MONARCH CASINO & RESORT INC 10-Q

ITEM 1. FINANCIAL STATEMENTS ​ MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ Nine months ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Casino ​ $ 37,292 ​ $ 34,169 ​ $ 74,267 ​ $ 95,981 ​ Food and beverage ​ ​ 12,835 ​ ​ 18,341 ​ ​ 30,491 ​ ​ 54,026 ​ Hotel ​ ​ 6,613 ​ ​ 9,878 ​ ​ 14,502 ​ ​ 27,192 ​ Other ​ ​ 3,129 ​ ​ 3,197 ​ ​ 6,776 ​ ​ 9,887 ​ Net revenues ​ ​ 59,869 ​ ​ 65,585 ​ ​ 126,036 ​ ​ 187,086 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Casino ​ ​ 10,566 ​ ​ 11,674 ​ ​ 22,836 ​ ​ 33,831 ​ Food and beverage ​ ​ 9,635 ​ ​ 14,566 ​ ​ 24,954 ​ ​ 42,885 ​ Hotel ​ ​ 2,796 ​ ​ 3,437 ​ ​ 6,694 ​ ​ 10,014 ​ Other ​ ​ 1,249 ​ ​ 1,699 ​ ​ 3,120 ​ ​ 4,913 ​ Selling, general and administrative ​ ​ 15,856 ​ ​ 17,885 ​ ​ 41,920 ​ ​ 50,843 ​ Depreciation and amortization ​ ​ 3,891 ​ ​ 3,686 ​ ​ 11,544 ​ ​ 10,984 ​ Other operating items, net ​ ​ 2,448 ​ ​ 1,115 ​ ​ 4,910 ​ ​ 1,739 ​ Total operating expenses ​ ​ 46,441 ​ ​ 54,062 ​ ​ 115,978 ​ ​ 155,209 ​ Income from operations ​ ​ 13,428 ​ ​ 11,523 ​ ​ 10,058 ​ ​ 31,877 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income before income taxes ​ ​ 13,428 ​ ​ 11,523 ​ ​ 10,058 ​ ​ 31,877 ​ Provision for income taxes ​ ​ ( 2,683 ) ​ ​ ( 2,197 ) ​ ​ ( 1,640 ) ​ ​ ( 6,257 ) ​ Net income ​ $ 10,745 ​ $ 9,326 ​ $ 8,418 ​ $ 25,620 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings per share of common stock ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.59 ​ $ 0.52 ​ $ 0.46 ​ $ 1.42 ​ Diluted ​ $ 0.57 ​ $ 0.50 ​ $ 0.44 ​ $ 1.37 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average number of common shares and potential common shares outstanding ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 18,218 ​ ​ 18,056 ​ ​ 18,186 ​ ​ 17,997 ​ Diluted ​ ​ 18,861 ​ ​ 18,709 ​ ​ 18,823 ​ ​ 18,665 ​ ​ ​ ​ The Notes to the Consolidated Financial Statements are an integral part of these statements. ​ 3 Table of Contents MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except shares) ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2020 December 31, 2019 ASSETS ​ ​ (Unaudited) ​ ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 30,526 $ 60,539 ​ Receivables, net ​ ​ 5,283 ​ 5,458 ​ Income taxes receivable ​ ​ — ​ 185 ​ Inventories ​ ​ 7,348 ​ 6,735 ​ Prepaid expenses ​ ​ 7,109 ​ 6,238 ​ Total current assets ​ 50,266 ​ 79,155 ​ Property and equipment ​ ​ ​ ​ ​ ​ ​ Land ​ 30,769 ​ 30,769 ​ Land improvements ​ 7,856 ​ 7,842 ​ Buildings ​ 193,235 ​ 193,235 ​ Buildings improvements ​ 32,000 ​ 31,986 ​ Furniture and equipment ​ 149,412 ​ 152,461 ​ Construction in progress ​ 314,888 ​ 285,789 ​ Right of use assets ​ ​ 14,977 ​ ​ 15,574 ​ Leasehold improvements ​ 3,848 ​ 3,848 ​ ​ ​ 746,985 ​ 721,504 ​ Less accumulated depreciation and amortization ​ ( 226,562 ) ​ ( 220,021 ) ​ Net property and equipment ​ 520,423 ​ 501,483 ​ Other assets ​ ​ ​ ​ ​ ​ ​ Goodwill ​ 25,111 ​ 25,111 ​ Intangible assets, net ​ 663 ​ 1,538 ​ Deferred income taxes ​ 2,683 ​ 2,683 ​ Other assets, net ​ — ​ 908 ​ Total other assets ​ 28,457 ​ 30,240 ​ Total assets ​ $ 599,146 $ 610,878 ​ LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ ​ Current portion of long-term debt ​ $ 10,000 ​ $ 20,000 ​ Accounts payable ​ ​ 11,282 ​ 17,037 ​ Construction accounts payable ​ ​ 1,393 ​ ​ 7,528 ​ Accrued expenses ​ 34,634 ​ 34,109 ​ Income taxes payable ​ ​ 1,454 ​ ​ — ​ Short-term lease liability ​ ​ 800 ​ ​ 791 ​ Total current liabilities ​ 59,563 ​ 79,465 Long-term lease liability ​ ​ 14,189 ​ ​ 14,797 ​ Long-term debt, net ​ 171,864 ​ 175,415 ​ Total liabilities ​ 245,616 ​ 269,677 ​ 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; 18,260,072 outstanding at September 30, 2020; 18,141,383 outstanding at December 31, 2019 ​ ​ 191 ​ 191 ​ Additional paid-in capital ​ 37,466 ​ 35,215 ​ Treasury stock, 836,228 shares at September 30, 2020; 954,917 shares at December 31, 2019 ​ ( 11,117 ) ​ ( 12,777 ) ​ Retained earnings ​ 326,990 ​ 318,572 ​ Total stockholders’ equity ​ 353,530 ​ 341,201 ​ Total liabilities and stockholders’ equity ​ $ 599,146 $ 610,878 ​ ​ The Notes to the Consolidated Financial Statements are an integral part of these statements. 