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4-Traders Homepage  >  Equities  >  Nyse MKT  >  Nevada Gold & Casinos    UWN

NEVADA GOLD & CASINOS (UWN)
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NEVADA GOLD & CASINOS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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03/19/2018 | 09:26pm CEST
The following discussion and analysis ("MD&A") should be read in conjunction
with our condensed consolidated financial statements and notes thereto included
in Item 1 of this Quarterly Report and with Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in our Annual Report
for the year ended April 30, 2017, filed on Form 10-K with the SEC on July
27,
2017.


Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations
is based upon our condensed consolidated financial statements. We prepare these
financial statements in conformity with GAAP. As such, we are required to make
certain estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods presented. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments. On an on-going basis, we evaluate our estimates;
however, actual results may differ from these estimates under different
assumptions or conditions. There have been no material changes or developments
in our evaluation of the accounting estimates and the underlying assumptions or
methodologies that we believe to be Critical Accounting Policies and Estimates
as disclosed in our Annual Report for the year ended April 30, 2017, filed on
Form 10-K with the SEC on July 27, 2017.



Executive Overview



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



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



  14





COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2018 AND JANUARY 31, 2017



Net revenues. Net revenues were $18.1 million for the three months ended January
31, 2018, and $17.9 million for the same period ended January 31, 2017. The $0.2
million increase is primarily due to a $0.3 million, or 30%, increase in poker
revenue due to one of our Washington properties being converted into an
all-poker card room, and a $0.1 million, or 4%, increase in food revenue also at
our Washington properties, offset by $0.2 million, or 8%, decrease in slot
revenue at Club Fortune compared to last year due to a decrease in hold
percentage. South Dakota's revenues remained relatively steady compared to the
prior year's quarter despite having 42 fewer slot machines due to the closure of
a property where our slot route had machines on August 29, 2017.



Total operating expenses. Total operating expenses were $17.5 million for the
three months ended January 31, 2018, compared to $18.4 million in the same
period ended January 31, 2017. South Dakota had an impairment expense of $1.1
million in the prior year. Casino expenses increased $0.1 million, or 1%,
primarily resulting from Washington's minimum wage increase. Food and beverage
expenses increased $0.2 million, or 12%, also due to Washington's minimum wage
increase and food specials at Club Fortune. Marketing and administrative
expenses increased $0.2 million due to additional poker expenses at one of our
Washington properties. Depreciation and amortization expenses decreased $0.2
million due to Washington's $0.1 million decrease from prior year as certain
customer relationship intangibles are now fully amortized, and South Dakota's
$0.1 million decrease from prior year as certain assets became fully
depreciated. Corporate, as well as facility and other expenses remained
relatively steady when compared to the same period last year.



Non-operating income (expense). Total non-operating expense increased $34,127
for the three months ended January 31, 2018, compared to the same period ended
January 31, 2017, primarily due to the increase in the swap fair value in the
prior year offset by a reduction in interest expense in the current year.



Income taxes. For the three months ended January 31, 2018 and 2017, our effective tax rates (exclusive of discrete items) were 19% and -38%, respectively. The difference between the current and prior year's quarterly federal effective tax rate is the non-deductible goodwill impairment in the period ended January 31, 2017.

COMPARISON OF THE NINE MONTHS ENDED JANUARY 31, 2018 AND JANUARY 31, 2017



Net revenues. Net revenues were $56.1 million for the nine months ended January
31, 2018, and $54.6 million for the same period ended January 31, 2017. The
increase is due to our Washington properties where we had a $1.0 million, or 3%,
increase in table game revenue due to an increase in both play and hold
percentage and a $0.3 million, or 10%, increase in poker revenue. We also had a
$0.3 million, or 3%, increase in net revenue at Club Fortune compared to last
year due to an increase in cash slot play. South Dakota's revenues remained
relatively steady compared to the prior year.



