MONARCH CASINO & RESORT INC - Quarter Report: 2019 March (Form 10-Q)

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

 

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

For the quarterly period ended March 31, 2019

 

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 No. 0-22088

 

 

 

MONARCH CASINO & RESORT, INC.

(Exact name of registrant as specified in its charter)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Registrant’s telephone number, including area code:  (775) 335-4600

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has 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.  Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☒  No ☐

 

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

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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).  Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 17,985,692 shares as of May 3, 2019.

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

 

The Notes to the Consolidated Financial Statements are an integral part of these statements.

MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except shares)

 

The Notes to the Consolidated Financial Statements are an integral part of these statements.

MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except shares)

 

 

 

 

 

 

 

The Notes to the Consolidated Financial Statements are an integral part of these statements.

 

 

 

 

MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)

 

 

 

The Notes to the Consolidated Financial Statements are an integral part of these statements.

MONARCH CASINO & RESORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

QUARTERLY PERIOD ENDED MARCH 31, 2019

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation:

 

Monarch Casino & Resort, Inc. was incorporated in 1993. Unless otherwise indicated, “Monarch” and the “Company” refer to Monarch Casino & Resort, Inc. and its subsidiaries. Monarch owns and operates the Atlantis Casino Resort Spa, a hotel and casino in Reno, Nevada (the “Atlantis”) and Monarch Casino Black Hawk, a casino in Black Hawk, Colorado. In addition, Monarch owns separate parcels of land located next to the Atlantis and a parcel of land with an industrial warehouse located between Denver, Colorado and Monarch Casino Black Hawk. Monarch also owns Chicago Dogs Eatery, Inc. and Monarch Promotional Association, both of which were formed in relation to licensure requirements for extended hours of liquor operation in Black Hawk, Colorado.

 

The accompanying unaudited consolidated financial statements include the accounts of Monarch and its subsidiaries (the “Consolidated Financial Statements”). Intercompany balances and transactions are eliminated.

 

Interim Financial Statements:

 

The Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the management of the Company, all adjustments considered necessary for a fair presentation are included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

 

The balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements of the Company at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2018.

 

Fair Value of Financial Instruments:

 

The estimated fair value of the Company’s financial instruments has been determined by the Company, using available market information and valuation methodologies. However, considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

 

The carrying amounts of cash, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. Additionally, the carrying value of our debt approximates fair value due to the variable nature of applicable interest rates and relatively short-term maturity.

 

Debt Issuance Costs:

 

Costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the term of the related debt agreement. Loan issuance costs are included in “Other assets, net” on the Company’s consolidated balance sheets. As of March 31, 2019, loan issuance cost, net of amortization was $1.2 million.

 

Segment Reporting:

 

The accounting guidance for disclosures about segments of an enterprise and related information requires separate financial information to be disclosed for all operating segments of a business. Accounting Standards Codification (“ASC”) 280 allows individual operating segments to be aggregated for reporting purposes if certain criteria are met. The Company determined that the Company’s two operating segments, Atlantis and Monarch Casino Black Hawk, meet all of the aggregation criteria stipulated by ASC 280-10-50-11. The Company views each property as an operating segment and the two operating segments have been aggregated into one reporting segment.

 

Inventories

 

Inventories, consisting primarily of food, beverages, and retail merchandise, are stated at the lower of cost and net realizable value. Cost is determined based on the weighted average, which approximates a first-in, first-out method.

 

Capitalized Interest

 

The Company capitalizes interest costs associated with debt incurred in connection with major construction projects.  When no debt is specifically identified as being incurred in connection with a construction project, the Company capitalizes interest on amounts expended on the project at the Company’s average borrowing cost. Interest capitalization is ceased when the project is substantially complete. The Company capitalized $1.2 million during the quarter ended March 31, 2019.

 

Revenue Recognition

 

The majority of the Company’s revenue is recognized when products are delivered or services are performed. For certain revenue transactions (when a patron uses a club loyalty card), in accordance with accounting standard update No. 2014-09 (“ASC 606”), a portion of the revenue is deferred until the points earned by the patron are redeemed or expire.

Casino revenue: Casino revenues represent the net win from gaming activity, which is the difference between the amounts won and lost, which represents the transaction price. Jackpots, other than the incremental amount of progressive jackpots, are recognized at the time they are won by customers. Funds deposited by customers in advance and outstanding chips and slot tickets in the customers’ possession are recognized as a liability until such amounts are redeemed or used in gaming play by the customer. Additionally, net win is reduced by the performance obligations for the players’ club program, progressive jackpots and any pre-arranged marker discounts. Progressive jackpot provisions are recognized in two components: 1) as wagers are made for the share of players’ wagers that are contributed to the progressive jackpot award, and 2) as jackpots are won for the portion of the progressive jackpot award contributed by us. Cash discounts and other cash incentives to guests related to gaming play are recorded as a reduction to gaming revenue.

