GOLDEN ENTERTAINMENT, INC. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2020

OR

For the transition period from _____ to _____

Commission File Number: 000-24993

GOLDEN ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (702) 893-7777

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of August 3, 2020, the registrant had 28,124,174 shares of common stock, $0.01 par value per share, outstanding.

GOLDEN ENTERTAINMENT, INC.

FORM 10-Q

INDEX

Part I. Financial Information

ITEM 1. FINANCIAL STATEMENTS 

GOLDEN ENTERTAINMENT, INC.

Consolidated Balance Sheets

(In thousands, except per share data)

The accompanying condensed notes are an integral part of these consolidated financial statements.

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GOLDEN ENTERTAINMENT, INC.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

The accompanying condensed notes are an integral part of these consolidated financial statements.

2

GOLDEN ENTERTAINMENT, INC.

Consolidated Statements of Shareholders’ Equity

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

3

GOLDEN ENTERTAINMENT, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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Consolidated Statements of Cash Flows – (Continued)

(In thousands)

(Unaudited)

The accompanying condensed notes are an integral part of these consolidated financial statements.

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GOLDEN ENTERTAINMENT, INC.

Condensed Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Nature of Business and Basis of Presentation

Overview

Golden Entertainment, Inc. and its wholly-owned subsidiaries own and operate a diversified entertainment platform, consisting of a portfolio of gaming assets that focus on resort casino operations and distributed gaming (including gaming in the Company’s branded taverns). Unless otherwise indicated, the terms “Golden” and the “Company,” refer to Golden Entertainment, Inc. together with its subsidiaries.

The Company conducts its business through two reportable operating segments: Casinos and Distributed Gaming. The Company’s Casinos segment involves the operation of ten resort casino properties in Nevada and Maryland, comprising:

The Company’s Distributed Gaming segment involves the installation, maintenance and operation of slots and amusement devices in non-casino locations such as restaurants, bars, taverns, convenience stores, liquor stores and grocery stores in Nevada and Montana, and the operation of branded taverns targeting local patrons located primarily in the greater Las Vegas, Nevada metropolitan area.

Impact of COVID-19

In December 2019, an outbreak of COVID-19 began in Wuhan, Hubei Province, China. The disease has since spread rapidly across the world, causing the World Health Organization to declare COVID-19 a pandemic on March 11, 2020. Since that time, people across the globe have been advised to avoid non-essential travel, and steps have been taken by governmental authorities, including in the States in which the Company operates, to implement closures of non-essential operations to contain the spread of the virus. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. Following emergency executive orders issued by the Governors of Nevada, Maryland, and Montana, in the week of March 16, 2020, all of the Company’s properties were temporarily closed to the public and the Company’s Distributed Gaming operations at third-party locations were suspended. The Company’s Distributed Gaming operations in Montana and Nevada resumed on May 4, 2020 and June 4, 2020, respectively, and the Company’s Casino operations in Nevada and Maryland resumed on June 4, 2020 and June 19, 2020, respectively. However, as a result of the impact of the COVID-19 pandemic, the operations of the Colorado Belle remained suspended as of June 30, 2020. While all of the Company’s properties except for Colorado Belle had been re-opened as of June 30, 2020, the Company’s implementation of protocols intended to protect patrons and guests from potential COVID-19 exposure continues to limit the Company’s operations. These measures include enhanced sanitization, public gathering limitations of less than 50% of casino and tavern capacity, patron social distancing requirements, limitations on casino operations, which include disabling electronic gaming machines, and face mask and temperature check requirements for patrons. Certain amenities at the Company’s casinos may remain closed or operate in a limited capacity, including restaurants, bars, and other food and beverage outlets, as well as table games, spas and pools. These measures limit the number of patrons that are able to attend these venues. Subsequent to fiscal quarter end, effective July 10, 2020, the Governor of the State of Nevada issued a new emergency executive order mandating the closure of all bars, pubs, taverns, breweries, distilleries and wineries in seven counties, including Clark County (the location of most of the Company’s branded taverns) (refer to “Note 13 — Subsequent Events”). The Company cannot predict when these restrictions on its operations will be changed or eliminated.

