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 June 30, 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)

Nevada	88-0300760
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
3800 S. Virginia St.
Reno, Nevada	89502
(Address of Principal Executive Offices)	(ZIP Code)

(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:

Title of each class	Trading Symbols	Name of each exchange on which registered
Common Stock, $0.01 par value per share	MCRI	The Nasdaq Stock Market LLC (Nasdaq-GS)

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.

Large accelerated filer ☐	Accelerated filer ☒	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth company ☐

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: 18,050,481 shares as of August 5, 2019.

TABLE OF CONTENTS

Item	Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018 (unaudited)	3
Consolidated Balance Sheets at June 30, 2019 (unaudited) and December 31, 2018	4
Consolidated Statements of Stockholder’s Equity for the three and six months ended June 30, 2019 and June 30, 2018 (unaudited)	5
Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)	6
Notes to Consolidated Financial Statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	21
Item 4. Controls and Procedures	22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	22
Item 1A. Risk Factors	22
Item 6. Exhibits	23
Signatures	24

2

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)

	Three months ended				Six months ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenues
Casino	$	32,836	$	31,142	$	61,812	$	61,087
Food and beverage		17,993		17,541		35,685		34,479
Hotel		8,809		8,097		17,314		14,460
Other		3,123		3,129		6,690		6,151
Net revenues		62,761		59,909		121,501		116,177
Operating expenses
Casino		11,337		10,856		22,157		21,552
Food and beverage		14,321		13,196		28,319		26,290
Hotel		3,447		3,056		6,577		6,555
Other		1,634		1,565		3,214		3,110
Selling, general and administrative		16,506		16,152		32,958		31,337
Depreciation and amortization		3,695		3,738		7,298		7,430
Loss on disposition of assets		—		4		—		4
Pre-opening expenses		188		—		624		—
Total operating expenses		51,128		48,567		101,147		96,278
Income from operations		11,633		11,342		20,354		19,899
Other expenses
Interest expense, net of amounts capitalized		—		(42)		—		(122)
Total other expense		—		(42)		—		(122)
Income before income taxes		11,633		11,300		20,354		19,777
Provision for income taxes		(2,354)		(2,061)		(4,060)		(3,797)
Net income	$	9,279	$	9,239	$	16,294	$	15,980
Earnings per share of common stock
Net income
Basic	$	0.52	$	0.52	$	0.91	$	0.90
Diluted	$	0.50	$	0.50	$	0.88	$	0.86
Weighted average number of common shares and potential common shares outstanding
Basic		17,997		17,821		17,967		17,795
Diluted		18,666		18,569		18,643		18,556

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

3

MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except shares)

	June 30, 2019		December 31, 2018
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	26,526	$	30,462
Receivables, net		6,404		6,740
Income taxes receivable		—		279
Inventories		3,700		3,692
Prepaid expenses		4,449		5,508
Total current assets		41,079		46,681
Property and equipment
Land		30,034		30,034
Land improvements		7,719		7,645
Buildings		193,235		193,235
Buildings improvements		26,019		25,995
Furniture and equipment		148,699		139,772
Construction in progress		246,670		180,518
Right of use assets		15,975		—
Leasehold improvements		3,782		3,782
		672,133		580,981
Less accumulated depreciation and amortization		(213,301)		(206,657)
Net property and equipment		458,832		374,324
Other assets
Goodwill		25,111		25,111
Intangible assets, net		2,121		2,704
Deferred income taxes		4,027		4,027
Other assets, net		2,011		2,280
Total other assets		33,270		34,122
Total assets	$	533,181	$	455,127
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	11,501	$	11,182
Construction accounts payable		18,802		17,152
Accrued expenses		31,038		31,111
Income taxes payable		2,223		—
Short-term lease liability		802		—
Total current liabilities		64,366		59,445
Long-term lease liability		15,180		—
Long-term debt		132,510		94,500
Total liabilities		212,056		153,945
Stockholders’ equity
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued		—		—
Common stock, $.01 par value, 30,000,000 shares authorized; 19,096,300 shares issued; 18,015,734 outstanding at June 30, 2019; 17,919,021 outstanding at December 31, 2018		191		191
Additional paid-in capital		32,411		30,111
Treasury stock, 1,080,566 shares at June 30, 2019; 1,177,279 shares at December 31, 2018		(14,527)		(15,876)
Retained earnings		303,050		286,756
Total stockholders’ equity		321,125		301,182
Total liabilities and stockholders’ equity	$	533,181	$	455,127

