ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of our results of operations and our present financial condition. The consolidated financial statements and the accompanying notes contain additional detailed information that should be referred to when reviewing this material.
Cautionary Note on Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) regarding our expectations and beliefs concerning future expansion and acquisition opportunities; positioning of our properties to benefit from future macro and local economic growth; business prospects; business strategies and outlook; competitive advantages and sources of competition; marketing strategy; approvals and licensing requirements; employee relations; capital requirements; anticipated source of funds and adequacy of such funds to meet our debt obligations and capital requirements; financial condition, legal matters and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. We note that many factors could cause our actual results and experience to change significantly from the anticipated results or expectations expressed in our forward-looking statements. When words and expressions such as “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions are used in this Form 10-K, 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. Example of forward-looking statements include, among others, statements we make regarding: (i) our belief that we have sufficient liquidity to fund our operations and any remaining renovation projects, litigation costs and ongoing capital expenditures; (ii) our expectation regarding the availability of future acquisition opportunities; (iii) our beliefs regarding the quality of our products and guest services in Reno and Black Hawk; (iv) our expectations regarding our guests' acceptance of the casino, hotel and related amenities at Monarch Casino Resort Spa Black Hawk and Atlantis; (v) our expectations regarding our future position in, and share of, the high-end segment of the market and the quality of service we provide to our guests; (vi) our expectations regarding the litigation and any appeal relating to the construction of the Monarch Black Hawk expansion and related liens recorded by the general contractor and certain subcontractors against the Monarch Black Hawk; (vii) our belief regarding the proximity that the Reno-Sparks Convention Center will have on the Atlantis; (viii) the continuing strength of our balance sheet and our expected free cash flow; (ix) our expectations regarding continuing our dividend payments in the future; (x) our belief regarding the appeal of the locations of our properties to certain segments of our customers; (xi) our expectations regarding broad-based employment growth in the Reno market; and (xii) our beliefs regarding the impact that Monarch Rewards will have on guest loyalty at each of our properties. Actual results and future events and conditions may differ materially from those described in any forward-looking statements. Therefore, you should not rely on any of these forward-looking statements.
Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to change significantly from those set forth in our forward-looking statements, including the following factors:
our ability to successfully implement our business and growth strategies;
our ability to successfully defend against and remove the liens recorded against the Monarch Black Hawk by the general contractor and certain subcontractors with respect to the expansion and renovation of the property;
access to available and reasonable financing on a timely basis;
our ability to maintain strong working relationships with our regulators, employees, lenders, suppliers, insurance carriers, customers, and other stakeholders;
impact of any uninsured losses;
changes in guest visitation or spending patterns due to health or other concerns;
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construction factors, including delays, disruptions, availability of labor and materials, increased costs of labor and materials, contractor disagreements, zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters, building permit issues and other regulatory approvals or issues;
ongoing disagreements over costs of and responsibility for delays and other construction related matters with our Monarch Black Hawk general contractor, PCL including, as previously reported, the litigation against us by such contractor, the court’s decision, issued February 14, 2025, following the trial of the matter in 2023, and our appeal of that decision;
affirmative and extensive counterclaims for construction defects, breach of contract, breach of warranty, fraud, fraudulent inducement, negligence and other construction related claims that we have filed against the Monarch Black Hawk contractor, PCL in the above-mentioned litigation in which litigation the parties recently received the Court’s decision following the trial of the matter in 2023 and appeal of that decision;
our potential need to post bonds or other forms of surety to support our legal remedies, including in connection with the potential appeal noted above;
risks related to development and construction activities (including disputes with and defaults by contractors and subcontractors; construction, equipment or staffing problems and delays; shortages of materials or skilled labor; environmental, health and safety issues; weather and other hazards, site access matters, and unanticipated cost increases);
changes in laws mandating increases in minimum wages and employee benefits;
changes in laws, rules and regulations permitting expanded and other forms of gaming in our key markets;
the effects of labor shortages on our market position, growth and financial results;
current broad-based inflation on the economy, including supply and wage inflation;
the potential of increased regulatory and other burdens to address the direct and indirect impacts of the spread of infectious diseases;
guest acceptance of our expanded facilities at Monarch Black Hawk and the resulting impact on our market position, growth and financial results;
competition in our target market areas;
our dependence on two resorts;
our ability to realize the anticipated benefits of our expansion and renovation projects.