Temporary closures of the Company’s operations due to the COVID-19 pandemic resulted in lease concessions for certain of the Company’s taverns and route locations. Such concessions provided for deferral of rent payments with no substantive changes to the consideration due per the terms of the original contract and did not result in a substantial increase in the Company’s obligations under such leases. The Company elected to account for the deferred rent payments as variable lease payments, which resulted in an $8.8

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million reduction in rent expense for the three and six months ended June 30, 2020. Such rent expense will be recorded in future periods as these deferred payments are paid to the Company’s lessors.

The disruptions arising from the COVID-19 pandemic had a significant adverse impact on the Company’s financial condition and results of operations for the three and six months ended June 30, 2020. The duration and intensity of this global health emergency and related disruptions is uncertain. The impact of COVID-19 on the Company’s consolidated results of operations, cash flows and financial condition in 2020 will be material, but cannot be reasonably estimated at this time, as it is unknown when the COVID-19 pandemic will end, when or how quickly the current travel restrictions and tavern closures will be modified or cease to be necessary, and how these uncertainties will impact the Company’s business and the willingness of customers to spend on travel and entertainment.

The impact of the COVID-19 pandemic on the Company’s operations qualified as a triggering event necessitating an evaluation of long-lived assets, goodwill, and indefinite-lived intangible assets for indicators of impairment as discussed in “Note 3 — Property and Equipment, Net” and “Note 4 — Goodwill and Intangible Assets, Net.”

On March 16, 2020, the Company fully drew the available capacity of $200 million under its revolving credit facility (the “Revolving Credit Facility”) as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic. During the second quarter of 2020, the Company repaid $190 million of its borrowings under the Revolving Credit Facility, and as of June 30, 2020, $190 million remained available to the Company for reborrowing. In addition, the Company has implemented various mitigating actions to preserve liquidity, including delaying material capital expenditures, reducing cash operating expenses and implementing a non-essential cost reduction program. To further enhance its liquidity position or to finance any future acquisition or other business investment initiatives, the Company may obtain additional financing, which could consist of debt, convertible debt or equity financing from public or private credit and capital markets.

Basis of Presentation

The unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) has been condensed and/or omitted. For further information, refer to the audited consolidated financial statements of the Company for the year ended December 31, 2019 and the notes thereto included in the Company’s Annual Report on Form 10-K (the “Annual Report”) previously filed with the SEC. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, which included only normal recurring adjustments, necessary to present fairly the Company’s results for the periods presented. Results for interim periods should not be considered indicative of the results to be expected for the full year and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report.

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

Significant Accounting Policies

There have been no changes to the significant accounting policies disclosed in the Company’s Annual Report.

Net Loss Per Share

For all periods, basic net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding. Diluted net loss per share in profitable periods reflects the effect of all potentially dilutive common shares outstanding by dividing net loss by the weighted-average of all common and potentially dilutive shares outstanding. Due to the net losses for the three and six months ended June 30, 2020 and 2019, the effect of all potential common share equivalents was anti-dilutive, and therefore, all such shares were excluded from the computation of diluted weighted average shares outstanding for both periods. The amount of potential common share equivalents excluded were 345,655 and 758,984 for three and six months ended June 30, 2020, respectively, and 739,934 and 892,282 for the three and six months ended June 30, 2019, respectively.

Reclassification of Prior Year Balances

Reclassifications were made to the Company’s consolidated financial statements for the three and six months ended June 30, 2019 to conform to the current period presentation, where applicable.

Accounting Standards Issued and Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“Topic 326”). The new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial

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instruments, the Company is required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The Company adopted the standard as of January 1, 2020, and the adoption did not have a material impact on the Company’s financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“Topic 820”). The new guidance amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted the standard as of January 1, 2020, and the adoption did not have a material impact on the Company’s financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU is intended to eliminate potential diversity in practice in accounting for costs incurred to implement cloud computing arrangements that are service contracts by requiring customers in such arrangements to follow internal-use software guidance with respect to such costs, with any resulting deferred implementation costs recognized over the term of the contract in the same income statement line item as the fees associated with the hosting element of the arrangement. The Company adopted the standard as of January 1, 2020, and the adoption did not have a material impact on the Company’s financial statements and disclosures.

Accounting Standards Issued but Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU is intended to simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations, and interim calculations, and adds guidance to reduce the complexity of applying Topic 740. The standard is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its financial statements and disclosures; however, it does not expect the impact to be material.