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

4

MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except shares)

	Common Stock			Additional
	Shares			Paid-in		Retained		Treasury
	Outstanding	Amount		Capital		Earnings		Stock		Total
Balance, January 1, 2019	17,919,021	$	191	$	30,111	$	286,756	$	(15,876)	$	301,182
Net exercise of stock options	57,670		—		241		—		804		1,045
Stock-based compensation expense	—		—		915		—		—		915
Net income	—		—		—		7,015		—		7,015
Balance, March 31, 2019	17,976,691	$	191	$	31,267	$	293,771	$	(15,072)	$	310,157
Net exercise of stock options	39,043		—		141		—		545		686
Stock-based compensation expense	—		—		1,003		—		—		1,003
Net income	—		—		—		9,279		—		9,279
Balance, June 30, 2019	18,015,734	$	191	$	32,411	$	303,050	$	(14,527)	$	321,125

	Common Stock			Additional
	Shares			Paid-in		Retained		Treasury
	Outstanding	Amount		Capital		Earnings		Stock		Total
Balance, January 1, 2018	17,759,446	$	191	$	26,890	$	257,516	$	(18,123)	$	266,474
Net exercise of stock options	32,938		—		85		—		465		550
Stock-based compensation expense	—		—		566		—		—		566
Adjustment to beginning retained earnings for accounting changes in accordance with the new revenue recognition standard	—		—		—		(4,858)		—		(4,858)
Net income	—		—		—		6,741		—		6,741
Balance, March 31, 2018	17,792,384	$	191	$	27,541	$	259,399	$	(17,658)	$	269,473
Net exercise of stock options	82,269		—		(86)		—		1,157		1,071
Stock-based compensation expense	—		—		825		—		—		825
Net income	—		—		—		9,239		—		9,239
Balance, June 30, 2018	17,874,653	$	191	$	28,280	$	268,638	$	(16,501)	$	280,608

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

5

MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)

	Six Months Ended June 30,
	2019		2018
Cash flows from operating activities:
Net income	$	16,294	$	15,980
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,298		7,430
Amortization of deferred loan costs		269		269
Stock-based compensation		3,649		3,012
Provisions (recoveries) for bad debts		24		(19)
Loss on disposition of assets		—		4
Changes in operating assets and liabilities:
Receivables		312		1,941
Income taxes		2,502		1,548
Inventories		(8)		35
Prepaid expenses		1,059		434
Right of use asset, net		7		—
Accounts payable		319		(773)
Accrued expenses		(73)		(1,392)
Net cash provided by operating activities		31,652		28,469
Cash flows from investing activities:
Change in construction payable		1,650		13,562
Acquisition of property and equipment		(75,248)		(54,819)
Net cash used in investing activities		(73,598)		(41,257)
Cash flows from financing activities:
Long-term debt borrowings		38,010		10,770
Net cash provided by financing activities		38,010		10,770
Change in cash		(3,936)		(2,018)
Cash and cash equivalents at beginning of period		30,462		29,151
Cash and cash equivalents at end of period	$	26,526	$	27,133
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	1,558	$	2,250
Accrued expenses - adjustment to beginning retained earnings for accounting changes in accordance with the new revenue recognition standard		—		4,858

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

6

MONARCH CASINO & RESORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

QUARTERLY PERIOD ENDED JUNE  30, 2019

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

Monarch Casino & Resort, Inc. was incorporated in 1993. Unless otherwise indicated, “Monarch”, “us”, “we” 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 and six months ended June 30, 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 the Company’s 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 June 30, 2019, loan issuance cost, net of amortization was $1.1 million.

7

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 $1.4 million and $2.6 million, respectively, during the three and six months ended June  30, 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 June 30,  2019, we had estimated the obligations related to the players’ club program at $9.3 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. 