 

Players’ Club Program: The Company operates a players’ club program under which as players perform gaming activities they earn and accumulate points, which may be redeemed for a variety of goods and services. Given the significance of the players’ club program and the ability for members to bank such points based on their past play, we have determined that players’ club program points granted in conjunction with gaming activity constitute a material right and, as such, represent a performance obligation associated with the gaming contracts. At the time points are earned, we recognize deferred revenue at the standalone selling prices (SSP) of the goods and services that the points are expected to be redeemed for, with a corresponding decrease in gaming revenue. The points estimated SSP is computed as the cash redemption value of the points expected to be redeemed, which is determined through an analysis of all redemption activity over the preceding twelve-month period.

 

As of March 31, 2019, we had estimated the obligations related to the players’ club program at $9.4 million, which is included in Accrued Expenses in the Liabilities and Stockholders’ Equity section in the Consolidated Balance Sheet.

 

Pursuant to the new Financial Accounting Standards Board (“FASB”) guidelines, food and beverage, hotel and other complimentaries are now valued at their retail price and included as revenues within their respective categories, with a corresponding decrease in gaming revenues. In addition, the cost of providing these complimentary goods and

services are now included as expenses within their respective categories, resulting in a corresponding decrease in casino expenses.

Food and Beverage, Hotel and Other (retail) Revenues: Food and Beverage, Hotel and Other Revenues in general are recognized when products are delivered or services are performed. We recognize revenue related to the products and services associated to the players points’ redemptions at the time products are delivered or services are performed, with corresponding reduction in the deferred revenue, at SSP. Other complimentaries in conjunction with the gaming and other business are also valued at SSP. Hotel revenue is presented net of non-third-party rebate and commission.

Other Revenues:  Other revenues (excluding retail) primarily consist of commissions received on ATM transactions and cash advances, which are recorded on a net basis as the Company represents the agent in its relationship with the third-party service providers, and commissions and fees received in connection with pari-mutuel wagering, which are also recorded on a net basis.

Sales and other taxes: Sales taxes and other taxes collected from customers on behalf of governmental authorities are accounted for on a net basis and are not included in revenues or operating expenses. In addition, tips and other gratuities, excluding service charges, collected from customers on behalf of our employees are also accounted for on a net basis and are not included in revenues or operating expenses.

 

NOTE 2. ACCOUNTING FOR LEASES

 

We adopted accounting standard update (“ASU”) No. 2016-02, “Leases (Topic 842), (“ASC 842”)” which requires leases with durations greater than twelve months to be recognized on the balance sheet. We adopted the standard using the modified retrospective approach with an effective date as of the beginning of our fiscal year, January 1, 2019. At January 1, 2019 we recorded a transition adjustment for the right of use assets of $16.4 million offset by short- and long-term lease liabilities of $0.9 million and $15.5 million, respectively, properly treated as a non-cash item in the Consolidated Statement of Cash Flows. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

 

For leases with terms greater than 12 months, we record the related asset and obligation at the present value of the lease payments over the lease term. Many of our leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. As permitted by ASC 842, we elected not to separate non-lease components from their related lease components.

 

When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.

 

As of the end of the first quarter of 2019 our right of use assets consisted of the Parking Lot Lease, the Driveway Lease (as defined and discussed in NOTE 6. RELATED PARTY TRANSACTIONS), as well as certain billboard leases.

 

The table below presents information related to the lease costs for operating leases during 2019 (in thousands):

 

Upon adoption of the new lease standard, incremental borrowing rates used for existing leases were established using the rates in effect as of the lease inception or modification date. The weighted-average incremental borrowing rate of the leases presented in the lease liability as of the end of the first quarter of 2019 was 4.32%.

 

The weighted-average remaining lease term of the leases presented in the lease liability as of the end of the first quarter of 2019 was 22.06 years.

 

Following is the undiscounted cash flow for the nine months of the current year, for each of the next four years and total of the remaining years to the operating lease liabilities recorded on the balance sheet (in thousands):

 

Cash paid related to the operating leases presented in the lease liability as of the end of the first quarter of 2019 was $368 thousand.

 

NOTE 3. STOCK-BASED COMPENSATION

 

In accordance with ASU No. 2016-09, the Company records any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Income in the reporting periods in which vesting occurs. As a result, the Company’s income tax expense and associated effective tax rate are impacted by fluctuations in stock price between the grant dates and vesting dates of equity awards.

 

For the three months ended March 31, 2019 and 2018, the effect of the adoption of ASU No. 2016-09 was a decrease of tax expense by $253 thousand and $145 thousand, respectively, resulting in an increase of basic and diluted earnings per share by approximately a $0.01, for each of the periods.

