Kinbasha Gaming International, Inc.

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.

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.

 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.

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.