8

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. The Company recognizes revenue related to the products and services associated with 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

The Company 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. The Company adopted the standard using the modified retrospective approach with an effective date as of the beginning of its fiscal year, January 1, 2019. At January 1, 2019, the Company 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. The Company elected the package of transition provisions available for expired or existing contracts, which allowed it to carryforward its 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, the Company records the related asset and obligation at the present value of the lease payments over the lease term. Many of the Company’s leases include rental escalation clauses, renewal options and/or termination options that are factored into its determination of lease payments when appropriate. As permitted by ASC 842, the Company elected not to separate non-lease components from their related lease components.

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

As of the end of the second quarter of 2019, the Company’s 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):

	Three months ended		Six months ended
	June 30, 2019		June 30, 2019
Short-term lease costs	$	88	$	176
Long-term lease costs		371		742
Total lease costs	$	459	$	918

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 June 30, 2019 was 4.32%.

The weighted-average remaining lease term of the leases presented in the lease liability as of June 30, 2019 was 21.93 years.

9

Following is the undiscounted cash flow for the remaining six 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):

	Operating
	Leases
Year ending December 31,
2019	$	736
2020		1,446
2021		1,432
2022		1,078
2023		1,072
Thereafter		19,084
Total minimum lease payments		24,848
Less: amount of lease payment representing interest		(8,866)
Present value of future minimum payments		15,982
Less: current obligations under leases		(802)
Long-term lease obligations	$	15,180

Cash paid related to the operating leases presented in the lease liability for the six months ended June 30, 2019 was $736 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 June 30,  2019 and 2018, the effect of the adoption of ASU No. 2016-09 was a decrease of tax expense by $167 thousand and $484 thousand, respectively, resulting in an increase of basic and diluted earnings per share by approximately $0.01 and $0.03,  respectively. For the six months ended June 30, 2019 and 2018, the effect of the adoption of ASU No. 2016-09 was a decrease of tax expense by $420 thousand and $629 thousand, respectively, resulting in an increase of basic and diluted earnings per share by approximately $0.03 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):

	Three months ended				Six months ended
	June 30,				June 30,
	2019		2018		2019		2018
Casino	$	55	$	43	$	101	$	81
Food and beverage		48		36		98		74
Hotel		22		11		43		21
Selling, general and administrative		878		735		1,676		1,215
Total stock-based compensation, before taxes		1,003		825		1,918		1,391
Tax benefit		(211)		(173)		(403)		(292)
Total stock-based compensation, net of tax	$	792	$	652	$	1,515	$	1,099

10

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):

	Three months ended  June 30,
	2019			2018
		Per Share			Per Share
	Shares	Amount		Shares	Amount
Basic	17,997	$	0.52	17,821	$	0.52
Effect of dilutive stock options	669		(0.02)	748		(0.02)
Diluted	18,666	$	0.50	18,569	$	0.50

	Six months ended June 30,
	2019			2018
		Per Share			Per Share
	Shares	Amount		Shares	Amount
Basic	17,967	$	0.91	17,795	$	0.90
Effect of dilutive stock options	676		(0.03)	761		(0.04)
Diluted	18,643	$	0.88	18,556	$	0.86

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 June 30, 2019 and 2018,  options for approximately 792 thousand and 441 thousand shares, respectively, were excluded from the computation. For the six months ended June 30, 2019 and 2018, options for approximately 759 thousand and 441 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.

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In June 2016, the FASB issued amended accounting guidance for measurement of credit losses on financial instruments. The amended accounting guidance replaces the incurred loss impairment model with a forward-looking expected loss model, and is applicable to most financial assets, including trade receivables other than those arising from operating leases. The amended guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted for interim and annual periods beginning after December 15, 2018. A modified retrospective transition method with a cumulative-effect adjustment to retained earnings is required to be applied at the date of adoption. The Company is currently assessing the impact the adoption of this standard will have on its Consolidated Financial Statements.

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, the Company has 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 Motor Inn, Inc., 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, surface parking for the Atlantis. 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 June 30, 2019 and 2018, the Company paid $174 thousand in rent, plus $1 thousand and $1 thousand, respectively, in operating expenses relating to this lease. For each of the six-month periods ended June 30, 2019 and 2018, the Company paid $348 thousand in rent, plus $13 thousand and $9 thousand, respectively, in operating expenses relating to this lease. The right of use asset and lease liability balances as of June 30, 2019, recognized in the Consolidated Balance Sheet, was $10.9 million.