 

The Company is estimating forfeitures, rather than accounting for forfeitures, as they occur.

 

Reported stock-based compensation expense was classified as follows (in thousands):

 

 

 

 

 

NOTE 4. EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing reported net earnings by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect the additional dilution for all potentially dilutive securities such as stock options. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands):

 

 

Excluded from the computation of diluted earnings per share are options where the exercise prices are greater than the market price as their effects would be anti-dilutive in the computation of diluted earnings per share. For the three months ended March 31, 2019 and 2018, options for approximately 725 thousand and 236 thousand shares, respectively, were excluded from the computation.

 

NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS

 

In August 2018, the FASB issued an ASU to align the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset in the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of income as the costs related to the hosting fees. The guidance in this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted including adoption in any interim period. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after adoption. The Company is currently assessing the impact the adoption of this standard will have on its Consolidated Financial Statements.

 

In January 2017, the FASB issued an ASU that simplifies the accounting for goodwill impairment for all entities by eliminating the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is allowed for all entities as of January 1, 2017, for annual and any interim impairment tests occurring after January 1, 2017.

 

 In February 2016, the FASB issued an ASU, amended January 2017, which addresses the recognition and measurement of leases. Under the new guidance, for all leases (with the exception of short-term leases), at the commencement date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Further, the new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities, which no longer provides a source for off- balance sheet financing. The standard permits two approaches, one requiring retrospective application of the new guidance with restatement of prior years, and one requiring prospective application of the new guidance. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, amending certain aspects of the new leasing standard. The amendment allows an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods.  We adopted this standard as of the first quarter of 2019. See NOTE 2. ACCOUNTING FOR LEASES.

 

A variety of proposed or otherwise potential accounting standards are currently under review and study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, the implementation of any such proposed or revised standards would have on the Company’s Consolidated Financial Statements.

 

NOTE 6. RELATED PARTY TRANSACTIONS

 

The shopping center adjacent to the Atlantis (the “Shopping Center”) is owned by Biggest Little Investments, L.P. (“BLI”). John Farahi and Bob Farahi, Co-Chairmen of the Board and executive officers of the Company, and Ben Farahi are the three largest stockholders (the “Farahi Family Stockholders”) of Monarch and each also beneficially owns limited partnership interests in BLI. Maxum LLC is the sole general partner of BLI, and Ben Farahi is the sole managing member of Maxum LLC. Neither John Farahi nor Bob Farahi has any management or operational control over BLI or the Shopping Center. Until May 2006, Ben Farahi held the positions of Co-Chairman of the Board, Secretary, Treasurer and Chief Financial Officer of the Company.

 

On August 28, 2015, Monarch, through its subsidiary Golden Road, entered into a 20-year lease agreement with BLI for a portion of the Shopping Center, consisting of an approximate 46,000 square-foot commercial building on approximately 4.2 acres of land adjacent to the Atlantis (the “Parking Lot Lease”). This lease gives the Atlantis the right to use a parcel, approximately 4.2 acres, comprised of a commercial building and surrounding land adjacent to the Atlantis. The primary purpose of the Parking Lot Lease is to provide additional, convenient, Atlantis surface parking. The Company demolished the commercial building and converted the land into approximately 300 additional surface parking spaces for the Atlantis. The minimum annual rent under the Parking Lot Lease is $695 thousand, commencing on November 17, 2015. The minimum annual rent is subject to a cost of living adjustment increase on each five-year anniversary. In addition, the Company is responsible for payment of property taxes, utilities and maintenance expenses related to the leased property. The Company has an option to renew the Parking Lot Lease for an additional 10-year term. If the Company elects not to exercise its renewal option, the Company will be obligated to pay BLI $1.6 million. For each of the three-month periods ended March 31, 2019 and 2018, the Company paid $174 thousand in rent, plus $12 thousand and $8 thousand, respectively, in operating expenses relating to this lease. The right of use asset and lease liability balances as of March 31, 2019, recognized in the Consolidated Balance Sheet, was $10.9 million.

 

In addition, the Atlantis shares a driveway with the Shopping Center and leases approximately 37,400 square feet from BLI (the “Driveway Lease”) for an initial lease term of 15 years, which commenced on September 30, 2004, at an original annual rent of $300 thousand plus common area expenses. The annual rent of the Driveway Lease is subject to a cost of living adjustment increase on each five-year anniversary of the Driveway Lease. The total cost of the improvements was $2.0 million of which $1.35 million was paid by the Company. The cost of the driveway improvements is being depreciated over the 15-year expected economic life of the asset; some components of the driveway were depreciated over a shorter period of time. Effective August 28, 2015, in connection with the Company entering into the Parking Lot Lease, the Driveway Lease was amended to: (i) make the Company solely responsible for the operation and maintenance costs of the shared driveway (including the fountains thereon); (ii) eliminate the Company’s obligation to reimburse the Shopping Center for its proportionate share of common area expenses; and (iii) exercise the three successive five-year renewal terms beyond the initial 15 year term in the existing Driveway Lease agreement. At the end of the renewal terms, the Company has the option to purchase the leased driveway section of the Shopping Center. For each of the three-month periods ended March 31, 2019 and 2018, the Company paid $94 thousand in rent, plus $9 thousand and $5 thousand, respectively, in operating expenses relating to this lease.  The right of use asset and lease liability balances as of March 31, 2019, recognized in the Consolidated Balance Sheet, was $4.3 million.

