NOTE

GOODWILL AND INTANGIBLES

Changes in the carrying amount of goodwill are as follows (in thousands):

	Gross Carrying Amount
	EGM		Table Products		Interactive(1)			Total
Balance at December 31, 2017	$	266,868	$	6,641	$	4,828		$	278,337
Foreign currency adjustments		11		—		(182	)		(171	)
Purchase accounting adjustment		200		—		—			200
Acquisition		—		—		3,725			3,725
Impairment		—		—		(4,828	)		(4,828	)
Balance at December 31, 2018	$	267,079	$	6,641	$	3,543		$	277,263
Foreign currency adjustments		769		—		(10	)		759
Acquisition		11,380		1,180		—			12,560
Impairment		—		—		(3,533	)		(3,533	)
Balance at December 31, 2019	$	279,228	$	7,821	$	-		$	287,049

(

)

Accumulated goodwill impairment charges for the Interactive segment as of

December

31,

2019

were

$8.4

million.

The Company performed a quantitative assessment, or "Step

analysis, as of

October 1, 2019

on the EGM and Table Products reporting units. Both reporting units had a significant amount of cushion between the fair value and carrying value. We estimated the fair value of both reporting units using the discounted cashflow method. The most significant factor in the assessment was the projected cashflows. Other factors affecting the assessment were the discount rates of

10%

for EGM and

14%

for Table Products and the long-term growth rate of

for both reporting units. In addition to the discounted cashflow method, we used the market approach that considered both comparable public companies and comparable industry transactions in which we used industry trading and transaction revenue and EBITDA multiples.

During the

second

quarter of

2019,

our RMG interactive reporting unit fell short of its expected operating results, driven by the delays launching new operators and extended regulatory timelines in new jurisdictions, which was considered to be a triggering event. Accordingly, we reduced the projections of the future operating results for this reporting unit, originally established when we acquired AGS iGaming in

2018.

As a result of this triggering event, we performed a quantitative impairment analysis of the associated goodwill and determined that the entire balance of

$3.5

million was impaired. In performing the quantitative goodwill impairment test for our RMG interactive reporting unit, we estimated the fair value of the reporting unit using an income approach that analyzed projected discounted cash flows. We used projections of revenues and operating costs with estimated growth rates during the forecast period, capital expenditures and cash flows that considered historical and estimated future results and general economic and market conditions, as well as the estimated impact of planned business and operational strategies. The estimates and assumptions used in the discounted cash flow analysis included a terminal year long-term growth rate of

3.0%

and an overall discount rate of

25%

based on our weighted average cost of capital for the Company and premiums for the small size of the reporting unit and forecast risk.

2018,

the Interactive Social reporting unit had a goodwill carrying value of

$4.8

million. The Company performed a quantitative, or “Step

1”

analysis in

2018,

in which we determined the entire balance of goodwill was impaired. In performing the Step

goodwill impairment test for our Interactive Social reporting unit, we estimated the fair value of the Interactive Social reporting unit using an income approach that analyzed projected discounted cash flows. We used projections of revenues and operating costs with estimated growth rates during the forecast period, capital expenditures and cash flows that considered historical and estimated future results and general economic and market conditions, as well as the estimated impact of planned business and operational strategies. In the

fourth

quarter of the year ended

December 31, 2018,

during the annual budgeting process the Company decided to change its strategy with regard to marketing and user acquisition activities that drive its

B2C

Social offerings. The strategic decision to significantly cut spending in this area and to focus completely on the

B2B

Social business, was the primary reason for a reduction in the projected discounted cash flows that were used in the impairment test. The estimates and assumptions used in the discounted cash flow analysis included a terminal year long-term growth rate of

3.0%

and an overall discount rate of

19%

based on our weighted average cost of capital for the Company and premiums for the small size of the reporting unit and forecast risk.