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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 June 30, 2019 and 2018, the Company paid $94 thousand in rent, plus $4 thousand and $4 thousand, respectively, in operating expenses relating to this lease. For each of the six-month periods ended June 30, 2019 and 2018, the Company paid $188 thousand in rent, plus $13 thousand and $9 thousand, respectively, in operating expenses relating to this lease. The right of use asset and lease liability balances as of June 30, 2019, recognized in the Consolidated Balance Sheet, was $4.2 million.

The Company occasionally leases billboard advertising, storage space and parking lot space from affiliates controlled by the Farahi Family Stockholders and paid $33 thousand and $35 thousand, respectively, for the three-month periods ended June 30, 2019 and 2018,  and paid $69 thousand and $67 thousand, respectively, for the six-month periods ended June 30, 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 the Amended Credit Facility, our available borrowing capacity is $250.0 million, and the maturity date is July 20, 2021.

As of June 30, 2019,  the Company had an outstanding principal balance of $132.5 million under the Amended Credit Facility, a $0.6 million Standby Letter of Credit, and $116.9 million remaining in available borrowings of the $250.0 million maximum principal available under the Amended Credit Facility. As of June 30, 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 on the earlier of the last business day of the first full quarter after completion of the expansion project at the Monarch Casino Black Hawk (the “Monarch Black Hawk Expansion”), or on 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. The Company may be required to prepay borrowings under the Amended Credit Facility no later than December 31, 2019, depending on our leverage ratio. The Company has 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 June 30, 2019,  the Company is 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 June 30, 2019, the Company’s Total Leverage Ratio and Fixed Charge Coverage Ratio were 2.1:1 and 10.1:1, 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.

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At June 30, 2019,  the Company’s interest rate was based on LIBOR and its leverage ratio was such that pricing for borrowings under the Amended Credit Facility was LIBOR plus 1.50%. At June 30, 2019, the one-month LIBOR interest rate was approximately 2.20%. 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.

The Company 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.

The Company believes that its existing cash balances, cash flow from operations and borrowings available under the Amended Credit Facility will provide it with sufficient resources to fund its operations, meet its debt obligations, and fulfill its capital expenditure plans over the next twelve months; however, its operations are subject to financial, economic, competitive, regulatory, and other factors, many of which are beyond its control. If the Company is unable to generate sufficient cash flow or if its cash needs exceed our borrowing capacity under the Amended Credit Facility, it 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 six months ended June 30, 2019 and 2018, the Company’s effective tax rate was 19.9% and 19.2%, respectively. The variation in the effective tax rate in the six-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 June 30, 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.

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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”) including, but not limited to (i) our expectations and beliefs concerning the project scope, timing for completion, budget and estimated costs, pre-opening expenses, transformative potential and our continued investment in our Monarch Black Hawk Expansion; (ii) our expectations regarding financing of the Monarch Black Hawk Expansion; (iii) our general contractor’s expectations regarding timing for completion of various phases of the Monarch Black Hawk Expansion; (iv) our expectations to have a full year of expanded operations in 2020; (v) our expectations regarding our business prospects, strategies and outlook; (vi) our expectations regarding the positioning of our properties to benefit from future macro and local economic growth; (vii) our expectations regarding future capital requirements; (viii) our anticipated sources of funds and adequacy of such funds to meet our debt obligations and capital requirements; and (ix) our expectations regarding legal 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:

· our ability to successfully implement our business and growth strategies;

· our ability to realize the anticipated benefits of our expansion and renovation projects, including the Monarch Black Hawk Expansion;

· our general contractor’s ability to accurately predict the timing for completion of the Monarch Black Hawk expansion;

· we have not yet entered into a guaranteed maximum price (“GMP”) amendment to the construction contract with our Monarch Casino Black Hawk general contractor and negotiation of the GMP may involve disagreements between the parties, including potential disagreements over costs of and responsibility for delays and other construction related matters;

· components of our Monarch Casino Black Hawk construction project will be outside the scope of any GMP amendment to the construction contract;

· risks related to development and construction activities (including disputes with and defaults by contractors and subcontractors; construction, equipment or staffing problems and delays; shortages of materials or skilled labor; environmental, health and safety issues; weather and other hazards, site access matters, and unanticipated cost increases);

