aware of any recently issued accounting pronouncements that when adopted will have a material affect on the Company’s financial position or result of its operations.

Note 3 – Investment in Equity Securities

Investment in equity securities consisted of the following (in thousands):

Activity in our investment in equity securities consisted of the following (in thousands):

8

 Note 4 - Capital Leases

The Company leases property and equipment under leases that qualify as capital leases.  The leases are generally for a term of three to eight years and as of December 31, 2011, all of the leases had expired.

The Company is delinquent in the payment of its capital lease obligations.  Therefore, substantially all of the capital leases are in default, which makes the full contractual amount due and payable on demand. As of June 30, 2013, the date of the most recent condensed consolidated balance sheet, the leasing companies have not accelerated payment.The leasing arrangements provide for a default penalty at a rate of 14% per annum, of the unpaid obligation.  For the three months ended June 30, 2013 and 2012, the Company recorded interest and penalty expense of approximately $72 thousand and $135 thousand, respectively. The capital lease obligation balances includes the accrued payable for interest and penalties as of June 30, 2013, which amounted to approximately $3.0 million. The Company has classified these capital lease obligations along with the associated accrued interest and penalties under current obligations.

Note 5 - Notes Payable Default

The Company is delinquent in the payment of principal on various notes.  Therefore, these notes are in default, which makes the full contractual amount of principal and accrued interest due and payable on demand.  

These notes have original due dates ranging from May 2007 through November 2018 and are collateralized by various assets and properties.  These notes bear interest at rates ranging from 0.091% to 4.42% per annum, with a weighted average rate of 3.6% per annum, and most provide for a penalty rate of interest at the rate of 14% per annum.   The principal shareholder of the Company has personally guaranteed the majority of these notes.

Most of these notes have been in default since 2006.  For the past several years, the Company has worked with the lenders and in many cases the Company has obtained forbearances and loan modifications that have allowed it to effectively extend the maturity of the notes through interest only and/or reduced principal payments, generally negotiated on a six month or annual basis.  Lenders with whom the Company has not negotiated forbearances or loan modifications have accepted lower payments without bringing legal action or foreclosing on their security.  As of the date of the most recent condensed consolidated balance sheet, to the best knowledge of the Company, there were no pending foreclosure or litigation actions to collect these notes.

For the three months ended June 30, 2013 and 2012, the Company recorded interest and default interest expense of $1.07 million and $1.17 million, respectively.   As of June 30, 2013, the Company has accrued interest and default interest of $19.3 million with respect to these notes.  The Company has classified the principal and associated accrued interest and default interest on these notes as Notes Payable.

Note 6 - Gaming Operations

The Company derives revenues from the operation of pachinko and pachislot games.  The Company is subject to licensing requirements established by the Prefectural Public Safety Commission.  

The following table sets forth gaming, net (total wagers less customer payouts) for the periods presented (in thousands):

9

Note 7 – Related Party Transactions

On April 22, 2013, the Company loaned approximately $375 thousand to Shinestar K.K., (“SHS”) an entity wholly owned by Satoshi Okamura, our Chief Operating Officer and one of our directors. The loan bears interest at the rate of 3% per annum, is due and payable on March 31, 2014, may be prepaid at any time without penalty, and is guaranteed by Mr. Okamura. The proceeds of the loan were used to pay the costs and expenses in connection with the construction and opening of a convenience store owned 100% by SHS across the road from the Company's pachinko parlor in the city of Mito in the Ibaraki prefecture. Also, the Company is a guarantor for approximately $101 thousand loan for SHS. The Company has evaluated these related party transactions under ASC 810 Consolidations. Based on the Company’s analysis, the guarantee of the loan would trigger consolidation of SHS under ASC 810-10-25 Variable Interest Entities. The Company believes, based on qualitative and quantitative analysis, consolidation of SHS is immaterial, and as of June 30, 2013, has not consolidated SHS.  The Company will reevaluate these related party transactions under ASC 810 Consolidations at each reporting period.

Note 8 – Subsequent Events

Management has considered all events occurring through the date the condensed consolidated financial statements have been issued, and has determined no material subsequent events are required to be disclosed.

10

Item 2.

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

Overview

We own and operate 21 pachinko parlors in Japan.  Our revenues consist primarily of customer wagers at our parlors and to a lesser extent food and beverages sold at these parlors.  Our costs include payoffs to customers, the costs of operating the pachinko parlors, and general and administrative costs.