4 Table of Contents MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUIT Y (In thousands, except shares, Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Additional ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares ​ ​ ​ ​ Paid-in ​ Retained ​ Treasury ​ ​ ​ ​ ​ Outstanding Amount Capital Earnings Stock Total ​ Balance, January 1, 2020 18,141,383 $ 191 $ 35,215 $ 318,572 $ ( 12,777 ) $ 341,201 ​ Net exercise of stock options 30,545 ​ ​ — ​ ( 428 ) ​ — ​ 428 ​ ​ — ​ Stock-based compensation expense — ​ — ​ 873 ​ — ​ — ​ 873 ​ Net income — ​ — ​ — ​ 2,020 ​ — ​ 2,020 ​ Balance, March 31, 2020 ​ 18,171,928 $ 191 $ 35,660 $ 320,592 $ ( 12,349 ) $ 344,094 ​ Net exercise of stock options 17,634 ​ ​ — ​ ( 552 ) ​ — ​ 246 ​ ( 306 ) ​ Stock-based compensation expense — ​ — ​ 981 ​ — ​ — ​ 981 ​ Net loss — ​ — ​ — ​ ( 4,347 ) ​ — ​ ( 4,347 ) ​ Balance, June 30, 2020 18,189,562 $ 191 $ 36,089 $ 316,245 $ ( 12,103 ) $ 340,422 ​ Net exercise of stock options ​ 70,510 ​ ​ — ​ 402 ​ ​ — ​ ​ 986 ​ ​ 1,388 ​ Stock-based compensation expense — ​ — 897 ​ — ​ — ​ 897 ​ Capital contribution ​ — ​ ​ — ​ ​ 78 ​ ​ — ​ ​ — ​ ​ 78 ​ Net income — ​ — — ​ 10,745 ​ — ​ 10,745 ​ Balance, September 30, 2020 18,260,072 $ 191 $ 37,466 $ 326,990 $ ( 11,117 ) $ 353,530 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ Net exercise of stock options 66,401 ​ ​ — ​ 290 ​ — ​ 925 ​ 1,215 ​ Stock-based compensation expense — ​ — ​ 1,027 ​ — ​ — ​ 1,027 ​ Net income — ​ — ​ — ​ 9,326 ​ — ​ 9,326 ​ Balance, September 30, 2019 18,082,135 $ 191 $ 33,728 $ 312,376 $ ( 13,602 ) $ 332,693 ​ ​ The Notes to the Consolidated Financial Statements are an integral part of these statements. 5 Table of Contents MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2020 2019 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 8,418 $ 25,620 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 11,544 ​ 10,984 ​ Amortization of deferred loan costs ​ 466 ​ 403 ​ Stock-based compensation ​ 2,751 ​ 5,892 ​ Provision for bad debts ​ 75 ​ 44 ​ Loss on disposition of assets ​ 5 ​ — ​ Write off of unamortized debt issuance costs ​ 95 ​ — ​ Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ Receivables ​ ​ 100 ​ ​ ( 67 ) ​ Income taxes ​ ​ 1,639 ​ ​ 4,415 ​ Inventories ​ ​ ( 613 ) ​ ​ ( 848 ) ​ Prepaid expenses ​ ​ 37 ​ ( 80 ) ​ Right of use asset, net ​ ​ ( 2 ) ​ ​ 10 ​ Accounts payable ​ ( 5,755 ) ​ ( 33 ) ​ Accrued expenses ​ 525 ​ 1,629 ​ Net cash provided by operating activities ​ 19,285 ​ 47,969 ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ Proceeds from sale of assets ​ 25 ​ — ​ Change in construction payable ​ ​ ( 6,135 ) ​ ​ ( 4,348 ) ​ Acquisition of property and equipment ​ ​ ( 30,237 ) ​ ​ ( 106,345 ) ​ Net cash used in investing activities ​ ( 36,347 ) ​ ( 110,693 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ Proceeds from exercise of stock options ​ 1,161 ​ — ​ Principal payments on long-term debt ​ ( 20,000 ) ​ — ​ Loan issuance cost ​ ​ ( 2,862 ) ​ ​ — ​ Long-term debt borrowings ​ 8,750 ​ 61,350 ​ Net cash (used in) provided by financing activities ​ ( 12,951 ) ​ 61,350 ​ ​ ​ ​ ​ ​ ​ ​ ​ Change in cash and cash equivalents ​ ( 30,013 ) ​ ( 1,374 ) ​ Cash and cash equivalents at beginning of period ​ 60,539 ​ 30,462 ​ Cash and cash equivalents at end of period ​ $ 30,526 $ 29,088 ​ ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ ​ ​ Cash paid for income taxes ​ $ — $ 1,842 Conversion of long term deposit to short term deposit ​ $ 908 ​ ​ — ​ ​ ​ The Notes to the Consolidated Financial Statements are an integral part of these statements. ​ 6 Table of Contents MONARCH CASINO & RESORT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020 ​ 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 Resort Spa Black Hawk, a casino in Black Hawk, Colorado (the “Monarch Casino Black Hawk”). 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 September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. ​ The balance sheet at December 31, 2019 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, 2019. ​ Impact of COVID-19 : ​ In March 2020, a global pandemic was declared due to an outbreak of a new strain of coronavirus (“COVID-19”). In an effort to contain the virus, on March 16 th the state of Colorado mandated a temporary shutdown of all casinos including Monarch Casino Resort Spa Black Hawk and on March 17 th the state of Nevada mandated the temporary closure of all casinos including Atlantis Casino Resort Spa in Reno. The COVID-19 outbreak has had, and will continue to have, an adverse effect on the Company's results of operations. ​ Our Nevada and Colorado properties reopened with limited operations on June 4, 2020 and June 17, 2020, respectively. The poker room and buffet at Atlantis resumed operations at the beginning of August. The table games at our Colorado property resumed operation on September 11, 2020. The buffet at our Colorado property is temporarily being operated as a table-service restaurant. Additionally, changes were made from routine operations relating to restrictions in occupancy and social distancing requirements, which include reduced seating at table games at and in all restaurants, and a decreased number of active slot machines on the casino floors. The convention business at Atlantis was affected by the state-mandated gathering limits, which at this time are 50 persons or 50% of fire code capacity, whichever is less. We have experienced hotel stay and convention booking cancelations, and since the reopening, guest visitation and hotel and convention bookings have been lower than prior to the state-mandated closures, and are expected to remain lower for the near future. ​ 7 Table of Contents The Company has taken steps to mitigate the effects of the economic downturn and uncertainty by reducing the operating expenses taking advantage of federal and state government programs that support companies affected by the COVID-19 pandemic and their employees, and entering in an amended and restated credit agreement with its lender, which extended the maturity date of the Company’s credit facility to September 3, 2023 and increased the aggregated principal amount of the facility from $ 241.3 million to $ 270.0 million with an option to increase the facility by up to an additional $ 75.0 million revolving line of credit. See NOTE 6. LONG-TERM DEBT. ​ The Company believes that the $ 4.0 million of cash in our interest-bearing money market fund and the $ 70.0 million available under our Amended Credit Facility as of September 30, 2020, as well as the anticipated operating cash flow, will be sufficient to fund its operations, meets its debt obligations and fulfill its capital expenditure plans for the next twelve months. Given the Company's liquidity position at September 30, 2020, management believes the Company has sufficient liquidity to fund operations and satisfy its obligations for the next twelve months. ​ Goodwill: ​ The Company accounts for goodwill in accordance with ASC Topic 350, Intangibles-Goodwill and Other (“ASC Topic 350”). ASC Topic 350 gives companies the option to perform a qualitative assessment that may allow them to skip the quantitative test as appropriate. The Company tests its goodwill for impairment annually during the fourth quarter of each year, or whenever events or circumstances make it more likely than not that impairment may have occurred. Impairment testing for goodwill is performed at the reporting unit level, and each of the Company’s casino properties is considered to be a reporting unit. ​ Goodwill consists of the excess of the acquisition cost over the fair value of the net assets acquired in business combinations in April 2012. As of September 30, 2020, we had goodwill totaling $ 25.1 million related to the purchase of Monarch Casino Black Hawk, Inc. ​ Due to the COVID-19 pandemic related government orders to suspend operations at our properties and the continued adverse effect of the pandemic on our business, after reopening of our properties, we performed a qualitative assessment for the quarters ended March 31, 2020 and June 30, 2020 to determine if the Company’s goodwill was impaired. The impairment testing, resulted in the recognition of no impairment loss. Based upon the financial performance of the company during the third quarter, management determined that there was no continued indicator of impairment . The evaluations used to assess the Company’s goodwill for impairment incorporate inherent uncertainties that are difficult to predict in the current economic environment. When evaluating for impairment, we make numerous highly subjective and judgmental estimates and assumptions, all of which are subject to a variety of risks and uncertainties, and many of which are based on significant unobservable inputs. The most significant assumptions and inputs used in evaluating for impairment are projected short-term and long-term operating results and cash flows, projected capital expenditures, estimated long-term growth rates and the weighted-average cost of capital of market participants, adjusted for the risk profile of the assets being evaluated. The timing and trajectory of the expected post-pandemic economic recovery is unknown, and accordingly, estimates and assumptions are likely to change as more information becomes available. ​ The Company believes that it has made reasonable estimates and judgments in performing its analysis in light of the risks and uncertainties surrounding the COVID-19 pandemic. However, if the excess of fair value over the carrying amount declines by a significant amount in the future as a result of changes in actual and projected operating results or other internal or external economic factors, the Company could be required to recognize goodwill impairment charges in future periods. ​ 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. The Company determined that the Company’s two operating segments, Atlantis and Monarch Casino Black Hawk, meet 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. ​ 8 Table of Contents Inventories: ​ Inventories, consisting primarily of food, beverages, and retail merchandise, are stated at the lower of cost and net realizable value. Cost is determined by the weighted average and specific identification methods. Net realizable value is defined by the Financial Accounting Standards Board (“FASB”) as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ​ Debt Issuance Costs: ​ Costs incurred in connection with the issuance of long-term debt are amortized to interest expense over the term of the related debt agreement utilizing the effective interest rate method. Unamortized amounts of debt issuance costs are recorded as a reduction of the outstanding debt and included in “Long-term debt, net”. ​ On September 3, 2020, the Company refinanced its credit facility. The unamortized costs related to the existing credit facility as of August 31, 2020 was $ 476 thousand. As the credit facility is a loan syndication with separate debt instruments existing between the debtor and the individual creditors participating in the syndication, in accordance to ASC 470-50, the Company expensed $ 95 thousand, representing a portion of unamortized debt issuance cost, allocated to the lenders that left the syndication and deferred the rest of the unamortized debt issuance cost of the existing credit facility, together with the issuance costs of the new facility. ​ As of September 30, 2020, debt issuance costs, net of amortization, were $ 3.1 million. ​ 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 $ 1.8 million and $ 5.0 million during the three and nine months ended September 30, 2020, respectively. ​ 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 the Company. 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, the Company has 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, the Company recognizes 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. 9 Table of Contents ​ As of September 30, 2020, the Company had estimated the obligations related to the players’ club program at $ 10.4 million, which is included in Accrued Expenses in the Liabilities and Stockholders’ Equity section in the Consolidated Balance Sheet. ​ 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 rebates and commissions. The cost of providing these complimentary goods and services are included as expenses within their respective categories. 