· our ability to generate sufficient operating cash flow to service our debt obligations and working capital needs and to help finance our expansion plans;

· our ability to effectively manage expenses to optimize our margins and operating results;

· guest acceptance of our expanded facilities once completed and the resulting impact on our market position, growth and future financial results;

· our ability to successfully complete potential acquisitions and investments;

· successful integration of acquisitions;

· access to capital and credit, including our ability to finance future business requirements and the Monarch Black Hawk Expansion;

· risks related to our present indebtedness and future borrowings;

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· adverse trends in the gaming industry;

· changes in patron demographics;

· general market and economic conditions, including but not limited to, the effects of local and national economic, housing and energy conditions on the economy in general and on the gaming and lodging industries in particular;

· the impact of rising interest rates and our ability to refinance debt as it matures at commercially reasonable rates or at all;

· our ability to continue to comply with the covenants and terms of our credit instruments;

· our dependence on two resorts;

· ability of large stockholders to influence our affairs;

· our dependence on key personnel;

· the availability of adequate levels of insurance;

· changes in federal, state, and local laws and regulations, including environmental and gaming licenses or legislation and regulations, and laws and regulations permitting expanded and other forms of gaming in our key markets;

· ability to obtain and maintain gaming and other governmental licenses and regulatory approvals;

· any violations by us of the anti-money laundering laws;

· cybersecurity risks, including misappropriation of customer information or other breaches of information security;

· impact of natural disasters, severe weather, terrorist activity and similar events;

· our competitive environment, including increased competition in our target market areas;

· increases in the effective rate of taxation at any of our properties or at the corporate level;

· our ability to successfully estimate the impact of accounting, tax and legal matters; and

· risks, uncertainties and other factors described in “Item 1A - Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) and our other filings with the Securities and Exchange Commission.

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 drives additional revenue and profit at Atlantis, we are experiencing the adverse effect of increased labor costs, which, combined with continued aggressive marketing programs by our competitors, have applied upward pressure on Atlantis operating margins.

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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 expects the first five floors of the new tower, which includes the expanded casino, restaurants and certain public areas, to be completed late in the third quarter or early in the fourth quarter of 2019, and the balance of the hotel tower and new amenities in the fourth quarter of 2019.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three-Month Periods Ended June 30, 2019 and 2018

For the three months ended June 30,  2019, our net income totaled $9.3 million, or $0.50 per diluted share, compared to net income of $9.2 million, or $0.50 per diluted share for the same period in 2018, reflecting a 0.4% increase in net income and no change in diluted earnings per share. Net revenues in the three months ended June 30, 2019, totaled $62.8 million, an increase of $2.9 million, or 4.8%, compared to the three months ended June 30, 2018. Income from operations for the three months ended June 30, 2019 totaled $11.6 million compared to $11.3 million for the same period in 2018.

Casino revenue increased 5.4% in the second quarter of 2019 compared to the second quarter of 2018 due to an increase in guests’ spend per visit and partially offset by 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 decreased from 34.9% in the second quarter of 2018 to 34.5% in the same quarter of 2019 due to improved operational efficiencies and revenue growth.

Food and beverage revenue for the second quarter of 2019 increased 2.6% over the second quarter of 2018 due to an increase in food and beverage revenue per cover of 5.5%, partially offset by a 2.7% decrease in food and beverage covers. Food and beverage operating expense as a percentage of food and beverage revenue increased in the second quarter of 2019 to 79.6% compared to 75.2% for the same period in 2018 as a result of an increase in labor expense and higher cost of goods sold.

Hotel revenue increased 8.8% in the second quarter of 2019 compared to the second quarter of 2018 due to a $21.18 increase in Average Daily Rate (“ADR”) to $129.91 in the second quarter of 2019 from ADR of $108.73 in the second quarter of 2018. The ADR growth was driven by an increase in cash ADR, as well as an increase in the complimentary ADR, recognized at the stand alone dynamic selling price. Hotel occupancy of 88.3% during the second quarter of 2019 was 3.2 percentage points lower compared to 91.5% during the second quarter of 2018. Revenue per Available Room (“REVPAR”), calculated by dividing total hotel revenue by total rooms available, was $118.34 and $107.98 for the three months ended June 30, 2019 and 2018, respectively. Hotel operating expense as a percentage of hotel revenue increased to 39.1% in the second quarter of 2019 compared to 37.7% for the comparable prior year period primarily as a result of the increases in labor expense and repair and maintenance expense, combined with the decline in occupancy.

