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Note 3 - Merger with Sartini Gaming, Inc. | 12 Months Ended
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Dec. 31, 2015
Notes to Financial Statements |
Business Combination Disclosure [Text Block] | 3. Merger with Sartini Gaming, Inc. Overview On July 31, 2015, the Company acquired Sartini Gaming through the consummation of the Merger. At the effective time of the Merger, all issued and outstanding shares of capital stock of Sartini Gaming were canceled and converted into the right to receive shares of the Company’s common stock. At the closing of the Merger, the Company issued 7,772,736 shares of its common stock to The Blake L. Sartini and Delise F. Sartini Family Trust (the “Sartini Trust”), as sole shareholder of Sartini Gaming in accordance with the agreement and plan of merger (the “Merger Agreement”). In addition, at the closing of the Merger, the Company issued 457,172 shares of its common stock to holders of warrants issued by a subsidiary of Sartini Gaming that elected to receive shares of the Company’s common stock in exchange for their warrants. The total number of shares of the Company’s common stock issued in connection with the Merger was subject to adjustment pursuant to the post-closing adjustment provisions of the Merger Agreement. In connection with such post-closing adjustment, the Company issued an additional 223,657 shares of its common stock to the Sartini Trust. As a result, the value of the purchase consideration following such adjustment was $77.4 million. This amount is the product of the 8,453,565 shares of the Company’s common stock issued in the aggregate in connection with the Merger and the closing price of $9.15 per share of the Company's common stock on July 31, 2015. As of December 31, 2015, an additional 777,274 shares are being held in escrow as security in the event of any claims for indemnifiable losses in accordance with the Merger Agreement. Under the Merger Agreement, the number of shares of the Company’s common stock issued in connection with the Merger reflected the pre-Merger value of Sartini Gaming relative to the pre-Merger value of the Company, which pre-Merger values were calculated in accordance with formulas set forth in the Merger Agreement. To determine the number of shares of the Company’s common stock issued in connection with the Merger, the sum of the number of shares of the Company’s common stock outstanding immediately prior to the Merger and the number of shares issuable upon the exercise of outstanding in-the-money stock options were divided by the percentage of the total pre-Merger value of both companies that represented the Company’s pre-Merger value to determine the total number of fully diluted shares immediately following the Merger. The number of shares of the Company’s common stock issued in connection with the Merger was the difference between the total number of fully diluted shares immediately following the Merger and the total number of fully diluted shares immediately prior to the Merger. No fractional shares of the Company’s common stock were issued in connection with the Merger, and any fractional share was rounded to the nearest whole share. The Merger Agreement specified the procedure for determining the pre-Merger values of Sartini Gaming and the Company. The final pre-Merger values of the Company and Sartini Gaming were determined and approved during the fourth quarter of 2015, pursuant to the post-closing adjustment provisions of the Merger Agreement. The total number of shares of the Company’s common stock issued in connection with the Merger was as follows:
Pre-Merger Value of Lakes |  |  | Lakes % |  |  | Pre-Merger Value of Sartini Gaming |  |  | Sartini Gaming % |  |  | Total Post-Closing Shares (1) |  |  | Total Shares Issued in Connection with Merger (2) |
$ | 134,615,083 |  |  |  | 62.6 | % |  | $ | 80,523,753 |  |  |  | 37.4 | % |  |  | 22,592,260 |  |  |  | 8,453,565 |
| (1) | Calculated as the sum of the number of shares of the Company’s common stock outstanding immediately after the Merger (on a fully diluted basis, including shares issuable upon the exercise of outstanding in-the-money stock options) and the shares of the Company’s common stock issued pursuant to the post-closing adjustment provisions of the Merger Agreement .
| (2) | Includes 457,172 shares of the Company’s common stock that were issued to certain former holders of warrants issued by a subsidiary of Sartini Gaming upon the closing of the Merger.
Merger Accounting The Merger has been accounted for under the purchase method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations . Under the purchase method, the total estimated purchase price, or consideration transferred, was measured at the Merger closing date. The purchase price of the acquisition was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over the estimated fair values was recorded as goodwill. The goodwill recognized in the Merger was primarily attributable to potential expansion and future development of, and anticipated synergies from , the tavern brands and the acquired distributed gaming and casino businesses, while enhancing the Company’s existing brand and casino portfolio. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company may continue to record adjustments to the carrying value of assets acquired and liabilities assumed with a corresponding offset to goodwill during the measurement period, which can be up to one year from the date of the consummation of the Merger . The Company will allocate the goodwill to each reporting unit at the conclusion of the measurement period. Measurement Period Adjustments The final pre-Merger values of the Company and Sartini Gaming were determined and approved during the fourth quarter of 2015, pursuant to the post-closing adjustment provisions of the Merger Agreement. As a result of this post-closing adjustment calculation, the number of shares issued in connection with the Merger was increased by an additional 223,657 shares, and the 388,637 shares of the Company's common stock held in escrow as security for the post-closing adjustment were released to the Sartini Trust. The effect of the issuance of these additional shares on the purchase price consideration calculation was an increase of $2.1 million to $77.4 million. This amount is the product of the 8,453,565 total shares of the Company’s common stock issued in connection with the Merger on July 31, 2015 and issued pursuant to the post-closing “true-up” adjustment and the $9.15 per share closing price of the Company's common stock on July 31, 2015. The Company accounted for the issuance of the additional 223,657 shares, and the adjustment of the purchase price consideration, during the fourth quarter of 2015 when the additional shares were issued. In addition to the issuance of the additional shares pursuant to the post-closing adjustment calculation mentioned above, during the measurement period so far, the Company has:
| ● | recorded a deferred tax liability totaling $14.7 million due to the assumption of a net deferred tax liability generated from intangible assets acquired in the Merger , with a corresponding increase to goodwill by the same amount .