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 the Company’s employees are also accounted for on a net basis and are not included in revenues or operating expenses. ​ Other Operating items, net: ​ Other operating items, net, in general consist of miscellaneous operating charges or proceeds. For the three months ended September 30, 2020, Other operating items, net, was $ 2.4 million and included: $ 0.9 million in pre-opening expenses relating to the Monarch Black Hawk Expansion project; $ 0.5 million in professional service fees relating to our construction litigation; $ 0.5 million in Colorado legislation lobbying expenses; $ 0.4 million equipment, supplies and employee testing expenses directly attributable to the pandemic for reopening of the properties and incremental to normal operations; and $ 0.1 million in unamortized debt issuance cost write off. For the nine months ended September 30, 2020, Other operating items, net, was $ 4.9 million and included: $ 1.9 million in pre-opening expenses relating to the Monarch Black Hawk Expansion project; $ 0.8 million in professional service fees relating to our construction litigation; $ 1.4 million in Colorado legislation lobbying expenses; $ 0.7 million in equipment, supplies and employee testing expenses directly attributable to the pandemic for reopening of the properties and incremental to normal operations; and $ 0.1 million in unamortized debt issuance cost write off. For the three and nine months ended September 30, 2019, Other operating items, net, was $ 1.1 million and $ 1.7 million, representing: $ 0.9 million and $ 1.5 million pre-opening expenses relating to the Monarch Black Hawk Expansion project, respectively; and $ 0.2 million in professional service fees relating to our construction litigation for each of the periods. ​ Impact of Recently Adopted Accounting Standards: ​ Financial Instruments - Credit Losses: In June 2016, the FASB issued amended accounting guidance for the measurement of credit losses on financial instruments. The Accounting Standards Update (“ASU”) 2016-13 significantly changes the way entities account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. 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. In the first quarter of 2020, the Company adopted ASU 2016-13. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements. ​ 10 Table of Contents The Company extends short-term credit to its gaming customers. Such credit is non-interest bearing and is due on demand. In addition, the Company also has receivables due from hotel guests and convention groups and events, which are primarily secured with a credit card. An allowance for doubtful accounts is set up for all Company receivables based upon the Company’s historical collection and write-off experience and taking in consideration the current economic conditions and management’s expectations of future economic conditions. The allowance is applied even when the risk of credit loss is remote. When a situation warrants, the Company may create a specific identification reserve for a high collection risk receivables. The Company writes off its uncollectible receivables once all efforts have been made to collect such receivables. The book value of receivables approximates fair value due to the short-term nature of the receivables. ​ Cloud Computing Arrangement Implementation Costs: In August 2018, the FASB issued ASU 2018-15 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 Company adopted the guidance effective January 1, 2020 . The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements. ​ Goodwill impairment: In January 2017, the FASB issued ASU 2017-04 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 Company adopted the guidance effective January 1, 2020 . The adoption of this ASU did not have a material impact on the Company’s 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 2. ACCOUNTING FOR LEASES ​ 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. ​ As of September 30, 2020, the Company’s right of use assets consisted of the Parking Lot Lease, the Driveway Lease (as defined and discussed in NOTE 5. RELATED PARTY TRANSACTIONS) , as well as certain billboard leases. ​ 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 September 30, 2020 was 4.33 %. ​ The weighted-average remaining lease term of the leases presented in the