Other revenue was essentially flat compared to the same prior year period.

Selling, general and administrative (“SG&A”) expense increased to $16.5 million in the second quarter of 2019 from $16.2 million in the second quarter of 2018 primarily due to a $0.7 million increase in salaries, wages and related benefits expense, partially offset by a $0.2 million decrease in utilities expense, $0.1 million decrease in repairs and maintenance expense and $0.1 million decrease in property taxes at Atlantis. As a percentage of net revenue, SG&A expense decreased to 26.3% in the second quarter of 2019 compared to 27.0% in the same period in 2018.

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Depreciation and amortization expense was essentially unchanged at $3.7 million for the three months ended June 30, 2019 and 2018.

During the second 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 second quarter of 2018 was $42.0 thousand. See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

Comparison of Operating Results for the Six-Month Periods Ended June 30, 2019 and 2018

For the six months ended June 30, 2019, our net income totaled $16.3 million, or $0.88 per diluted share, compared to net income of $16.0 million, or $0.86 per diluted share, for the same period in 2018, reflecting a 2.0% increase in net income and 2.3% increase in diluted earnings per share. Net revenues totaled $121.5 million in the six-month period of 2019, reflecting an increase of $5.3 million, or 4.6%, compared to the same period in 2018. Income from operations for the six months ended June 30, 2019 totaled $20.4 million compared to $19.9 million for the same period in 2018, representing an increase of $0.5 million or 2.3%.

Casino revenue increased 1.2% in the first six months of 2019 compared to the first six months of 2018 due to an increase in gaming activities, partially offset by 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 to 35.8% in the first six months of 2019 compared to 35.3% in the first six months of 2018, primarily as a result of an increase in promotional expenses.

Food and beverage revenue for the first six months of 2019 increased 3.5% over the first six months of 2018 due to a 3.6% increase in average revenue per cover, partially offset by a 0.1% decrease in covers. Food and beverage operating expense as a percentage of food and beverage revenue increased in the first six months of 2019 to 79.4% compared to 76.2% for the same period in the prior year, primarily as a result of increased labor expense and higher cost of goods sold.

Hotel revenue increased 19.7% due to an increase in ADR to $126.06 in the first six months of 2019 compared to $100.57 in the first six months of 2018, partially offset by a decrease in occupancy to 86.3% during the first six months of 2019 compared to 88.5% during the first six months of 2018. The increase in ADR was a result of an increase in cash ADR of $17.20, combined with an increase in complimentary ADR, recognized at the stand alone dynamic selling price. Hotel operating expense as a percentage of hotel revenue decreased to 38.0% in the first six months of 2019 as compared to 45.3% for the comparable prior year period as a result of a decrease in small equipment expense and higher ADR.

Other revenue increased 8.8% in the first six months of 2019 compared to the first six months of 2018 due to a recovery of written off bad debt.

SG&A expense increased by $1.6 million to $33.0 million in the first six months of 2019 primarily due to an increase in salaries, wages and employee benefit expenses. As a percentage of net revenue, SG&A expense slightly increased to 27.1% in the first six months of 2019 from 27.0% in the first six months of 2018.

Depreciation and amortization expense decreased slightly to $7.3 million for the six months ended June 30, 2019 as compared to $7.4 million for the six months ended June 30, 2018 primarily as a result of assets having become fully depreciated.

All $2.6 million in interest in the first six months of 2019 was capitalized, compared to $0.7 million of interest capitalized and $0.1 million expensed in the same period of 2018.

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.

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Cash paid for capital expenditures for the six-month periods ended June 30, 2019 and 2018 totaled approximately $73.6 million and $41.3 million, respectively. During the six-month period ended June 30, 2019 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. During the six-month period ended June 30, 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 and the Amended Credit Facility.

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 Monarch Black Hawk Expansion Plan includes multi-phased expansion of Monarch Casino Black Hawk, which 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. Our total overall budget for the completion of the Monarch Casino Black Hawk hotel tower and casino expansion is approximately $264 to $269 million.