 

We occasionally lease billboard advertising, storage space and parking lot space from affiliates controlled by the Farahi Family Stockholders and paid $36 thousand and $32 thousand, respectively, for the three-month periods ended March 31, 2019 and 2018, for such leases.

 

NOTE 7. LONG-TERM DEBT

 

On July 20, 2016, the Company entered into an amended and restated credit facility agreement (the “Amended Credit Facility”), under which our former $100.0 million credit facility (under which as of June 30, 2016 the borrowing capacity had been reduced to $45.5 million as a result of $19.5 million in mandatory reductions pursuant to the agreement and $35.0 million in voluntary reductions, as allowed by the agreement) was increased to $250.0 million, and the maturity date was extended from November 15, 2016 to July 20, 2021.

 

As of March 31, 2019, the Company had an outstanding principal balance of $110.5 million under the Amended Credit Facility, a $0.6 million Standby Letter of Credit and $138.9 million remaining in available borrowings of the $250.0 million maximum principal available under the Amended Credit Facility. As of March 31, 2019, there have been no withdrawals from the Standby Letter of Credit.

 

The total revolving loan commitment under the Amended Credit Facility will be automatically and permanently reduced to $50.0 million in the first full quarter after completion of the expansion project at the Monarch Casino Black Hawk (the “Monarch Black Hawk Expansion”) and all then outstanding revolving loans up to $200.0 million under the Amended Credit Facility will be converted to a term loan at such time. We may be required to prepay borrowings under the Amended Credit Facility no later than December 31, 2019 using excess cash flows depending on our leverage ratio. We have an option to permanently reduce the maximum revolving available credit at any time so long as the amount of such reduction is at least $0.5 million and in multiples of $50 thousand.

 

Borrowings are secured by liens on substantially all of the Company’s real and personal property.

 

In addition to other customary covenants for a facility of this nature, as of March 31, 2019, we are required to maintain a Total Leverage Ratio (Total Funded Debt divided by EBITDA, as defined in the Amended Credit Facility) of no more than 4.75:1 and a Fixed Charge Coverage Ratio (EBITDA divided by Fixed Charges, as defined in the Amended Credit Facility) of at least 1.15:1. As of March 31, 2019, the Company’s Total Leverage Ratio and Fixed Charge Coverage Ratio were 1.8:1 and 15.5:1, respectively.

 

The interest rate under the Amended Credit Facility is LIBOR plus a margin ranging from 1.00% to 2.50%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 1.50%, or the Prime Rate. The applicable margins will vary depending on our leverage ratio. Commitment fees are equal to the daily average unused revolving commitment multiplied by the commitment fee percentage, ranging from 0.175% to 0.45%, based on our leverage ratio.

 

At March 31, 2019, our interest rate was based on LIBOR and our leverage ratio was such that pricing for borrowings under the Amended Credit Facility was LIBOR plus 1.25%. At March 31, 2019, the one-month LIBOR interest rate was 2.50%. The carrying value of the debt outstanding under the Amended Credit Facility approximates fair value because the interest fluctuates with the lender’s prime rate or other market rates of interest.

 

We may prepay borrowings under the Amended Credit Facility without penalty (subject to certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period). Amounts prepaid may be re-borrowed so long as the total borrowings outstanding do not exceed the maximum principal available.

 

We believe that our existing cash balances, cash flow from operations and borrowings available under the Amended Credit Facility will provide us with sufficient resources to fund our operations, meet our debt obligations, and fulfill our capital expenditure plans over the next twelve months; however, our operations are subject to financial, economic, competitive, regulatory, and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow or if our cash needs exceed our borrowing capacity under the Amended Credit Facility, we could be required to adopt one or more alternatives, such as reducing, delaying or eliminating planned capital expenditures, selling assets, restructuring debt or obtaining additional equity capital.

 

NOTE 8. TAXES

 

For the three months ended March 31, 2019 and 2018, the Company’s effective tax rate was 19.6% and 20.5%, respectively. The variation in the effective tax rate in the three-month periods of 2019 and 2018 is primarily attributable to the difference in the excess tax benefit on stock-based compensation.