| ● | recorded an adjustment to increase goodwill by $1.6 million, decreasing accounts receivable by the same amount, due to the determination that receivables acquired as part of the Merger were deemed to be uncollectible as of the Merger date.
| ● | further analyzed the trade names acquired as part of the Merger , which were originally given 10 year useful lives, and concluded that the trade names are indefinite-lived. An adjustment to reverse previously recognized amortization for the trade names was recorded during the fourth quarter of 2015. The amount included the reversal of $0.2 million in amortization expense related to the third quarter of 2015.
| ● | determined that the preliminary estimated useful lives of certain tangible acquired assets were not consistent with the useful lives used by other market participants. The useful lives determined during the measurement period were updated to reflect the Company’s determination and are reflected in the property and equipment by category table below.
| ● | identified an acquired prepaid asset (recorded in other current assets previously) that was reclassed to a gaming license that represents the Company’s ability and right to operate in its current capacity in the state of Montana. Management has valued the gaming license using estimates for explicit and implicit costs to obtain the gaming license and has determined the license has an indefinite life.
Allocation The preliminary allocation of the $77.4 million final purchase price to the assets acquired and liabilities assumed as of July 31, 2015 was as follows (in thousands):
|  | Amount |
Cash |  | $ | 25,539 |
Other current assets |  |  | 14,830 |
Property and equipment |  |  | 84,104 |
Intangible assets |  |  | 80,760 |
Goodwill |  |  | 96,288 |
Current liabilities |  |  | (13,245 | )
Warrant liability |  |  | (3,435 | )
Debt |  |  | (190,587 | )
Deferred tax liability |  |  | (14,687 | )
Other long-term liabilities |  |  | (2,217 | )
Total purchase price |  | $ | 77,350 |
The amounts preliminarily assigned to property and equipment by category are summarized in the table below (in thousands):
|  | Remaining Useful Life (Years) |  |  | Amount Assigned |
Land |  | Not applicable |  |  | $ | 12,470 |
Land improvements |  | 5 | - | 14 |  |  |  | 4,030 |
Building and improvements |  | 19 | - | 25 |  |  |  | 21,310 |
Leasehold improvements |  | 1 | - | 28 |  |  |  | 20,793 |
Furniture, fixtures and equipment |  | 1 | - | 11 |  |  |  | 22,866 |
Construction in process |  | Not applicable |  |  |  | 2,635 |
Total property and equipment |  |  |  |  | $ | 84,104 |
The amounts assigned preliminarily to intangible assets by category are summarized in the table below (in thousands):
|  | Remaining Useful Life (Years) |  |  | Amount Assigned |
Trade names |  | Indefinite |  |  | $ | 12,200 |
Player relationships |  | 8 | - | 14 |  |  |  | 7,600 |
Customer relationships |  | 13 | - | 16 |  |  |  | 59,200 |
Gaming licenses |  | Indefinite |  |  |  | 960 |
Other intangible assets |  | 2 | - | 10 |  |  |  | 800 |
Total intangible assets |  |  |  |  |  |  | $ | 80,760 |
Trade names The trade names acquired encompass the various trade names utilized by the three casinos located in Pahrump, Nevada: Pahrump Nugget Hotel Casino (“Pahrump Nugget”), Gold Town Casino and Lakeside Casino & RV Park. Additionally, the acquired branded taverns utilize various trade names to market and create brand identity for their services and for marketing purposes, including: PT’s Pub, PT’s Gold, Sierra Gold and Sean Patrick’s. The trade names for the Pahrump casinos and taverns have indefinite lives. Player relationships Player relationships acquired include relationships with players frequenting the Company’s branded taverns and Nevada casinos. These player relationships comprise Golden Rewards members for the taverns and Gold Mine Rewards members for the Nevada casinos, and such relationships are expected to lead to recurring revenue streams, as well as new revenue opportunities arising from the reputations of the taverns and Nevada casinos. Customer relationships Customer relationships relate to relationships with the Company’s third party distributed gaming customers that have been developed over many years and are expected to lead to recurring revenue streams, as well as new revenue opportunities arising from the Company’s reputation. The economic life of the customer relationships is preliminarily estimated to be 13 to 16 years, depending on the customer, and is based on the estimated present value of cash flows attributable to the asset. Gaming licenses The Nevada casinos maintain gaming licenses that allow them to operate in their current capacity. The Nevada gaming licenses have an indefinite life. Other intangible assets Other intangible assets acquired include internally developed software and non-compete agreements. The software is utilized for accounting and marketing purposes and is integrated into the Company’s gaming devices in its distributed gaming operations. The economic life of this software is estimated to be 10 years based on the expected future utilization of the software in its current form. In conjunction with the Merger Agreement, key employees executed non-competition agreements. The economic life of these non-compete agreements is estimated to be two years based on the contractual term of the agreements. Preliminary estimates of future amortization expense related to the finite-lived intangible assets acquired are as follows:
|  | 2016 |  |  | 2017 |  |  | 2018 |  |  | 2019 |  |  | 2020 |  |  | Thereafter |
|  | (In thousands) |
Estimated amortization expense |  | $ | 5,055 |  |  | $ | 4,992 |  |  | $ | 4,904 |  |  | $ | 4,904 |  |  | $ | 4,904 |  |  | $ | 40,736 |
See Note 16, Financial Instruments and Fair Value Measurements , for further discussion regarding the valuation of the acquired tangible and intangible assets. Credit Agreement In connection with the Merger, the Company entered into a Credit Agreement with Capital One, National Association (as administrative agent) and the lenders named therein (the “Credit Agreement”) for a $120.0 million senior secured term loan and a $40.0 million revolving credit facility to refinance the outstanding senior secured indebtedness of Sartini Gaming and the Company’s financing facility with Centennial Bank. See Note 10, Debt , for a discussion of the Credit Agreement and associated refinancing. Selected Financial Information Related to the Acquiree The consolidated financial position of Sartini Gaming is included in the Company’s consolidated balance sheet as of December 31, 2015 and Sartini Gaming’s consolidated results of operations for the period from August 1, 2015 through December 31, 2015 are included in the Company’s consolidated statements of operations and cash flows for the year ended December 31, 2015. From August 1, 2015 through December 31, 2015, the Company recorded $117.6 million in net revenues and $10.4 million in net income from the operations of Sartini Gaming’s distributed gaming and casino businesses. Total assets related to Sartini Gaming’s distributed gaming and casino businesses were approximately $221.6 million and $76.7 million, respectively, as of December 31, 2015, which consisted primarily of property and equipment and intangible assets, including goodwill, recorded on a preliminary basis as the measurement period for the business combination remained open as of December 31, 2015. Unaudited Pro Forma Combined Financial Information The following unaudited pro forma combined financial information for the years ended December 31, 2015 and December 28, 2014 are presented as if the Merger had occurred at the beginning of each period presented:
|  | Twelve Months Ended |
|  | December 31, |  |  | December 28, |
|  | 2015 |  |  | 2014 |
|  | (In thousands, except per share data) |
Pro forma combined net revenues |  | $ | 345,437 |  |  | $ | 335,631 |
Pro forma combined net income (loss) |  |  | 27,645 |  |  |  | (38,426 | )
Pro forma combined net income (loss) per share: |  |  |  |  |  |  |  |
Basic |  | $ | 1.27 |  |  | $ | (1.76 | )
Diluted |  | $ | 1.25 |  |  | $ | (1.76 | )
Weighted average common shares outstanding: |  |  |  |  |  |  |  |
Basic |  |  | 21,848 |  |  |  | 21,833 |
Diluted |  |  | 22,073 |  |  |  | 21,833 |
This unaudited pro forma combined financial information has been prepared for illustrative purposes only and is not necessarily indicative of or intended to represent the results that would have been achieved had the Merger been consummated as of the dates indicated or that may be achieved in the future. The unaudited pro forma combined financial information does not reflect any operating efficiencies and associated cost savings that may be achieved as a result of the Merger. The following adjustments have been made to the pro forma combined net income (loss) and pro forma combined net income (loss) per share in the table above:
| ● | includes additional depreciation expense of property, plant and equipment, and additional amortization expense of intangible assets acquired in the Merger based on their estimated fair values and estimated useful lives;
| ● | reflects the impact of issuance of 8,453,565 shares on July 31, 2015 in connection with the Merger based on the final pre-Merger values;
| ● | reflects $11.5 million and $0.5 million of transaction-related costs associated with the Merger for the years ended December 31, 2015 and December 28, 2014, respectively;
| ● | reflects the elimination of the warrants issued by a subsidiary of Sartini Gaming, which were purchased for $3.4 million in cash and for 457,172 shares of the Company’s common stock (equivalent to $4.2 million based on the Merger per share price); and
| ● | reflects the elimination of approximately $1 0.0 million of income tax benefit during the year ended December 31, 2015, related to the assumption of a net deferred tax liability generated from the intangible assets acquired in the Merger.

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