lease liability as of September 30, 2020 was 21.3 years. ​ Cash paid related to the operating leases presented in the lease liability for each of the nine months ended September 30, 2020 and 2019, was $ 1.1 million. ​ 11 Table of Contents 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. ​ Reported stock-based compensation expense was classified as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ Nine months ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Casino ​ $ 46 $ 51 $ 102 $ 152 Food and beverage ​ 45 ​ 52 ​ 114 ​ 150 ​ Hotel ​ 33 ​ 28 ​ 88 ​ 71 ​ Selling, general and administrative ​ 773 ​ 896 ​ 2,447 ​ 2,572 ​ Total stock-based compensation, before taxes ​ 897 ​ 1,027 ​ 2,751 ​ 2,945 ​ Tax benefit ​ ( 189 ) ​ ( 216 ) ​ ( 578 ) ​ ( 618 ) ​ Total stock-based compensation, net of tax ​ $ 708 $ 811 $ 2,173 $ 2,327 ​ ​ ​ 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 September 30, ​ ​ ​ 2020 ​ 2019 ​ ​ ​ ​ ​ Per Share ​ ​ ​ Per Share ​ ​ Shares Amount Shares Amount ​ Basic 18,218 $ 0.59 18,056 $ 0.52 ​ Effect of dilutive stock options 643 ​ ( 0.02 ) 653 ​ ( 0.02 ) ​ Diluted 18,861 $ 0.57 18,709 $ 0.50 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ 2020 ​ 2019 ​ ​ ​ ​ ​ Per Share ​ ​ ​ Per Share ​ ​ Shares Amount Shares Amount ​ Basic 18,186 $ 0.46 17,997 $ 1.42 ​ Effect of dilutive stock options 637 ​ ( 0.02 ) 668 ​ ( 0.05 ) ​ Diluted 18,823 $ 0.44 18,665 $ 1.37 ​ ​ 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 September 30, 2020 and 2019, options for approximately 1,062 thousand and 847 thousand shares, respectively, were excluded from the computation. For the nine months ended September 30, 2020 and 2019, options for approximately 1,077 thousand and 795 thousand shares, respectively, were excluded from the computation. ​ ​ 12 Table of Contents NOTE 5. 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 have significant holdings (the “Farahi Family Stockholders”) in 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, Atlantis surface parking. The Company demolished the 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 the 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 ten-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 September 30, 2020 and 2019, the Company paid $ 174 thousand in rent, plus $ 13 and $ 6 thousand, respectively, in operating expenses relating to this lease. For each of the nine-month periods ended September 30, 2020 and 2019, the Company paid $ 522 thousand in rent, plus $ 20 thousand and $ 19 thousand, respectively, in operating expenses relating to this lease. The right of use asset and lease liability balances as of September 30, 2020, recognized in the Consolidated Balance Sheet, was $ 10.6 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 is subject to a cost of living adjustment increase on each five-year anniversary of the Driveway Lease. 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 the three-month periods ended September 30, 2020 and 2019, the Company paid $ 101 thousand and $ 94 thousand in rent, respectively, plus $ 8 thousand and $ 7 thousand, respectively, in operating expenses relating to this lease. For each of the nine-month periods ended September 30, 2020 and 2019, the Company paid $ 303 thousand and $ 282 thousand in rent, respectively, plus $ 17 thousand and $ 20 thousand, respectively, in operating expenses relating to this lease. The right of use asset and lease liability balances as of September 30 , 2020, recognized in the Consolidated Balance Sheet, was $ 4.0 million. ​ The Company occasionally leases billboard advertising, storage space and parking lot space from affiliates controlled by the Farahi Family Stockholders and paid $ 27 thousand and $ 48 thousand for the three-month periods ended September 30, 2020 and 2019 respectively, for such leases, and paid $ 101 thousand and $ 117 thousand, respectively, for the nine-month periods ended September 30, 2020 and 2019, for such leases. ​ NOTE 6. LONG-TERM DEBT ​ On September 3, 2020, the Company entered into the Fourth Amended and Restated Credit Agreement with Wells Fargo Bank, N.A., as administrative agent and certain banks (the “Fourth Amended Credit Facility”). The