Historically, in addition to our pachinko operations, we operated restaurants and two hotels.  These businesses were generally unsuccessful and materially adversely affected our results of operations and financial condition.  We closed or sold all of these more than two years ago except for three restaurants; we sold the business rights for these restaurants on July 1, 2012.  In that sale, we retained the physical assets of the restaurants consisting of land, buildings and fixed assets, which we leased to the new operator, a related party.  

Our functional currency is the yen, and accordingly our earnings and assets are denominated in yen.  As a result, appreciation or depreciation in the value of the yen relative to the dollar would affect our financial results reported in dollars without giving effect to any underlying change in our business or results of operations.  The average exchange rate was 98.75 yen to 1 dollar in the three months ended June 30, 2013, compared to 80.11 yen to 1 dollar in the three months ended June 30, 2012.  Accordingly, our results of operations in the three months ended June 30, 2013 compared to the three months ended June 30, 2012, when reported in dollars appear much weaker than they are when expressed in yen.

Our revenues of $18.7 million in the three months ended June 30, 2013 were 21.7% lower than our revenues of $23.9 million in the three months ended June 30, 2012.  The principal reason for this decrease was the change in the yen/dollar exchange rate. Our revenues, when expressed in yen, decreased less than 2% between these periods.  Another reason for the decrease is that we sold the business rights for our three restaurants in July 2012, and thus we had no revenues from these restaurants during the three months ended June 30, 2013.

We had net income of $761,000 in the three months ended June 30, 2013, as compared to a net loss of $1.9 million in the three months ended June 30, 2012.  The improvement in net income was due primarily to imporved market conditons and the fact that in 2012 we were still recovering from the March 2011 earthquake.

We generally finance the costs of opening our pachinko parlors and pachinko machines and other fixed assets used in the parlors.  This debt is usually secured by the real estate or equipment purchased.  As of June 30, 2013, we had total debt of $122.5 million, of which $92 million was in default.  We incurred most of the debt in default in the early 2000s.  The debt was used to finance our expansion efforts.  Since 2006, we have worked with our lenders and in many cases have obtained formal and informal forbearances and loan modifications that have allowed us to effectively extend the maturity of our debt through interest only and/or reduced principal payments, generally negotiated on a six month or annual basis.  Lenders with whom we have not negotiated forbearances or loan modifications have accepted lower payments without bringing legal action or foreclosing on their security.  As of the date of this report, we were not subject to any litigation or foreclosure proceedings with respect to our debt.  

11

Our future success will depend in part upon our ability to restructure a substantial part of our defaulted debt to obtain forgiveness of some amount of principal and interest (including default interest) and/or the material extension of the maturity dates of the debt, or to refinance that debt on more favorable terms in Japan.  There is no assurance that our lenders will agree to forgive any portion of our debt or continue to accept reduced payments or that we will be able to refinance the debt.   

In addition, our plan to improve our financial performance is to follow the “chain store” model and open new pachinko parlors in order to take advantage of our centralized IT, marketing, employee training and machine maintenance infrastructure which we believe currently has the capacity to support up to 28 parlors.  We have targeted two regions for expansion: (1) the Tokyo metropolitan area, which includes the Tokyo metropolis and the Chiba, Saitama and Kanagawa prefectures and (2) the Ibaraki prefecture.

With a GDP that exceeds the combined GDP of New York City and London, the Tokyo metropolitan area is a natural area for us to extend our brand and exploit our operational capabilities.  We have demonstrated our ability to successfully operate in the highly competitive Tokyo market with the success of our parlors in this area.  These parlors have been more successful than our Ibaraki parlors in part because of greater population and in part because these parlors have more machines.  Mid-sized parlors with more than 500 machines have competitive advantages over small-sized parlors with fewer than 300 machines.  

We are also considering opening or acquiring additional parlors in Ibaraki prefecture where we are the largest operator with 18 parlors.  We are a dominant force in this region and have numerous strategic advantages over other pachinko parlor operators that have only one or two stores.  Our concentration of operations in this region provides certain economies of scale in terms of technical support, advertising and brand awareness.  Further, as one of the region's largest employers, we are often able to recruit the best qualified candidates and we maintain excellent relations with community leaders, an important factor in the highly regulated pachinko industry.