Intangible assets consist of the following (in thousands):

		December 31, 2019							December 31, 2018
	Useful Life (years)	Gross Value		Accumulated Amortization			Net Carrying Value		Gross Value		Accumulated Amortization			Net Carrying Value
Indefinite-lived trade names	Indefinite	$	12,126	$	—		$	12,126	$	12,126	$	—		$	12,126
Trade and brand names	5 - 7		14,870		(13,209	)		1,661		14,730		(10,681	)		4,049
Customer relationships	5 - 12		219,788		(120,384	)		99,404		188,772		(93,358	)		95,414
Contract rights under development and placement fees	1 - 7		48,180		(8,888	)		39,292		19,620		(14,367	)		5,253
Gaming software and technology platforms	1 - 7		162,391		(96,193	)		66,198		151,055		(82,371	)		68,684
Intellectual property	10 - 12		19,345		(7,575	)		11,770		17,205		(5,830	)		11,375
		$	476,700	$	(246,249	)		230,451	$	403,508	$	(206,607	)	$	196,898

Intangible assets are amortized over their respective estimated useful lives ranging from

one

twelve

years. Amortization expense related to intangible assets was

$46.4

million,

$45.1

million and

$44.4

million for the years ended

December

31,

2019,

2018

and

2017,

respectively.

Management reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. We recorded impairments related to internally developed gaming titles of

$0.5

million for the year ended

December

31,

2019.

For the year ended

December 31, 2018,

the Company recognized impairment charges related to internally developed gaming titles and assets associated with terminated development agreements of

$1.3

million.

2019,

and prior to the goodwill impairment assessment noted above, we completed a qualitative review of long-lived assets for all asset groups to determine if events or changes in circumstances indicated that the carrying amount of each asset group

may

not

be recoverable (i.e. if a “triggering event” existed). Based on this review, we tested the recoverability of the long-lived assets, other than goodwill and indefinite-lived intangible assets, in certain asset groups related to the RMG Interactive reporting unit where a triggering event existed at the lowest level at which identifiable cash flows existed, the reporting unit level. The recoverability test failed, meaning that the undiscounted cash flows were less than the carrying value of the related asset group and we therefore measured the amount of any impairment loss as the amount by which the carrying amount of the asset group exceeded its fair value using the projected reporting unit cash flows, a

25%

discount rate, and

long-term growth rate. We then allocated the indicated impairment loss to the long-lived assets of the group on a pro rata basis, except for certain assets whose carrying value was reduced only to their individually determined fair value. Specifically, from the pro rata allocation, we recorded a full impairment of RMG customer relationships, gaming licenses, and game content, which had a carrying value of

$0.6

million. We also reduced the value of the RMG technology platform by

$0.7

million to its fair value of

$0.4

million. The technology platform was valued using the royalty savings method (level

fair value measurement), which is a risk-adjusted discounted cash flow approach. The royalty savings method values an intangible asset by estimating the royalties saved through ownership of the asset. The royalty savings method requires identifying the future revenue that would be impacted by the technology platform (or royalty-free rights to the assets), multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. We used a discount rate of

25%.

The royalty rate used in such valuation was

and was based on a consideration of market rates for similar categories of assets.

The Company enters into development agreements and placement fee agreements with certain customers to secure floor space under lease agreements for its gaming machines. Amounts paid in connection with the development agreements are repaid to the Company in accordance with the terms of the agreement, whereas placements fees are

not

reimbursed. For development agreements in the form of a loan, interest income is recognized on the repayment of the notes based on the stated rate or, if

not

stated explicitly in the development agreement, on an imputed interest rate. If the stated interest rate is deemed to be other than a market rate or zero, a discount is recorded on the note receivable as a result of the difference between the stated and market rate and a corresponding intangible asset is recorded. The intangible asset is recognized in the financial statements as a contract right under development agreement and amortized as a reduction in revenue over the term of the agreement. Placement fees can be in the form of cash paid upfront or free lease periods and are accreted over the life of the contract and the expense is recorded as a reduction of revenue. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of

$6.4

million,

$4.6

million and

$4.7

million for the years ended

December

31,

2019,

2018

and

2017,

respectively.

March 2019,

we entered into a placement fee agreement with a customer for certain of its locations and capitalized approximately

$33.1

million additional placement fees, in addition to

$2.1

million of unamortized fees related to superseded contracts. The liability was recorded at present value and cash payments totaling

$40.1

million will be paid over a term of

months.

The estimated amortization expense of definite-lived intangible assets as well as the accretion of contract rights under development and placement fees, for each of the next

five

years and thereafter is as follows (in thousands):

For the year ended December 31,	Amortization Expense		Placement Fee Accretion
2020	$	41,191	$	8,451
2021		29,625		6,596
2022		26,769		6,277
2023		23,277		5,913
2024		21,972		5,389
Thereafter		36,199		6,666
Total	$	179,033	$	39,292