 

No uncertain tax positions were recorded as of March 31, 2019 and 2018. No change in uncertain tax positions is anticipated over the next twelve months.

 

NOTE 9. STOCK REPURCHASE PLAN

 

On October 22, 2014, the board of directors of Monarch authorized a stock repurchase plan (the “Repurchase Plan”). Under the Repurchase Plan, the board of directors authorized a program to repurchase up to 3,000,000 shares of the Company’s 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, as amended, subject to market conditions, applicable legal requirements and other factors. The Repurchase Plan does not obligate the Company to acquire any particular amount of common stock and the plan may be suspended at any time at the Company’s discretion, and it will continue until exhausted. The actual timing, number and value of shares repurchased under the repurchase program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s stock, general market economic conditions and applicable legal requirements. The Company has made no purchases under the Repurchase Plan.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Unless otherwise indicated, “Monarch,” “Company,” “we,” “our” and “us” refer to Monarch Casino & Resort, Inc. and its subsidiaries.

 

STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) regarding our expectations and beliefs concerning the timing for completion, cost, financing, transformative potential, scope and impact of, and continued investment in, our Monarch Black Hawk Expansion; additional revenue opportunities as a result of project and budget modifications for our Monarch Black Hawk Expansion; timing of completion of various phases and project updates by our general contractor; our full year of expanded operations in 2020; business prospects; business strategies and outlook; additional revenue opportunities as a result of project and budget modifications for our Monarch Black Hawk Expansion; positioning of our properties to benefit from future macro and local economic growth; capital requirements; anticipated sources of funds and adequacy of such funds to meet our debt obligations and capital requirements; financial condition, legal matters and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. We note that many factors could cause our actual results and experience to change significantly from the anticipated results or expectations expressed in our forward-looking statements. When words and expressions such as “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “will,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions are used in this Form 10-Q, as well as statements containing phrases such as “in our view,” “we cannot assure you,” “although no assurance can be given,” or “there is no way to anticipate with certainty,” forward-looking statements are being made.

 

Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to change significantly from those set forth in our forward-looking statements, including the following factors:

 

 

We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions, except as required by law. New risks emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements.

 

OVERVIEW

 

Monarch was incorporated in the state of Nevada in 1993. We own and operate the Atlantis Casino Resort Spa, a hotel and casino in Reno, Nevada (the “Atlantis”) and Monarch Casino Black Hawk, a casino in Black Hawk, Colorado. In addition, we own separate parcels of land located next to the Atlantis and a parcel of land with an industrial warehouse located between Denver, Colorado and Monarch Casino Black Hawk. We also own Chicago Dogs Eatery, Inc. and Monarch Promotional Association, both of which were formed in relation to licensure requirements for extended hours of liquor operation in Black Hawk, Colorado.

 

We earn revenues, operating income and cash flow from Atlantis and Monarch Casino Black Hawk, primarily through our casino, food and beverage operations and, at Atlantis, our hotel operations. The Monarch Casino Black Hawk does not have a hotel; however, we are in the process of renovations and construction that will include a hotel. We focus on delivering exceptional service and value to our guests. Our hands-on management style focuses on exceptional customer services and cost efficiencies.

 

Atlantis: Our business strategy is to maximize revenues, operating income and cash flow primarily through our casino, food and beverage operations and hotel operations. We continuously upgrade our property. With quality gaming, hotel and dining products, we believe the Atlantis is well positioned to benefit from future macro and local economic growth. Businesses continue to relocate to Northern Nevada and local business volume has steadily increased. While such economic activity could ultimately drive additional revenue and profit at Atlantis, we are experiencing the more immediate effect of increased labor costs, which, combined with continued aggressive marketing programs by our competitors, have applied upward pressure on Atlantis operating costs.

 

Monarch Casino Black Hawk:  Since the acquisition of Monarch Casino Black Hawk in April 2012, our focus has been to maximize casino and food and beverage revenues while upgrading the existing facility and working on the major expansion. There is currently no hotel on the property. In August 2015, we completed the redesign and upgrade of the existing Monarch Casino Black Hawk, bringing to the facility’s interior the same quality, ambiance and finishes of the ongoing master planned expansion that we expect will transform Monarch Casino Black Hawk into a full-scale casino resort. In the fourth quarter of 2013, we began work on the Monarch Black Hawk Expansion. In November 2016, we opened for guest use our elegant nine-story parking facility with about 1,350 spaces for guest use. Construction of a new hotel tower and casino expansion on the site where the old parking structure was sitting is under way. (See CAPITAL SPENDING AND DEVELOPMENT – Monarch Black Hawk Expansion Plan). Once completed, the Monarch Black Hawk Expansion Plan will nearly double the casino space and will add a 23-story hotel tower with approximately 500 guest rooms and suites, an upscale spa and pool facility, three additional restaurants (increasing the total to four), additional bars and associated support facilities. Our general contractor has informed us that it is working diligently to complete the expanded casino and hotel tower as well as the new restaurants and retail areas by the end of the third quarter of 2019. We expect the general contractor to provide us with the final phasing and opening dates for the expanded facilities in the second quarter of 2019. In addition, we expect to complete the upgraded amenities in the existing casino in the fourth quarter of 2019, leading to a first full year of expanded operations in 2020.