The general contractor of the Monarch Casino Black Hawk expansion project has informed us that it expects the first five floors of the new tower, which includes the expanded casino, restaurants and certain public areas, to be completed late in the third quarter or early in the fourth quarter of 2019, and the balance of the hotel tower and new amenities in the fourth quarter of 2019. 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 Facility.

For the six months ended June 30, 2019, net cash provided by operating activities totaled $31.7 million, an increase of $3.2 million, or 11.2% compared to the same period in the prior year. This increase was primarily the result of an increase in share based compensation expense, a decrease in working capital and an increase in net income.

Net cash used in investing activities totaled $73.6 million and $41.3 million during the six months ended June 30, 2019 and 2018, respectively. Net cash used in investing activities during the first six 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 first six 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 six months of 2019 and 2018, we borrowed $38.0 million and $10.8 million, respectively, under the Amended Credit Facility. The borrowings were used to fund the Monarch Casino Black Hawk expansion.

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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 June 30, 2019, we had an outstanding principal balance of approximately $132.5 million under the Amended Credit Facility, a $0.6 million Standby Letter of Credit and approximately $116.9 million remaining in available borrowings under the $250.0 million maximum principal available under Amended Credit Facility. As of June 30, 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 on the earlier of the last business day 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, 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 June 30, 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 June 30, 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 2.1:1 and 10.1:1, 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 June 30, 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 1.50%. At June 30, 2019, the one-month LIBOR interest rate was approximately 2.20%. 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.

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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 June 30, 2019 and the next five years and thereafter are as follow (in millions):

	Payments due by period (1)
			Less						Greater
			than 1		1 to 3		3 to 5		than 5
	Total		year		years		years		years
Operating Leases (2)	$	24.9	$	1.5	$	2.7	$	2.1	$	18.6
Purchase Obligations (3)		34.7		30.2		2.3		2.2		—
Borrowings Under Amended Credit Facility (4)		132.5		—		132.5		—		—
Total Contractual Cash Obligations	$	192.1	$	31.7	$	137.5	$	4.3	$	18.6

(1) Because interest payments under our Amended Credit Facility are subject to factors that, in our judgment, vary materially, the amount of future interest payments is not presently determinable. These factors include: i) future short-term interest rates; ii) our future leverage ratio which varies with EBITDA and our borrowing levels; and iii) the rate at which we deploy capital and other spending which, in turn, impacts the level of future borrowings. 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 interest rate is adjusted quarterly based on our leverage ratio, which is calculated using operating results over the previous four quarters and borrowings at the end of the most recent quarter. Based on our leverage ratio, at June 30, 2019, pricing was LIBOR plus 1.50% and will be adjusted in subsequent quarters in accordance with our leverage ratio. At June 30, 2019, the one-month LIBOR was 2.20%.

(2) Operating leases include the Driveway Lease, the Parking Lot Lease, billboards leases and housing leases in Black Hawk, Colorado.

(3) Purchase obligations represent approximately $25.0 million of commitments related to capital projects and approximately $9.7 million of materials and supplies used in the normal operation of our business. All of the purchase orders and construction commitments are cancelable by us upon providing a 30-day notice.

(4) The amount represents payment obligations of outstanding draws against the Amended Credit Facility as of June 30, 2019.

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 June 30, 2019, we estimate that the remaining cost to complete the Monarch Black Hawk Expansion is between $70 million and $77 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 June 30, 2019, we had $132.5 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 June 30, 2019 would result in a change in our annual interest cost of approximately $1.3 million. See “Liquidity and Capital Resources” for further discussion of our Amended Credit Facility and capital structure.

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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 June 30, 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 six-month period ended June 30,  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 six-month period ended June 30, 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.

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ITEM 6. EXHIBITS

Exhibit No	Description
31.1*	Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation
101.DEF*	XBRL Taxonomy Extension Definition
101.LAB*	XBRL Taxonomy Extension Labels
101.PRE*	XBRL Taxonomy Extension Presentation

*   Filed herewith.

** Furnished herewith

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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.

	MONARCH CASINO & RESORT, INC.
	(Registrant)
Date: August 7, 2019	By:	/s/ EDWIN S. KOENIG
	Edwin S. Koenig, Chief Accounting Officer
	(Principal Financial and Accounting Officer and Duly Authorized Officer)

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