Total operating expenses. Total operating expenses were $54.1 million for the
nine months ended January 31, 2018, compared to $54.7 million in the same period
ended January 31, 2017. South Dakota had an impairment expense of $1.1 million
in the prior year. Casino expenses increased $0.5 million, or 2%, when compared
to the same period last year primarily due to Washington's minimum wage
increase. Food and beverage expenses increased $0.4 million, or 9%, also due to
Washington's minimum wage increase and food specials at Club Fortune. Marketing
and administrative expenses increased $0.4 million due to additional poker
promotional expenses at one of our Washington properties. Corporate expense
decreased $0.2 million primarily due to Club Fortune acquisition expenses
incurred last year. Depreciation and amortization decreased by $0.5 million due
to certain Washington customer relationship intangibles that are now fully
amortized and certain South Dakota assets that are now fully depreciated.
Facility and other expenses remained relatively steady when compared to the
same
period last year.


Non-operating income (expense). Total non-operating expense remained relatively steady for the nine months ended January 31, 2018, as compared to the nine months ended January 31, 2017.



Income taxes. For the nine months ended January 31, 2018 and 2017, our effective
tax rates (exclusive of discrete items) were 28% and -51%, respectively.  The
difference between the federal statutory rate of approximately 29.7% (composed
of 34.0% through December of 2017 and 21% thereafter) and the 2018 fiscal year
to date's effective tax rate is primarily due to utilization of general business
credits. The difference between the 2018 and the 2017 fiscal year to date
effective tax rate is primarily due to the non-deductible goodwill impairment in
the prior year.



  15






Non-GAAP Financial Measures



The term "adjusted EBITDA" is used by us in presentations, quarterly earnings
calls, and other instances as appropriate. Adjusted EBITDA is defined as net
income before interest, income taxes, depreciation and amortization, change in
swap fair value, goodwill and other long-lived asset impairment charges,
write-offs of project development costs, acquisition costs, litigation charges,
non-cash stock grants, non-cash employee stock purchase plan discounts,
amortization of deferred rent, net income or loss from assets held for sale, and
net losses/gains from asset dispositions. Adjusted EBITDA is presented because
it is a required component of financial ratios reported by us to our lenders,
and it is also frequently used by securities analysts, investors, and other
interested parties, in addition to and not in lieu of GAAP results, to compare
to the performance of other companies that also publicize this information.



Adjusted EBITDA is not a measurement of financial performance under GAAP and
should not be considered as an alternative to net income as an indicator of our
operating performance or any other measure of performance derived in accordance
with GAAP.


The following tables show adjusted EBITDA by operating unit:



                                                            Adjusted EBITDA
For the three months ended:   Washington       South Dakota        Nevada       Corporate         Total

January 31, 2018              $ 1,528,113     $     (120,490 )   $  357,969     $ (569,857 )   $ 1,195,735

January 31, 2017              $ 1,588,979     $     (111,145 )   $  576,213     $ (627,553 )   $ 1,426,494




                                                              Adjusted EBITDA

For the nine months ended: Washington South Dakota Nevada

Corporate Total

January 31, 2018              $  4,407,456     $      150,604     $ 

1,203,646 $ (1,838,381 ) $ 3,923,325

January 31, 2017              $  4,536,212     $      197,010     $   786,299     $ (1,922,491 )   $ 3,597,030



Net income (loss) reconciliation to Adjusted EBITDA:


                                                              For the three months ended
                                                       January 31, 2018        January 31, 2017
Net income (loss)                                     $          193,327      $         (683,046 )
Adjustments:
Net interest expense and change in swap fair value                42,545   
               8,418
Income tax expense                                               397,861                 189,738
Depreciation and amortization                                    538,907                 756,606
Stock compensation                                                14,760                   1,787
Loss on disposal of assets                                           308                  42,574
Impairment of goodwill                                                 -               1,101,471
Amortization of deferred rent                                      8,027                   8,946
Adjusted EBITDA                                       $        1,195,735      $        1,426,494




