2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates also include preliminary estimates of values assigned to assets acquired and liabilities assumed in connection with the Merger, including conclusions of useful lives, separate entity values and underlying valuation metrics and methods. These preliminary estimates could change significantly during the measurement period which can remain open for up to one year after the closing date of the Merger

. See Note 3,

Merger with Sartini Gaming, Inc.,

for further information regarding the Merger.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Investments in unconsolidated investees, which are 20% or less owned and where the Company does not have the ability to significantly influence the operating or financial decisions of the entity, are accounted for under the cost method. As of December 31, 2015, the Company did not have any investments in unconsolidated investees or any significant variable interests in variable interest entities. See Note 8,

Cost Method Investments

, for a discussion of the Company’s former investments in unconsolidated investees.

Effective September 10, 2014, the Company implemented a 1-for-2 reverse split of its common stock where each two shares of issued and outstanding common stock were converted into one share of common stock. The reverse split reduced the number of shares of the Company’s common stock outstanding from approximately 26.8 million to 13.4 million. The par value of the common stock remains at $0.01 per share and the number of authorized shares of common stock decreased from 200 million to 100 million. Proportional adjustments were also made to the Company’s outstanding stock options. All share information presented in this Annual Report on Form 10-K gives effect to the reverse stock split.

Cash and Cash Equivalents

Cash and cash equivalents include highly-liquid investments with original maturities of three months or less. Although these balances may at times exceed the federal insured deposit limit, the Company believes such risk is mitigated by the quality of the institution holding such deposit.

Short-Term Investments and Concentrations of Credit Risk

Short-term investments consist of commercial paper, corporate bonds and certificates of deposit which are classified as available-for-sale securities and are valued at current market value, with the resulting unrealized gains and losses, if any, excluded from earnings and reported, net of tax, as a separate component of shareholders' equity until realized. The Company’s investments in certificates of deposit have been federally-insured. Any investments in commercial paper and corporate bonds carry a rating by one or more of the nationally recognized statistical rating organizations. Any change in such rating agencies’ approach to evaluating credit and assigning an opinion could negatively impact the fair value of existing investments the Company owns at the time of such change. Any impairment loss to reduce an investment's carrying amount to its fair market value is recognized in income when a decline in the fair market value of an individual security below its cost or carrying value is determined to be other-than-temporary.

Inventory

Inventories consist primarily of food and beverage and retail items and are stated at the lower of cost or market. Cost is determined using the average cost inventory method.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. A significant amount of the Company’s property and equipment was acquired through the Merger and therefore was initially recognized at fair value on July 31, 2015. Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives:

Building and site improvements (years)	5	-	40
Furniture and equipment (years)	1	-	15
Leasehold improvements (years)	1	-	28

The Company owns parcels of land, including land currently held for sale. The Company performs an impairment analysis on the land it owns at least quarterly to determine if an impairment has occurred.

Gaming Licenses

The Company’s gaming licenses represent costs incurred to acquire the rights to conduct gaming in the states of Maryland, Montana and Nevada and have been recorded as intangible assets. The Maryland gaming license associated with Rocky Gap is subject to amortization as it has a finite life of 15 years. Amortization of the Rocky Gap gaming license began on the date the gaming facility opened for public play in May 2013. The Company considers its Nevada and Montana gaming licenses to be indefinite-lived intangible assets that are not subject to amortization. The Company evaluates the intangible assets for impairment on at least a quarterly basis.

Rewards Programs

The Company has established a Rewards Club promotional program at Rocky Gap to encourage repeat business from frequent customers and patrons. Rewards Club casino player relationships represent loyalty program members who earn points based on play and amounts spent on the purchase of rooms, food, beverage and resort activities, which points are redeemable for complimentary slot play and free goods and services at Rocky Gap’s hotel, restaurants, spa and golf course.

The Company also offers a Gold Mine Rewards promotional program at its Nevada casinos to encourage repeat business from frequent customers and patrons. The close proximity of the Company’s three Nevada casino properties allows it to leverage the convenience of a one-card player rewards system, where reward points and other benefits can be earned and redeemed across all three of the Company’s Nevada casinos via a single card. Gold Mine Rewards casino player relationships represent loyalty program members who earn points based on play, which points are redeemable for food, beverages and hotel rooms, among other items.

In its Distributed Gaming segment, the Company also offers a Golden Rewards promotional program for its taverns. Golden Rewards tavern player relationships represent loyalty program members who earn points based on play, which points are redeemable for complimentary slot play, food and beverages, among other items.

Tavern and casino player relationships are expected to lead to recurring revenue streams, as well as new revenue opportunities arising from the reputations.

The Company records points redeemed for complimentary gaming play as a reduction to gaming revenue and points redeemed for free goods and services as promotional allowances. The Rewards Club, Gold Mine Rewards and Golden Rewards point accrual are included in current liabilities on the Company’s consolidated balance sheet.

Revenue Recognition and Promotional Allowances

The Company generally enters into three types of gaming device placement contracts as part of the distributed gaming business: space lease, revenue share and participation agreements. Under space lease agreements, the Company pays a fixed monthly rental fee for the right to install, maintain and operate the Company’s gaming devices at a business location. Under these agreements, the Company recognizes all gaming revenue and records fixed monthly rental fees as gaming expenses in the consolidated statement of operations. Under revenue share agreements, the Company records all gaming revenue generated from the Company’s gaming devices placed at the location and pays the business location a percentage of such gaming revenue. The amount the Company pays the business location is recorded as gaming expenses in the consolidated statement of operations.

With regard to both space lease and revenue share agreements, the Company holds the applicable gaming license to conduct gaming at the location (although revenue share locations are required to obtain separate regulatory approval to receive a percentage of the gaming revenue). Under participation agreements, the business location holds the applicable gaming license and retains a percentage of the gaming revenue that it generates from the Company’s gaming devices. Under these agreements, the Company records all gaming revenue generated from the Company’s gaming devices placed at the location and the amount the business location retains is recorded as gaming expenses in the consolidated statement of operations.

Gaming revenue, which is defined as the difference between gaming wins and losses, is recognized as wins and losses occur from gaming activities. The retail value of rooms, food and beverage, and other services furnished to customers without charge, including coupons for discounts when redeemed, is included in gross revenues and then deducted as a promotional allowance. The estimated cost of providing such promotional allowances is included in gaming expenses.

Food, beverage, and retail revenues are recorded at the time of sale. Room revenue is recorded at the time of occupancy. Sales taxes and surcharges collected from customers and remitted to governmental authorities are presented on a net basis. Accounts receivable deemed uncollectible are charged off through a provision for uncollectible accounts. No material amounts were deemed uncollectible during fiscal years 2015, 2014 or 2013.

Revenue in prior periods from the management, development, financing of and consulting with Indian-owned casino gaming facilities was recognized as it was earned pursuant to the relevant agreement.

Gaming Taxes

Rocky Gap is subject to gaming taxes based on gross gaming revenues and also pays an annual flat tax based on the number of table games and video lottery terminals in operation during the year. The Company’s Pahrump casinos are subject to taxes based on gross gaming revenues and pay annual fees based on the number of slot machines and table games licensed during the year. Additionally, the Company’s Distributed Gaming segment is subject to taxes based on the Company’s share of non-restricted gross gaming revenue for those locations that have grandfathered rights to more than 15 gaming devices for play, and/or annual and quarterly fees at all tavern and third party distributed gaming locations. These gaming taxes are recorded as gaming expenses in the consolidated statements of operations. Total gaming taxes were $24.2 million, $20.2 million and $10.7 million for fiscal years 2015, 2014 and 2013, respectively.

Advertising Expenses

The Company expenses advertising costs as incurred. Advertising expenses, which are included in selling, general and administrative expenses, were $3.4 million, $2.5 million and $2.0 million for fiscal years 2015, 2014 and 2013, respectively.

Share-Based Compensation Expense

The Company has various share-based compensation programs, which provide for equity awards including stock options and restricted stock units. The Company uses the straight-line method to recognize compensation expense associated with share-based awards based on the fair value on the date of grant, net of the estimated forfeiture rate, if any. Expense is recognized over the requisite service period related to each award, which is the period between the grant date and the award’s stated vesting term. The fair value of stock options is estimated using the Black-Scholes option pricing model. All of the Company’s stock compensation expense is recorded in selling, general and administrative expenses in the consolidated statements of operations. See Note 12,

Share-Based Compensation,

for additional discussion.

Income Taxes

The determination of the Company’s income tax-related account balances requires the exercise of significant judgment by management. Accordingly, the Company determines deferred tax assets and liabilities based upon the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Management assesses the likelihood that deferred tax assets will be recovered from future taxable income and establishes a valuation allowance when management believes recovery is not likely.

The Company records estimated penalties and interest related to income tax matters, including uncertain tax positions, if any, as a component of income tax expense.

Litigation Costs

The Company does not accrue for future litigation costs, if any, to be incurred in connection with outstanding litigation and other dispute matters but rather records such costs when the legal and other services are rendered.

New Accounting Standards

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11,

Inventory (Topic 330): Simplifying the Measurement of Inventory

(“ASU 2015-11”). Under this new guidance, entities that measure inventory using any method other than last-in, first-out or the retail inventory method will be required to measure inventory at the lower of cost and net realizable value

, applied prospectively for annual and interim periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-11 will be effective for the Company’s first quarter of 2017. The Company determined that the impact of the new standard on its consolidated financial statements will not be material.

In April 2015, the FASB issued ASU No. 2015-03,

Simplifying the Presentation of Debt Issuance Costs

(“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts, instead of being presented as another asset. The Company early adopted this standard during 2015 and management believes the impact on the Company’s consolidated financial statements was not material. Additionally, in August 2015, the FASB issued ASU No. 2015-15,

Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements

, which further clarifies the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Debt issuance costs related to line-of-credit of arrangements can be recorded as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, for interim periods within those fiscal years, and early adoption is permitted. The Company determined that the impact of the new standard on its consolidated financial statements will not be material.

In May 2014, the FASB issued ASU No. 2014-09,

Revenue from Contracts with Customers

(“ASU 2014-09”). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. On July 9, 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year, which will be effective for the Company’s first quarter of 2018. The Company is evaluating the impact this standard will have on its financial statements.