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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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12/15/2016 | 10:20pm CET
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, 2016, filed on Form 10-K with the SEC on July
29,
2016.


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, 2016, filed on
Form 10-K with the SEC on July 29, 2016.



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.



  13






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.



COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2016 AND OCTOBER 31, 2015



Net revenues. Net revenues were $18.5 million for the three months ended October
31, 2016, and $16.1 million for the same period ended October 31, 2015. The
increase is due to the inclusion of Club Fortune's $3.1 million of net revenue
(Club Fortune was acquired on December 1, 2015), partially offset by net revenue
decreases of $0.5 million for the properties in Washington and $0.2 million in
South Dakota. The decrease in Washington's revenues was due to a lower hold
percentage impacting Washington revenue by $0.2 million and reduced poker play.
South Dakota revenues were $2.2 million this quarter compared to $2.4 million in
the prior year's quarter primarily due to lower handle as a result of 47 fewer
units in operation and the South Dakota market's revenue being down
approximately 8% for the quarter compared to prior year.



Total operating expenses. Total operating expenses were $18.3 million for the
three months ended October 31, 2016, compared to $15.1 million in the same
period ended October 31, 2015. The increase was primarily due to Club Fortune
operating expenses, which were $3.4 million. Excluding Club Fortune's operating
expenses, casino expenses decreased $0.2 million when compared to the same
period last year primarily due to lower revenue driven commissions and gaming
taxes in South Dakota. Marketing and administration increased $1.0 million over
the prior year period primarily due to Club Fortune. Depreciation and
amortization decreased by $0.1 million, excluding Club Fortune's expenses,
because certain Washington customer relationship intangibles are now fully
amortized. Food and beverage, corporate, facility and other expenses remained
relatively steady when compared to the same period last year on a same property
basis (excluding the impact of the addition of Club Fortune).



Non-operating income (expense). Total non-operating expense decreased $27
thousand for the three months ended October 31, 2016, compared to the three
months ended October 31, 2015. The decrease resulted primarily from the $0.1
million increase in the swap fair value, partially offset by the $0.1 million
increase in interest expense and amortization of loan issue costs primarily due
to the increase in the outstanding debt since October 31, 2015.



Income Taxes. For the three months ended October 31, 2016, our effective tax
rate was 32%. For the three months ended October 31, 2015, our effective income
tax rate was 33%. The difference between the federal statutory rate of 34% and
the year to date's effective tax rate is primarily due to general business
credits.



COMPARISON OF THE SIX MONTHS ENDED OCTOBER 31, 2016 AND OCTOBER 31, 2015




Net revenues. Net revenues were $36.8 million for the six months ended October
31, 2016, and $32.1 million for the same period ended October 31, 2015. The
increase is due to the inclusion of Club Fortune's $6.4 million of net revenue
(Club Fortune was acquired on December 1, 2015), partially offset by net revenue
decreases of $1.2 million for the properties in Washington and $0.4 million in
South Dakota. Washington net revenues decreased $0.9 million after excluding
prior year revenue from the Golden Nugget property, which was sold June 30,
2015. The decrease in Washington's revenue was due to a lower hold percentage
and $0.5 million of reduced poker play. South Dakota revenues were $4.2 million
compared to $4.6 million in the prior year's period primarily due to lower
handle as a result of 47 fewer units in operation.



Total operating expenses. Total operating expenses were $36.5 million for the
six months ended October 31, 2016, compared to $30.3 million in the same period
ended October 31, 2015. The increase was primarily due to Club Fortune operating
expenses, which were $6.9 million. Excluding Club Fortune's operating expenses,
casino expenses decreased $0.6 million when compared to the same period last
year primarily due to $0.4 million decreases in South Dakota due to lower
revenue driven commissions and gaming taxes and $0.2 million in Washington
primarily due to the sale of the Golden Nugget property. Marketing and
administration increased $2.1 million over the prior year period primarily due
to Club Fortune. Corporate expense increased $0.2 million after excluding
acquisition expenses primarily due to first quarter professional fees and
on-going consulting fees paid to the former owner of Club Fortune. Depreciation
and amortization decreased by $0.2 million, excluding Club Fortune's expenses,
because certain Washington customer relationship intangibles are now fully
amortized. Food and beverage, corporate, facility and other expenses remained
relatively steady when compared to the same period last year on a same property
basis (excluding the impact of the addition of Club Fortune).



Non-operating income (expense). Total non-operating expense increased $91
thousand for the six months ended October 31, 2016, compared to the six months
ended October 31, 2015. The increase resulted primarily from the $0.1 million
increase in interest expense and amortization of loan issue costs primarily due
to the increase in the outstanding debt since October 31, 2015.



Income Taxes. For the six months ended October 31, 2016, our effective tax rate
was 31%. For the six months ended October 31, 2015, our effective income tax
rate was 33%. The difference between the federal statutory rate of 34% and the
current year's effective tax rate is primarily due to general business credits.



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,
exclusion of 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.