Fourth Amended Credit Facility amends and restates the Company’s $ 250.0 million credit facility, dated as of July 20, 2016 (the “Amended Credit Facility”). On September 29, 2020, the Company and its lender executed an Amendment to the Fourth Amended Credit Facility, which amends the definition of “Financial Covenant Start Date”. ​ 13 Table of Contents The Fourth Amended Credit Facility extends the maturity date of the Amended Credit Facility from July 20, 2021 to September 3, 2023. In addition, the Fourth Amended Credit Facility increases the aggregate principal amount of the credit facilities to $ 270.0 million. The $ 270.0 million Fourth Amended Credit Facility consists of: $ 200 million term loan (“Term Loan Facility”) and $ 70 million revolving credit facility (“Revolving Credit Facility”). ​ The Company is required to make quarterly principal payments under the Term Loan Facility on each Term Loan Installment Date, commencing on December 31, 2020, in an amount equal to (x) the percentage set forth opposite the applicable period during which such Term Loan Installment Date occurs (i.e., 1.25 % for the period from December 31, 2020 to September 30, 2021, and 2.50 % for the period from December 31, 2021 and thereafter) multiplied by (y) $ 200.0 million. Commencing with the delivery of the compliance certificate for fiscal year 2021, the Company may be required to prepay borrowings under the Fourth Amended Credit Facility using excess cash flows for each fiscal year, depending on the Company’s leverage ratio. The estimated amount of the mandatory principal payments due in the next twelve months is $ 10.0 million. ​ As of September 30, 2020, the Company had an outstanding principal balance of $ 185.0 million under the Term Loan Facility, from which $ 10 million is expected to have a maturity date in next twelve months. As of September 30, 2020, the Company had no borrowings under the Revolving Credit Facility, therefore all $ 70.0 million remained available for borrowing. ​ 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 September 30, 2020, the Company is required to maintain a Total Leverage Ratio (as defined in the Fourth Amended Credit Facility) of no more than 4.75 :1 and Fixed Charge Coverage Ratio (as defined in the Fourth Amended Credit Facility) of at least 1.15 :1. As of September 30, 2020, the Company’s Total Leverage Ratio and Fixed Charge Coverage Ratio were 2.2 :1 and 9.1 :1. ​ The Fourth Amended Credit Facility added a new definition, “Operational Liquidity”, to the Amended Credit Facility. Operational Liquidity as defined is, as of any date of determination, the amount by which (a) (i) the Unused Revolving Commitment as of such date, plus (ii) cash (including cage cash) as of such date exceeds (b) (i) $ 24,000,000 minus (ii) any retainage costs with respect to the expansion project and any settlement or judgment under the PCL Litigation paid in cash; provided that from and after the expansion project completion date, the receipt of a final certificate of occupancy (or its local equivalent) for the expansion project and the final resolution or disposition of the PCL Litigation, the amount in this clause (b) shall be deemed to be zero . The Borrowers shall not permit Operational Liquidity to be less than $ 25,000,000 at any time. In addition, any borrowing under the Amended Credit Facility, greater than $ 51,000,000 shall be used solely to pay retainage costs with respect to the Expansion Project and any settlement or judgment under the PCL Litigation. As of September 30, 2020, the Company’s Operational Liquidity were $ 76.5 million. ​ The interest rate under the Amended Credit Facility is LIBOR plus a margin ranging from 1.75 % to 3.25 %, or a base rate (as defined in the Fourth Amended Credit Facility) plus a margin ranging from 0.75 % to 2.25 %, or the Prime Rate. The applicable margins vary depending on Company’s leverage ratio. Commitment fees are equal to the daily average unused revolving commitment multiplied by the commitment fee percentage, ranging from 0.35 % to 0.575 %, based on our leverage ratio. ​ On the terms and subject to some conditions, the Company may, at any time before the Maturity Date, request