No other recently issued accounting standards that are not yet effective have been identified that management believes are likely to have a material impact on the Company’s financial statements.

Note 2 – Acquisitions

The Company had no material acquisitions for the three and six months ended June 30, 2020.

Laughlin Acquisition

On January 14, 2019, the Company completed the acquisition of Edgewater Gaming, LLC and Colorado Belle Gaming, LLC (the “Laughlin Entities”) from Marnell Gaming, LLC (“Marnell”) for $156.2 million in cash (after giving effect to the post-closing adjustment provisions in the purchase agreement) and the issuance of 911,002 shares of the Company’s common stock to certain assignees of Marnell (the “Laughlin Acquisition”). The results of operations of the Laughlin Entities are included in the Company’s results subsequent to the acquisition date. The determination of the fair value of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) was completed in the fourth quarter of 2019.

Note 3 – Property and Equipment, Net

Property and equipment, net, consisted of the following:

Depreciation expense for property and equipment, including finance leases, was $26.3 million and $51.8 million for the three and six months ended June 30, 2020, and $24.3 million and $45.9 million for the three and six months ended June 30, 2019, respectively.

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The Company concluded that the impact of the current COVID-19 pandemic on its operations and financial results is an indicator that impairment may exist related to its long-lived assets. As a result, the Company revised its cash flow projections to reflect the current economic environment, including the uncertainty around the nature, timing and extent of elimination or change of the restrictions on its operations, and utilized such projections in performing an interim qualitative assessment of its property and equipment for potential impairment. The Company completed an undiscounted cash flow analysis for each of its properties based on these revised cash flow projections, and the cash flows were sufficient to recover the Company’s assets such that there was no impairment of the Company’s long-lived assets as of June 30, 2020.

To the extent the Company becomes aware of new facts and circumstances arising from the COVID-19 pandemic that impact its operations, the Company will revise its cash flow projections accordingly, as its estimates of future cash flows are highly dependent upon certain assumptions, including, but not limited to, the nature, timing, and extent of elimination or change of the restrictions on the Company’s operations and the extent and timing of the economic recovery globally, nationally, and specifically within the gaming industry. If such assumptions are not accurate, the Company may be required to record impairment charges in future periods, whether in connection with its regular review procedures, or earlier, if an indicator of an impairment is present prior to such evaluation.

Note 4 – Goodwill and Intangible Assets, Net

The Company tests goodwill and indefinite-lived intangible assets for impairment annually in the last quarter of the year, unless events or changes in circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its fair value. Finite-lived intangible assets are evaluated for potential impairment whenever there is an indicator that the carrying value of an asset group may not be recoverable.

During the first quarter of 2020, the Company concluded that the COVID-19 pandemic had an adverse impact on its operations and financial results, particularly within the Company’s Casinos segment due to the mandatory property closures, which management considered an indicator of impairment, and necessitated a performance of interim qualitative and quantitative impairment tests. The Company’s interim assessment resulted in recognition of a non-cash impairment of its Casinos segment goodwill of $6.5 million.

Mandatory shut-down of the Company’s properties for a majority of the second quarter of 2020 resulted in deterioration of performance of the Company’s casino properties in particular, which required the Company to revise its cash flow projections to reflect the current economic environment, including the uncertainty surrounding the nature, timing, and extent of elimination or change of the restrictions on the Company’s operations. As a result of the impact of the COVID-19 pandemic, the operations of the Colorado Belle remained suspended as of June 30, 2020. The Company conducted an interim qualitative and quantitative assessment of its goodwill and intangible assets for potential impairment, which resulted in recognition of an additional non-cash impairment of the Company’s Casinos segment in the amount of $18.8 million for the three months ended June 30, 2020. The assessment also indicated that the carrying value of an indefinite-lived trade name for certain of the Company’s properties within the Casinos segment exceeded its fair value and resulted in recognition of a non-cash impairment charge of $2.6 million.

The estimated fair value of goodwill and indefinite-lived intangible assets for the first and second quarter was determined using discounted cash flow models which utilized Level 3 inputs as follows: discount rate of 12.0%; long-term revenue growth rate of 2.0% to 3.0%.

There was no impairment of the remaining goodwill or other intangible assets for the three and six months ended June 30, 2020. 