  14





The following tables show adjusted EBITDA by operating unit:



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

October 31, 2016              $ 1,521,273     $      212,866     $ 65,261  

$ (640,779 ) $ 1,158,621

October 31, 2015              $ 1,995,624     $      251,968     $      -     $    (580,686 )   $ 1,666,906




                                                           Adjusted EBITDA
                                                                             Corporate -
For the six months ended:   Washington       South Dakota       Nevada          Other            Total

October 31, 2016            $ 2,947,233     $      308,155     $ 210,086     $ (1,294,938 )   $ 2,170,536

October 31, 2015            $ 3,728,103     $      409,795     $       -     $ (1,119,836 )   $ 3,018,062




Adjusted EBITDA reconciliation to net income:



                                                                     For the three months ended
                                                              October 31, 2016        October 31, 2015

Net income                                                   $          150,022      $          617,988
Adjustments:
Net interest expense and change in swap fair value                       64,103                  91,125
Income tax expense                                                       70,842                 301,122
Depreciation and amortization                                           773,510                 488,709
Acquisition expenses                                                          -                  80,660
Stock compensation and employee stock purchases                          85,143                  80,300
Loss on disposal of assets                                                5,546                   2,050
Amortization of deferred rent                                             9,455                   4,952
Adjusted EBITDA                                              $        1,158,621      $        1,666,906




                                                                     For the six months ended
                                                              October 31, 2016       October 31, 2015

Net income                                                   $           50,450     $        1,075,985
Adjustments:
Net interest expense and change in swap fair value                      281,833                191,232
Income tax expense                                                       22,854                528,634
Depreciation and amortization                                         1,550,022                999,503
Acquisition expenses                                                    113,900                260,780
Stock compensation and employee stock purchases                         115,606                110,495
Loss (gain) on disposal of assets                                        13,916               (161,430 )
Amortization of deferred rent                                            21,955                 12,863
Adjusted EBITDA                                              $        2,170,536     $        3,018,062




  15





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 six months ended October
31, 2016 and 2015:



                                                   Six Months Ended
                                             October 31,      October 31,
                                                 2016             2015
           Net cash provided by (used in):
           Operating activities              $    976,006     $  1,816,113
           Investing activities              $   (317,291 )   $ (1,263,859 )
           Financing activities              $ (2,004,109 )   $   (580,442 )



Operating activities. Net cash provided by operating activities during the six
months ended October 31, 2016, decreased by $0.8 million over the comparable
period in the prior fiscal year. This lower operating cash flow primarily
resulted from the $0.7 million decrease in operating income before depreciation
and amortization and gain or loss on disposal of assets.



Investing activities. Net cash used in investing activities during the six
months ended October 31, 2016, decreased by $0.9 million over the comparable
period in the prior fiscal year primarily due to the $1.5 million deposit paid
in the prior year towards the Club Fortune acquisition, partially offset by the
current year's $0.5 million increase in purchases of property and equipment.



Financing activities. Net cash used in financing activities during the six
months ended October 31, 2016, increased $1.4 million over the comparable period
in the prior fiscal year. The increase mainly resulted from the $1.5 million
proceeds from the bank loan to finance the Club Fortune acquisition in the
prior
fiscal year.


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;

- new management contracts

- working capital requirements;

- obtaining debt financing; and

- debt service requirements.




Also, in July 2016, we announced that our board of directors approved a $2.0
million stock repurchase program to purchase our common stock in the open market
or in privately negotiated transactions from time to time, in compliance with
Rule 10b-18 of the Securities and Exchange Act of 1934, subject to market
conditions, applicable legal requirements, loan covenants and other factors.
During the quarter ended October 31, 2016, the Company repurchased 189,788
shares for the treasury at a weighted average-price per share of $1.81, costing
$351,965, (including commissions and other related transaction costs). The
repurchase plan does not obligate the Company to acquire any specified number or
value of common stock.


As of October 31, 2016, we have $4.9 million available to borrow per the Credit Agreement. Principal reductions due on the Credit Facility are as follows:




November 1, 2016 - October 31, 2017    $           -
November 1, 2017 - October 31, 2018           67,223

November 1, 2018 - October 31, 2019 2,500,000 November 1, 2019 - October 31, 2020 1,875,000 November 1, 2020 - November 30, 2020 11,057,777 Total payments

                            15,500,000
Unamortized debt discount                   (290,171 )
Total long-term debt                   $  15,209,829



On October 31, 2016, excluding restricted cash of $1,518,888, we had cash and cash equivalents of $10,237,713. The restricted cash consists of funds for player supported jackpots.




In November 2016, Washington state approved increasing the state minimum wage to
$11.00 per hour effective January 1, 2017. The minimum wage is scheduled to
increase to $11.50 in 2018, $12.00 in 2019, $13.50 in 2020 and would thereafter
be indexed to inflation. The company estimates the passage of this proposal
increases its annualized payroll expense by approximately $1.2 million in the
first full year of the increase. The Company is addressing ways to mitigate the
overall financial impact of this potential change.



  16





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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