 

RESULTS OF OPERATIONS

 

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2019 and 2018

 

For the three months ended March 31, 2019, our net income totaled $7.0 million, or $0.38 per diluted share, compared to net income of $6.7 million, or $0.36 per diluted share for the same period in 2018, reflecting a 4.1% increase in net income and a 5.6% increase in diluted earnings per share. Net revenues in the three months ended March 31, 2019, totaled $58.7 million, an increase of $2.5 million, or 4.4%, compared to the three months ended March 31, 2018. Income from operations for the three months ended March 31, 2019 totaled $8.7 million compared to $8.6 million for the same period in 2018.

 

Casino revenue decreased 3.2% in the first quarter of 2019 compared to the first quarter of 2018, due to an increase in promotional allowances (primarily hotel), recognized at the stand alone selling price and recorded as casino contra revenue. Casino operating expense as a percentage of casino revenue increased from 35.7% in the first quarter of 2018 to 37.3% in the same quarter of 2019 due to the increase in promotional allowances.

 

Food and beverage revenue for the first quarter of 2019 increased 4.5% over the first quarter of 2018, due to a 2.6% increase in food and beverage covers combined with a 1.8% increase in food and beverage revenue per cover. Food and beverage operating expense as a percentage of food and beverage revenue increased in the first quarter of 2019 to 79.1% compared to 77.3% for the same period in 2018 as a result of an increase in labor and product cost.

 

Hotel revenue increased 33.7% in the first quarter of 2019 compared to the first quarter of 2018. Average daily room rate (“ADR”) of $122.04 in the first quarter of 2019 was $34.22 higher than the ADR of $87.82 in the first quarter of 2018 due to an increase in cash ADR, partially attributable to the Safari group in January, and an increase in the complimentaries ADR recognized at the stand alone selling (retail) price. Hotel occupancy of 84.3% during the first quarter of 2019 was 1.2 percentage points lower compared to 85.5% during the first quarter of 2018. Revenue per Available Room (“REVPAR”), calculated by dividing total hotel revenue by total rooms available, was $114.72 and $85.80 for the three months ended March 31, 2019 and 2018, respectively. Hotel operating expense as a percentage of hotel revenue decreased to 36.8% in the first quarter of 2019 compared to 55.0% for the comparable prior year period primarily as a result of the increase in ADR, combined with a decrease in hotel small equipment.

 

Other revenue increased 18.0% in the first quarter of 2019 compared to the first quarter of 2018 driven primarily by increased miscellaneous revenue, as well as increases in arcade, spa and retail revenues.

 

Selling, general and administrative (“SG&A”) expense increased to $16.5 million in the first quarter of 2019 from $15.2 million in the first quarter of 2018 primarily due to a $1.0 million increase in salaries, wages and related benefits expense and a $0.3 million increase in repairs and maintenance, and outside services expenses. As a percentage of net revenue, SG&A expense increased to 28.0% in the first quarter of 2019 compared to 27.0% in the same period in 2018.

 

Depreciation and amortization expense was $3.6 million and $3.7 million for the three months ended March 31, 2019 and 2018, respectively.

 

During the first quarter of 2019, we capitalized all interest paid and accrued as the borrowings on our Amended Credit Facility were strictly used to finance the Monarch Black Hawk Expansion Plan. Interest expense, net of amounts capitalized, in the first quarter of 2018 was $80.0 thousand. See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

 

CAPITAL SPENDING AND DEVELOPMENT

 

We seek to continually upgrade and maintain our facilities in order to present a fresh, high quality product to our guests. In addition, we have invested, and continue to invest, in our Monarch Black Hawk Expansion Plan.

 

Cash paid for capital expenditures for the three-month periods ended March 31, 2019 and 2018 totaled approximately $36.1 million and $12.8 million, respectively. During the three-month periods ended March 31, 2019 and 2018, our capital expenditures related primarily to the new hotel tower and casino expansion at Monarch Casino Black Hawk, the renovation of our hotel suites at Atlantis  and the acquisition of gaming and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Casino Black Hawk. The capital expenditures were funded from operating cash flows and the Amended Credit Facility. During the three-month period ended March 31, 2018, our capital expenditures related primarily to the new hotel tower and casino expansion at Monarch Casino Black Hawk and the acquisition of gaming and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Casino Black Hawk. The capital expenditures were funded from operating cash flows.