The following table summarizes goodwill activity by reportable segment:

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Intangible assets, net, consisted of the following:

Total amortization expense related to intangible assets was $5.6 million and $11.3 million for the three and six months ended June 30, 2020, respectively, and $5.7 million and $11.3 million for the three and six months ended June 30, 2019, respectively.

To the extent the Company becomes aware of new facts and circumstances arising from the COVID-19 pandemic that impact its operations, the Company will revise its cash flow projections accordingly, as its estimates of future cash flows are highly dependent upon certain assumptions, including, but not limited to, the nature, timing, and extent of elimination or change of the restrictions on the Company’s operations and the extent and timing of the economic recovery globally, nationally, and specifically within the gaming industry. If such assumptions are not accurate, the Company may be required to record impairment charges in future periods, whether in connection with its regular review procedures, or earlier, if an indicator of an impairment is present prior to such evaluation.

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Note 5 – Accrued Liabilities

Accrued liabilities consisted of the following:

Note 6 – Long-Term Debt

Long-term debt, net, consisted of the following: 

Senior Secured Credit Facility

In October 2017, the Company entered into a senior secured credit facility consisting of a $900 million senior secured first lien credit facility (consisting of an $800 million term loan (the “Term Loan”) and a $100 million Revolving Credit Facility) with JPMorgan Chase Bank, N.A. (as administrative agent and collateral agent), the lenders party thereto and the other entities party thereto (the “Credit Facility”). The Revolving Credit Facility was subsequently increased from $100 million to $200 million in 2018 increasing the total Credit Facility capacity to $1.0 billion.

As of June 30, 2020, the Company had $772 million in principal amount of outstanding Term Loan borrowings under its Credit Facility, no letters of credit outstanding, and $10 million in principal amount of outstanding borrowings under the Revolving Credit Facility, leaving borrowing availability under the Revolving Credit Facility as of June 30, 2020 of $190 million.

The Revolving Credit Facility matures on October 20, 2022, and the Term Loan matures on October 20, 2024. The Term Loan is repayable in 27 quarterly installments of $2 million each, which commenced in March 2018, followed by a final installment of $746 million at maturity.

The Company was in compliance with its financial covenants under the Credit Facility as of June 30, 2020.

Senior Unsecured Notes

On April 15, 2019, the Company issued $375 million in principal amount of 7.625% Senior Notes due 2026 (“2026 Unsecured Notes”) in a private placement to institutional buyers at face value. The 2026 Unsecured Notes bear interest at 7.625%, payable semi-annually on April 15^th and October 15^th of each year.

The weighted-average effective interest rate on the Company’s outstanding borrowings under the Credit Facility and the 2026 Unsecured Notes was approximately 5.37% and 5.74% for the three and six months ended June 30, 2020, respectively.

Note 7 – Stockholders’ Equity and Stock Incentive Plans

Share Repurchase Program

On March 12, 2019, the Company’s Board of Directors authorized the repurchase of up to $25.0 million additional shares of common stock. Share repurchases may be made from time to time in open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements, including compliance with the Company’s finance agreements. There is no minimum number of shares that the Company is required to repurchase and the repurchase program

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may be suspended or discontinued at any time without prior notice. As of June 30, 2020, the Company had not repurchased any shares under the March 12, 2019 authorization.

Stock Options

The following table summarizes the Company’s stock option activity: 

Share-based compensation expense, net related to stock options was $0.5 million and $1.1 million for the three and six months ended June 30, 2020, respectively, and $0.9 million and $3.4 million for the three and six months ended June 30, 2019, respectively. The Company’s unrecognized share-based compensation expense related to stock options was $1.0 million as of June 30, 2020, which is expected to be recognized over a weighted-average period of 0.6 years. The unrecognized share-based compensation expense related to stock options was $3.6 million as of June 30, 2019, which was expected to be recognized over a weighted-average period of 1.4 years.

Restricted Stock Units

The following table summarizes the Company’s activity related to time-based restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”):

Additionally, 108,957 of the PSUs included in the outstanding balance at January 1, 2020 represent PSUs granted in March 2018 (the “2018 PSU Awards”). During the first quarter of 2020, the Company’s financial results for the applicable performance goals were certified, with 70.4% of the “target” number of PSUs for the 2018 PSU Awards “earned” based on the Company’s performance, subject to one additional year of time-based vesting. Accordingly, the total number of PSUs granted in the 2018 PSU Awards that are eligible to vest was reduced by 32,235 shares from 108,957 shares to 76,722 shares.