  16






                                                              For the nine months ended
                                                       January 31, 2018       January 31, 2017
Net income (loss)                                     $          956,305     $         (632,596 )
Adjustments:
Net interest expense and change in swap fair value               298,747   
            290,253
Income tax expense                                               718,496                212,592
Depreciation and amortization                                  1,848,490              2,306,628
Acquisition expenses                                                   -                113,900
Stock compensation                                                89,438                117,393
Loss on disposal of assets                                         5,773                 56,490
Impairment of goodwill                                                 -              1,101,471
Amortization of deferred rent                                      6,076                 30,899
Adjusted EBITDA                                       $        3,923,325     $        3,597,030



Liquidity and Capital Resources


Historical Cash Flows


The following table sets forth our consolidated net cash provided by (used in)
operating, investing and financing activities for the nine months ended January
31, 2018 and 2017:



                                                   Nine Months Ended
                                             January 31,      January 31,
                                                 2018             2017
           Net cash provided by (used in):
           Operating activities              $  3,066,143     $  1,949,546
           Investing activities              $   (413,472 )   $   (312,429 )
           Financing activities              $ (4,685,941 )   $ (3,636,553 )



Operating activities. Net cash provided by operating activities during the nine
months ended January 31, 2018, increased by $1.1 million over the comparable
period in the prior fiscal year. The increased operating cash flow primarily
resulted from the $0.5 million increase in net income, adjusted for non-cash
expenses of depreciation and amortization, impairment expense and income tax, as
well as the $0.6 million change in working capital.



Investing activities. Net cash used in investing activities during the nine
months ended January 31, 2018, increased by $0.1 million compared to the prior
fiscal year primarily due to a $0.3 million decrease in collections on notes
receivable, partially offset by a decrease in purchase of property and
equipment.



Financing activities. Net cash used in financing activities during the nine
months ended January 31, 2018, increased $1.0 million over the comparable period
in the prior fiscal year. The increase mainly resulted from the $1.2 million
increase in the purchase of treasury stock.



Future Sources and Uses of Cash

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

- capital requirements related to future acquisitions;

 - cash flow from operations;


 - treasury stock purchases;

- working capital requirements;

- obtaining debt financing; and

 - debt service requirements.




In July 2016, our board of directors approved a $2.0 million stock repurchase
program to purchase our common stock in the open market or in privately
negotiated transactions from time to time, subject to market conditions,
applicable legal requirements, loan covenants and other factors. The repurchase
plan does not obligate the Company to acquire any specified number or value of
common stock. On July 12, 2017, the board of directors authorized an additional
$2.0 million for future stock purchases, either in the open market or in private
transactions. During the three months ended January 31, 2018, the Company did
not repurchase any shares. During the nine months ended January 31, 2018, the
Company repurchased 788,301 shares at a weighted average price of $2.16 per
share, costing $1,701,597 (including commissions). As of January 31, 2018, $1.7
million remains available under the share repurchase authorization.



  17





As of January 31, 2018, we have $8.0 million available to borrow per the Credit Agreement. Principal reductions due on the Credit Facility are as follows:

February 1, 2018 - January 31, 2019 $ - February 1, 2019 - January 31, 2020

              -
February 1, 2020 - November 30, 2020     9,300,000
Total payments                           9,300,000
Unamortized debt discount                 (165,630 )
Total long-term debt                   $ 9,134,370




On January 31, 2018, excluding restricted cash of $2,058,849, we had cash and
cash equivalents of $8,598,633. The restricted cash consists of funds for player
supported jackpots for our Washington operations.



Washington state increased the state minimum wage from $11.00 in the prior year
to $11.50 per hour effective January 1, 2018. The minimum wage is scheduled to
increase to $12.00 in 2019, $13.50 in 2020 and would thereafter be indexed to
inflation. The company estimates the January increase could impact its
Washington payroll expense by $0.5 million annually before offsetting changes
planned to mitigate the impact of the minimum wage increase.



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



Off-Balance Sheet Arrangements

None.

© Edgar Online, source Glimpses

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Michael P. Shaunnessy President & Chief Executive Officer
William J. Sherlock Chairman
James D. Meier CFO, Secretary, CAO & Vice President
Francis Michael Ricci Independent Director
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