 

Monarch Black Hawk Expansion Plan

 

In the fourth quarter of 2013, we began work to convert the Monarch Casino Black Hawk into a full-scale casino resort (the “Monarch Black Hawk Expansion Plan”).

 

The multi-phased expansion of the Monarch Casino Black Hawk involves construction of a new parking structure, demolition of the existing parking structure and construction of a new hotel tower and casino expansion. In November 2016, the new nine-story parking structure, offering approximately 1,350 parking spaces, was completed and became available for use by Monarch Casino Black Hawk guests. The demolition and removal of the old parking structure, which included a controlled implosion of the old garage, was completed in the first quarter of 2017.

 

On February 8, 2017, we broke ground on the hotel tower and casino expansion. The new 23-story tower will nearly double the existing casino space and will include approximately 500 hotel rooms, an upscale spa and pool facility, three additional restaurants and additional bars.

 

In 2018, we completed certain modifications to the Monarch Casino Black Hawk construction project scope which, we believe, will provide additional revenue opportunities for our expanded resort, including enlarging the casino floor and associated amenities by approximately 6,500 square feet. In addition, we made adjustments to the budget for the rise in construction costs and furniture, fixtures and equipment costs. Accordingly, our total overall budget for the completion of the Monarch Casino Black Hawk hotel tower and casino expansion is approximately $264 to $269 million.

 

Our general contractor has informed us that it is working diligently to complete the expanded casino and hotel tower as well as the new restaurants and retail areas by the end of the third quarter of 2019. We expect the general contractor to provide us with the final phasing and opening dates for the expanded facilities in the second quarter of 2019. In addition, we expect to complete the upgraded amenities in the existing casino in the fourth quarter of 2019, leading to a first full year of expanded operations in 2020. We expect to finance the cost through a combination of operating cash flows and the Amended Credit Facility. We can provide no assurance that any project will be completed on schedule, if at all, or within established budgets, or that any project will result in increased earnings to us.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal sources of liquidity have been cash provided by operations and, for capital expansion projects, borrowings available under our Amended Credit Facilities.

 

For the three months ended March 31, 2019, net cash provided by operating activities totaled $13.5 million, an increase of $0.4 million, or 3.4% compared to the same period in the prior year. This increase was primarily a result of an increase in share based compensation expense and an increase in net income, offset by a decrease in working capital and a decrease in depreciation and amortization expense.

 

Net cash used in investing activities totaled $36.1 million and $12.8 million during the three months ended March 31, 2019 and 2018, respectively. Net cash used in investing activities during the first three months of 2019 consisted primarily of cash used for the new hotel tower and casino expansion at Monarch Casino Black Hawk, for renovation of our hotel suites at Atlantis and for acquisition of gaming and other equipment at both properties. Net cash used in investing activities during the three months of 2018 consisted primarily of cash used for the new hotel tower and casino expansion at Monarch Casino Black Hawk and for acquisition of gaming and other equipment at both properties.

 

In the first three months of 2019, we borrowed $16.0 million against the Amended Credit Facility, which was used to fund the Monarch Casino Black Hawk expansion. There were no financing activities during the first three months of 2018.

 

Amended Credit Facility

 

Under the Amended Credit Facility, our available borrowing capacity is $250.0 million with a maturity date of July 20, 2021. We anticipate that the proceeds from the Amended Credit Facility will be used to partially fund the Monarch Black Hawk Expansion Plan, for ongoing capital expenditure, for working capital needs and general corporate purposes and requirements.

 

As of March 31, 2019, we had an outstanding principal balance of approximately $110.5 million under the Amended Credit Facility, a $0.6 million Standby Letter of Credit and approximately $138.9 million remaining in available borrowings under the $250.0 million maximum principal available under Amended Credit Facility. As of March 31, 2019, there have been no withdrawals from the Standby Letter of Credit.

 

The total revolving loan commitment under the Amended Credit Facility will be automatically and permanently reduced to $50.0 million at the earlier of the first full quarter after completion of the hotel tower and casino expansion at the Monarch Casino Black Hawk and December 31, 2019 and all then outstanding revolving loans up to $200.0 million under the Amended Credit Facility will be converted to a term loan at such time. We may be required to prepay borrowings under the Amended Credit Facility no later than December 31, 2019, using excess cash flows depending on our leverage ratio. We have an option to permanently reduce the maximum revolving available credit at any time so long as the amount of such reduction is at least $0.5 million and in multiples of $50,000.

 

Borrowings are secured by liens on substantially all of our real and personal property.

 

In addition to other customary covenants for a facility of this nature, as of March 31, 2019, we are required to maintain a Total Leverage Ratio (Total Funded Debt divided by EBITDA, as defined in the Amended Credit Facility) of no more than 4.75:1 and a Fixed Charge Coverage Ratio (EBITDA divided by fixed charges, as defined in the Amended Credit Facility) of at least 1.15:1. As of March 31, 2019, we were in compliance with the financial covenants contained in the Amended Credit Facility, as our Total Leverage Ratio and Fixed Charge Coverage Ratio were 1.8:1 and 15.5:1, respectively.

 

The interest rate under the Amended Credit Facility is LIBOR plus a margin ranging from 1.00% to 2.50%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 1.50%, or the Prime Rate. The applicable margins will vary depending on our leverage ratio. Commitment fees are equal to the daily average unused revolving commitment multiplied by the commitment fee percentage, ranging from 0.175% to 0.45%, based on our leverage ratio.

 

At March 31, 2019, our interest rate was based on LIBOR and our leverage ratio was such that pricing for borrowings under the Amended Credit Facility was LIBOR plus 1.25%. At March 31, 2019, the one-month LIBOR interest rate was 2.50%. The carrying value of the debt outstanding under the Amended Credit Facility approximates fair value because the interest fluctuates with the lender’s prime rate or other market rates of interest.

 

We may prepay borrowings under the Amended Credit Facility without penalty (subject to certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period). Amounts prepaid may be re-borrowed so long as the total borrowings outstanding do not exceed the maximum principal available.

 

We believe that our existing cash balances, cash flow from operations and borrowings available under the Amended Credit Facility will provide us with sufficient resources to fund our operations, meet our debt obligations, and fulfill our capital expenditure plans over the next twelve months; however, our operations are subject to financial, economic, competitive, regulatory, and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow or if our cash needs exceed our borrowing capacity under the Amended Credit Facility, we could be required to adopt one or more alternatives, such as reducing, delaying or eliminating planned capital expenditures, selling assets, restructuring debt or obtaining additional equity capital.

 

CRITICAL ACCOUNTING POLICIES

 

A description of our critical accounting policies and estimates can be found in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K. For a more extensive discussion of our accounting policies, see Note 1. “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in our 2018 Form 10-K filed with SEC on March 14, 2019.

 

CONTRACTUAL OBLIGATIONS

 

Our contractual obligations as of March 31, 2019 and the next five years and thereafter are as follows (in millions):

 

 

 

 

 

As described in the “CAPITAL SPENDING AND DEVELOPMENT” section above, we commenced a

substantial expansion of our Monarch Casino Black Hawk facility starting in 2014. While we have disclosed the estimated cost of that expansion, we have not entered into contracts for substantial portions of the work. For this reason, we have included in the table above only the amounts for which we have contractual commitments. At March 31, 2019, we estimate that the remaining cost to complete the Monarch Black Hawk Expansion is between $100 million and $107 million.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates and commodity prices. Our current primary market risk exposure is interest rate risk relating to the impact of interest rate movements under our Amended Credit Facility.

 

As of March 31, 2019, we had $110.5 million of outstanding principal balance under our Amended Credit Facility which bears interest at variable rates. A hypothetical 1% increase in the interest rate on the balance outstanding under the Amended Credit Facility at March 31, 2019 would result in a change in our annual interest cost of approximately $1.1 million. See “Liquidity and Capital Resources” for further discussion of our Amended Credit Facility and capital structure.

 

 We do not enter into derivative financial instruments for trading or speculative purpose, nor have we experienced any losses to date on any derivative financial instruments due to counterparty credit risk.

 

We do not have any cash or cash equivalents as of March 31, 2019 that are subject to market risk.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), an evaluation was carried out by our management, with the participation of our Chief Executive Officer and our Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined by Rule 13a-15(e) under the Exchange Act). Based upon the evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of the Evaluation Date. During the three-month period ended March 31, 2019, we implemented certain controls related to the adoption of FASB ASC Topic 842, effective January 1, 2019. These controls were designed and implemented to ensure the completeness and accuracy over financial reporting. With the exception of the controls implemented for FASB ASC Topic 842, there were no changes in our internal control over financial reporting during the three-month period ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may be party to claims that arise in the normal course of business. Management believes that the amount of any reasonably possible or probable loss for known matters would not have a material adverse impact on our financial condition, cash flows or results of operations; however, the outcome of these actions is inherently difficult to predict.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors we previously disclosed in Item 1A of our 2018 Form 10-K.

 

We encourage investors to review the risks and uncertainties relating to our business disclosed under the heading Risk Factors or otherwise in the 2018 Form 10-K, as well as those contained in Part I - Forward-Looking Statements thereof, as revised or supplemented by our Quarterly Reports filed with the SEC since the filing of the 2018 Form 10-K.

ITEM 6. EXHIBITS

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

 

 

 

*   Filed herewith.

** Furnished herewith

 

 

 

 

 

 

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.