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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Monarch Casino & Resort, Inc.    MCRI

MONARCH CASINO & RESORT, INC.

(MCRI)
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MONARCH CASINO & RESORT : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/07/2020 | 03:33pm EDT

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) the impact of the COVID-19 pandemic on our revenues, cash flows, liquidity, construction projects, results of operations and financial condition; (ii) our expectations regarding the return to normalized operations; (iii) our beliefs regarding the sufficiency of our cash and other financial resources; (iv) our expectations regarding discussions with our lenders about refinancing and/or additional relief options and steps under the Amended Credit Facility that may be requested in light of currently-changing circumstances, as well as our expectations regarding credit facility covenant compliance and our ability to continue to obtain necessary covenant waivers; (v) our expectations regarding changes in our operations and services relating to restrictions in occupancy and social distancing requirements; (vi) our beliefs regarding the effectiveness of the actions we've taken with respect to the COVID-19 pandemic and the quality of our properties as key factors in Monarch's long-term success; (vii) our expectations and beliefs concerning the project scope, timing for completion, receipt of all occupancy and other regulatory approvals for portion of the expansion project, impact of the ongoing construction litigation, budget and estimated costs, pre-opening expenses, transformative potential and our continued investment in our expansion project at the Monarch Casino Black Hawk (the "Monarch Black Hawk Expansion"); (viii) our expectations regarding financing of the Monarch Black Hawk Expansion; (ix) our expectations and intentions regarding the expenses, defenses and outcomes of the lawsuit filed by the construction project general contractor against us; (x) our expectations regarding our business prospects, strategies and outlook; (xi) our expectations regarding the positioning of our properties to benefit from future macro and local economic growth; (xii) our expectations regarding future capital requirements; (xiii) our anticipated sources of funds and adequacy of such funds to meet our debt obligations and capital requirements; and (xiv) 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:

adverse impacts of the COVID-19 outbreak on our business, constructions

? projects, financial condition, liquidity, cash flows, operating results, and

access to capital markets;

? adverse impacts of the COVID-19 outbreak on short-term and long-term travel,

leisure and discretionary spending habits and practices of our guests;

actions by government officials at the federal, state or local level,

? including, without limitation, further temporary or extended shutdowns, travel

restrictions, social distancing and shelter-in-place orders, in connection with

the COVID-19 outbreak;

impact of any further temporary or extended shutdowns on our ability to

? maintain compliance with the terms and conditions of our credit facilities and

other material contracts;

? our ability to negotiate relief options and amendments to our Amended Credit

Facility;

? our ability to maintain strong relationships with our regulators, employees,

lenders, suppliers, customers, insurance carriers, and other stakeholders;

? impact of any uninsured losses;

the adverse impact of cancellations and/or postponements of hotel stays and

? convention and trade shows on our business, market position, growth, financial

condition and operating results;

? a delay in or failure of the changes in guest visitation, entertainment choices

and spending patterns, including


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a decrease in overall demand after reopening our casinos, due to health and

other concerns, to return to normalized pre-pandemic levels;

the impact of social distancing requirements and other health and safety

? protocols implemented at our properties, including a reduction in operating

margins (or negative operating margins);

potentially uninsurable liability exposure to customers and staff should they

? become (or allege that they have become) infected with COVID-19 while at one of

our resorts;

unwillingness of employees to report to work due to the adverse effects of the

? COVID-19 pandemic or to otherwise conduct work under any revised work

environment protocols;

? the potential of increases in state and federal taxation to address budgetary

and other impacts of the COVID-19 pandemic;

? the potential of increased regulatory and other burdens to address the direct

and indirect impacts of the COVID-19 pandemic;

? 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;

construction factors, including delays, disruptions, construction defects,

increased costs of labor and materials, contractor disagreements, availability

? of labor and materials, zoning issues, environmental restrictions, soil and

water conditions, weather and other hazards, site access matters, occupancy and

building permit issues and other regulatory approvals or issues;

ongoing disagreements over costs of and responsibility for delays, construction

defects and other construction related matters with our Monarch Casino Black

? Hawk general contractor, including, as previously reported, the litigation

against us by such contractor and our filing of affirmative defenses and

extensive counterclaims against the Monarch Casino Black Hawk contractor;

? our potential need to post bonds or other forms of surety to support our legal

remedies;

risks related to development and construction activities (including disputes

with and defaults by contractors and subcontractors; construction, equipment or

? staffing problems and delays; construction defects; shortages of materials or

skilled labor; environmental, health and safety issues; weather and other

hazards, site access matters, and unanticipated cost increases);

risks related to pending litigation, which is costly and time-consuming to

defend, and if decided against us, could require us to pay substantial

? judgments or settlements. We cannot predict with certainty the outcomes of such

legal proceedings, and the costs incurred in litigation can be substantial,

regardless of the outcome. Substantial unanticipated verdicts, fines and

rulings do sometimes occur;

? risks and uncertainties relating to obtaining court and governmental approval

or permits necessary to open the Monarch Black Hawk Expansion to the public;

? 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;

? 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 potential of increases in state and federal taxation to address budgetary

and other impacts of the COVID-19 pandemic;

? the potential of increased regulatory and other burdens to address the direct

and indirect impacts of COVID-19 pandemic;

? the impact of rising interest rates and our ability to refinance debt as it

matures at commercially reasonable rates or at all;

? fluctuations in interest rates, including the impact of any discontinuance,

modification or other reform of


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LIBOR, or the establishment of alternative reference rates;

? 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, 2019 (the "2019

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 Resort Spa 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, as well as for possible adverse macro-economic conditions.



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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 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). Once completed, the Monarch Black Hawk Expansion 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. Based on the current construction progress, the Company anticipates that the podium, which includes the expanded casino, restaurants, hotel administration, and lounges, as well as some hotel floors, will open in the third quarter of 2020 and the balance of the hotel tower will open in the fourth quarter of 2020.



KEY PERFORMANCE INDICATORS


We use certain Key Performance Indicators ("KPI") to manage our operation and measure our performance.

Gaming revenue KPI: Our management reviews on a consistent basis the volume metrics and hold percentage metrics for each gaming area. The main volume measurements are slot coin-in, table games drop, sportsbook write and keno write. Slot coin-in represents the dollar amount wagered in slot machines, including free promotional wagers. Table games drop represents the total amount of cash and net markers deposited in the table drop box. Keno write and sportsbook write represents the dollar amount wagered at our counters, along with sportsbook write made through our mobile wagering system. Volume metrics are important in managing the business, as our gaming win is affected by actual hold percentage, which in general varies from the expected hold percentage and historical hold percentage. Gaming win represents the amount of wagers retained by us. Hold percentage represents win as a percentage of slot coin-in, table game drop, sportsbook write, or keno write. Our win and hold percentages are calculated before discounts, commissions, deferring revenue associated with our loyalty programs and allocating casino revenues related to goods and services provided to patrons on a complimentary basis.

Food and Beverage revenue KPI: The main KPIs in managing our food and beverage operations are covers and average revenue per cover. A cover represents the number of guests served and is an indicator of volume. Average revenue per cover represents the average amount spent per food and beverage outlets' served guests. Changes in the average revenue per cover might be an indicator for changes in menu offerings, changes in menu prices or may indicate changes in our guests' preferences and purchasing habits.

Hotel revenue KPI: The main KPIs used in managing our hotel operation are the occupancy rate (a volume indicator), which is the average percentage of available hotel rooms occupied during a period, and the average daily rate ("ADR", a price indicator), which is the average price per sold room. Available rooms exclude those rooms unavailable for occupancy during the period due to renovation, development, or other requirements. Sold rooms include rooms where the guests do not show up for their stay and lose their deposit. The calculations of the occupancy rate and ADR include the impact of rooms provided on a complimentary basis. Revenue per available room ("RevPAR") represents total hotel revenue per available room and is a representation of the occupancy rate, ADR and miscellaneous hotel sales.

Operating margins: Our management is consistently focused on controlling expenses and finding cost savings, without affecting the quality of the product we offer and our guests' services and experience. We measure our performance using expense margin, which is a percentage of direct expenses, including labor cost of product and any other operating expenses related to the gaming, food and beverage, or hotel operation to the net gaming, food and beverage, or hotel revenues. Selling, general and administrative ("SG&A") margin represents SG&A expenses for a period as a percentage of total net revenue for a period. In managing the food and beverage operation we use Cost Of Goods Sold ("COGS") percentage, which represents a percentage of product cost to the food and beverage revenue and is a measurement of commodity prices and menu sales prices.

Our management evaluates the KPI as compared to prior periods, the peer group, or market, as well as for any trends.

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RESULTS OF OPERATIONS


Impact of the COVID-19 Pandemic

Monarch operating results for the three and six months ended June 30, 2020 were significantly impacted by the unprecedented government-mandated closure of our Nevada and Colorado properties in response to the COVID 19 pandemic, which lasted approximately three months.

In March 2020, the World Health Organization declared the rapidly growing COVID-19 outbreak a global pandemic. On March 16, 2020, in an effort to contain the virus, the state of Colorado mandated a temporary shutdown of all casinos including Monarch Casino Black Hawk and, on March 17, 2020, the state of Nevada mandated the temporary closure of all casinos including the Atlantis in Reno.

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 have not yet resumed operations. At our Colorado property, table games have not yet resumed operations and our buffet 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 Atlantis and in all restaurants, and a decreased number of active slot machines on the casino floors. 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.

Despite a strong reopening, we are operating in an environment of high uncertainty and there may be additional government restrictions placed on all of our services, such as gaming, restaurants, spas and salons, entertainment venues and convention and meeting space, which could lead to lower demand and revenue. Such restrictions could also increase our costs, further decrease our operating margins and have a material adverse effect on our operations, cash flows and financial results.

While we have incurred significant disruptions from the COVID-19 outbreak, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the possibility of the outbreak levels seen to return, the impact on demand following the reopening of our casinos, and other actions or restrictions that may be taken by governmental authorities, the impact to the general U.S economy and to our customers and other factors identified in Part II, Item 1A "Risk Factors" in this Form 10-Q. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition.

Comparison of Operating Results for the Three-Month Periods Ended June 30, 2020 and 2019

For the three months ended June 30, 2020, our net loss totaled $4.3 million, or $(0.24) per diluted share, compared to net income of $9.3 million, or $0.50 per diluted share for the same period in 2019, reflecting a 146.8% and 148.0% decrease in net (loss) income and diluted (losses) earnings per share, respectively. Net revenues in the three months ended June 30, 2020, totaled $15.2 million, a decrease of $47.6 million, or 75.9%, compared to the three months ended June 30, 2019. Loss from operations for the three months ended June 30, 2020 totaled $5.5 million compared to 11.6 million for the same period in 2019.

Casino revenue decreased 69.8% in the second quarter of 2020 compared to the second quarter of 2019 which was driven by the COVID-19 outbreak. Gaming operations were suspended more than two thirds of the second quarter of 2020. Casino operating expense as a percentage of casino revenue decreased to 26.8% for the three months ended June 30, 2020 compared to 34.5% for the three months ended June 30, 2019, as a result of effective cost management.

Food and beverage revenue for the second quarter of 2020 decreased 83.9% compared to the second quarter of 2019 due to an 88.8% decrease in food and beverage covers, as a result of the pandemic related suspension of our food and beverage operations during the majority of the quarter. Food and beverage revenue per cover increased year-over-year by a 43.6%. Food and beverage operating expense as a percentage of food and beverage revenue increased in the second quarter of 2020 to 96.6% compared to 79.6% for the same period in 2019 primarily as a result of a decrease in revenue due to the COVID-19 pandemic-related shutdown of our operations and an increase in labor expenses as a percentage of revenue.

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Hotel revenue decreased 83.3% in the second quarter of 2020 compared to the second quarter of 2019 due to the suspension of our hotel operations during the majority of the quarter and lower hotel occupancy of 61.3% during the period the hotel was opened in the second quarter of 2020 compared to 88.3% during the second quarter of 2019. The ADR decreased $28.87, from $129.91 in the second quarter of 2019 to $101.04 in the second quarter of 2020. REVPAR, calculated by dividing total hotel revenue by total rooms available, was $66.65 and $118.34 for the three months ended June 30, 2020 and 2019, respectively. Hotel operating expense as a percentage of hotel revenue increased to 61.8% in the second quarter of 2020 compared to 39.1% for the comparable prior year period primarily as a result of the COVID-19 pandemic related shutdown of our operations.

Other revenue decreased 71.8% in the second quarter of 2020 compared to the same prior year period.

Selling, general and administrative ("SG&A") expense decreased to $8.9 million in the second quarter of 2020 from $16.5 million in the second quarter of 2019 primarily due to cost mitigation measures implemented during the closure of our properties, including the temporary furlough of approximately 90% of the Company's employees, a 50% reduction of executives' salaries, and the CEO and board members having forgone all cash compensation. As a percentage of net revenue, SG&A expense increased to 58.5% in the second quarter of 2020 compared to 26.3% in the same period in 2019.

Depreciation and amortization expense increased to $3.8 million for the three months ended June 30, 2020 compared to $3.7 million for the same prior year period, due to new assets placed into service during the current quarter.

During the second quarter of 2020, we recognized $0.2 million in pre-opening expense related to the Monarch Black Hawk Expansion project, $0.2 million in professional service fees relating to our construction litigation, $0.5 million in Colorado legislation lobbying expenses and $0.3 million in equipment, supplies and employee testing expenses directly attributable to the pandemic for reopening of the properties and incremental to normal operations. During the second quarter of 2019, we recognized $0.2 million in pre-opening expense related to the upcoming opening of the new hotel and expanded casino in Black Hawk. These expenses are included in Other operating items, net in the Consolidated Statement of Operations.

During each of the second quarters of 2020 and 2019, we capitalized $1.4 million of interest, which is all interest, paid and accrued during those quarters, as the borrowings on our Amended Credit Facility were exclusively used to finance the Monarch Black Hawk Expansion. 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, 2020 and 2019

For the six months ended June 30, 2020, we had a net loss of $2.3 million, or $(0.13) per diluted share, compared to net income of $16.3 million, or $0.88 per diluted share for the same period in 2019, reflecting a 114.3% and 114.8% decrease in net income and diluted earnings per share, respectively. Net revenues in the six months ended June 30, 2020, totaled $66.2 million, a decrease of $55.3 million, or 45.5%, compared to the six months ended June 30, 2019. Loss from operations for the six months ended June 30, 2020 totaled a $3.4 million compared to $20.4 million income from operations for the same period in 2019.

Casino revenue decreased 40.2% in the first six months of 2020 compared to the first six months of 2019 and was driven by the COVID-19 outbreak, which culminated in a suspension of our operations in mid-March 2020, partially offset by an increase in guests' spend per visit during the first two months of 2020 compared to the same period in 2019. Casino operating expense as a percentage of casino revenue decreased to 33.2% for the six months ended June 30, 2020 compared to 35.8% for the six months ended June 30, 2019.

Food and beverage revenue for the first six months of 2020 decreased 50.5% compared to the 2019 same period due to a 57.0% decrease in food and beverage covers, partially offset by a 14.9% increase in food and beverage revenue per cover. Food and beverage operating expense as a percentage of food and beverage revenue increased in the first six months of 2020 to 86.8% compared to 79.4% for the same period in 2019 primarily as a result of the decline in casino revenue due to the COVID-19 pandemic and the subsequent shutdown of our operations for approximately three months.

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Hotel revenue decreased 54.4% in the first six months of 2020 compared to the first six months of 2019 due to the pandemic related hotel shutdown for approximately three months and the decrease in hotel occupancy to 71.8% during the period the hotel was open compared to 86.3% occupancy during the first six months of 2019, combined with a $5.33 decrease in ADR, from $126.06 in the first six months of 2019 to $120.73 in the first six months of 2020. REVPAR was $91.85 and $116.53 for the period the hotel was open in the first six months ended June 30, 2020 and for the six months ended June 30, 2019, respectively. Hotel operating expense as a percentage of hotel revenue increased to 49.4% in the first six months of 2020 compared to 38.0% for the comparable prior year period primarily as a result of the COVID-19 pandemic and the subsequent shutdown of our operations.

Other revenue decreased 45.5% in the first six months of 2020 compared to the same prior year period.

SG&A expense decreased to $26.1 million in the first six months of 2020 from $33.0 million in the first six months of 2019 primarily due to the COVID-19 shutdown and the related cost mitigation measures taken by management. As a percentage of net revenue, SG&A expense increased to 39.4% in the first six months of 2020 compared to 27.1% in the same period in 2019.

Depreciation and amortization expense increased to $7.7 million for the six months ended June 30, 2020 compared to $7.3 million for the same prior year period, due to new assets placed into service during the six-month period.

During the first six months of 2020, we recognized $1.0 million in pre-opening expense related to the upcoming opening of the new hotel and expanded casino in Black Hawk, $0.3 million in construction litigation expense related to the lawsuit filed by the Monarch Black Hawk Expansion construction project general contractor against the Company, $0.8 millionColorado in legislation lobbing expenses and $0.3 in million equipment, supplies and employee testing expenses directly attributable to the pandemic for reopening of the properties and incremental to normal operations. During the first six months of 2019, we recognized $0.6 million in pre-opening expense related to the upcoming opening of the new hotel and expanded casino in Black Hawk. Those expenses are included in Other operating items, net in the Consolidated Statement of Operations.

During the first six months of 2020 and 2019, we capitalized $3.2 million and $2.6 million of interest, respectively, which is all interest, paid and accrued during those periods, as the borrowings on our Amended Credit Facility were exclusively used to finance the Monarch Black Hawk Expansion. See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

CAPITAL SPENDING AND DEVELOPMENT

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

Cash paid for capital expenditures for the six-month periods ended June 30, 2020 and 2019 totaled approximately $22.6 million and $73.6 million, respectively. During the six-month period ended June 30, 2020 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 during this period were funded from available cash and cash equivalents. 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 hotel suites at Atlantis and the acquisition of gaming and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Casino Black Hawk. The capital expenditures during this period were funded from operating cash flows, available cash and cash equivalents and borrowings from the credit facility.



Monarch Black Hawk Expansion


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").



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The Monarch Black Hawk Expansion includes a 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 million to $269 million. Based on the current construction progress, we anticipate that the podium, which includes the expanded casino, restaurants, hotel administration, and lounges, as well as some hotel floors, will open in the third quarter of 2020 and the balance of the hotel tower will open in the fourth quarter of 2020.

We expect to finance the cost through a combination of operating cash flows, available cash and cash equivalents 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. Further, although we intend to seek recovery from our general contractor through the current litigation, we may be required to fund certain costs of correcting construction defects and deficiencies until, and if, recovered from the general contractor.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity have been cash provided by operations, and available cash and cash equivalents, and, for capital expansion projects, borrowings available under our Amended Credit Facility. On June 4, 2020, Atlantis Casino Resort Spa re-opened, after approximately two and a half months of closure ordered by the Nevada governor in response to the COVID-19 pandemic, and resumed limited operations. On June 17, 2020, Monarch Casino Black Hawk, re-opened, after approximately three months of closure ordered by the Colorado governor in response to the COVID-19 pandemic, and resumed limited operations.

For the six months ended June 30, 2020, net cash used in operating activities totaled $10.0 million, compared to net cash provided by operating activities of $31.7 million in the same prior year period. This decrease was primarily a result of a decrease in net income combined with an increase in working capital, especially a decrease in accounts payable and accrued expenses.

Net cash used in investing activities totaled $22.6 million and $73.6 million during the six months ended June 30, 2020 and 2019, respectively. Net cash used in investing activities during the first six months of 2020 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. 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 the renovation of hotel suites at Atlantis and for acquisition of gaming and other equipment at both properties.

Net cash provided by financing activities in the first six months of 2020 totaled $10.4 million and consisted of $16 million borrowing under the Amended Credit Facility revolving loan, offset by $5.0 million mandatory principal payment to the Amended Credit Facility term loan, as well as a $0.6 million effect from the stock options net exercise. In the first six months of 2019, we borrowed $38.0 million under the Amended Credit Facility. The borrowings were used to fund the Monarch Casino Black Hawk Expansion.



Amended Credit Facility


On July 20, 2016, the Company entered into an Amended Credit Facility. Under the Amended Credit Facility, the Company's available borrowing capacity was $250.0 million, and the maturity date was July 20, 2021.



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At December 31, 2019, the total revolving loan commitment under the Amended Credit Facility was automatically and permanently reduced to $50.0 million and all $200.0 million outstanding under the revolving loan was converted to a term loan. Prior to the conversion, we drew all available borrowings up to $200.0 million. Following the conversion to a term loan, on December 31, 2019, we made a $3.8 million mandatory principal payment.

As of June 30, 2020, the Company had an outstanding principal balance of $191.3 million under the Amended Credit Facility term loan. As of June 30, 2020, the Company had $16.0 million outstanding and $34 million remaining in available borrowings under the Amended Credit Facility revolving loan. The Company has a $0.6 million Standby Letter of Credit, from which there have been no withdrawals.

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, 2020, 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 3.5:1 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, 2020, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 5.2:1 and 1.7:1, 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 vary depending on Company's leverage ratio.

We may prepay borrowings under the Amended Credit Facility revolving loan 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.

On the terms and subject to some conditions, we may, at any time before the Maturity Date, request an increase of the total revolving loan commitment, 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.

We are required to make principal payments on the amount of the term loans on each Term Loan Installment Date (last business day of each quarter, starting with the quarter ending December 31, 2019) in an amount equal to (x) the percentage set forth opposite the applicable year during which such Term Loan Installment Date occurs multiplied by (y) the Conversion Amount. The estimated amount of the mandatory principal payment due in the next twelve months is $25.0 million.

In relation to the COVID-19 pandemic closure of our properties, the Company and the lender executed, on June 9, 2020, Limited Waiver and Amendment to Credit Agreement.

The lender agreed to waive any default or event of default under the Amended Credit Facility resulting from (i) the failure to have the Atlantis Casino Resort or the Monarch Casino Black Hawk open and operating during the period commencing on April 1, 2020 and ending on September 30, 2020; (ii) the construction of the Monarch Black Hawk Expansion being stopped at any time prior to September 30, 2020; and (iii) the occurrence of a material adverse change on or prior to September 30, 2020, as a result of a mandated business cessation order. The lender also agreed to waive any default on the financial covenants under the Amended Credit Facility for a period commencing on April 1, 2020 and ending on September 29, 2020.



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The Amended Credit Facility was amended by adding 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 $26,000,000 shall be used solely to pay retainage costs with respect to the Expansion Project and any settlement or judgment under the PCL Litigation.

As a part of the limited waiver and amendment, for a period starting on June 9, 2020 until the first adjustment to occur after the fiscal quarter ending September 30, 2020, the interest rate is set as LIBOR plus 2.50%, or base rate plus 1.50% and the commitment fees are set at 0.45%.

We are in continuing discussions with our lenders regarding additional relief options and amendments of the Amended Credit Facility. Currently, we have a term sheet and firm commitment letters from all banks participating in the current lending group for refinancing, which will be completed upon signing of the documents and will increase our credit facility and extend the lending period.

If negotiations for the refinancing are not successful, this could have a material adverse impact to the Company's financial condition.

We believe that the $18.7 million cash in our interest-bearing money market fund and the $34.0 million available under our Amended Credit Facility as of June 30, 2020, as well as anticipated operating cash flow, will be sufficient to sustain operations for the twelve months from filing of Form 10-Q for the quarter ended June 30, 2020 and fulfill our capital expenditure plans. However, we are surrounded by uncertainty about COVID-19, as well as financial, economic, competitive, regulatory, and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow in the upcoming months 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 issuing additional equity.

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 2019 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 2019 Form 10-K filed with the SEC on March 12, 2020.



CONTRACTUAL OBLIGATIONS


Our contractual obligations as of June 30, 2020 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)                  $  23.4$    1.4$   2.3$    2.2$    17.5
Purchase Obligations (3)                 26.8        23.4        1.8        1.6            -
Borrowings Under Amended Credit
Facility (4)                            207.3        25.0      182.3          -            -

Total Contractual Cash Obligations $ 257.5$ 49.8$ 186.4$ 3.8$ 17.5




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  Table of Contents

    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. (1) 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
    and the Limited Waiver and Amendment to Credit Agreement, signed on June 9,
    2020, at June 30, 2020, pricing was LIBOR plus 2.5%.



(2) Operating leases include the Driveway Lease, the Parking Lot Lease and

    billboards leases.




    Purchase obligations represent approximately $16.7 million of commitments

related to capital projects and approximately $10.1 million of materials and (3) 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, 2020.



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, 2020, we estimate that the remaining cost to complete the Monarch Black Hawk Expansion is between $9 million and $16 million.

© Edgar Online, source Glimpses


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Financials (USD)
Sales 2020 168 M - -
Net income 2020 5,52 M - -
Net Debt 2020 164 M - -
P/E ratio 2020 155x
Yield 2020 -
Capitalization 826 M 826 M -
EV / Sales 2020 5,91x
EV / Sales 2021 3,24x
Nbr of Employees 2 300
Free-Float 65,6%
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John Farahi Co-Chairman, Chief Executive Officer & Secretary
Bob Farahi Co-Chairman & President
David-Jacques Farahi Chief Operating Officer
Craig F. Sullivan Independent Director
Yvette E. Landau Independent Director
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