Our plans to acquire or develop any new pachinko parlors are mostly dependent on our ability to attract global investors to creative financing instruments in the form of high yield securitized convertible debt and equity offerings.  And we are currently shaping up the strong attraction of Kinbasha.  To date, however, we have not obtained any financing outside of Japan and we can give no assurance that we will be able to do so.

Results of Operations -- Comparison of Three Months ended June 30, 2013 and 2012

Net Revenues

Net gaming revenues as a percentage of total wagers were as follows for the periods presented:

Our net gaming revenues decreased in the three months ended June 30, 2013 from the three months ended June 30, 2012 as a result of the change in the yen/dollar exchange rate.  When expressed in yen, net gaming revenues increased 0.3% in the three months ended June 30, 2013 from the three months ended June 30, 2012.  

12

Total wagers had been adversely affected due to a general decline in the Japanese economy.  However, a parlor damaged by the earthquake reopened in April 2012, and total wagers had improved during this period.

Our pay-out ratio slightly decreased from 83.4% in the three months ended June 30, 2012 to 83.3% in the three months ended June 30, 2013.  Our payout ratio decreased due to a change in the mix of pachinko machines played by our customers and marketing programs designed to promote the use of general prize payouts, which have a lower cost than special prizes.

Revenues from our food and beverage operations decreased from $835,000 in the three months ended June 30, 2012 to $74,000 in the three months ended June 30, 2013.  The decrease was due to the sale of business rights for our three remaining restaurants to a related party on July 1, 2012, and therefore we did not generate any revenues from these restaurants in the quarter ended June 30, 2013 except for $21,000 of rental income.

Cost of Revenues

Cost of revenues as a percentage of net revenues was as follows for the periods presented:

 Our cost of revenues decreased by $5.8 million from the three months ended June 30, 2012 to the three months ended June 30, 2013.  This decrease was due primarily to the change in the yen/dollar exchange rate.  Other reasons for the decrease are as follows.   Salaries and wages decreased in part due to reduced employee benefits.  Depreciation expense decreased in part because of a decrease in the unit cost of pachinko machines purchased.  Facilities and other expense decreased in part because in the three months ended June 30, 2012 we had repairs and recovery from the damage caused by March 2011 earthquake.  Cost of our food and beverage operations (Cost of Revenues, other) decreased in part due to the sale of the business rights for our remaining three restaurants on July 1, 2012.  Disposal of property and equipment expense decreased in part because we are using pachinko machines for longer periods to reduce the need to purchase of new pachinko machines.

Operating Expenses

Operating expenses as a percentage of net revenues were as follows for the periods presented:

13

Operating expenses decreased from $4.7 million in the three months ended June 30, 2012 to $3.3 million in the three months ended June 30, 2013.  This decrease was due primarily to the change in the yen/dollar exchange rate.

In addition, marketing and advertising expenses decreased due to a reduction in advertising expenditures following the adoption in July 2012 of regulations for Japanese pachinko parlors that limit conducting promotions offering higher payoffs by day or machine.  

General and administrative expenses also decreased because of reduced retirement benefits. .

Other Income (Expense)

Interest expense decreased from $2.2 million in the three months ended June 30, 2012 to $1.7 million in the three months ended June 30, 2013. The decrease in interest expense was primarily due to the change in the yen/dollar exchange rate.  

Financial Condition, Liquidity and Sources of Capital

Financial Condition

Property and equipment decreased from $104.9 million at March 31, 2013 to $98.8 million at June 30, 2013, principally because of the change in the yen/dollar exchange rate.

Other assets decreased to $11.4 million at June 30, 2013 from $12.1 million at March 31, 2013, due primarily to the change in the yen/dollar exchange rate.  

Our accounts payable and accrued expenses increased to $21.5 million at June 30, 2013 from $21.0 million at March 31, 2013.  The increase occurred because of an increase in electricity costs that more than offset a decrease resulting from the change in yen/dollar exchange rate.

Our debt, consisting of capital lease obligations, notes payable, bonds and related party debt, was $ 122.5 million at June 30, 2013 and $132.3 million at March 31, 2013.  At June 30, 2013, the debt included $100.2 million of principal and $22.3 million of accrued interest (including default or penalty interest).  The bank debt and capital lease obligations were obtained principally to finance the purchase of equipment, the construction or renovation of our pachinko parlors, or in certain cases the land on which our pachinko parlors are located.  These loans and leases are secured by the equipment, leasehold improvements or land purchased, and substantially all of our assets are collateral for one or more of our loans.  Our bank debt, in the aggregate amount of $95.5 million at June 30, 2013, bears interest at fixed rates ranging from 0.09% per annum to 4.4% per annum (other than default rates).  Our non -bank debt, in the aggregate amount of $27.0 million at June 30, 2013, bears interest at a weighted rate of approximately 17% per annum.  