an increase of Revolving Credit Facility, provided that each such increase is equal to $ 15.0 million or an integral multiple of $ 1.0 million in excess and, after giving effect to the requested increase, the aggregate amount of the increases in the total revolving loan commitment shall not exceed $ 75.0 million. ​ The Company may prepay borrowings under the Fourth Amended Credit Facility revolving loan without penalty (subject to certain conditions and certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period). Once reduced or cancelled, the Revolving Credit Facility may not be increased or reinstated without the prior written consent of all lenders. ​ 14 Table of Contents The Company believes that the $ 4.0 million cash in its interest-bearing money market fund and the $ 70.0 million available under its Amended Credit Facility as of September 30, 2020 will be sufficient to support its current operations, meet its debt obligations and fulfill its capital expenditure plans for the twelve months from filing of Form 10-Q for the quarter ended September 30, 2020; however, the Company is surrounded by uncertainty about COVID-19 and the reopening of its operations, as well as financial, economic, competitive, regulatory, and other factors, many of which are beyond its control. If the Company is unable to generate sufficient cash flow in the upcoming months or if its cash needs exceed the Company’s borrowing capacity under the Fourth 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 issuing additional equity. ​ NOTE 7. TAXES ​ For the nine months ended September 30, 2020 and 2019, the Company’s effective tax rate was 16.3 % and 19.6 %, respectively. The low effective tax rate for the nine months ended September 30, 2020 was a result of the high weight of excess tax benefit on stock option exercises on the provision for income taxes, as the suspension of the operations in mid-March for about three months and continued negative effect of the COVID-19 pandemic resulted in reduced income before income tax for the nine-month period ended September 30, 2020. ​ Deferred tax assets were evaluated by considering historical levels of income, estimates of future taxable income and the impact of tax planning strategies. ​ No uncertain tax positions were recorded as of September 30, 2020 and 2019. No change in uncertain tax positions is anticipated over the next twelve months. ​ NOTE 8. 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. ​ NOTE 9. LEGAL MATTERS ​ On August 30, 2019, PCL Construction Services, Inc. (“PCL”) filed a complaint in District Court, City and County of Denver, Colorado, against the Company and its Colorado subsidiaries, in connection with the Company’s expansion plans for Monarch Casino Black Hawk. The complaint alleges, among other things, the defendants breached the construction contract with PCL and certain implied warranties. On December 5, 2019, the Company filed its answer and counterclaim, which alleges, among other items, that PCL breached the construction contract, duties of good faith and fair dealing, and implied and express warranties, made fraudulent or negligent misrepresentations on which the Company and its Colorado subsidiaries relied, and included claims for monetary damages as well as equitable and declaratory relief. ​ The court has set a trial date for May 17, 2021. Discovery in the action is ongoing, and we are currently unable to determine the probability of the outcome or reasonably estimate the loss or gain, if any. ​ The Company recognized $ 0.5 million and $ 0.8 million in construction litigation expense relating to this lawsuit for the three and nine months ended September 30, 2020, respectively, which are included in Other operating items, net on the Consolidated Statements of Operations. ​ 15 Table of Contents From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. Management believes that the amount of any reasonably possible or probable loss for such other known matters would not have a material adverse impact on our financial conditions, cash flows or results of operations; however, the outcome of these actions is inherently difficult to predict. ​ ​ ​ ​ ​ ​ 16 Table of Contents