our ability to effectively manage expenses to optimize our margins and operating results;
risks related to our present indebtedness and future borrowings and our ability to meet our debt obligations and comply with our loan covenants;
adverse trends in the gaming industries;
changes in patron demographics;
general market and economic conditions, including but not limited to, the effects of local and national economic, credit and capital market conditions, housing and energy conditions on the economy in general and on the gaming and lodging industries in particular;
our ability to generate sufficient operating cash flow to finance our expansion plans and fund working capital;
the impact of rising interest rates and our ability to refinance debt as it matures at commercially reasonable rates or at all;
disruptions and shortages in the supply chain;
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, rules and regulations, including environmental and gaming licenses or legislation and regulations;
our ability to comply with existing laws and regulations to which we are subject;
our ability to obtain and maintain gaming and other governmental licenses and regulatory approvals;
any violations by us of the anti-money laundering laws;
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cybersecurity risks, including misappropriation of customer information or other breaches of information security;
impact of natural disasters, severe weather, terrorist activity and similar events;
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;
risks, uncertainties and other factors described from time to time in this and our other SEC filings and reports;
the effects of macro and micro economic conditions on employment growth in the economy in general;
the effects of labor shortages on our ability to grow our business and to expand our market share in each of our key markets;
our ability to generate sufficient cash flow and manage our expenses to deleverage the Company;
the impact of the regional wars and conflicts throughout the world;
adverse impacts of an infectious disease outbreak on our business, construction projects, financial condition and operating results;
actions by government officials at the federal, state and/or local level with respect to steps to be taken, including, without limitation, temporary or extended shutdowns, travel restrictions, social distancing and shelter-in-place orders, in connection with an infectious disease outbreak;
our ability to manage guest safety concerns caused by an infectious disease outbreak; and
the impact of tariffs imposed on goods originating from Mexico, Canada, China or other parts of the world.
For a more detailed description of certain Risk Factors affecting our business, see Item 1A, “Risk Factors.”
We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions, except as required by law. New risks emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements.
OVERVIEW
Monarch 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 hotel and casino in Black Hawk, Colorado (the “Monarch Black Hawk”). 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 the Monarch Black Hawk. We also own Chicago Dogs Eatery, Inc. and Monarch Promotional Association, Inc., both of which were formed in relation to licensure requirements for extended hours of liquor operation in Black Hawk, Colorado.
Our business strategy is to maximize revenues, operating income and cash flow primarily through our casino, food and beverage, and hotel operations at the Atlantis and Monarch Black Hawk. We focus on delivering exceptional service and value to our guests. Our hands-on management style focuses on customer service and cost efficiencies.
FACTORS IMPACTING OUR RESULTS OF OPERATIONS
Our operating results may be affected by, among other things, competitive factors, gaming tax increases, mandated minimum wages, the commencement of new gaming operations, renovations at our facilities, general public sentiment regarding travel and public gatherings, overall economic conditions and governmental policies affecting the disposable income of our patrons, public health conditions including global pandemics and localized outbreaks of infectious diseases, terrorism and weather conditions affecting our properties, as well as those matters discussed in Item 1A. “Risk Factors” above.
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The following significant factors and trends should be considered in analyzing our operating performance:
Atlantis: 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. Reno remains a healthy local-oriented market, but at the same time a very competitive market. The market’s employment growth is broad based and we expect this positive indicator will support the continued strength of our business at Atlantis. At the same time, the tight employment environment has created labor challenges, including wage inflation, which we are actively managing. In addition, we are facing additional competition from the continued growth of California tribal gaming and an extremely competitive promotional environment in Northern Nevada. The increase in the labor costs and the other inflationary pressures, combined with continued aggressive marketing programs by our competitors, has applied pressure on Atlantis’ revenue growth, operating costs and profit margins.
Monarch Casino Resort Spa Black Hawk: Monarch Black Hawk is the first property encountered by visitors arriving from Denver and other major population centers via Highway 119. The Denver metro economy remains strong with higher than the national average per capita personal income. Monarch Black Hawk has been developed into a world-class resort, is positioned to leverage its expanded operations, and take advantage of the elimination of betting limits several years ago and allowance of new game types in Black Hawk, Colorado, as well as to benefit from the growing state-wide online and retail sports betting. Monarch Black Hawk also is experiencing labor challenges, resulting from the distance to the staffing filter markets of Golden, Colorado and the Denver metro area and low unemployment at those markets. We continue to attract high value players from across Colorado’s Front Range, who had previously tended to travel to other markets, such as Las Vegas, for a high-end casino entertainment experience. We believe that the quality of our expanded product and exceptional guest service will meet the demand of the high-end segment of the market and will grow revenue and accelerate market share.
KEY PERFORMANCE INDICATORS
We use certain Key Performance Indicators (“KPI”) to manage our operation and measure our performance.
Gaming revenue KPI: Our management regularly 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 (“F&B”) 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.
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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 the quality of 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 KPIs as compared to prior periods, the peer group, or market, as well as for any trends.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended December 31, 2025 and 2024
For the year ended December 31, 2025, our net income totaled $101.4 million, or $5.43 per diluted share, compared to net income of $72.8 million, or $3.84 per diluted share for the same period of 2024, reflecting a 39.3% increase in net income and 41.4% increase in diluted EPS (“Earnings Per Share”). Net income and diluted EPS for the years ended December 31, 2025 and 2024, were impacted by: (i) $27.6 million, or $1.14 per diluted EPS, of accrued loss relating to the principal judgment on the litigation between the Company and the Monarch Black Hawk’s general contractor, PCL Construction Services, Inc. recorded in 2024; (ii) $2.75 million, or $0.12 per diluted EPS, from accrued interest expense relating to the principal judgment on the litigation between the Company and Monarch Black Hawk’s general contractor, PCL Construction Services, Inc., recorded in 2025; (iii) $1.6 million, or $0.07 per diluted EPS, from higher legal and consulting costs relating to the same litigation and the Company’s ongoing appeal of the related judgment; and (iv) $3.9 million, or $0.17 per diluted EPS, from accrual for other litigation expenses. Net revenue for the years ended December 31, 2025 and 2024 were $545.1 million and $522.2 million, respectively, reflecting an increase of $22.9 million, or 4.4%.
Casino revenue increased 6.8% in the year ended December 31, 2025, compared to the same period of 2024. Casino operating expense as a percentage of casino revenue decreased to 36.2% for the year ended December 31, 2025, compared to 37.2% for the same period in 2024, primarily due to increase in gaming revenue resulted from increase in market share at both locations and decreases in labor expense.
Food and beverage revenue increased 2.1% in the year ended December 31, 2025 over the same period in 2024, due to a 3.8% increase in average revenue per cover partially offset by a 1.6% decrease in covers. Food and beverage operating expense as a percentage of food and beverage revenue in the year ended December 31, 2025 was 71.0% compared to 73.7% for the same period in 2024. Food and beverage operating expense as a percentage of food and beverage revenue decreased as a result of decrease in labor expense and cost of goods sold.
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Hotel revenue decreased 0.2% in the year ended December 31, 2025 over the same period in 2024 due to a decrease in hotel occupancy to 81.6% in the year ended December 31, 2025 from 82.8% for the same period in 2024. The decrease in occupancy is primarily result of low mid-week occupancy, as the competitors are offering very low daily rates. ADR increased to $188.13 for the year ended December 31, 2025 from $183.80 for the year ended December 31, 2024. RevPAR was $164.72 in the year ended December 31, 2025 and $164.80 for the same period in 2024. Hotel operating expense as a percent of the hotel revenue for the year ended December 31, 2025 was 34.6% compared to 34.3% for the same period in 2024. The increase in the hotel expense margin was primarily due to the increase in hotel operating supplies expense.
Other revenue increased 1.6% in the year ended December 31, 2025 compared to the same period in 2024 driven primarily by increases in spa and commission revenues.
SG&A expense increased to $109.4 million in the year ended December 31, 2025 from $108.3 million in the same period of 2024 due to: i) a $1.2 million increase in repairs and maintenance expense; ii) a $0.7 million increase in property taxes, offset by iii) a $0.5 million decrease in salaries, wages, employee benefits and other employee related expenses; and iv) a $0.3 million decrease in utility expense. As a percentage of net revenue, SG&A expense decreased to 20.1% in the year ended December 31, 2025 from 20.7% in the corresponding prior year period of 2024.
Depreciation and amortization expense increased to $54.0 million for the year ended December 31, 2025, as compared to $51.4 million for the same period in 2024 primarily due to the addition of assets related to the redesign and upgrade of the hotel rooms at Atlantis, as well as ongoing maintenance capital expenditures at both properties.
During the year ended December 31, 2025, we recognized, $2.7 million in accrued interest expense relating to the principal judgment on the litigation between the Company and Monarch Black Hawk’s general contractor, PCL Construction Services, Inc., $2.4 million in professional service fees relating to appeal of the principal judgment on the same litigation, $3.9 million in joint stipulation of settlement filed with court in a class action case in which the Company is a defendant $0.1 million in lobbying and other expense to oppose the expansion of iGaming, and $0.1 million in loss on disposal of assets. During the year ended December 31, 2024, we recognized $27.6 million loss relating to the principal judgment on the litigation between the Company and Monarch Black Hawk’s general contractor, PCL Construction Services, Inc., $0.8 million in professional service fees relating to the same litigation, and $0.2 million in loss on disposal of assets.
During the year ended December 31, 2025, we had no borrowings under the credit facility. During the year ended December 31, 2024, we decreased the outstanding principal balance under our Amended Credit Facility by $5.5 million to no balance outstanding as of December 31, 2024. During 2025, we recognized $1.9 million in interest income. During 2024, we recognized $0.1 million in interest expense, net of interest income. See further discussion of our Amended Credit Facility in the Liquidity And Capital Recourses section below.
Comparison of Operating Results for the Years Ended December 31, 2024 and 2023
Refer to ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.
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CAPITAL SPENDING AND DEVELOPMENT
We seek to continuously upgrade and maintain our facilities in order to present a fresh, high-quality product to our guests. Capital expenditures during the years ended December 31, 2025 and 2024 were as follows (in thousands):
Atlantis
Monarch Black Hawk
During the years ended December 31, 2025 and 2024, capital expenditures related primarily to the redesign and upgrade of all hotel rooms at Atlantis, properties maintenance capital expenditures and the acquisition of gaming equipment at both of our properties.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash provided by operations and, for capital expansion projects, borrowings available under our Amended Credit Facility.
Operating Activities
For the year ended December 31, 2025, net cash provided by operating activities totaled $164.7 million, an increase of $24.0 million, or 17.1%, compared to the same period of the prior year. This increase was primarily due to an increase in revenue and an increase in interest income, net of interest expense, partially offset by an increase in operating expenses.
Investing Activities
Net cash used in investing activities totaled $37.2 million and $43.8 million in the years ended December 31, 2025 and 2024, respectively. Net cash used in investing activities during the years ended December 31, 2025 and 2024 consisted primarily of cash used for hotel rooms redesign and upgrade project at Atlantis, properties maintenance capital expenditures and for the acquisition of gaming and other equipment at both properties.
Financing Activities
Net cash used in financing activities of $89.9 million in the year ended December 31, 2025 represented $72.7 million used for the repurchase of Company common stock under the Repurchase Plan and $21.9 million used for payment of dividends, offset by $4.7 million of proceeds from stock options exercise, net of payroll taxes from net exercises. Net cash used in financing activities of $81.5 million in the year ended December 31, 2024 represented $60.0 million used for the repurchase of Company common stock under the Repurchase Plan, $22.2 million used for payment of dividends, and $5.5 million principal payments under the Amended Credit Facility, offset by $6.2 million of proceeds from stock options exercise, net of payroll taxes from net exercises.
We expect that the Company’s cash position in the next quarters may be negatively impacted by the outstanding payments related to the Monarch Black Hawk Expansion project litigation and the judgment of $74.6 million issued February 14, 2025, which are included in Current Liabilities on the balance sheet as of December 31, 2025 and December 31,2024.
Purchase obligations of materials and supplies used in the normal operation of our business represent approximately $19.2 million as of December 31, 2025 and all are cancelable by us upon providing a 30-day notice.
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Amended Credit Facility
On December 31, 2024, the Company entered into the Sixth Amended and Restated Credit Agreement (the “Amended Credit Facility”) with Wells Fargo Bank, N.A., as administrative agent. The Amended Credit Facility amends and restates the Company’s $100.0 million credit facility, dated as of February 1, 2023 (the “Prior Facility”).