14

Debt in Default

At June 30, 2013, we were in default on debt in the aggregate amount of $92.0 million, as compared to $97.1 million at March 31, 2013.  At June 30, 2013, debt in default included principal of $72.7 million and accrued interest (including default or penalty interest) of $19.3 million.  This decrease in debt in default was due to the change in the yen/dollar exchange rate.

This debt has been in default for periods of up to seven years.  Most of the debt provides for penalties or default interest upon default, generally at 14% per annum.  To date, most of the lenders have not enforced this provision but there is no assurance they will not do so in the future.

For the past several years, we have worked with our lenders and in many cases have obtained formal or informal forbearances and loan modifications that have allowed us to effectively extend the maturity of our debt through interest only and/or reduced principal payments, generally negotiated on a six month or annual basis. Lenders with whom we have not negotiated forbearances or loan modifications have accepted lower payments without bringing legal action or foreclosing on their security. As of the date of this report, we were not subject to any litigation or foreclosure proceedings with respect to our debt.  

The following table provides certain information regarding our debt in default with respect to each lender to whom our defaulted debt exceeded 5% of our total assets at June 30, 2013.  The outstanding balances are as of June 30, 2013.

15

_____________________

(1)

Year of first default

(2)

A is accrued interest, D is default interest accrued.

(3)

All of the Company’s real properties are collateralized by one or more mortgages, in some cases up to four mortgages.  

(4)

Since the initial defaults in 2006, we have been making monthly payments in amounts based on discussions with our lenders, with an agreed upon interest rate of 3.5% per annum.  The amount of the payments varies from time to time (generally on an annual basis), based primarily on the amount of principal payments we advise the lenders we can make.  The principal payment ratio was 1%, 0.5% and 0% in fiscal year 2013, 2012 and 2011 respectively.  While most of our lenders have accepted payments at these rates in the past, they have not been obligated to do so there is no assurance they will continue to accept such payments in the future.  

(5)  In April 2013, Sumitomo Mitsui Banking Corporation assigned this debt to Aozora Asset Company.

Our debt in default not disclosed in the table consists of approximately 125 loans held by 12 lenders.

Our future success will depend in part upon our ability to renegotiate a substantial part of our defaulted debt or refinance the debt on more favorable terms.  We will seek to obtain forgiveness of some amount of principal and interest (including default interest) and/or the material extension of the maturity dates of the debt.

Cash Flows

During the three months ended June 30, 2013 and 2012, we generated $8.5 million and $10.5 million, respectively, of cash flows from operating activities.  The decrease in cash flows from operating activities was due to the change in the yen/dollar exchange ratio, as expressed in yen cash flows from operating activities increased.  

During the three months ended June 30, 2013 and 2012, we used cash of $4.9 million and $10.2 million, respectively, for investing activities.  This decrease was due in part to the fact that in the 2012 quarter we had $5.8 million in purchases of equipment and pachinko machine due to the reopening of a pachinko parlor in April 2012.

During the three months ended June 30, 2013 and 2012, we used cash of $3.9 million and $0.9 million, respectively, for financing activities, primarily to pay debt.  We are generally required to apply any net positive cash flow from our operating and investing activities to repay debt.

Liquidity

Although we had net income in the three months ended June 30, 2013 and in fiscal year 2013, prior to that we incurred substantial net losses.  Starting in 2006, we had begun experiencing financial problems, which has caused us to become delinquent in repayment of a large portion of our debt.

16

We do not have financial resources or liquidity to repay our debt that is in default.  Most of this debt has been in default since 2006.  During this period, we have worked with our lenders and in many cases have obtained formal or informal forbearances and loan modifications that have allowed us to effectively extend the maturity of our debt through interest only and/or reduced principal payments, generally negotiated on a six month or annual basis.  Lenders with whom we have not negotiated forbearances or loan modifications have accepted lower payments without bringing legal action or foreclosing on their security.  As of the date or this report, none of our lenders had brought litigation or foreclosure proceedings with respect to any of our debt.