Share-based compensation expense, net related to RSUs was $1.1 million and $2.1 million for the three and six months ended June 30, 2020, respectively, and $1.0 million and $2.1 million for the three and six months ended June 30, 2019, respectively. Share-based compensation expense related to PSUs was $0.2 million and $0.7 million for the three and six months ended June 30, 2020, respectively, and $0.2 million and $0.6 million for the three and six months ended June 30, 2019, respectively.

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As of June 30, 2020, there was $9.8 million and $5.1 million of unamortized share-based compensation expense related to RSUs and PSUs, respectively, which is expected to be recognized over a weighted-average period of 2.3 years for both RSUs and PSUs. As of June 30, 2019, there was $7.4 million and $4.0 million of unamortized share-based compensation expense related to RSUs and PSUs, respectively, which was expected to be recognized over a weighted-average period of 2.3 years and 2.4 years for RSUs and PSUs, respectively.

As of June 30, 2020, a total of 1,529,029 shares of the Company’s common stock remained available for grants of awards under the Golden Entertainment, Inc. 2015 Incentive Award Plan, which includes the annual increase in the number of shares available for grant on January 1, 2020 of 1,066,403 shares.

Note 8 – Income Tax

The Company’s effective income tax rate was 0.3% and 0.2% for the three and six months ended June 30, 2020, respectively, and (8.5)% and (8.2)% for the three and six months ended June 30, 2019, respectively.

Income tax expense of $0.2 million and $0.3 million for the three and six months ended June 30, 2020, respectively, was primarily due to the change in valuation allowance against the Company’s deferred tax assets during the three and six months of 2020. Income tax benefit of $1.3 million and $2.0 million for the three and six months ended June 30, 2019, respectively, was primarily due to the change in valuation allowance against the Company’s deferred tax assets during the three and six months of 2019.

Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income, and the impact of tax planning strategies. The Company continues to evaluate its deferred tax asset valuation allowance on a quarterly basis.

As of June 30, 2020, the Company’s 2017 and 2018 federal tax returns were under audit by the IRS.

Note 9 – Financial Instruments and Fair Value Measurements

Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Thus, assets and liabilities categorized as Level 3 may be measured at fair value using inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.

The carrying values of the Company’s cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short duration of these financial instruments.

The following table summarizes the fair value measurement of the Company’s long-term debt:

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The estimated fair value of the Company’s Term Loan, Revolving Credit Facility and 2026 Unsecured Notes is based on a relative value analysis performed as of June 30, 2020 and December 31, 2019. The finance lease liabilities and notes payable are fixed-rate debt, are not traded and do not have observable market inputs, therefore, the fair value is estimated to be equal to the carrying value.

As of June 30, 2020, the Company had an interest rate cap agreement that was outstanding with a notional amount of $650 million, which expires on December 31, 2020. Using Level 2 inputs, the Company adjusts the carrying value of the interest rate cap agreement to estimated fair value quarterly based upon observable market-based inputs that reflect the present values of the difference between estimated future fixed rate payments and future variable receipts. The fair value of the Company’s interest rate cap agreement was immaterial as of June 30, 2020 and December 31, 2019. As the Company elected to not apply hedge accounting, the change in fair value of its interest rate cap agreement was recorded in the consolidated statement of operations.

Note 10 – Commitments and Contingencies

Participation and Revenue Share Agreements

The Company enters into slot placement contracts in the form of participation and revenue share agreements. 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 slots. Under revenue share agreements, the Company pays the business location a percentage of the gaming revenue generated from the Company’s slots placed at the location, rather than a fixed monthly rental fee. The aggregate contingent payments recognized by the Company as gaming expenses under revenue share and participation agreements were $14.0 million and $50.0 million for the three and six months ended June 30, 2020, respectively, including $0.1 million and $0.3 million, respectively, under revenue share and participation agreements with related parties, as described in “Note 12 — Related Party Transactions.” The aggregate contingent payments recognized by the Company as gaming expenses under revenue share and participation agreements were $39.4 million and $77.9 million for the three and six months ended June 30, 2019, respectively, including $0.3 million and $0.5 million, respectively, under the revenue share and participation agreements with related parties.