The Amended Credit Facility extends the maturity date to January 1, 2028 and removes the lien on real property under the Prior Facility. Additionally, the interest rate under the Amended Credit Facility is either SOFR (the Secured Overnight Financing Rate) plus a margin of 1.25% or the Base Rate (as defined in the Amended Credit Facility) plus a margin of 0.25%. The Commitment Fee Percentage (as defined in the Amended Credit Facility) was revised to be 0.25% per annum .
In addition to other customary covenants for a facility of this nature, as of December 31, 2025, the Company is required to maintain a Total Leverage Ratio (as defined in the Amended Credit Facility) of no more than 1.5:1.0 and Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility) of at least 1.1:1.0. As of December 31, 2025, the Company’s Total Leverage Ratio and Fixed Charge Coverage Ratio associated with the Prior Facility was 0.0:1.0 and 149.7:1.0.
On February 24, 2025, Wells Fargo Bank agreed to waive its right to declaring an event of default under the Amended Credit Facility arising out of the February 14, 2025 judgment on the litigation between Monarch and PCL, so long as we strictly comply with each and every other provision of the Credit Facility. We believe that we are in full compliance.
As of December 31, 2025, the Company had no outstanding principal balance under the Amended Credit Facility, a $0.6 million standby letter of credit and $99.4 million remained available for borrowing.
We believe that the available cash in bank, expected cash flows from operating activities and the $99.4 million available under our Amended Credit Facility as of December 31, 2025 will be sufficient to support our current operations, meet our debt obligations and fulfill our capital expenditure plans for the twelve months from the filing of Form 10-K for the year ended December 31, 2025; however, we are surrounded by uncertainty about 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 the Company’s available cash and 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, or issuing additional equity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain of our policies, including the estimated useful lives assigned to our assets, the determination of the allowance for doubtful accounts and allowance for unredeemed gift certificates, self-insurance reserves, deferred revenue, the calculation of income tax liabilities and the calculation of stock-based compensation, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on historical experience, terms of existing contracts, observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from our estimates. To provide an understanding of the methodologies applied, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the Notes to Consolidated Financial Statements.
The consolidated financial statements include the accounts of Monarch and its subsidiaries. Intercompany balances and transactions are eliminated.
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Casino Revenues
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. The players club performance obligations result in recognition of deferred revenue at the standalone selling prices (“SSP”) of the goods and services that the points are expected to be redeemed for. Progressive jackpot provisions are recognized in two components: 1) as wagers are made for the share of players’ wagers that are contributed to the progressive jackpot award, and 2) as jackpots are won for the portion of the progressive jackpot award contributed by us. Cash discounts and other cash incentives to guests related to gaming play are recorded as a reduction to gaming revenue.
Income Taxes
Income taxes are recorded in accordance with the liability method pursuant to authoritative guidance. Under the asset and liability approach for financial accounting and reporting for income taxes, the following basic principles are applied in accounting for income taxes at the date of the financial statements: (a) a current liability or asset is recognized for the estimated taxes payable or refundable on taxes for the current year; (b) a deferred income tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; (c) the measurement of current and deferred tax liabilities and assets is based on the provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated; and (d) the measurement of deferred income taxes is reduced, if necessary, by the amount of any tax benefits that, based upon available evidence, are not expected to be realized.
Our income tax returns are subject to examination by tax authorities. We assess potentially unfavorable outcomes of such examinations based on accounting standards for uncertain income taxes. Under the accounting guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50.0% likelihood of being realized upon ultimate settlement. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and disclosure.
Stock-based Compensation
We account for stock-based compensation in accordance with authoritative guidance which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs a liability in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. It requires an entity to measure the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize that cost over the service period. We calculate the grant-date fair value using the Black-Scholes valuation model.
The Black-Scholes valuation model requires the input of highly subjective assumptions which include the expected term of options granted, risk-free interest rates, expected volatility, and expected rates of dividends. We estimate an expected term for each stock option grant based on the weighted-average time between grant date and exercise date and the risk-free interest rate assumption was based on U.S. Treasury rates appropriate for the expected term. We use historical data and projections to estimate expected volatility and expected employee behaviors related to option exercises and forfeitures.
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RECENTLY ISSUED ACCOUNTING STANDARDS
A variety of proposed or otherwise potential accounting standards are currently under review and study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, the implementation of any such proposed or revised standards would have on the Company’s Consolidated Financial Statements.