Assuming our lenders continue to accepts payments at levels comparable to our payment levels during the past several years and do not initiate other collection or foreclosure actions, and assuming there is no material adverse change in the pachinko industry generally, we believe our business will generate sufficient cash from operations to pay our expenses when due for the next twelve months.

However, at current levels, we are not generating sufficient cash flows to make any substantial reduction in our outstanding debt in fiscal year 2014.  We will attempt to renegotiate a substantial part of our debt to obtain the forgiveness of some amount of principal and accrued interest (including default interest) and/or the material extension of the maturity dates of the debt.  We can provide no assurance that our lenders will agree to any of these changes or will not seek to collect their loans through litigation or foreclose actions.   

We also plan to open or acquire pachinko parlors to generate greater positive cash flow.  To do this, we will need additional financing.

Our condensed consolidated financial statements do not reflect any adjustments to the carrying value of assets or liabilities as a result of the uncertainty about our ability to pay obligations as they become due.  Our independent registered public accounting firm has included an explanatory paragraph in their report on our most recent annual audited financial statements expressing substantial doubt about our ability to continue as a going concern because of these matters, as required by auditing standards of the Public Company Accounting Oversight Board (United States).

Foreign Currency Adjustments

Our functional currency is the yen.  Our condensed consolidated financial statements are translated into United States dollars at period-end exchange rates for assets and liabilities, and weighted-average exchange rates for revenues and expenses.  The resulting translation adjustments are included in determining comprehensive income.  The accumulated foreign currency translation adjustment account is also recorded as a separate component of shareholders’ deficit.  Transaction gains and losses, if any, in foreign currencies are reflected in operations.  

The exchange rate was 99.10 yen to 1 dollar at June 30, 2013, and 94.16 yen to 1 dollar at March 31, 2013.  The average exchange rate was 98.75 yen to 1 dollar in the three months ended June 30, 2013, compared to 80.11 yen to 1 dollar in the three months ended June 30, 2012.  Even when we experience an increase or decrease in our results of operations, the results in dollars may not reflect the correlational results due to fluctuation of the currency rate in the market.  For example, when the yen gets weaker versus the dollar from one period to the next period, our financial results will appear stronger when expressed in dollars comparing the first period to the next period.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable

17

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide reasonable assurance only of achieving the desired control objectives, and management necessarily is required to apply its judgment in weighing the costs and benefits of possible new or different controls and procedures.  Limitations are inherent in all control systems, so no evaluation of controls can provide absolute assurance that all control issues and any fraud within the company have been detected.

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures.  Based on this evaluation, management concluded that our disclosure controls and procedures were not effective as of that date due primarily to a lack of employees sufficiently knowledgeable in SEC accounting and reporting.

There was no change in our internal control over financial reporting during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

Nothing to report.

Item 1A.

Risk Factors

Not applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Nothing to report.    

Item 3.

Defaults upon Senior Securities

Nothing to report.

Item 4.

Mine Safety Disclosures

Nothing to report.

18

Item 5.

Other Information

In February 2013, we guaranteed a loan in the principal amount of $101,000 on behalf of Shinestar K.K., an entity wholly owned by Satoshi Okamura, our Chief Operating Officer and one of our directors. The loan bears interest at the rate of 1.05% per annum, is payable in equal monthly installments through August 2017, and is also guaranteed by Mr. Okamura. The proceeds of the loan were used to pay costs and expenses in connection with the construction of a convenience store across the road from our pachinko parlor in the city of Mito in the Ibaraki prefecture.  We believe that having convenience stores in or near our pachinko parlors may attract more customers because of added convenience of a wider food selection, alcoholic beverages and automated teller machines.  However, when we approached a well-known national convenience store franchisor about opening a store near this parlor, the franchisor advised us that while it would place a store there we could not have an ownership interest in the store due to the difficulty we might have in obtaining the necessary operating licenses as a result of our financial condition.  As a result, we asked Mr. Okamura if he would build and operate the store, and he agreed and formed Shinestar K.K. for this purpose.  The store opened in April 2013 and, as previously disclosed, in in that month we made a loan to Shinestar to pay other costs and expenses of the construction and opening of the parlor.  We made both the guaranty and loan because Shinestar had undertaken to build and open the store at our request and the store would benefit our Mito parlor.

Item 6.

Exhibits

19

SIGNATURES

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

20

.