Legal Matters

From time to time, the Company is involved in a variety of lawsuits, claims, investigations and other legal proceedings arising in the ordinary course of business, including proceedings concerning labor and employment matters, personal injury claims, breach of contract claims, commercial disputes, business practices, intellectual property, tax and other matters for which the Company records reserves. Although lawsuits, claims, investigations and other legal proceedings are inherently uncertain and their results cannot be predicted with certainty, the Company believes that the resolution of its currently pending matters should not have a material adverse effect on its business, financial condition, results of operations or liquidity. Regardless of the outcome, legal proceedings can have an adverse impact on the Company because of defense costs, diversion of management resources and other factors. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect the Company’s business, financial condition, results of operations or liquidity in a particular period.

On August 31, 2018, prior guests of The Strat filed a purported class action complaint against the Company in the District Court, Clark County, Nevada, on behalf of similarly situated individuals and entities that paid the Clark County Combined Transient Lodging Tax (“Tax”) on the portion of a resort fee that constitutes charges for Internet access, during the period of February 6, 2014 through the date the alleged conduct ceases. The lawsuit alleged that the Tax was charged in violation of the federal Internet Tax Freedom Act, which imposed a national moratorium on the taxation of Internet access by states and their political subdivisions, and sought, on behalf of the plaintiff and the putative class, damages equal to the amount of the Tax collected on the Internet access component of the resort fee, injunctive relief, disgorgement, interest, fees and costs. All defendants to this matter, including Golden Entertainment, Inc., filed a joint motion to dismiss this matter for lack of merit. The District Court granted this joint motion to dismiss on February 21, 2019. The plaintiffs filed an appeal to the Supreme Court of Nevada on April 10, 2019. The Company, and other defendants, filed an appellate response brief on October 19, 2019. On July 29, 2020 the Supreme Court of the State of Nevada upheld the lower court’s 2019 dismissal of this case.

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On August 5, 2015 a prior employee filed a Charge of Discrimination with the Equal Employment Opportunity Commission (“EEOC”) and subsequently filed an Amended Charge of Discrimination on January 2016 alleging that the Company engaged in disability discrimination under the Americans with Disabilities Act of 1990, as amended. The EEOC has requested financial recovery as well as that the Company update certain policies and procedures. In late 2019 the EEOC issued a Letter of Determination and invited the Company to participate in a mediation on behalf of the plaintiff and similarly situated parties to work toward a resolution of this matter. The Company has agreed to mediation in this matter. No mediation date has yet been set.

While legal proceedings are inherently unpredictable and no assurance can be given as to the ultimate outcome of any of the above matters, based on management’s current understanding of the relevant facts and circumstances, the Company believes that these proceedings should not have a material adverse effect on its financial position, results of operations or cash flows.

Note 11 – Segment Information

The Company conducts its business through two reportable operating segments: Casinos and Distributed Gaming. The Company’s Casinos segment involves the ownership and operation of resort casino properties in Nevada and Maryland. The Company’s Distributed Gaming segment involves the installation, maintenance and operation of slots and amusement devices in non-casino locations such as restaurants, bars, taverns, convenience stores, liquor stores and grocery stores in Nevada and Montana, and the operation of branded taverns targeting local patrons located primarily in the greater Las Vegas, Nevada metropolitan area. The Corporate and Other segment includes the Company’s cash and cash equivalents, miscellaneous receivables and corporate overhead. Costs recorded in the Corporate and Other segment have not been allocated to the Company’s reportable operating segments because these costs are not easily allocable and to do so would not be practical.

The Company evaluates each segment’s profitability based upon such segment’s Adjusted EBITDA, which represents each segment’s earnings before interest and other non-operating income (expense), income taxes, depreciation and amortization, impairment of goodwill and intangible assets, acquisition and severance expenses, preopening and related expenses, asset disposal and other writedowns, share-based compensation expenses, and change in fair value of derivative, calculated before corporate overhead (which is not allocated to each segment).

The following tables set forth, for the periods indicated, certain operating data for the Company’s segments, and reconciles net income (loss) to Adjusted EBITDA: