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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/07/23 PlayAGS, Inc. 10-Q 9/30/23 71:6.6M RDG Filings/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.63M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
4: EX-32 Certification -- §906 - SOA'02 HTML 22K
10: R1 Document And Entity Information HTML 75K
11: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 131K
12: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 42K
(Parentheticals)
13: R4 Condensed Consolidated Statements of Operations HTML 114K
and Comprehensive (Loss) Income (Unaudited)
14: R5 Condensed Consolidated Statements of Changes In HTML 71K
Stockholders' Equity (Unaudited)
15: R6 Condensed Consolidated Statements of Cash Flows HTML 138K
(Unaudited)
16: R7 Note 1 - Description of the Business and Summary HTML 114K
of Significant Accounting Policies
17: R8 Note 2 - Property and Equipment HTML 31K
18: R9 Note 3 - Goodwill and Intangibles HTML 71K
19: R10 Note 4 - Accrued Liabilities HTML 32K
20: R11 Note 5 - Long-term Debt HTML 38K
21: R12 Note 6 - Stockholders' Equity HTML 29K
22: R13 Note 7 - Write-downs and Other Charges HTML 25K
23: R14 Note 8 - Basic and Diluted Loss HTML 33K
24: R15 Note 9 - Benefit Plans HTML 28K
25: R16 Note 10 - Stock-based Compensation HTML 62K
26: R17 Note 11 - Income Taxes HTML 27K
27: R18 Note 12 - Commitments and Contingencies HTML 42K
28: R19 Note 13 - Operating Segments HTML 87K
29: R20 Note 14 - Acquisitions HTML 24K
30: R21 Insider Trading Arrangements HTML 29K
31: R22 Significant Accounting Policies (Policies) HTML 154K
32: R23 Note 1 - Description of the Business and Summary HTML 62K
of Significant Accounting Policies (Tables)
33: R24 Note 2 - Property and Equipment (Tables) HTML 29K
34: R25 Note 3 - Goodwill and Intangibles (Tables) HTML 71K
35: R26 Note 4 - Accrued Liabilities (Tables) HTML 31K
36: R27 Note 5 - Long-term Debt (Tables) HTML 34K
37: R28 Note 8 - Basic and Diluted Loss (Tables) HTML 30K
38: R29 Note 10 - Stock-based Compensation (Tables) HTML 56K
39: R30 Note 13 - Operating Segments (Tables) HTML 71K
40: R31 Note 1 - Description of the Business and Summary HTML 31K
of Significant Accounting Policies (Details
Textual)
41: R32 Note 1 - Description of the Business and Summary HTML 37K
of Significant Accounting Policies -
Disaggregation of Revenues (Details)
42: R33 Note 1 - Description of the Business and Summary HTML 28K
of Significant Accounting Policies - Property and
Equipment Useful Life (Details)
43: R34 Note 1 - Description of the Business and Summary HTML 28K
of Significant Accounting Policies - Estimated
Fair Value of Long-term Debt (Details)
44: R35 Note 2 - Property and Equipment (Details Textual) HTML 26K
45: R36 Note 2 - Property and Equipment - Property and HTML 30K
Equipment (Details)
46: R37 Note 3 - Goodwill and Intangibles (Details HTML 33K
Textual)
47: R38 Note 3 - Goodwill and Intangibles - Changes in HTML 32K
Goodwill (Details)
48: R39 Note 3 - Goodwill and Intangibles - Intangible HTML 56K
Assets (Details)
49: R40 Note 4 - Accrued Liabilities - Accrued Liabilities HTML 35K
(Details)
50: R41 Note 5 - Long-term Debt (Details Textual) HTML 53K
51: R42 Note 5 - Long-term Debt - Schedule of Long-term HTML 30K
Debt (Details)
52: R43 Note 5 - Long-term Debt - Schedule of Long-term HTML 30K
Debt (Details) (Parentheticals)
53: R44 Note 6 - Stockholders' Equity (Details Textual) HTML 38K
54: R45 Note 7 - Write-downs and Other Charges (Details HTML 21K
Textual)
55: R46 Note 8 - Basic and Diluted Loss (Details Textual) HTML 28K
56: R47 Note 8 - Basic and Diluted Income (Loss) Per Share HTML 48K
- Schedule of Earnings (Details)
57: R48 Note 9 - Benefit Plans (Details Textual) HTML 38K
58: R49 Note 10 - Stock-based Compensation (Details HTML 63K
Textual)
59: R50 Note 10 - Stock-based Compensation - Stock Option HTML 56K
Activity (Details)
60: R51 Note 10 - Stock-based Compensation - Restricted HTML 41K
Stock Activity (Details)
61: R52 Note 10 - Stock-based Compensation - Phantom Stock HTML 41K
Units (Details)
62: R53 Note 11 - Income Taxes (Details Textual) HTML 24K
63: R54 Note 12 - Commitments and Contingencies (Details HTML 33K
Textual)
64: R55 Note 13 - Operating Segments (Details Textual) HTML 21K
65: R56 Note 13 - Operating Segments - Financial HTML 59K
Information by Segment (Details)
66: R57 Note 14 - Acquisitions (Details Textual) HTML 31K
69: XML IDEA XML File -- Filing Summary XML 131K
67: XML XBRL Instance -- ags20230930_10q_htm XML 1.40M
68: EXCEL IDEA Workbook of Financial Report Info XLSX 111K
6: EX-101.CAL XBRL Calculations -- ags-20230930_cal XML 126K
7: EX-101.DEF XBRL Definitions -- ags-20230930_def XML 1.04M
8: EX-101.LAB XBRL Labels -- ags-20230930_lab XML 817K
9: EX-101.PRE XBRL Presentations -- ags-20230930_pre XML 1.09M
5: EX-101.SCH XBRL Schema -- ags-20230930 XSD 147K
70: JSON XBRL Instance as JSON Data -- MetaLinks 389± 619K
71: ZIP XBRL Zipped Folder -- 0001437749-23-030654-xbrl Zip 252K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
| (Mark One) |
|
| i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarter ended i September 30, 2023
or
| i ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to .
Commission file number i 001-38357
PLAYAGS, INC.
(Exact name of registrant as specified in its charter)
| i Nevada | i 46-3698600 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| (Address of principal executive offices) (Zip Code) |
| ( i 702) i 722-6700 |
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| i Common stock, $0.01 par value | i AGS | i New York Stock Exchange |
As of November 3, 2023, there were i 38,712,204 shares of the Registrant’s common stock, $0.01 par value per share, outstanding.
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. i 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). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
| Large accelerated filer ☐ | i Accelerated filer ☒ | Non-accelerated filer ☐ | Smaller reporting company i ☐ | Emerging growth company i ☒ |
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. Yes i ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No ☒
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CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2023 AND DECEMBER 31, 2022 |
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AT SEPTEMBER 30, 2023 AND 2022 |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
(unaudited)
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | i 43,662 | $ | i 37,891 | ||||
| Restricted cash | i 230 | i 20 | ||||||
| Accounts receivable, net of allowance for credit losses of $1,359 and $1,974, respectively | i 67,626 | i 59,909 | ||||||
| Inventories | i 36,893 | i 35,394 | ||||||
| Prepaid expenses | i 5,909 | i 4,020 | ||||||
| Deposits and other | i 5,211 | i 8,930 | ||||||
| Total current assets | i 159,531 | i 146,164 | ||||||
| Property and equipment, net | i 80,377 | i 82,361 | ||||||
| Goodwill | i 289,879 | i 287,680 | ||||||
| Intangible assets, net | i 129,236 | i 142,109 | ||||||
| Deferred tax asset | i 8,551 | i 7,893 | ||||||
| Operating lease assets, net | i 10,353 | i 11,198 | ||||||
| Other assets | i 5,821 | i 7,346 | ||||||
| Total assets | $ | i 683,748 | $ | i 684,751 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | i 9,455 | $ | i 15,244 | ||||
| Accrued liabilities | i 36,700 | i 37,262 | ||||||
| Current maturities of long-term debt | i 6,267 | i 6,060 | ||||||
| Total current liabilities | i 52,422 | i 58,566 | ||||||
| Long-term debt | i 548,479 | i 550,081 | ||||||
| Deferred tax liability, non-current | i 2,991 | i 2,048 | ||||||
| Operating lease liabilities, long-term | i 9,227 | i 10,413 | ||||||
| Other long-term liabilities | i 7,885 | i 14,282 | ||||||
| Total liabilities | i 621,004 | i 635,390 | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock at $0.01 par value; 50,000,000 shares authorized, no shares issued and outstanding | i — | i — | ||||||
| Common stock at $0.01 par value; 450,000,000 shares authorized at September 30, 2023 and at December 31, 2022; and 38,702,415 and 37,789,131 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | i 386 | i 378 | ||||||
| Additional paid-in capital | i 415,014 | i 406,436 | ||||||
| Accumulated deficit | ( i 353,111 | ) | ( i 353,125 | ) | ||||
| Accumulated other comprehensive income (loss) | i 455 | ( i 4,328 | ) | |||||
| Total stockholders’ equity | i 62,744 | i 49,361 | ||||||
| Total liabilities and stockholders’ equity | $ | i 683,748 | $ | i 684,751 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(amounts in thousands, except per share data)
(unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2022 |
2023 |
2022 |
||||||||||||||
| Revenues |
||||||||||||||||
| Gaming operations |
$ | i 61,026 | $ | i 56,592 | $ | i 180,641 | $ | i 166,396 | ||||||||
| Equipment sales |
i 28,352 | i 21,667 | i 81,744 | i 61,304 | ||||||||||||
| Total revenues |
i 89,378 | i 78,259 | i 262,385 | i 227,700 | ||||||||||||
| Operating expenses |
||||||||||||||||
| Cost of gaming operations(1) |
i 13,246 | i 10,375 | i 37,030 | i 31,512 | ||||||||||||
| Cost of equipment sales(1) |
i 13,540 | i 11,857 | i 38,854 | i 32,030 | ||||||||||||
| Selling, general and administrative |
i 19,453 | i 16,955 | i 56,379 | i 50,881 | ||||||||||||
| Research and development |
i 9,731 | i 9,702 | i 31,476 | i 29,952 | ||||||||||||
| Write-downs and other (gains) charges |
( i 11 | ) | i 1,389 | i 624 | i 1,824 | |||||||||||
| Depreciation and amortization |
i 18,896 | i 18,950 | i 56,677 | i 56,979 | ||||||||||||
| Total operating expenses |
i 74,855 | i 69,228 | i 221,040 | i 203,178 | ||||||||||||
| Income from operations |
i 14,523 | i 9,031 | i 41,345 | i 24,522 | ||||||||||||
| Other expense (income) |
||||||||||||||||
| Interest expense |
i 14,588 | i 10,291 | i 42,362 | i 27,851 | ||||||||||||
| Interest income |
( i 591 | ) | ( i 305 | ) | ( i 1,267 | ) | ( i 728 | ) | ||||||||
| Loss on extinguishment and modification of debt |
i - | i - | i - | i 8,549 | ||||||||||||
| Other (expense) income |
( i 259 | ) | i 445 | ( i 347 | ) | i 714 | ||||||||||
| Income (loss) before income taxes |
i 785 | ( i 1,400 | ) | i 597 | ( i 11,864 | ) | ||||||||||
| Income tax (expense) benefit |
( i 941 | ) | i 1,876 | ( i 236 | ) | i 1,288 | ||||||||||
| Net (loss) income |
( i 156 | ) | i 476 | i 361 | ( i 10,576 | ) | ||||||||||
| Foreign currency translation adjustment |
( i 1,355 | ) | i 23 | i 4,783 | i 466 | |||||||||||
| Total comprehensive (loss) income |
$ | ( i 1,511 | ) | $ | i 499 | $ | i 5,144 | $ | ( i 10,110 | ) | ||||||
| Basic and diluted (loss) income per common share: |
||||||||||||||||
| Basic |
$ | ( i 0.00 | ) | $ | i 0.01 | $ | i 0.01 | $ | ( i 0.28 | ) | ||||||
| Diluted |
$ | ( i 0.00 | ) | $ | i 0.01 | $ | i 0.01 | $ | ( i 0.28 | ) | ||||||
| Weighted average common shares outstanding: |
||||||||||||||||
| Basic |
i 38,162 | i 37,244 | i 37,965 | i 37,116 | ||||||||||||
| Diluted |
i 38,162 | i 37,244 | i 37,972 | i 37,116 | ||||||||||||
(1) exclusive of depreciation and amortization
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands)
(unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2022 |
2023 |
2022 |
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| Common stock |
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| Balance, beginning of period |
$ | i 379 | $ | i 371 | $ | i 378 | $ | i 369 | ||||||||
| Vesting of restricted stock |
i 7 | i 6 | i 8 | i 8 | ||||||||||||
| Balance of common stock, end of period |
i 386 | i 377 | i 386 | i 377 | ||||||||||||
| Additional paid-in capital |
||||||||||||||||
| Balance, beginning of period |
i 411,925 | i 397,785 | i 406,436 | i 392,161 | ||||||||||||
| Stock-based compensation expense |
i 3,096 | i 4,946 | i 8,586 | i 10,572 | ||||||||||||
| Modification of liability awards to equity |
i - | i 2,391 | i - | i 2,391 | ||||||||||||
| Vesting of restricted stock |
( i 7 | ) | ( i 6 | ) | ( i 8 | ) | ( i 8 | ) | ||||||||
| Balance of additional paid-in capital, end of period |
i 415,014 | i 405,116 | i 415,014 | i 405,116 | ||||||||||||
| Accumulated deficit |
||||||||||||||||
| Balance, beginning of period |
( i 352,635 | ) | ( i 355,951 | ) | ( i 353,125 | ) | ( i 344,889 | ) | ||||||||
| Net (loss) income |
( i 156 | ) | i 476 | i 361 | ( i 10,576 | ) | ||||||||||
| Restricted stock vesting and withholding |
( i 320 | ) | ( i 191 | ) | ( i 347 | ) | ( i 201 | ) | ||||||||
| Balance of accumulated deficit, end of period |
( i 353,111 | ) | ( i 355,666 | ) | ( i 353,111 | ) | ( i 355,666 | ) | ||||||||
| Accumulated other comprehensive income (loss) |
||||||||||||||||
| Balance, beginning of period |
i 1,810 | ( i 5,627 | ) | ( i 4,328 | ) | ( i 6,070 | ) | |||||||||
| Foreign currency translation adjustment |
( i 1,355 | ) | i 23 | i 4,783 | i 466 | |||||||||||
| Balance of accumulated other comprehensive income (loss), end of period |
i 455 | ( i 5,604 | ) | i 455 | ( i 5,604 | ) | ||||||||||
| Total stockholders' equity |
$ | i 62,744 | $ | i 44,223 | $ | i 62,744 | $ | i 44,223 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended September 30, |
||||||||
| 2022 |
||||||||
| Cash flows from operating activities |
||||||||
| Net income (loss) |
$ | i 361 | $ | ( i 10,576 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
i 56,677 | i 56,979 | ||||||
| Accretion of contract rights under development agreements and placement fees |
i 4,697 | i 4,790 | ||||||
| Amortization of deferred loan costs and discount |
i 1,918 | i 2,167 | ||||||
| Write-off of deferred loan costs and discount |
i - | i 1,586 | ||||||
| Cash paid for debt prepayment penalties to prior debt holders |
i - | i 848 | ||||||
| Stock-based compensation expense |
i 8,586 | i 10,572 | ||||||
| Provision for bad debts |
i 558 | i 402 | ||||||
| Loss on disposition of long-lived assets |
i 385 | i 337 | ||||||
| Impairment of assets |
i 239 | i 21 | ||||||
| Fair value adjustment of contingent consideration |
i - | i 1,466 | ||||||
| Deferred income tax |
i 1,147 | i 936 | ||||||
| Changes in assets and liabilities that relate to operations: |
||||||||
| Accounts receivable |
( i 7,550 | ) | ( i 8,868 | ) | ||||
| Inventories |
i 1,827 | ( i 6,856 | ) | |||||
| Prepaid expenses |
( i 1,877 | ) | ( i 2,259 | ) | ||||
| Deposits and other |
i 4,066 | ( i 1,266 | ) | |||||
| Other assets, non-current |
( i 283 | ) | ( i 134 | ) | ||||
| Accounts payable and accrued liabilities |
( i 10,996 | ) | i 2,429 | |||||
| Net cash provided by operating activities |
i 59,755 | i 52,574 | ||||||
| Cash flows from investing activities |
||||||||
| Business acquisitions, net of cash acquired |
i - | ( i 4,750 | ) | |||||
| Proceeds from payments on customer notes receivable |
i 3,081 | i 137 | ||||||
| Purchase of intangibles |
( i 183 | ) | i - | |||||
| Software development and other expenditures |
( i 17,855 | ) | ( i 15,439 | ) | ||||
| Proceeds from disposition of assets |
i 11 | i 15 | ||||||
| Purchases of property and equipment |
( i 28,458 | ) | ( i 34,484 | ) | ||||
| Net cash used in investing activities |
( i 43,404 | ) | ( i 54,521 | ) | ||||
| Cash flows from financing activities |
||||||||
| Repayment of prior first lien credit facilities |
i - | ( i 521,215 | ) | |||||
| Repayment of first lien credit facilities |
( i 4,313 | ) | ( i 2,876 | ) | ||||
| Repayment of incremental term loans |
i - | ( i 93,575 | ) | |||||
| Payment of financed placement fee obligations |
( i 4,316 | ) | ( i 3,917 | ) | ||||
| Proceeds from term loans |
i - | i 569,250 | ||||||
| Payment of deferred loan costs |
i - | ( i 4,838 | ) | |||||
| Payment of debt prepayment penalties to prior debt holders |
i - | ( i 848 | ) | |||||
| Payments of previous acquisition obligation |
( i 301 | ) | ( i 445 | ) | ||||
| Payments on finance leases and other obligations |
( i 1,141 | ) | ( i 920 | ) | ||||
| Repurchase of stock |
( i 347 | ) | ( i 201 | ) | ||||
| Net cash used in financing activities |
( i 10,418 | ) | ( i 59,585 | ) | ||||
| Effect of exchange rates on cash and cash equivalents |
i 48 | i 2 | ||||||
| Net decrease in cash, cash equivalents and restricted cash |
i 5,981 | ( i 61,530 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of period |
i 37,911 | i 94,997 | ||||||
| Cash, cash equivalents and restricted cash, end of period |
$ | i 43,892 | $ | i 33,467 | ||||
| Supplemental cash flow information |
||||||||
| Non-cash investing and financing activities: |
||||||||
| Leased assets obtained in exchange for new operating lease liabilities |
$ | i 882 | $ | i 956 | ||||
| Leased assets obtained in exchange for new finance lease liabilities |
$ | i 1,702 | $ | i 354 | ||||
| Property and equipment obtained in exchange for new other long-term liability |
$ | i 1,153 | $ | i - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
PlayAGS, Inc. (the "Company," "PlayAGS," "we," "us," or "our") is a leading designer and supplier of gaming products and services for the gaming industry. We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in three distinct segments: Electronic Gaming Machines (“EGM”), which includes server-based systems and back-office systems that are used by Class II Native American and Mexico gaming jurisdictions and Class III Native American, commercial and charitable jurisdictions; Table Products (“Table Products”), which includes live felt table games, side-bets and progressives as well as card shufflers including our newly introduced card shuffler, “Pax S”; and Interactive Games (“Interactive”), which provides game content and access to our remote gaming server to real money gaming ("RMG") online casino operators as well as social casino games available for desktop and mobile devices. Each segment’s activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.
Electronic Gaming Machines
Our EGM segment offers a library of proprietary video slot titles developed for the global marketplace, and EGM cabinets which include our premium lease-only cabinets of Orion Starwall, Orion Curve Premium and Big Red ("Colossal Diamonds") as well as cabinets available for sale or lease including the newly released Spectra UR43, along with Orion Portrait, Orion Slant, Orion Curve, Orion Upright, and ICON cabinets. In addition to providing complete EGM units, we offer conversion kits that allow existing game titles to be converted to other game titles offered within that operating platform.
Table Products
Our Table Products include both internally developed and acquired proprietary table products, side-bets, progressives, and table technology related to blackjack, poker, baccarat, craps and roulette. We have acquired a number of popular proprietary brands, including In Bet Gaming (“In Bet”), Buster Blackjack, Double Draw Poker and Criss Cross Poker that are based on traditional well-known public domain games such as blackjack and poker; however, these proprietary games provide intriguing betting options that offer more excitement and greater volatility to the player, ultimately enhancing our casino customers’ profitability. In addition, we offer a single deck card shuffler for poker tables, Dex S, as well as our new second shuffler, the Pax S single-deck shuffler.
Interactive
We specialize in providing a Business-to-Business ("B2B") game aggregation platform catering to the rapidly growing online real-money gaming ("RMG") sector. Our remote gaming server empowers us to deliver an extensive library of games developed by our internal game development studios. Our catalog encompasses various game types, including slots, table games, and progressive technology. Our RMG solutions resonate with a diverse and widespread player base, positioning us as a trusted partner for operators seeking to thrive in the competitive global gaming landscape.
AGS also offers Business-to-Consumer (“B2C”) free-to-play social casino apps that players across the globe can enjoy anytime online or on their mobile devices. Our most popular app, Lucky Play Casino, offers mobile players all the thrills of Vegas casinos. Players can choose from dozens of AGS player-favorite slot games and other casino classics like video poker, blackjack, and bingo. Our apps also feature in-app tournaments, rumbles, VIP bonuses, and unique interactive challenges.
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Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures required by generally accepted accounting principles (“GAAP”) are omitted or condensed in these condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) that are necessary for a fair statement of the Company's financial position, results of operations and cash flows for the interim periods have been made. The interim results reflected in these condensed consolidated financial statements are not necessarily indicative of results to be expected for the full fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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Principles of Consolidation
The accompanying condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make decisions based upon estimates, assumptions, and factors considered relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of the estimates and assumptions. Accordingly, actual results could differ materially from those anticipated.
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Revenue Recognition
Leasing of equipment in both our EGM and Table Products segments is accounted for under lease accounting guidance in ASC 842, "Leases" (ASC 842) and is recorded in gaming operations revenue. Our remaining revenue streams are accounted for under ASC 606 "Revenue from contracts with customers" (ASC 606) including equipment sales in our EGM and, to a lesser extent, in our Table Products and Interactive segments. Revenue earned in our Interactive segment is recorded in gaming operations revenue.
The following table disaggregates our revenues by type within each of our segments (amounts in thousands):
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| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2023 | 2022 | ||||||||||||||
| EGM | ||||||||||||||||
| Gaming operations | $ | i 54,026 | $ | i 50,233 | $ | i 160,789 | $ | i 148,067 | ||||||||
| Equipment sales | i 27,836 | i 21,387 | i 80,312 | i 60,926 | ||||||||||||
| Total | $ | i 81,862 | $ | i 71,620 | $ | i 241,101 | $ | i 208,993 | ||||||||
| Table Products | ||||||||||||||||
| Gaming operations | $ | i 3,871 | $ | i 3,756 | $ | i 11,445 | $ | i 10,652 | ||||||||
| Equipment sales | i 516 | i 280 | i 1,432 | i 378 | ||||||||||||
| Total | $ | i 4,387 | $ | i 4,036 | $ | i 12,877 | $ | i 11,030 | ||||||||
| Interactive | ||||||||||||||||
| Gaming Operations | $ | i 3,129 | $ | i 2,603 | $ | i 8,407 | $ | i 7,677 | ||||||||
| Total Revenue | $ | i 89,378 | $ | i 78,259 | $ | i 262,385 | $ | i 227,700 | ||||||||
Gaming Operations
Gaming operations revenue is earned by providing customers with gaming machines, gaming machine content licenses, table products, back-office equipment and linked progressive systems, which are collectively referred to as gaming equipment, under participation arrangements. The participation arrangements convey the right to use the equipment (i.e., gaming machines and related integral software) for a stated period of time, which typically ranges from one to three years upon which the contract continues on a month-to-month basis thereafter. In some instances, the Company will enter into arrangements for longer periods of time; however, many of these arrangements include the ability of the customer to cancel the contract and return the games to the Company, a provision which renders the contracts effectively month-to-month contracts. The Company will also enter into lease contracts with a revenue sharing arrangement whereby the lease payments due from the customer are variable. Our participation arrangements are accounted for as operating leases primarily due to these factors. In some instances, we will offer a free trial period during which no revenue is recognized. If during or at the conclusion of the trial period the customer chooses to enter into a lease for the gaming equipment, we commence revenue recognition according to the terms of the agreement.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Under participation arrangements, the Company retains ownership of the gaming equipment installed at the customer facilities and receives either revenue based on a percentage of the win per day generated by the gaming equipment or a fixed daily fee. Thus, in our consolidated financial statements the Company records revenue monthly related to these arrangements and the gaming equipment is recorded in property and equipment, net on our condensed consolidated balance sheet and depreciated over the expected life of the gaming equipment.
The majority of the Company’s leases require the Company to provide maintenance throughout the entire term of the lease. In some cases, a performance guarantee exists that, if not met, provides the customer with the right to return the gaming machines to the Company. This performance guarantee is considered a cancellation clause, a provision which renders the contracts effectively month-to-month contracts. Accordingly, the Company accounts for these contracts in a similar manner with its other operating leases as described above.
Gaming operations revenue is also earned from the licensing and maintenance of gaming equipment content and licensing of table product content. It is earned and recognized primarily on a daily or monthly fixed rate. Our B2C social casino products earn revenue from the sale of virtual coins or chips, which is recorded when the purchased coins or chips are used by the customer. B2C social casino revenue is presented gross of the platform fees. B2B social casino products earn revenue primarily based on a percentage of the monthly revenue generated by the white label casino apps that we build and operate for our customers. RMG revenue is earned primarily based on a percentage of the revenue produced by the games on our platform as well as monthly platform fees and initial integration fees. RMG revenue is presented net of payments to game and content suppliers.
Equipment Sales
Revenues from contracts with customers are recognized and recorded when the following criteria are met:
| • | We have a contract that has been approved by both the customer and the Company. Our contracts specify the products being sold and payment terms and are recognized when it is probable that we will collect substantially all of the contracted amount; and | |
| • | Control has been transferred and services have been rendered in accordance with the contract terms. |
Equipment sales are generated from the sale of gaming machines, table products and licensing rights to the integral game content software that is installed in the related equipment, parts, and other ancillary equipment. Also included within the deliverables are delivery, installation and training, all of which occur within a few days of arriving at the customer location. Equipment sales do not include maintenance beyond a standard warranty period. The recognition of revenue from the sale of gaming devices occurs as the customer obtains control of the product and all other revenue recognition criteria have been satisfied. Our contracts include a fixed transaction price. Amounts are due from customers within 30 to 90 days of the invoice date and to a lesser extent we offer extended payment terms of 12 to 24 months with payments due monthly during the extended payment period.
The Company enters into revenue arrangements that may consist of multiple performance obligations, which are typically multiple distinct products that may be shipped to the customer at different times. For example, sales arrangements may include the sale of gaming machines and table products to be delivered upon the consummation of the contract and additional game content conversion kits that will be delivered at a later date when requested by the customer to replace the game content on the customer’s existing gaming machines. Products are identified as separate performance obligations if they are distinct, which occurs if the customer can benefit from the product on its own and is separately identifiable from other promises in the contract.
Revenue is allocated to the separate performance obligations based on relative standalone selling prices determined at contract inception. Standalone selling prices are primarily determined by prices that we charge for the products when they are sold separately. When a product is not sold separately, we determine the standalone selling price with reference to our standard pricing policies and practices. We elected to exclude from the measurement of the transaction price, sales taxes and all other items of a similar nature, and also elected to account for shipping and handling activities as a fulfillment of our promise to transfer the goods. Accordingly, shipping and handling costs are included in cost of sales.
Revenue allocated to any undelivered performance obligations is recorded as a contract liability. The balance of our contract liabilities was not material as of September 30, 2023 and December 31, 2022.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
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Cash and Cash Equivalents
Cash and cash equivalents consist primarily of deposits held at major banks and other marketable securities with original maturities of 90 days or less.
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Restricted Cash
Restricted cash amounts represent funds held in escrow as collateral for the Company’s surety bonds for various gaming authorities.
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Receivables, Allowance for Credit Losses
Management estimates the allowance for expected credit losses balance using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current environmental economic conditions and reasonable and supportable forecast. The allowance for expected credit losses on financial instruments is measured on a collective (pool) basis when similar risk characteristics exist. The financial instruments that do not share risk characteristics, such as receivables related to development agreements, are evaluated on an individual basis. Expected credit losses are estimated over the contractual term of the related financial instruments, adjusted for expected prepayments when appropriate, based on a historical model that includes periodic write-offs, recoveries, and adjustments to the reserve. Historically, the identified portfolio segments have shared low collectability risk with immaterial write-off amounts. The Company made an accounting policy election not to present the accrued interest receivable balance on a separate statement of financial position line item. Accrued interest receivable is reported within the respective receivables line items on the consolidated balance sheet.
For the period ended September 30, 2023, there was no material activity in allowance for credit losses.
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Inventories
Inventories consist primarily of parts and supplies that are used to repair and maintain machinery and equipment as well as EGMs in production and finished goods held for sale. Inventories are stated at net realizable value. Cost of inventories is determined using the first-in, first-out (“FIFO”) method for all components of inventory. The Company regularly reviews inventory quantities and updates estimates for the net realizable value of inventories. This process includes examining the carrying values of parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose). Some of the factors involved in this analysis include the overall levels of the inventories, the current and projected sales levels for such products, the projected markets for such products and the costs required to sell the products, including refurbishment costs. Changes in the assumptions or estimates could materially affect the inventory carrying value. As of September 30, 2023 and December 31, 2022, the value of raw material inventory was $ i 29.4 million and $ i 31.0 million, respectively. As of September 30, 2023 and December 31, 2022, the value of finished goods inventory was $ i 7.5 million and $ i 4.4 million, respectively. There was i no work in process material as of September 30, 2023 and December 31, 2022.
/
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Property and Equipment
The cost of gaming equipment, consisting of fixed-base player terminals, file servers and other support equipment as well as other property and equipment, is depreciated over their estimated useful lives, using the straight-line method for financial reporting. The Company capitalizes costs incurred for the refurbishment of used gaming equipment that is typically incurred to refurbish a machine in order to return it to its customer location. The refurbishments extend the life of the gaming equipment beyond the original useful life. Repairs and maintenance costs are expensed as incurred. The Company routinely evaluates the estimated lives used to depreciate assets. The estimated useful lives are as follows:
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| Gaming equipment (in years) | i 1 to i 5 | |||
| Other property and equipment (in years) | i 3 to i 5 |
Financed leased cars and leasehold improvements are amortized/depreciated over the life of the contract.
The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company groups long-lived assets for impairment analysis at the lowest level for which identifiable cash flows can be measured independently of the cash flows of other assets and liabilities. This is typically at the individual gaming machine level or at the cabinet product line level. Impairment testing is performed and losses are estimated when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount.
When the estimated undiscounted cash flows are not sufficient to recover the asset’s carrying amount, an impairment loss is measured to the extent the fair value of the asset is less than its carrying amount.
The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to future cash flows expected to be generated by the asset. The Company’s policy is to impair, when necessary, excess or obsolete gaming machines on hand that are not expected to be used. Impairment is based upon several factors, including estimated forecast of gaming machine demand for placement into casinos. While the Company believes that the estimates and assumptions used in evaluating the carrying amount of these assets are reasonable, different assumptions could affect either the carrying amount or the estimated useful lives of the assets, which could have a significant impact on the results of operations and financial position.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
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Intangible Assets
The Company reviews its identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized for identifiable intangibles, other than goodwill, when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount.
When the estimated undiscounted cash flows are not sufficient to recover the intangible asset’s carrying amount, an impairment loss is measured to the extent the fair value of the asset is less than its carrying amount.
Certain trade names have an indefinite useful life and the Company tests these trade names for possible impairment at least annually, on October 1, or whenever events or changes in circumstances indicate that the carrying value may be impaired. We perform a qualitative assessment to determine if it is more likely than not that the fair value of the asset is less than its carrying amount. If we believe, as a result of our qualitative assessment, that it is more likely than not that the fair value of the asset is less than its carrying amount, the quantitative impairment test is required.
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Costs of Capitalized Computer Software
Internally developed gaming software represents the Company’s internal costs to develop gaming titles to utilize on the Company’s gaming machines. Internally developed gaming software is stated at cost and amortized over the estimated useful lives of the title or group of titles, if applicable, using the straight-line method. Software development costs are capitalized once technological feasibility has been established and are amortized when the software is placed into service. The computer software we develop reaches technological feasibility when a working model of the computer software is available. Any subsequent software maintenance costs, such as bug fixes and subsequent testing, are expensed as incurred. Discontinued software development costs are expensed when the determination to discontinue is made.
On a quarterly basis, or more frequently if circumstances warrant, the Company compares the net book value of its internally developed computer software to the net realizable value on a title or group of title basis. The net realizable value is determined based upon certain assumptions, including the expected future revenues and net cash flows of the gaming titles or group of gaming titles utilizing that software, if applicable.
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Goodwill
The excess of the purchase price of an acquired business over the estimated fair value of the assets acquired and the liabilities assumed is recorded as goodwill. The Company tests for possible impairment of goodwill at least annually, on October 1, or when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the reporting unit’s fair value of goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as the general economic environment, industry and market conditions, changes in key assumptions used since the most recently performed valuation and overall financial performance of the reporting units. If the Company determines that it is more likely than not that a reporting unit’s fair value is less than its carrying value, the Company performs a quantitative goodwill impairment analysis, and depending upon the results of that measurement, the recorded goodwill may be written down and charged to income from operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit.
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Acquisition Accounting
The Company applies the provisions of ASC 805, “Business Combinations” (ASC 805), in accounting for business acquisitions. It requires us to recognize separately from goodwill the fair value of assets acquired and liabilities assumed on the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Significant estimates and assumptions are required to value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable. These estimates are inherently uncertain and subject to refinement and typically include the calculation of an appropriate discount rate and projection of the cash flows associated with each acquired asset. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, “Fair Value Measurements” (ASC 820) to its financial assets and liabilities. Fair value is defined as a market-based measurement intended to estimate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows:
| • | Level 1 - quoted prices in an active market for identical assets or liabilities; | |
| • | Level 2 - quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for similar assets or liabilities, inputs derived principally from or corroborated by observable market data by correlation or other means; and | |
| • | Level 3 - valuation methodology with unobservable inputs that are significant to the fair value measurement. |
The carrying values of the Company’s cash and cash equivalents, restricted cash, receivables and accounts payable approximate fair value because of the short-term maturities of these instruments. The fair value of our long-term debt is based on the quoted market prices for similar issues (Level 2 inputs). The following table presents the estimated fair value of our long-term debt as of September 30, 2023 and December 31, 2022 (in thousands):
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| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
| Long-term Debt | $ | i 568,320 | $ | i 565,998 | $ | i 571,375 | $ | i 539,987 | ||||||||
/
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Accounting for Income Taxes
We conduct business globally and are subject to income taxes in U.S. federal, state, local, and foreign jurisdictions. Determination of the appropriate amount and classification of income taxes depends on several factors, including estimates of the timing and probability of realization of deferred income taxes, reserves for uncertain income tax positions and income tax payment timing.
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Taxes on income of our foreign subsidiaries are provided at the tax rates applicable to the tax jurisdictions in which they are located. Future tax benefits are recognized to the extent that realization of those benefits is considered more likely than not and a valuation allowance is established for deferred tax assets which do not meet this threshold.
The recoverability of certain deferred tax assets is based in part on estimates of future income and the timing of temporary differences, and the failure to fully realize such deferred tax assets could result in a higher tax provision in future periods.
We apply the accounting guidance to our uncertain tax positions and under the guidance, we may recognize a tax benefit from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized in the consolidated financial statements is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement.
We are required to make significant judgments when evaluating our uncertain tax positions and the related tax benefits. We believe our assumptions are reasonable; however, there is no guarantee that the final outcome of the related matters will not differ from the amounts reflected in our income tax provisions and accruals. We adjust our liability for uncertain tax positions based on changes in facts and circumstances such as the closing of a tax audit or changes in estimates. Our income tax provision may be impacted to the extent that the final outcome of these tax positions is different than the amounts recorded.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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Contingencies
The Company assesses its exposures to loss contingencies including claims and legal proceedings and accrues a liability if a potential loss is considered probable and the amount can be estimated. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, if the actual loss from a contingency differs from management’s estimate, there could be a material impact on the results of operations or financial position. Operating expenses, including legal fees, associated with contingencies are expensed when incurred.
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Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars at the period end rate of exchange for asset and liability accounts and the weighted average rate of exchange for income statement accounts. The effects of these translations are recorded as a component of other accumulated comprehensive income (loss) in stockholders’ equity.
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Research and Development
Research and development costs related primarily to software product development costs and is expensed as incurred until technological feasibility has been established. Employee related costs associated with product development are included in research and development.
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Recently Issued Accounting Pronouncements
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326). ASU No. 2022-02 eliminates the accounting guidance for troubled debt restructurings by creditors in ASC 310-40 and requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years with earlier adoption permitted. We adopted the amendment in the first quarter of 2023, which did not have a significant effect on our condensed consolidated financial statements.
We have not adopted any other new accounting pronouncements in the current period and there has not been any other recently issued accounting guidance that will have a significant effect on our consolidated financial statements.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
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| Gaming equipment | $ | i 255,076 | $ | i 232,244 | ||||
| Other property and equipment | i 25,412 | i 22,922 | ||||||
| Less: Accumulated depreciation | ( i 200,111 | ) | ( i 172,805 | ) | ||||
| Property and equipment, net | $ | i 80,377 | $ | i 82,361 | ||||
Gaming equipment and other property and equipment are depreciated over the respective useful lives of the assets ranging from one to five years. Depreciation expense was $ i 10.0 million and $ i 10.2 million for the three months ended September 30, 2023 and 2022, respectively. Depreciation expense was $ i 30.5 million and $ i 29.5 million for the nine months ended September 30, 2023 and 2022, respectively.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 3. GOODWILL AND INTANGIBLES
Changes in the carrying amount of goodwill are as follows (in thousands):
i| Gross Carrying Amount | ||||||||||||||||
| EGM | Table Products | Interactive(1) | Total | |||||||||||||
| $ | i 278,629 | $ | i 9,051 | $ | i - | $ | i 287,680 | |||||||||
| Foreign currency adjustments | i 2,199 | i - | i - | i 2,199 | ||||||||||||
| Balance at September 30, 2023 | $ | i 280,828 | $ | i 9,051 | $ | i - | $ | i 289,879 | ||||||||
(1) As of September 30, 2023, accumulated goodwill impairment charges for the Interactive segment taken prior to the fiscal year 2023 were $ i 8.4 million.
Intangible assets consist of the following (in thousands):
i
| Useful Life | Gross | Accumulated | Net Carrying | Gross | Accumulated | Net Carrying | ||||||||||||||||||||||
| (years) | Value | Amortization | Value | Value | Amortization | Value | ||||||||||||||||||||||
| Indefinite lived trade names | Indefinite | $ | i 12,126 | $ | - | $ | i 12,126 | $ | i 12,126 | $ | - | $ | i 12,126 | |||||||||||||||
| Trade and brand names | i 5 - i 7 | i 14,990 | ( i 14,765 | ) | i 225 | i 14,990 | ( i 14,722 | ) | i 268 | |||||||||||||||||||
| Customer relationships | i 5 - i 12 | i 222,123 | ( i 179,880 | ) | i 42,243 | i 219,146 | ( i 167,629 | ) | i 51,517 | |||||||||||||||||||
| Contract rights under development and placement fees | i 1 - i 7 | i 42,762 | ( i 28,542 | ) | i 14,220 | i 42,395 | ( i 23,844 | ) | i 18,551 | |||||||||||||||||||
| Gaming software and technology platforms | i 1 - i 7 | i 215,844 | ( i 162,251 | ) | i 53,593 | i 198,666 | ( i 147,437 | ) | i 51,229 | |||||||||||||||||||
| Intellectual property | i 10 - i 12 | i 21,845 | ( i 15,016 | ) | i 6,829 | i 21,845 | ( i 13,427 | ) | i 8,418 | |||||||||||||||||||
| Total intangible assets | $ | i 529,690 | $ | ( i 400,454 | ) | $ | i 129,236 | $ | i 509,168 | $ | ( i 367,059 | ) | $ | i 142,109 | ||||||||||||||
Intangible assets are amortized over their respective estimated useful lives ranging from one to twelve years. Amortization expense related to intangible assets was $ i 8.9 million and $ i 8.8 million for the three months ended September 30, 2023 and 2022, respectively. Amortization expense related to intangible assets was $ i 26.2 million and $ i 27.5 million for the nine months ended September 30, 2023 and 2022, respectively.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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. Amounts paid against the placement fee agreements with payment terms greater than ninety days are disclosed in the financing section of the condensed consolidated statement of cash flows. Amounts paid for the placement fee agreements with the agreement terms less than ninety days, are disclosed in the Investing section of the condensed consolidated statement of cash flows.
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 condensed consolidated 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 $ i 1.6 million for each of the three months ended September 30, 2023 and 2022. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of $ i 4.7 million and $ i 4.8 million for the nine months ended September 30, 2023 and 2022, respectively.
/NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
i
| Salary and payroll tax accrual | $ | i 13,956 | $ | i 13,255 | ||||
| Taxes payable | i 3,152 | i 2,903 | ||||||
| Current portion of operating lease liability | i 2,460 | i 2,287 | ||||||
| License fee obligation | i 713 | i 1,000 | ||||||
| Placement fees payable | i 6,314 | i 6,314 | ||||||
| Accrued other | i 10,105 | i 11,503 | ||||||
| Total accrued liabilities | $ | i 36,700 | $ | i 37,262 | ||||
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
i
| First Lien Credit Facilities: | ||||||||
| Term loans, interest at SOFR, subject to a 0.75% floor plus 4.0% (9.5% at September 30, 2023 and 8.7% at December 31, 2022), net of unamortized discount and deferred loan costs of $13.6 million at September 30, 2023 and $15.2 million at December 31, 2022 | $ | i 552,801 | $ | i 555,453 | ||||
| Finance leases | i 1,945 | i 688 | ||||||
| Total debt | i 554,746 | i 556,141 | ||||||
| Less: Current portion | ( i 6,267 | ) | ( i 6,060 | ) | ||||
| Long-term debt | $ | i 548,479 | $ | i 550,081 | ||||
First Lien Credit Facilities
On February 15, 2022, AP Gaming I, LLC (the “Borrower”), a Delaware limited liability company and wholly owned indirect subsidiary of PlayAGS, Inc. (the “Company”) and AP Gaming Holdings, LLC, a Delaware limited liability company and wholly owned indirect subsidiary of the Company (“Holdings”) entered into the Amended Credit Agreement with certain of the Borrower’s subsidiaries, the lenders party thereto and Jefferies Finance LLC, as administrative agent (the "Amended Credit Agreement"). The Amended Credit Agreement amends and restates the existing credit agreement, among the Borrower, Holdings, the lenders party thereto from time to time, the Administrative Agent and the other parties named therein.
The Borrower is a direct subsidiary of AP Gaming Holdings, LLC, which is a direct subsidiary of AP Gaming, Inc., which is a direct subsidiary of PlayAGS, Inc. These entities between the Borrower and PlayAGS, Inc. are holding companies with no other operations, cash flows, material assets or liabilities other than the equity interests in the Borrower.
The Amended Credit Agreement provides (i) a senior secured first lien term loan in an aggregate principal amount of $ i 575.0 million (the “New Term Loan Facility”), the proceeds of which, together with cash on hand of the Borrower and its subsidiaries, were used by the Borrower on the Closing Date to repay all amounts outstanding under the existing term loan facilities set forth in the Existing
Credit Agreement and to pay related fees and expenses, and (ii) a $ i 40.0 million senior secured first lien revolving facility, with a $ i 7.5
million letter of credit subfacility and a $ i 5.0 million swingline subfacility (the “New Revolving Credit Facility”).
Borrowings under the Amended Credit Agreement bear interest at a per annum rate equal to, at the Borrower’s election, either (a) an adjusted term Secured Overnight Financing Rate ("SOFR") for the interest period in effect, subject to a floor of (i) in the case of term loan borrowings, 0.75% and (ii) in the case of revolver borrowings, i 0.00% or (b) a base rate determined by the highest of (i) the prime rate
in effect, (ii) the federal funds effective rate plus i 0.50% and (iii) an adjusted term SOFR with an interest period of one month plus i 1.00%,
in each case plus an applicable margin of i 4.00% for adjusted term SOFR loans and i 3.00%
for base rate loans.
The New Term Loan Facility will mature on February 15, 2029 and, commencing with the quarter ending June 30, 2022, will amortize in quarterly installments equal to i 0.25% of the original aggregate principal amount of the term loans,
with the balance due at maturity. The commitments under the New Revolving Credit Facility will terminate on February 15, 2027.
The Borrower may voluntarily repay outstanding loans under the Amended Credit Agreement at any time, without prepayment premium or penalty, except in connection with a repricing event in respect of the New Term Loan Facility, subject to customary breakage costs with respect to adjusted term SOFR loans.
The Amended Credit Agreement includes customary mandatory prepayment events, affirmative covenants, negative covenants and events of default. In addition, the New Revolving Credit Facility requires the Borrower to comply on a quarterly basis, with a maximum net first lien senior secured leverage ratio of i 6.70
to 1.00 if the aggregate amount of funded loans and issued letters of credit (excluding up to $ i 5.0 million of undrawn letters of credit under the New Revolving Credit Facility and letters of credit that are cash collateralized) under the New Revolving Credit Facility on such date exceeds i 35%
of the then-outstanding commitments under the New Revolving Credit Facility.
An additional $ i 17.6 million in loan costs including original issue discount, lender fees, third-party costs, and make-whole premium were incurred related to the Amended Credit Agreement. Given the composition of the lender group, the transaction was accounted for as a debt modification for existing lenders. As a result of the amendment, approximately $ i 8.5 million in costs were expensed and included in the loss on extinguishment and modification of debt, and the remaining costs were capitalized and will be amortized over the term of the agreement.
As of September 30, 2023, there were no required financial covenants for our debt instruments.
Finance Leases
The Company has entered into leases for vehicles and equipment that are accounted for as finance leases.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 6. STOCKHOLDERS’ EQUITY
Our amended and restated articles of incorporation provide that our authorized capital stock will consist of i 450,000,000 shares of common stock, par value $ i 0.01 per
share, and i 50,000,000 shares of preferred stock, par value $ i 0.01 per share. As of September 30, 2023, we have i 38,702,415 shares
of common stock and i zero shares of preferred stock outstanding.
Common Stock
Voting Rights
The holders of our common stock are entitled to one vote per share on all matters submitted for action by the stockholders, and do not have cumulative voting rights with respect to the election of our directors.
Dividend and Distribution Rights
All shares of our common stock are entitled to share equally in any dividends and distributions our board of directors may declare from legally available sources, subject to the terms of any outstanding preferred stock.
Share repurchase program
During 2019, the board of directors approved a share repurchase program that will permit the Company to repurchase up to $ i 50.0 million of the Company’s shares of common stock. During the quarter ended June 30, 2023, the board approved extending this share buyback program to August 11, 2025. As of September 30, 2023, $ i 46.7 million of the $ i 50.0 million authorized by the board of directors is still available for repurchasing of the Company's shares of common stock.
/NOTE 7. WRITE-DOWNS AND OTHER CHARGES
The condensed consolidated statements of operations and comprehensive loss include various transactions, such as loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration that have been classified as write-downs and other charges.
During the three months ended September 30, 2023, the Company did not recognize any significant write-downs and other charges. During the three months ended September 30, 2022, the Company recognized $ i 1.4 million in write-downs and other charges primarily related to a fair value adjustment to contingent consideration.
During the nine months ended September 30, 2023, the Company recognized $ i 0.6 million in write-downs and other charges primarily related to the impairment of intangible assets and the disposal of long-lived assets. During the nine months ended September 30, 2022, the Company recognized $ i 1.8 million in write-downs and other charges primarily related to a fair value adjustment to contingent consideration.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 8. BASIC AND DILUTED (LOSS) INCOME
The Company computes net (loss) income per share in accordance with accounting guidance that requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the condensed consolidated statement of operations and comprehensive loss. Basic EPS is computed by dividing net income (loss) for the period by the weighted average number of shares outstanding during the period. Basic EPS includes common stock weighted for average number of shares issued during the period. Diluted EPS is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period, increased by potentially dilutive common shares that were outstanding during the period. Diluted EPS excludes all potential dilutive shares if their effect is anti-dilutive. Potentially dilutive common shares include stock options and restricted stock (see Note 10. "Stock-Based Compensation").
i
| Nine Months Ended September 30, 2023 | ||||
| Numerator: | ||||
| Net income | $ | i 361 | ||
| Net income attributable to participating securities | i 31 | |||
| Net income attributable to common stock | $ | i 330 | ||
| Denominator: | ||||
| Weighted average of common shares outstanding, basic | i 37,965 | |||
| Potential dilutive effect of stock options | i 7 | |||
| Weighted average of common shares outstanding, diluted | i 37,972 | |||
Excluded from the calculation of diluted EPS for the three months ended September 30, 2023 were i 1,222,987 restricted shares, subject to performance vesting conditions that have not been met yet, and i 622,934 dilutive stock options. Participating securities of i 3,580,202 were not allocated income in the calculation of EPS for the three months ended September 30, 2023 as their effect was anti-dilutive.
Excluded from the calculation of diluted EPS for the nine months ended September 30, 2023 were i 1,222,987 restricted shares, subject to performance vesting conditions that have not been met yet. Participating securities of i 3,525,008 were allocated income in the calculation of EPS for the nine months ended September 30, 2023.
/NOTE 9. BENEFIT PLANS
The Company has established a 401(k) plan (the “401(k) Plan”) for its employees. The 401(k) Plan allows employees to contribute a portion of their earnings, and the Company may match a percentage of the contributions on a discretionary basis. The expense associated with the 401(k) Plan for the three months ended September 30, 2023 and 2022 was $ i 0.5 million and $ i 0.4 million, respectively. The expense associated with the 401(k) Plan for the nine months ended September 30, 2023 and 2022 was $ i 1.7 million and $ i 1.5 million, respectively.
On April 28, 2014, the board of directors of the Company approved the 2014 Long-Term Incentive Plan (“LTIP”). Under the LTIP, the Company is authorized to grant nonqualified stock options, rights to purchase shares of common stock, restricted stock, restricted stock units and other awards to be settled in, or based upon, shares of common stock to persons who are directors and employees of and consultants to the Company or any of its subsidiaries on the date of the grant. The LTIP will terminate ten years after approval by the board. Subject to adjustments in connection with certain changes in capitalization, the maximum number of shares of common stock that may be delivered pursuant to awards under the LTIP is i 2,253,735. However, remaining awards for issuance under this plan will not be issued, and awards granted by the Company in the future are expected to be from the Omnibus Incentive Plan only.
On January 16, 2018, our board adopted and our stockholders approved the 2018 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) pursuant to which equity-based and cash incentives may be granted to participating employees, directors and consultants. On May 8, 2020, the board of directors of the Company approved an amendment to the Omnibus Incentive Plan to increase the number of shares of Common Stock authorized for issuance thereunder from i 1,607,389 shares to i 4,607,389 shares, an increase of i 3,000,000 shares (the “2020 Plan Amendment”), which was approved by the stockholders on July 1, 2020 at the 2020 Annual Meeting of Stockholders.
On April 28, 2022, the board of directors of the Company approved an amendment to the Omnibus Incentive Plan, as amended by the 2020 Plan Amendment, to increase the number of shares of Common Stock authorized for issuance thereunder from i 4,607,389 shares to i 9,607,389 shares, an increase of i 5,000,000 shares (the “2022 Plan Amendment”), which was approved by the stockholders on July 1, 2022 at the 2022 Annual Meeting of Stockholders. As a result of the 2022 Plan Amendment, awards that were previously accounted for as liability awards were reclassified to equity as they are expected to be settled with equity. Prior to the 2022 Plan Amendment, there were insufficient shares available to settle the liability awards with equity. As of September 30, 2023, we had i 4,423,884 shares available for issuance under the Omnibus Incentive Plan.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 10. STOCK-BASED COMPENSATION
The Company has granted equity or equity-based awards to eligible participants under its incentive plans. The awards include options to purchase the Company’s common stock, restricted stock or restricted stock units and phantom stock units. These awards include a combination of service and market conditions, as further described below.
We recognize stock-based compensation on a straight-line basis over the vesting period for time-based awards and we recognize the expense for awards with market conditions over the service period derived from the related valuation. As of September 30, 2023, there was i no unrecognized compensation expense associated with stock options, $ i 3.2 million was associated with restricted stock and restricted stock units, and $ i 12.1 million with phantom stock units. The unrecognized compensation expense associated with restricted and phantom stock units is expected to be recognized over a i 2.3 and i 2.2 year weighted average period, respectively.
During the quarter ended March 31, 2023, the Company amended certain performance-based restricted stock units granted to the CEO and CFO on April 30, 2021. The amendment provides eligibility for vesting based on both service and performance conditions. The incremental fair value attributable to the modified awards was $ i 3.9 million, of which i 50% will be recognized over the four year service period and i 50% over the performance vesting tranche, not to exceed one year.
Stock Options
The Company calculates the grant date fair value of stock options that vest over a service period using the Black Scholes model. For stock options and other stock awards that contain a market condition related to the return on investment that the Company’s stockholders achieve or obtaining a certain stock price, the awards are valued using a lattice-based valuation model. The assumptions used in these calculations are the expected dividend yield, expected volatility, risk-free interest rate and expected term (in years). Expected volatilities are based on implied volatilities from comparable companies. The risk-free rate is based on the U.S. Treasury yield curve for a term equivalent to the estimated time to liquidity. There were i no options granted during the three and nine months ended September 30, 2023.
Stock option awards represent options to purchase common stock and are granted pursuant to the Company’s incentive plans, and include options that the Company primarily classifies as Tranche A or time based, Tranche B and Tranche C.
Tranche A or time based options are eligible to vest in equal installments of i 20% or i 25% on each of the first five or four anniversaries of the date of the grant, subject to continued employment with the Company or its subsidiaries. In the event of a termination of employment without cause or as a result of death or disability, any such time based options which would have vested on the next applicable vesting date shall become vested, and the remaining unvested time based options shall be forfeited. In addition, upon a Change in Control (as defined in the incentive plans), subject to continued employment through the date of the Change in Control, all outstanding unvested time based options shall immediately vest.
All other option awards, comprised of Tranche B and Tranche C, are eligible to vest upon the satisfaction of certain performance conditions (collectively, “Performance Options”). These performance conditions included the achievement of investor returns or common stock trading prices. These performance conditions were achieved in October of 2018 for all Performance Options that have been granted and there are currently i 493,104 Performance Options exercisable and outstanding.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A summary of the changes in stock options outstanding during the nine months ended September 30, 2023, is as follows:
i
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Options outstanding as of December 31, 2022 | i 1,162,088 | $ | i 9.05 | i 2.4 | $ | i - | ||||||||||
| Granted | i - | $ | i - | - | $ | i - | ||||||||||
| Exercised | i - | $ | i - | - | $ | - | ||||||||||
| Canceled or forfeited | i 3,886 | $ | i 10.15 | - | $ | - | ||||||||||
| Options outstanding as of September 30, 2023 | i 1,158,202 | $ | i 9.04 | i 1.6 | $ | i 48 | ||||||||||
| Options exercisable as of September 30, 2023 | i 1,158,202 | $ | i 9.04 | i 1.6 | $ | i 48 | ||||||||||
Restricted Stock and Restricted Stock Units
Restricted stock awards and restricted stock units are typically eligible to vest in equal installments of i 25% on each of the first four anniversaries of the date of the grant, subject to continued employment with the Company or its subsidiaries. In the event of a termination of employment without cause upon or within 12 months following a change in control or as a result of death or disability, any such unvested time-based awards shall become vested.
Certain restricted stock units are eligible to vest upon the satisfaction of certain performance conditions. Vesting occurs on the first day that the average price per share of our common stock for a specified number of consecutive trading days exceeds certain stock prices, subject to continued employment with the Company or its subsidiaries. The performance-based restricted stock units will be forfeited if the performance target is not achieved within four years of the grant date.
A summary of the changes in restricted stock and restricted stock units outstanding during the nine months ended September 30, 2023, is as follows:
i
| Shares Outstanding | Weighted Average Grant Date Fair Value (per share) | |||||||
| Restricted Stock and Restricted Stock Units Outstanding as of December 31, 2022 | i 1,669,424 | $ | i 7.24 | |||||
| Granted | i 143,841 | $ | i 6.68 | |||||
| Vested | i 384,731 | $ | i 7.51 | |||||
| Canceled or forfeited | i 8,493 | $ | i 6.80 | |||||
| Restricted Stock and Restricted Stock Units Outstanding as of September 30, 2023 | i 1,420,041 | $ | i 10.07 | |||||
Phantom Stock Units
Phantom stock awards are typically eligible to vest in equal installments of i 25% on each of the first four anniversaries of the date of the grant, subject to continued employment with the Company or its subsidiaries. In the event of a termination of employment without cause upon or within 12 months following a change in control or as a result of death or disability, any such unvested awards shall become vested. Vesting tranches of the phantom stock awards can be settled in cash or stock at the Company’s discretion. The phantom stock awards that the Company intends to settle in cash are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period. The liability associated with such awards is included in “accrued liabilities” within the condensed consolidated balance sheets. All other stock-based awards are classified as equity.
Certain phantom stock units are eligible to vest upon the satisfaction of certain performance conditions. Vesting occurs on the first day that the average price per share of our common stock for a specified number of consecutive trading days exceeds certain stock prices and only if the performance date occurs prior to the fourth anniversary of the date of the grant. If the performance date occurs prior to the first anniversary of the date of grant, vesting will occur on the first anniversary of the date of grant, subject to continued employment with the Company or its subsidiaries.
A summary of the changes in phantom stock outstanding during the nine months ended September 30, 2023 is as follows:
i
| Shares Outstanding | Weighted Average Grant Date Fair Value (per share) | |||||||
| Phantom Stock Outstanding as of December 31, 2022 | i 2,619,608 | $ | i 5.98 | |||||
| Granted | i 1,620,727 | $ | i 6.15 | |||||
| Vested | i 581,567 | $ | i 6.01 | |||||
| Canceled or forfeited | i 70,469 | $ | i 5.78 | |||||
| Phantom stock outstanding as of September 30, 2023 | i 3,588,299 | $ | i 6.44 | |||||
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 11. INCOME TAXES
The Company's effective income tax rate for the three months ended September 30, 2023, was an expense of i 119.9%. The difference between the federal statutory rate of i 21.0% and the Company's effective tax rate for the three months ended September 30, 2023, is primarily due to changes in our valuation allowance on deferred tax assets and US tax on foreign income. The Company's effective income tax rate for the three months ended September 30, 2022, was a benefit of i 134.0%. The difference between the federal statutory rate of i 21.0% and the Company's effective tax rate for the three months ended September 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions.
The Company's effective income tax rate for the nine months ended September 30, 2023, was an expense of i 39.5%. The difference between the federal statutory rate of i 21.0% and the Company's effective tax rate for the nine months ended September 30, 2023, is primarily due to changes in our valuation allowance on deferred tax assets, the expiration of the applicable statute of limitations for certain uncertain tax positions and US tax on foreign income. The Company's effective income tax rate for the nine months ended September 30, 2022, was a benefit of i 10.9%. The difference between the federal statutory rate of i 21.0% and the Company's effective tax rate for the nine months ended September 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions.
/NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company is subject to federal, state and Native American laws and regulations that affect both its general commercial relationships with its customers, as well as the products and services provided to them. Periodically, the Company reviews the status of each significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. If a potential loss from any claim or legal proceeding is considered reasonably possible, the Company discloses an estimate of the possible loss or range of possible loss, or a statement that such an estimate cannot be made. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to their pending claims and litigation and may revise their estimates. Such revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial condition.
During the three months ended September 30, 2019, the Company received a demand letter from a customer and recorded a $ i 1.6 million loss reserve, for which insurance coverage has been triggered. In accordance with GAAP, the offsetting insurance recovery will be recognized when it is realized or realizable.
On June 25, and July 31, 2020 putative class action lawsuits were filed in the United States District Court for the District of Nevada (the "Court"), by two separate plaintiffs against PlayAGS, Inc. (the "Company") and certain of its officers, individually and on behalf of all persons who purchased or otherwise acquired Company securities between August 2, 2018 and August 7, 2019. The complaints alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by making false and misleading statements concerning the Company’s forward-looking financial outlook and accounting for goodwill and intangible assets in its iGaming reporting unit, resulting in injury to the purported class members when the value of the Company’s common stock declined following its release of its Second Quarter 2019 results on August 7, 2019.
On August 4, 2020, a third plaintiff (“OPPRS”) filed a putative class action lawsuit in the same court asserting similar claims to those alleged in the first two class action complaints, based on substantially the same conduct, on behalf of a slightly larger class (stretching back to May 3, 2018). Specifically, OPPRS claimed that the Company, certain of its officers, and certain entities that allegedly beneficially held over 50% of the Company’s common stock at the beginning of the class period, violated Sections 10(b) and 20(a) of the Exchange Act by allegedly making false and misleading statements concerning the Company’s forward-looking financial outlook and accounting for goodwill and intangible assets in its iGaming reporting unit, and the adequacy of its internal controls over financial reporting, resulting in injury to the purported class when the Company’s common stock price declined following the release of its Second Quarter 2019 results. In addition, based on substantially similar alleged false or misleading statements, OPPRS asserted claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, on behalf of all persons who purchased Company common stock pursuant and/or traceable to the Company’s August 2018 and March 2019 secondary public offerings. These secondary-offering claims were brought against the same defendants identified above, plus certain of the Company’s directors and the underwriters.
On October 28, 2020, the Court consolidated these three related putative class actions into In re PlayAGS, Inc. Securities Litigation and appointed OPPRS as lead plaintiff. On January 11, 2021, the lead plaintiff filed an Amended Complaint in the consolidated action against the same set of defendants, again asserting claims (i) under Sections 10(b) and 20(a) of the Exchange Act, with an even larger putative class period ( May 3, 2018 through March 4, 2020), and (ii) under Sections 11, 12(a)(2) and 15 of the Securities Act on behalf of the same putative class as in OPPRS’s previous complaint. The Amended Complaint alleges that statements the defendants made about, among other things, the Company’s growth, financial performance, and forward-looking financial outlook were materially false or misleading because the Company omitted to state that, according to plaintiffs, its market strength was declining, its growth strategies were unsustainable, and it was experiencing challenges in the Oklahoma market. Plaintiffs claim that the purported class was injured when the common stock price declined after the alleged “truth” was revealed following release of the Company’s financial reports on August 7, 2019, November 7, 2019, and March 4, 2020. Plaintiffs also assert that the Company violated Regulation S-K Items 303 and 105 by failing to disclose these same alleged negative trends and significant risks in the registration materials for the Company’s secondary offerings. Unlike the previous complaints, the Amended Complaint does not allege false or misleading statements concerning the Company’s accounting for the iGaming reporting unit or the adequacy of the Company’s internal controls over financial reporting.
On February 23, 2021, the Court granted the lead plaintiff’s unopposed motion to file a Second Amended Complaint. The Second Amended Complaint was filed on March 25, 2021 and asserts substantially the same claims as the Amended Complaint but extends the beginning of the putative class period back to January 26, 2018. On May 24, 2021, the defendants filed motions to dismiss the second amended complaint, and on December 2, 2022, the court granted in part and denied in part those motions. It dismissed each of the i five claims in the second amended complaint—including all claims under the Securities Act—but the court carved out from the dismissal a “scheme liability” claim under Section 10(b), brought only against the Company, David Lopez, and Kimo Akiona, which the court felt was insufficiently briefed. The lead plaintiff was granted leave to file a further amended complaint but chose not to, and instead seeks to move forward on the sole remaining scheme liability claim.
On January 17, 2023, the Company, Mr. Lopez, and Mr. Akiona filed an answer to the remaining claim, along with a motion to temporarily stay discovery and a motion for judgment on the pleadings, arguing that the legal findings contained in the court’s December 2, 2022 decision require dismissal of the scheme liability claim as well and termination of the action. Those motions were fully briefed as of March 22, 2023. On March 23, 2023, the Court decided the motion to temporarily stay discovery in favor of the defendants, holding that all discovery is stayed pending resolution of the motion for judgment on the pleadings. The defendants believe all claims in the action are without merit, and intend to defend vigorously against them, but there can be no assurances as to the outcome.
On March 18, 2022, a shareholder derivative lawsuit was filed in the United States District Court for the District of Nevada by putative stockholder Manjan Chowdhury, allegedly on behalf of the Company, that piggy-backs on the consolidated securities class action referenced above and currently pending before the same Court. The derivative complaint names David Lopez, Kimo Akiona, and members of the Board as defendants, and generally alleges that they breached their fiduciary duties by causing or failing to prevent the same allegedly false and misleading statements asserted in the securities class action. The derivative complaint also alleges claims for contribution against Mr. Lopez and Mr. Akiona under Sections 10(b) and 21D of the Exchange Act. On June 9, 2022, the court stayed the derivative action, pursuant to a stipulation between the parties, pending resolution of the motion to dismiss the consolidated securities class action. On January 27, 2023, at the request of the parties, the court ordered that the derivative action remain stayed pending resolution of the motion for judgment on the pleadings in the securities class action. The Company and the individual defendants believe the claims in the shareholder derivative action are without merit and intend to defend vigorously against them, but there can be no assurances as to the outcome.
At this time, we are unable to estimate the probability or the amount of liability, if any, related to the securities class action or the shareholder derivative matter.
In January 2021, we obtained the results of an audit conducted by the Alabama Department of Revenue (“ADOR”), in which the ADOR assessed $ i 3.3 million including interest in unpaid state and local rental taxes on participation revenues and licensing fees that we received from the leasing of EGMs to a Native American tribe in the state of Alabama in the period from May 2016 through August 2019. ADOR claims that such revenues constitute a lease rental payment and are deemed taxable in nature even in situations involving Native American tribe lessees.
We believe that we were not required to collect and remit Alabama state lease/rental tax on our leases of EGMs in the state as those leases are on federally designated Indian reservation land and because federal Indian trading laws and Indian gaming laws, as well as the U.S. Constitution, preempt application of the rental tax to these transactions with the Native American tribe. We have disputed ADOR’s audit findings in accordance with applicable state and local tax procedures and ADOR rules. Our dispute is currently in the discovery phase at the Alabama Tax Tribunal, which is the independent tax court for the state of Alabama. A merits trial for this dispute is scheduled for December 2023.
We have not accrued the $ i 3.3 million assessed by ADOR, as we do not believe that it is probable that a liability has occurred. However, if we do not prevail in the dispute with ADOR, we may be required to accrue this amount as well as applicable interest. It is also possible that ADOR may similarly audit the participation revenues and licensing fees that we received from the leasing of EGMs to a Native American tribe in the state of Alabama subsequent to August 2019. While we cannot reasonably calculate the amount that ADOR would assess for the revenues from such subsequent periods due to the types of revenues and rates that apply, based solely on the amount assessed for the period from May 2016 through August 2019, we estimate that ADOR’s assessment for taxable lease rental payments for subsequent periods through September 30, 2023 would not exceed $ i 2.6 million, excluding interest. There is no assurance that ADOR will assess our revenues from subsequent periods or that such assessment will not materially differ from our estimate.
In May 2023, we obtained the initial results of an audit conducted by Servicio de Administracion Tributaria (“SAT”) regarding the compliance of our EGMs imported into Mexico with the requirements of the North American Free Trade Agreement (“NAFTA”). SAT has concluded that EGMs we imported during certain periods do not comply with their documentation standards to demonstrate compliance with NAFTA and that therefore certain taxes were omitted when the machines were imported. Due to the omissions, SAT has also indicated that they plan to make an assessment of the omitted taxes together with interest, fines, and surcharges. SAT has not made an official assessment, but the amounts that SAT has communicated preliminarily with the Company include assessment scenarios of up to approximately $ i 9.4 million.
We plan to enter into discussions with SAT and the Mexican tax payer advocate, Procuraduría de la Defensa del Contribuyente (“PRODECON”), to reach an agreement with SAT regarding its final assessment which we expect to receive during these discussions. The discussions, with PRODECON’s assistance, are expected to nullify or result in a significant reduction of the anticipated tax to be assessed against the Company. We believe that the EGMs qualify under NAFTA and that the documentation we have provided to SAT has been sufficient to demonstrate this qualification. We also believe that SAT has not conducted its audit in compliance with Mexican law and regulations. Therefore, we will file nullity petitions before the Federal Tax Court in Mexico to invalidate SAT’s resolutions in this matter.
SAT has not made an official assessment and we have not accrued any amount related to this matter, as we cannot accurately estimate the final assessment within the potential loss range up to approximately $ i 9.4 million, including the possibility of a full reduction of the assessment based on our future petitions.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 13. OPERATING SEGMENTS
We report our business segment results by segment in accordance with the “management approach.” The management approach designates the internal reporting used by our chief operating decision maker (“CODM”), who is our Chief Executive Officer (the “CEO”), for making decisions and assessing performance of our reportable segments.
See Note 1. "Description of the Business and Summary of Significant Accounting Policies" for a detailed discussion of our i three segments. Each segment’s activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of its product lines. We evaluate the performance of our operating segments based on revenues and segment Adjusted EBITDA, which is defined in the paragraph below.
Segment revenues include leasing, licensing, or selling of products within each reportable segment. Segment Adjusted EBITDA includes the revenues and operating expenses from each segment adjusted for:
| • | Write-downs and other include items related to loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration; |
| • | Depreciation, amortization; |
| • | Loss on extinguishment and modification of debt primarily relates to the refinancing of long-term debt, in which deferred loan costs and discounts related to old senior secured credit facilities were written-off; |
| • | Other adjustments are primarily composed of the following: |
| • | Costs and inventory and receivable valuation charges associated with the COVID-19 pandemic, professional fees incurred for projects, costs incurred related to public offerings, contract cancellation fees and other transaction costs deemed to be non-operating in nature; |
| • | Acquisition and integration-related costs related to the purchase of businesses and to integrate operations and obtain costs synergies; |
| • | Restructuring and severance costs, which primarily relate to costs incurred through the restructuring of the Company’s operations from time to time and other employee severance costs recognized in the periods presented; |
| • | Legal and litigation related costs, which consist of payments to law firms and settlements for matters that are outside the normal course of business; |
| • | Other non-cash charges are costs related to non-cash charges and losses on the disposition of assets, non-cash charges on capitalized installation and delivery, which primarily includes the costs to acquire contracts that are expensed over the estimated life of each contract and non-cash charges related to accretion of contract rights under development agreements; and |
| • | Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards. |
Revenues in each segment are attributable to third parties and segment operating expenses are directly associated with the product lines included in each segment such as research and development, product approval costs, product-related litigation expenses, sales commissions and other directly-allocable sales expenses. Cost of gaming operations and cost of equipment sales primarily include the cost of products sold, service, manufacturing overhead, shipping and installation.
Segment Adjusted EBITDA excludes other income and expense, income taxes and certain expenses that are managed outside of the operating segments.
The following provides financial information concerning our reportable segments for the three and nine months ended September 30, 2023 and 2022 (amounts in thousands):
i
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2023 | 2022 | ||||||||||||||
| Revenues by segment | ||||||||||||||||
| EGM | $ | i 81,862 | $ | i 71,620 | $ | i 241,101 | $ | i 208,993 | ||||||||
| Table Products | i 4,387 | i 4,036 | i 12,877 | i 11,030 | ||||||||||||
| Interactive | i 3,129 | i 2,603 | i 8,407 | i 7,677 | ||||||||||||
| Total Revenues | i 89,378 | i 78,259 | i 262,385 | i 227,700 | ||||||||||||
| Adjusted EBITDA by segment | ||||||||||||||||
| EGM | i 36,772 | i 31,331 | i 107,661 | i 93,090 | ||||||||||||
| Table Products | i 2,436 | i 2,561 | i 6,950 | i 6,411 | ||||||||||||
| Interactive | i 903 | i 575 | i 1,596 | i 1,862 | ||||||||||||
| Subtotal | i 40,111 | i 34,467 | i 116,207 | i 101,363 | ||||||||||||
| Write-downs and other: | ||||||||||||||||
| Disposal of long-lived assets | ( i 11 | ) | ( i 79 | ) | i 385 | i 337 | ||||||||||
| Impairment of long-lived assets | i - | i 2 | i 239 | i 21 | ||||||||||||
| Fair value adjustments to contingent consideration | i - | i 1,466 | i - | i 1,466 | ||||||||||||
| Depreciation and amortization | i 18,896 | i 18,950 | i 56,677 | i 56,979 | ||||||||||||
| Interest expense, net of interest income and other | i 13,738 | i 10,431 | i 40,748 | i 27,837 | ||||||||||||
| Loss on extinguishment and modification of debt | i - | i - | i - | i 8,549 | ||||||||||||
| Other adjustments | i 1,127 | i 585 | i 1,584 | i 997 | ||||||||||||
| Other non-cash charges | i 2,480 | i 2,171 | i 7,391 | i 6,469 | ||||||||||||
| Non-cash stock-based compensation | i 3,096 | i 2,341 | i 8,586 | i 10,572 | ||||||||||||
| Income (loss) before income taxes | $ | i 785 | $ | ( i 1,400 | ) | $ | i 597 | $ | ( i 11,864 | ) | ||||||
The Company’s CODM does not receive a report with a measure of total assets or capital expenditures for each reportable segment as this information is not used for the evaluation of segment performance. The CODM assesses the performance of each segment based on Adjusted EBITDA and not based on assets or capital expenditures due to the fact that two of the Company’s reportable segments, Table Products and Interactive, are not capital intensive. Any capital expenditure information is provided to the CODM on a consolidated basis. Therefore, the Company has not provided asset and capital expenditure information by reportable segment.
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
/
NOTE 14. ACQUISITIONS
On January 3, 2022, the Company acquired certain intangible assets related to the purchase of table game-related intellectual property and an installed base of table games under the Lucky Lucky trade name from Aces Up Gaming. The acquisition was accounted for as an acquisition of business and the assets acquired were measured based on our estimates of their fair values at the acquisition date. We attribute the goodwill recognized to our ability to commercialize the products over our distribution and sales network, opportunities for synergies, and other strategic benefits. The consideration of $ i 4.8 million was allocated primarily to tax deductible goodwill for $ i 1.2 million and intangible assets of $ i 3.5 million, which will be amortized over a weighted average period of approximately i 9.1 years.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements include any statements that address future results or occurrences. In some cases you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “would,” “should,” “could” or the negatives thereof. Generally, the words “anticipate,” “believe,” “continue,” “expect,” “intend,” “estimate,” “project,” “plan” and similar expressions identify forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained elsewhere in this Quarterly Report on Form 10-Q as well as those discussed under “Item 1. Business” and “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year-ended December 31, 2022 are forward-looking statements. These forward-looking statements include statements that are not historical facts, including statements concerning our possible or assumed future actions and business strategies. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, many of which are outside of our control, which could cause our actual results, performance or achievements to differ materially from any results, performance or achievements expressed or implied by such forward-looking statements. Given the risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements are made only as of the date of this Quarterly Report. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments unless required by federal securities law. New factors emerge from time to time, and it is not possible for us to predict all such factors.
Unless the context indicates otherwise, or unless specifically stated otherwise, references to the “Company”, “PlayAGS”, “AGS”, “we”, “our” and “us” refer to PlayAGS, Inc. and its consolidated subsidiaries.
Overview
We are a leading designer and supplier of EGMs and other products and services for the gaming industry. We operate our business in three distinct segments: EGMs, Table Products and Interactive. Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line. Founded in 2005, we historically focused on supplying EGMs, including slot machines, video bingo machines, and other electronic gaming devices, to the Native American gaming market. Since 2014, we have expanded our product line-up to include: (i) Class III EGMs for commercial and Native American casinos permitted to operate Class III EGMs, (ii) EGMs that use the results of historical horse races ("HHR") in their game math, which are allowed in several niche markets and raceways, (iii) table game products and (iv) interactive products, all of which we believe provide us with growth opportunities as we expand in markets where we currently have limited or no presence. For the nine months ended September 30, 2023, approximately 69% of our total revenue was generated through recurring contracted lease agreements whereby we place EGMs and table game products at our customers’ gaming facilities under either a revenue sharing agreement (we receive a percentage of the revenues that these products generate) or fee-per-day agreement (we receive a daily or monthly fixed fee per EGM or table game product), or recurring revenue from our Interactive gaming operations.
EGM Segment
EGMs constitute our largest segment, representing 92% of our revenue for the nine months ended September 30, 2023. We have a library of over 550 proprietary game titles that we offer for delivery on our EGM cabinets. These include our premium lease-only cabinets Orion Starwall, Orion Curve Premium, Orion Rise, and Big Red ("Colossal Diamonds"). Also, our core cabinets that are available for sale and lease include the newly released Spectra UR43, as well as the Orion Portrait, Orion Slant, Orion Curve, Orion Upright and ICON. In addition to providing complete EGM units, we offer conversion kits, which are essentially software containing new games that allow existing game titles to be converted to other game titles offered within that operating platform and on an existing cabinet.
We design all of our cabinets with the intention of capturing the attention of players on casino floors while aiming to maximize operator profits. We offer our customers the option of either leasing or purchasing our EGMs and associated gaming systems. Currently, we derive a substantial portion of our revenues from EGMs installed under revenue sharing or fee-per-day lease agreements, also known as “participation” agreements, and we refer to such revenue generation as our “participation model.”
Table Products
In addition to our existing portfolio of EGMs, we also offer our customers more than 60 unique table product offerings, including live felt table games, side bet offerings, progressives, card shufflers, signage, and other ancillary table game equipment. Our table products are designed to enhance the table games section of the casino floor (commonly known as "the pit"). Our table products segment offers a full suite of side bets and specialty table games, and we believe that this segment will serve as an important growth engine for the Company, including by generating further cross-selling opportunities with our EGM offerings. As of September 30, 2023, we had an installed base of over 5,300 table products domestically and internationally and we believe we are presently a leading supplier of table products to the gaming industry based on number of products placed.
Our Table Products segment focuses on high margin recurring revenue generated by leases. Nearly all of the revenue we generate in this segment is recurring.
Interactive
We specialize in providing a Business-to-Business ("B2B") game aggregation platform catering to the rapidly growing online real-money gaming ("RMG") sector. Our remote gaming server empowers us to deliver an extensive library of games developed by our internal game development studios. Our catalog encompasses various game types, including slots, table games, and progressive technology. Our RMG solutions resonate with a diverse and widespread player base, positioning us as a trusted partner for operators seeking to thrive in the competitive global gaming landscape.
AGS also offers Business-to-Consumer (“B2C”) free-to-play social casino apps that players across the globe can enjoy anytime online or on their mobile devices. Our most popular app, Lucky Play Casino, offers mobile players all the thrills of Vegas casinos. Players can choose from dozens of AGS player-favorite slot games and other casino classics like video poker, blackjack, and bingo. Our apps also feature in-app tournaments, rumbles, VIP bonuses, and unique interactive challenges.
Key Drivers of Our Business
Our revenues are impacted by the following key factors:
| • |
the amount of money spent by consumers on our revenue share installed base; |
| • |
the amount of the daily fee and selling price of our participation electronic gaming machines; |
| • |
our revenue share percentage with customers; |
| • |
the capital budgets of our customers; |
| • |
the level of replacement of existing electronic gaming machines in existing casinos; |
| • |
expansion of existing casinos; |
| • |
development of new casinos; |
| • |
opening or closure of new gaming jurisdictions both in the United States and internationally; |
| • |
our ability to obtain and maintain gaming licenses in various jurisdictions; |
| • |
the relative competitiveness and popularity of our electronic gaming machines compared to competitive products offered in the same facilities; and |
| • |
general macro-economic factors, including levels of and changes to consumer disposable income and personal consumption spending. |
Our expenses are impacted by the following key factors:
| • |
fluctuations in the cost of labor relating to productivity; |
| • |
overtime and training; | |
| • |
fluctuations in the price of components for gaming equipment; |
| • |
fluctuations in energy prices that affect the cost of manufacturing and shipping of gaming equipment and parts; |
| • |
changes in the cost of obtaining and maintaining gaming licenses; |
| • |
fluctuations in the level of maintenance expense required on gaming equipment; and |
| • |
tariff increases. |
Variations in our selling, general and administrative expenses, and research and development expenses are primarily due to changes in employment and salaries and related fringe benefits.
Results of Operations
Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022
The following tables set forth certain selected condensed consolidated financial data for the three months ended September 30, 2023 and 2022 (in thousands):
| Three Months Ended September 30, | $ |
% |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Consolidated Statements of Operations: |
||||||||||||||||
| Revenues |
||||||||||||||||
| Gaming operations |
$ | 61,026 | $ | 56,592 | $ | 4,434 | 7.8 | % | ||||||||
| Equipment sales |
28,352 | 21,667 | 6,685 | 30.9 | % | |||||||||||
| Total revenues |
89,378 | 78,259 | 11,119 | 14.2 | % | |||||||||||
| Operating expenses |
||||||||||||||||
| Cost of gaming operations |
13,246 | 10,375 | 2,871 | 27.7 | % | |||||||||||
| Cost of equipment sales |
13,540 | 11,857 | 1,683 | 14.2 | % | |||||||||||
| Selling, general and administrative |
19,453 | 16,955 | 2,498 | 14.7 | % | |||||||||||
| Research and development |
9,731 | 9,702 | 29 | 0.3 | % | |||||||||||
| Write-downs and other charges |
(11 | ) | 1,389 | (1,400 | ) | (100.8 | )% | |||||||||
| Depreciation and amortization |
18,896 | 18,950 | (54 | ) | (0.3 | )% | ||||||||||
| Total operating expenses |
74,855 | 69,228 | 5,627 | 8.1 | % | |||||||||||
| Income from operations |
14,523 | 9,031 | 5,492 | 60.8 | % | |||||||||||
| Other expense (income) |
||||||||||||||||
| Interest expense |
14,588 | 10,291 | 4,297 | 41.8 | % | |||||||||||
| Interest income |
(591 | ) | (305 | ) | (286 | ) | 93.8 | % | ||||||||
| Other (expense) income |
(259 | ) | 445 | (704 | ) | (158.2 | )% | |||||||||
| Income (loss) before income taxes |
785 | (1,400 | ) | 2,185 | (156.1 | )% | ||||||||||
| Income tax (expense) benefit |
(941 | ) | 1,876 | (2,817 | ) | (150.2 | )% | |||||||||
| Net (loss) income |
$ | (156 | ) | $ | 476 | $ | (632 | ) | (132.8 | )% | ||||||
Revenues
Gaming Operations.
Gaming operations revenue increased primarily due to an increase in our EGM segment. EGM RPD increased 8.1% compared to the prior year from $24.31 per day to $26.28 per day. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed base year over year. The increase in gaming operations revenue is also attributable to a $0.1 million increase in Table Products revenue related to an increase in our installed base.
Equipment Sales.
The increase in equipment sales was primarily due to an increase of 331 EGMs sold year over year. We sold 1,345 EGM units during the three months ended September 30, 2023, compared to 1,014 EGM units in the prior year period.
Operating Expenses
Cost of gaming operations. The increase in the cost of gaming operations was primarily the result of increased field service and support as well as direct expenses and related costs compared to the prior year period due to increased activity. As a percentage of gaming operations revenue, costs of gaming operations was 21.7% for the three months ended September 30, 2023 compared to 18.3% for the prior year period.
Cost of equipment sales. The increase in cost of equipment sales is attributable to the increase in the number of units sold compared to the prior year period. As a percentage of equipment sales revenue, costs of equipment sales was 47.8% for the three months ended September 30, 2023 compared to 54.7% for the prior year period, which fluctuated year over year primarily due to a change in the mix of products sold between periods.
Selling, general and administrative. The increase in selling, general and administrative expenses is primarily due to a $2.5 million increase in salaries and benefits, a $1.1 million increase in non-cash stock-based compensation expense, offset by a $0.6 million decrease in professional fees.
Research and development.The increase in research and development expense is primarily due to a $0.3 million increase in salaries and benefits.
Write-downs and other charges. During the three months ended September 30, 2023, the Company did not recognize any significant write-downs and other charges. During the three months ended September 30, 2022, the Company recognized $1.4 million in write-downs and other charges primarily related to fair value adjustment to contingent consideration.
Other (expense) income
Interest expense. The increase in interest expense is predominantly attributable to an increase in our effective interest rate in the current quarter. See Item 1."Financial Statements" Note 5."Long-Term Debt" for a detailed discussion regarding long-term debt.
Other (expense) income. The fluctuation is due to the effect of foreign currency fluctuation on trade payables and receivables denominated in foreign currencies.
Income taxes. The Company's effective income tax rate for the three months ended September 30, 2023, was an expense of 119.9%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2023, is primarily due to changes in our valuation allowance on deferred tax assets and US tax on foreign income. The Company's effective income tax rate for the three months ended September 30, 2022, was a benefit of 134.0%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions.
Results of Operations
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Consolidated Statements of Operations: |
||||||||||||||||
| Revenues |
||||||||||||||||
| Gaming operations |
$ | 180,641 | $ | 166,396 | $ | 14,245 | 8.6 | % | ||||||||
| Equipment sales |
81,744 | 61,304 | 20,440 | 33.3 | % | |||||||||||
| Total revenues |
262,385 | 227,700 | 34,685 | 15.2 | % | |||||||||||
| Operating expenses |
||||||||||||||||
| Cost of gaming operations |
37,030 | 31,512 | 5,518 | 17.5 | % | |||||||||||
| Cost of equipment sales |
38,854 | 32,030 | 6,824 | 21.3 | % | |||||||||||
| Selling, general and administrative |
56,379 | 50,881 | 5,498 | 10.8 | % | |||||||||||
| Research and development |
31,476 | 29,952 | 1,524 | 5.1 | % | |||||||||||
| Write-downs and other charges |
624 | 1,824 | (1,200 | ) | (65.8 | )% | ||||||||||
| Depreciation and amortization |
56,677 | 56,979 | (302 | ) | (0.5 | )% | ||||||||||
| Total operating expenses |
221,040 | 203,178 | 17,862 | 8.8 | % | |||||||||||
| Income from operations |
41,345 | 24,522 | 16,823 | 68.6 | % | |||||||||||
| Other expense (income) |
||||||||||||||||
| Interest expense |
42,362 | 27,851 | 14,511 | 52.1 | % | |||||||||||
| Interest income |
(1,267 | ) | (728 | ) | (539 | ) | 74.0 | % | ||||||||
| Loss on extinguishment and modification of debt |
- | 8,549 | (8,549 | ) | (100.0 | )% | ||||||||||
| Other (expense) income |
(347 | ) | 714 | (1,061 | ) | (148.6 | )% | |||||||||
| Income (loss) before income taxes |
597 | (11,864 | ) | 12,461 | (105.0 | )% | ||||||||||
| Income tax (expense) benefit |
(236 | ) | 1,288 | (1,524 | ) | (118.3 | )% | |||||||||
| Net income (loss) |
$ | 361 | $ | (10,576 | ) | $ | 10,937 | (103.4 | )% | |||||||
Segment Operating Results
We report our business segment results by segment in accordance with the “management approach.” The management approach designates the internal reporting used by our chief operating decision maker, who is our Chief Executive Officer, for making decisions and assessing performance of our reportable segments.
See Item 1. “Financial Statements” Note 1. "Description of the Business and Summary of Significant Accounting Policies" for a detailed discussion of our three segments. Each segment’s activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of its product lines. We evaluate the performance of our operating segments based on revenues and segment Adjusted EBITDA.
Segment revenues include leasing, licensing or selling of products within each reportable segment. We measure segment performance in terms of revenue, segment-specific Adjusted EBITDA and unit placements. We believe that unit placements are an important gauge of segment performance for EGM’s and Table Products because it measures historical market placements of leased and sold units and provides insight into potential markets for next-generation products and service. We do not present a sold unit cumulative installed base as previously sold units may no longer be in use by our customers or may have been replaced by other models or products.
Adjusted Expenses
We have provided (i) adjusted cost of gaming operations, (ii) adjusted selling, general and administrative costs and (iii) adjusted research and development cost (collectively, the “Adjusted Expenses”) in this Form 10-Q because we believe such measure provides investors with additional information to measure our performance.
We believe that the presentation of each of the Adjusted Expenses is appropriate to provide additional information to investors about certain non-cash items that vary greatly and are difficult to predict. These Adjusted Expenses take into account non-cash stock compensation expense, acquisitions and integration related costs including restructuring and severance, initial and secondary public offering costs, legal and litigation expenses including settlement payments, new jurisdictions and regulatory licensing costs, non-cash charges on capitalized installation and delivery, non-cash charges and loss on disposition of assets and other adjustments that include costs and inventory and receivable valuation charges associated with the COVID-19 pandemic. Further, we believe each of the Adjusted Expenses provides a meaningful measure of our expenses because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures. It also provides management and investors with additional information to estimate our value.
Each of the Adjusted Expenses is not a presentation made in accordance with GAAP. Our use of the term Adjusted Expenses may vary from others in our industry. Each of the Adjusted Expenses should not be considered as an alternative to our operating expenses under GAAP. Each of the Adjusted Expenses has important limitations as an analytical tool, and you should not consider it in isolation or as a substitute for the analysis of our results as reported under GAAP.
Our definition of Adjusted Expenses allows us to add back certain non-cash charges that are deducted in calculating net loss and to deduct certain gains that are included in calculating net loss. However, these expenses and gains vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, in the case of charges or expenses, these items can represent the reduction of cash that could be used for other corporate purposes.
Due to these limitations, we rely primarily on our GAAP cost of gaming operations, cost of equipment sales, selling, general and administrative costs and research and development costs and use each of the Adjusted Expenses only supplementally.
The tables below present each of the Adjusted Expenses and include a reconciliation to the nearest GAAP measure.
Electronic Gaming Machines
Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022
| Three Months Ended September 30, | $ |
% |
||||||||||||||
| (amounts in thousands, except unit data) |
2023 |
2022 |
Change |
Change |
||||||||||||
| EGM segment revenues: |
||||||||||||||||
| Gaming operations |
$ | 54,026 | $ | 50,233 | $ | 3,793 | 7.6 | % | ||||||||
| Equipment sales |
27,836 | 21,387 | 6,449 | 30.2 | % | |||||||||||
| Total EGM revenues |
81,862 | 71,620 | 10,242 | 14.3 | % | |||||||||||
| EGM segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
12,331 | 9,745 | 2,586 | 26.5 | % | |||||||||||
| Less: Adjustments(2) |
948 | 633 | 315 | 49.8 | % | |||||||||||
| Adjusted cost of gaming operations |
11,383 | 9,112 | 2,271 | 24.9 | % | |||||||||||
| Cost of equipment sales |
13,391 | 11,792 | 1,599 | 13.6 | % | |||||||||||
| Selling, general and administrative |
18,020 | 15,366 | 2,654 | 17.3 | % | |||||||||||
| Less: Adjustments(3) |
3,673 | 1,815 | 1,858 | 102.4 | % | |||||||||||
| Adjusted cost of selling, general and administrative |
14,347 | 13,551 | 796 | 5.9 | % | |||||||||||
| Research and development |
8,054 | 8,217 | (163 | ) | (2.0 | )% | ||||||||||
| Less: Adjustments(4) |
509 | 791 | (282 | ) | (35.7 | )% | ||||||||||
| Adjusted cost of research and development |
7,545 | 7,426 | 119 | 1.6 | % | |||||||||||
| Accretion of placement fees |
1,576 | 1,592 | (16 | ) | (1.0 | )% | ||||||||||
| EGM Adjusted EBITDA |
$ | 36,772 | $ | 31,331 | $ | 5,441 | 17.4 | % | ||||||||
| EGM Business Segment Key Performance Indicators ("KPI's") |
||||||||||||||||
| EGM gaming operations: |
||||||||||||||||
| EGM installed base: |
||||||||||||||||
| Class II |
11,257 | 11,324 | (67 | ) | (0.6 | )% | ||||||||||
| Class III |
5,167 | 4,934 | 233 | 4.7 | % | |||||||||||
| Domestic installed base, end of period |
16,424 | 16,258 | 166 | 1.0 | % | |||||||||||
| International installed base, end of period |
6,083 | 6,274 | (191 | ) | (3.0 | )% | ||||||||||
| Total installed base, end of period |
22,507 | 22,532 | (25 | ) | (0.1 | )% | ||||||||||
| EGM revenue per day ("RPD"): |
||||||||||||||||
| Domestic revenue per day |
$ | 32.57 | $ | 31.13 | $ | 1.44 | 4.6 | % | ||||||||
| International revenue per day |
$ | 9.43 | $ | 7.34 | $ | 2.09 | 28.5 | % | ||||||||
| Total revenue per day |
$ | 26.28 | $ | 24.31 | $ | 1.97 | 8.1 | % | ||||||||
| EGM equipment sales |
||||||||||||||||
| EGM units sold |
1,345 | 1,014 | 331 | 32.6 | % | |||||||||||
| Average sales price ("ASP") |
$ | 19,380 | $ | 19,146 | $ | 234 | 1.2 | % | ||||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to cost of gaming operations include non-cash stock compensation expense, non-cash charges on capitalized installation and delivery and other adjustments. |
| (3) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, legal and litigation expenses including settlement payments and other adjustments. |
| (4) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
Gaming operations revenue increased primarily due to an increase in EGM RPD by 8.1% compared to the prior year from $24.31 per day to $26.28 per day. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed base year over year.
Equipment Sales
The increase in equipment sales was primarily due to an increase of 331 EGMs sold year over year. We sold 1,345 EGM units during the three months ended September 30, 2023, compared to 1,014 EGM units in the prior year period.
EGM Adjusted EBITDA
EGM Adjusted EBITDA includes revenues and operating expenses from the EGM segment adjusted for depreciation, amortization, write-downs and other charges, accretion of placement fees, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The increase in EGM Adjusted EBITDA is attributable to the increase in revenue described above, offset by an increase in the cost of equipment sales and an increase in operating expenses. EGM Adjusted EBITDA margin was 44.9% and 43.7% for the three months ended September 30, 2023 and 2022, respectively.
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| (amounts in thousands except unit data) |
2023 |
2022 |
Change |
Change |
||||||||||||
| EGM segment revenues: |
||||||||||||||||
| Gaming operations |
$ | 160,789 | $ | 148,067 | $ | 12,722 | 8.6 | % | ||||||||
| Equipment sales |
80,312 | 60,926 | 19,386 | 31.8 | % | |||||||||||
| Total EGM revenues |
241,101 | 208,993 | 32,108 | 15.4 | % | |||||||||||
| EGM segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
34,022 | 29,179 | 4,843 | 16.6 | % | |||||||||||
| Less: Adjustments(2) |
2,685 | 1,768 | 917 | 51.9 | % | |||||||||||
| Adjusted cost of gaming operations |
31,337 | 27,411 | 3,926 | 14.3 | % | |||||||||||
| Cost of equipment sales |
38,434 | 31,923 | 6,511 | 20.4 | % | |||||||||||
| Selling, general and administrative |
51,329 | 46,449 | 4,880 | 10.5 | % | |||||||||||
| Less: Adjustments(3) |
8,136 | 8,422 | (286 | ) | (3.4 | )% | ||||||||||
| Adjusted cost of selling, general and administrative |
43,193 | 38,027 | 5,166 | 13.6 | % | |||||||||||
| Research and development |
26,723 | 25,760 | 963 | 3.7 | % | |||||||||||
| Less: Adjustments(4) |
1,550 | 2,428 | (878 | ) | (36.2 | )% | ||||||||||
| Adjusted cost of research and development |
25,173 | 23,332 | 1,841 | 7.9 | % | |||||||||||
| Accretion of placement fees |
4,697 | 4,790 | (93 | ) | (1.9 | )% | ||||||||||
| EGM Adjusted EBITDA |
$ | 107,661 | $ | 93,090 | $ | 14,571 | 15.7 | % | ||||||||
| EGM Business Segment Key Performance Indicators ("KPI's") |
||||||||||||||||
| EGM gaming operations: |
||||||||||||||||
| EGM installed base: |
||||||||||||||||
| Class II |
11,257 | 11,324 | (67 | ) | (0.6 | )% | ||||||||||
| Class III |
5,167 | 4,934 | 233 | 4.7 | % | |||||||||||
| Domestic installed base, end of period |
16,424 | 16,258 | 166 | 1.0 | % | |||||||||||
| International installed base, end of period |
6,083 | 6,274 | (191 | ) | (3.0 | )% | ||||||||||
| Total installed base, end of period |
22,507 | 22,532 | (25 | ) | (0.1 | )% | ||||||||||
| EGM revenue per day ("RPD"): |
||||||||||||||||
| Domestic revenue per day |
$ | 32.95 | $ | 31.49 | $ | 1.46 | 4.6 | % | ||||||||
| International revenue per day |
$ | 8.87 | $ | 6.71 | $ | 2.16 | 32.2 | % | ||||||||
| Total revenue per day |
$ | 26.36 | $ | 24.07 | $ | 2.29 | 9.5 | % | ||||||||
| EGM equipment sales |
||||||||||||||||
| EGM units sold |
3,725 | 2,903 | 822 | 28.3 | % | |||||||||||
| Average sales price ("ASP") |
$ | 19,888 | $ | 19,368 | $ | 520 | 2.7 | % | ||||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to cost of gaming operation include non-cash stock compensation expense, non-cash charges on capitalized installation and delivery and other adjustments. |
| (3) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, legal and litigation expenses including settlement payments and other adjustments. |
| (4) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Table Products
Three Months Ended September 30, 2023 compared to Three Months Ended September 30, 2022
| Three Months Ended September 30, | $ |
% |
||||||||||||||
| (amounts in thousands, except unit data) |
2023 |
2022 |
Change |
Change |
||||||||||||
| Table Products segment revenues: |
||||||||||||||||
| Gaming operations |
$ | 3,871 | $ | 3,756 | $ | 115 | 3.1 | % | ||||||||
| Equipment sales |
516 | 280 | 236 | 84.3 | % | |||||||||||
| Total Table Products revenues |
4,387 | 4,036 | 351 | 8.7 | % | |||||||||||
| Table Products segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
504 | 211 | 293 | 138.9 | % | |||||||||||
| Less: Adjustments(2) |
103 | 63 | 40 | 63.5 | % | |||||||||||
| Adjusted cost of gaming operations |
401 | 148 | 253 | 170.9 | % | |||||||||||
| Cost of equipment sales |
149 | 65 | 84 | 129.2 | % | |||||||||||
| Selling, general and administrative |
981 | 865 | 116 | 13.4 | % | |||||||||||
| Less: Adjustments(3) |
81 | 104 | (23 | ) | (22.1 | )% | ||||||||||
| Adjusted cost of selling, general and administrative |
900 | 761 | 139 | 18.3 | % | |||||||||||
| Research and development |
517 | 528 | (11 | ) | (2.1 | )% | ||||||||||
| Less: Adjustments(4) |
16 | 27 | (11 | ) | (40.7 | )% | ||||||||||
| Adjusted cost of research and development |
501 | 501 | - | 0.0 | % | |||||||||||
| Table Products Adjusted EBITDA |
$ | 2,436 | $ | 2,561 | $ | (125 | ) | (4.9 | )% | |||||||
| Table Products unit information: |
||||||||||||||||
| Table products installed base, end of period |
5,309 | 4,969 | 340 | 6.8 | % | |||||||||||
| Average monthly lease price |
$ | 240 | $ | 243 | $ | (3 | ) | (1.2 | )% | |||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to cost of gaming operation include non-cash charges on capitalized installation and delivery. |
| (3) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, and other adjustments. |
| (4) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
The increase in Table Products gaming operations revenue is attributable to an increase in the Table Products installed base. The continuing success of our progressives such as Bonus Spin Xtreme, and our growing installed base of our Pax S and Dex shufflers are the primary drivers of the increase in the Table Products installed base compared to the prior year period.
Equipment Sales
The increase in equipment sales is primarily due to an increase in the sale of our Pax S single-deck shufflers in the current period.
Tables Products Adjusted EBITDA
Table Products Adjusted EBITDA includes the revenues and operating expenses from the Table Products segment adjusted for depreciation, amortization, write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The decrease in Table Products Adjusted EBITDA is attributable to the increase in operating expenses, offset by increase in the revenue as described above.
Table Products
Nine Months Ended September 30, 2023 compared to Nine Months Ended September 30, 2022
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| (amounts in thousands, except unit data) |
2023 |
2022 |
Change |
Change |
||||||||||||
| Table Products segment revenues: |
||||||||||||||||
| Gaming operations |
$ | 11,445 | $ | 10,652 | $ | 793 | 7.4 | % | ||||||||
| Equipment sales |
1,432 | 378 | 1,054 | 278.8 | % | |||||||||||
| Total Table Products revenues |
12,877 | $ | 11,030 | 1,847 | 16.7 | % | ||||||||||
| Table Products segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
1,639 | 963 | 676 | 70.2 | % | |||||||||||
| Less: Adjustments(2) |
299 | 213 | 86 | 40.4 | % | |||||||||||
| Adjusted cost of gaming operations |
1,340 | 750 | 590 | 78.7 | % | |||||||||||
| Cost of equipment sales |
420 | 107 | 313 | 292.5 | % | |||||||||||
| Selling, general and administrative |
2,963 | 2,508 | 455 | 18.1 | % | |||||||||||
| Less: Adjustments(3) |
262 | 214 | 48 | 22.4 | % | |||||||||||
| Adjusted cost of selling, general and administrative |
2,701 | 2,294 | 407 | 17.7 | % | |||||||||||
| Research and development |
1,511 | 1,528 | (17 | ) | (1.1 | )% | ||||||||||
| Less: Adjustments(4) |
45 | 60 | (15 | ) | (25.0 | )% | ||||||||||
| Adjusted cost of research and development |
1,466 | 1,468 | (2 | ) | (0.1 | )% | ||||||||||
| Table Products Adjusted EBITDA |
$ | 6,950 | $ | 6,411 | $ | 539 | 8.4 | % | ||||||||
| Table Products unit information: |
||||||||||||||||
| Table products installed base, end of period |
5,309 | 4,969 | 340 | 6.8 | % | |||||||||||
| Average monthly lease price |
$ | 238 | $ | 243 | $ | (5 | ) | (2.1 | )% | |||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to cost of gaming operation include non-cash charges on capitalized installation and delivery. |
| (3) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, and other adjustments. |
| (4) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
The increase in Table Products gaming operations revenue is attributable to an increase in the Table Products installed base. The continuing success of our progressives such as Bonus Spin Xtreme, and our growing installed base of our Pax S and Dex shufflers are the primary drivers of the increase in the Table Products installed base compared to the prior year period.
Equipment Sales
The increase in equipment sales is primarily due to an increase in the sale of our Pax S single-deck shufflers in the current period.
Tables Products Adjusted EBITDA
Table Products Adjusted EBITDA includes the revenues and operating expenses from the Table Products segment adjusted for depreciation, amortization, write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The increase in Table Products Adjusted EBITDA is attributable to the increase in revenue described above, partially offset by an increase in operating expenses.
Interactive
Three Months Ended September 30, 2023 compared to Three Months Ended September 30, 2022
| Three Months Ended September 30, | $ |
% |
||||||||||||||
| (amounts in thousands) |
2023 | 2022 | Change | Change | ||||||||||||
| Interactive segment revenue: |
||||||||||||||||
| Gaming Operations |
$ | 3,129 | $ | 2,603 | $ | 526 | 20.2 | % | ||||||||
| Total Interactive revenue |
3,129 | 2,603 | 526 | 20.2 | % | |||||||||||
| Interactive segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
411 | 419 | (8 | ) | (1.9 | )% | ||||||||||
| Selling, general and administrative |
452 | 724 | (272 | ) | (37.6 | )% | ||||||||||
| Less: Adjustments(2) |
(223 | ) | 50 | (273 | ) | (546.0 | )% | |||||||||
| Adjusted cost of selling, general and administrative |
675 | 674 | 1 | 0.1 | % | |||||||||||
| Research and development |
1,160 | 957 | 203 | 21.2 | % | |||||||||||
| Less: Adjustments(3) |
20 | 22 | (2 | ) | (9.1 | )% | ||||||||||
| Adjusted cost of research and development |
1,140 | 935 | 205 | 21.9 | % | |||||||||||
| Interactive Adjusted EBITDA |
$ | 903 | $ | 575 | $ | 328 | 57.0 | % | ||||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense. |
| (3) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
The increase in gaming operations revenue is primarily attributable to an increase in RMG revenues from Canadian and the US-based operators, offset by decreased revenue from international customers and our social casino revenues due to our decision to strategically refocus our resources on growth opportunities within the regulated North American RMG market.
Interactive Adjusted EBITDA
Interactive Adjusted EBITDA includes the revenues and operating expenses from the Interactive segment adjusted for depreciation, amortization, write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The increase in Interactive Adjusted EBITDA is primarily attributable to the increase in revenues as described above, offset by an increase in operating expenses.
Interactive
Nine Months Ended September 30, 2023 compared to Nine Months Ended September 30, 2022
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| (amounts in thousands) |
2023 |
2022 |
Change |
Change |
||||||||||||
| Interactive segment revenue: |
||||||||||||||||
| Gaming Operations |
$ | 8,407 | $ | 7,677 | $ | 730 | 9.5 | % | ||||||||
| Total Interactive revenue |
8,407 | 7,677 | 730 | 9.5 | % | |||||||||||
| Interactive segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
1,369 | 1,370 | (1 | ) | (0.1 | )% | ||||||||||
| Selling, general and administrative |
2,087 | 1,924 | 163 | 8.5 | % | |||||||||||
| Less: Adjustments(2) |
(157 | ) | 103 | (260 | ) | (252.4 | )% | |||||||||
| Adjusted cost of selling, general and administrative |
2,244 | 1,821 | 423 | 23.2 | % | |||||||||||
| Research and development |
3,242 | 2,664 | 578 | 21.7 | % | |||||||||||
| Less: Adjustments(3) |
44 | 40 | 4 | 10.0 | % | |||||||||||
| Adjusted cost of research and development |
3,198 | 2,624 | 574 | 21.9 | % | |||||||||||
| Interactive Adjusted EBITDA |
$ | 1,596 | $ | 1,862 | $ | (266 | ) | (14.3 | )% | |||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense. |
| (3) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
The increase in gaming operations revenue is primarily attributable to an increase in RMG revenues from Canadian and the US-based operators, offset by decreased revenue from international customers and our social casino revenues due to our decision to strategically refocus our resources on growth opportunities within the regulated North American RMG market.
Interactive Adjusted EBITDA
Interactive Adjusted EBITDA includes the revenues and operating expenses from the Interactive segment adjusted for depreciation, amortization, write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The decrease in Interactive Adjusted EBITDA is primarily attributable to increased operating expenses and offset by an increase in revenues as described above.
TOTAL ADJUSTED EBITDA RECONCILIATION TO NET (LOSS) INCOME
We have provided total Adjusted EBITDA in this Form 10-Q because we believe such measure provides investors with additional information to measure our performance.
We believe that the presentation of total Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items that we do not expect to continue at the same level in the future, as well as other items we do not consider indicative of our ongoing operating performance. Further, we believe total Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures. It also provides management and investors with additional information to estimate our value.
Total Adjusted EBITDA is not a presentation made in accordance with GAAP. Our use of the term total Adjusted EBITDA may vary from others in our industry. Total Adjusted EBITDA should not be considered as an alternative to operating income or net loss. Total Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation or as a substitute for the analysis of our results as reported under GAAP.
Our definition of Adjusted EBITDA allows us to add back certain non-cash charges that are deducted in calculating net loss and to deduct certain gains that are included in calculating net (loss) income. However, these expenses and gains vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, in the case of charges or expenses, these items can represent the reduction of cash that could be used for other corporate purposes.
Due to these limitations, we rely primarily on our GAAP results, such as net (loss) income, income from operations, EGM Adjusted EBITDA, Table Products Adjusted EBITDA or Interactive Adjusted EBITDA and use Total Adjusted EBITDA only supplementally.
The following tables reconcile net loss to total Adjusted EBITDA (amounts in thousands):
Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022
| Three Months Ended September 30, |
$ |
% |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Net (loss) income |
$ | (156 | ) | $ | 476 | $ | (632 | ) | (132.8 | )% | ||||||
| Income tax benefit (expense) |
941 | (1,876 | ) | 2,817 | (150.2 | )% | ||||||||||
| Depreciation and amortization |
18,896 | 18,950 | (54 | ) | (0.3 | )% | ||||||||||
| Interest expense, net of interest income and other |
13,738 | 10,431 | 3,307 | 31.7 | % | |||||||||||
| Write-downs and other(1) |
(11 | ) | 1,389 | (1,400 | ) | (100.8 | )% | |||||||||
| Other adjustments(2) |
1,127 | 585 | 542 | 92.6 | % | |||||||||||
| Other non-cash charges(3) |
2,480 | 2,171 | 309 | 14.2 | % | |||||||||||
| Non-cash stock-based compensation(4) |
3,096 | 2,341 | 755 | 32.3 | % | |||||||||||
| Total Adjusted EBITDA |
$ | 40,111 | $ | 34,467 | $ | 5,644 | 16.4 | % | ||||||||
| (1) |
Write-downs and other include items related to loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration. |
| (2) |
Other adjustments are primarily composed of the following: |
| • |
Costs and inventory and receivable valuation charges associated with the COVID-19 pandemic, professional fees incurred for projects, costs incurred related to public offerings, contract cancellation fees and other transaction costs deemed to be non-operating in nature; |
| • |
Acquisition and integration-related costs related to the purchase of businesses and to integrate operations and obtain costs synergies; |
| • |
Restructuring and severance costs, which primarily relate to costs incurred through the restructuring of the Company’s operations from time to time and other employee severance costs recognized in the periods presented; and |
| • |
Legal and litigation related costs, which consist of payments to law firms and settlements for matters that are outside the normal course of business. |
| (3) |
Other non-cash charges are costs related to non-cash charges and losses on the disposition of assets, non-cash charges on capitalized installation and delivery, which primarily includes the costs to acquire contracts that are expensed over the estimated life of each contract and non-cash charges related to accretion of contract rights under development agreements. |
| (4) |
Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards. |
The following tables reconcile net loss to total Adjusted EBITDA (amounts in thousands):
Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Net income (loss) |
$ | 361 | $ | (10,576 | ) | $ | 10,937 | (103.4 | )% | |||||||
| Income tax benefit (expense) |
236 | (1,288 | ) | 1,524 | (118.3 | )% | ||||||||||
| Depreciation and amortization |
56,677 | 56,979 | (302 | ) | (0.5 | )% | ||||||||||
| Interest expense, net of interest income and other |
40,748 | 27,837 | 12,911 | 46.4 | % | |||||||||||
| Loss on extinguishment and modification of debt(1) |
- | 8,549 | (8,549 | ) | (100.0 | )% | ||||||||||
| Write-downs and other(2) |
624 | 1,824 | (1,200 | ) | (65.8 | )% | ||||||||||
| Other adjustments(3) |
1,584 | 997 | 587 | 58.9 | % | |||||||||||
| Other non-cash charges(4) |
7,391 | 6,469 | 922 | 14.3 | % | |||||||||||
| Non-cash stock-based compensation(5) |
8,586 | 10,572 | (1,986 | ) | (18.8 | )% | ||||||||||
| Total Adjusted EBITDA |
$ | 116,207 | $ | 101,363 | $ | 14,844 | 14.6 | % | ||||||||
| (1) | Loss on extinguishment and modification of debt primarily relates to the refinancing of long-term debt, in which deferred loan costs and discounts related to old senior secured credit facilities were written-off. |
| (2) |
Write-downs and other include items related to loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration. |
| (3) |
Other adjustments are primarily composed of the following: |
| • |
Costs and inventory and receivable valuation charges associated with the COVID-19 pandemic, professional fees incurred for projects, costs incurred related to public offerings, contract cancellation fees and other transaction costs deemed to be non-operating in nature; |
| • |
Acquisition and integration-related costs related to the purchase of businesses and to integrate operations and obtain costs synergies; |
| • |
Restructuring and severance costs, which primarily relate to costs incurred through the restructuring of the Company’s operations from time to time and other employee severance costs recognized in the periods presented; and |
| • |
Legal and litigation related costs, which consist of payments to law firms and settlements for matters that are outside the normal course of business. |
| (4) |
Other non-cash charges are costs related to non-cash charges and losses on the disposition of assets, non-cash charges on capitalized installation and delivery, which primarily includes the costs to acquire contracts that are expensed over the estimated life of each contract and non-cash charges related to accretion of contract rights under development agreements. |
| (5) |
Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards. |
LIQUIDITY AND CAPITAL RESOURCES
We expect that primary ongoing liquidity requirements for the next twelve months after the condensed consolidated financial statements are issued will be for operating capital expenditures, working capital, debt servicing, game development and other customer acquisition activities. We expect to finance these liquidity requirements through a combination of cash on hand, additional financing, and cash flows from operating activities.
Part of our overall strategy includes consideration of expansion opportunities into underserved markets and acquisition and other strategic opportunities that may arise periodically. We may require additional funds in order to execute on such strategic growth and may incur additional debt or issue additional equity to finance any such transactions. We cannot assure you that we will be able to obtain such debt or issue any such additional equity on acceptable terms or at all.
As of September 30, 2023, the Company had $43.7 million in cash and cash equivalents and $40.0 million available to draw under its revolving credit facility. As of September 30, 2023, management believes that the Company has sufficient liquidity to fund its operating requirements and meet its obligations as they become due for at least the next twelve months after the condensed consolidated financial statements are issued.
Indebtedness
First Lien Credit Facilities
For a detailed description of indebtedness, see Item 1. "Financial Statements" Note 5. "Long-Term Debt."
As of September 30, 2023, there were no required financial covenants for our debt instruments.
The following table summarizes our historical cash flows (in thousands):
| Nine Months Ended September 30, |
||||||||||||
| 2022 |
Change |
|||||||||||
| Cash Flow Information: |
||||||||||||
| Net cash provided by operating activities |
$ | 59,755 | $ | 52,574 | $ | 7,181 | ||||||
| Net cash used in investing activities |
(43,404 | ) | (54,521 | ) | 11,117 | |||||||
| Net cash used in financing activities |
(10,418 | ) | (59,585 | ) | 49,167 | |||||||
| Effect of exchange rates on cash and cash equivalents |
48 | 2 | 46 | |||||||||
| Net decrease in cash, cash equivalents and restricted cash |
$ | 5,981 | $ | (61,530 | ) | $ | 67,511 | |||||
Operating activities
The increase in cash provided by operating activities is attributable to a $2.1 million increase in cash used related to operating assets and liabilities, as well as an improvement in our net loss adjusted for non-cash expenses that increased by $5.7 million.
Investing activities
The decrease in cash used in investing activities was primarily due to a $6.0 million decrease in the purchases of property and plant, as well as a $4.8 million decrease cash used in business acquisitions described in Item 1. “Financial Statements” Note 14. “Acquisitions”, a $2.9 million increase in collections on customer note receivable, offset by $2.4 million increase in software development and other expenditures.
Financing activities
The decrease in cash used in financing activities of $49.4 million is primarily attributable to the reduction of debt principal and payment of related debt issuance costs in conjunction with our entering into The Amended Credit Agreement in the prior period as described in Item 1. “Financial Statements” Note 5. "Long-Term Debt."
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies can be found in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022. There were no material changes to our policies during the nine months ended September 30, 2023.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See related disclosure at Item 1. “Financial Statements” Note 1. “Description of the Business and Summary of Significant Accounting Policies.”
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates. Our primary exposure to market risk is interest rate risk associated with our long-term debt, which accrues interest at variable rates. Certain of our debt instruments accrue interest at SOFR subject to an interest rate floor plus an applicable margin rate. In the normal course of business, we are exposed to fluctuations in interest rates as we seek debt and equity capital to sustain our operations. All of our interest rate sensitive financial instruments are held for purposes other than trading purposes. As of September 30, 2023, less than 1% of our debt were fixed-rate instruments. Assuming a constant outstanding balance for our variable-rate long term debt, a hypothetical 1% decrease in interest rates would decrease interest expense approximately $5.7 million over the next twelve months, while a hypothetical 1% increase in interest rates would increase interest expense approximately $5.7 million over the next twelve months.
Foreign currency risk. We are exposed to foreign currency exchange rate risk that is inherent to our foreign operations. We currently transact business in Mexico and to a lesser extent in the United Kingdom using the local currency. Our settlement of inter-company trade balances requires the exchange of currencies, which results in the recognition of foreign currency fluctuations. We expect that certain operations will continue to be denominated in foreign currencies. As such, we expect our cash flows and earnings to continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure information is recorded, processed, summarized and reported within the periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f), that occurred as of the end of the fiscal quarter covered by this report, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The information required by Item 1. "Legal Proceedings" is incorporated herein by reference from Note 12. “Commitments and Contingencies” of our notes to the condensed consolidated financial statements in this Report.
"Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2022 (the "Annual Report") includes a discussion of our risk factors. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
(a). Exhibits
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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PlayAGS, Inc. |
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| Date: |
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By: |
/s/ KIMO AKIONA |
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Name: |
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Title: |
Chief Financial Officer, Chief Accounting Officer and Treasurer (Principal Financial and Accounting Officer) |
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 2/15/29 | ||||
| 2/15/27 | ||||
| 8/11/25 | ||||
| Filed on: | 11/7/23 | 8-K | ||
| 11/3/23 | ||||
| For Period end: | 9/30/23 | |||
| 6/30/23 | 10-Q | |||
| 3/31/23 | 10-Q | |||
| 3/23/23 | ||||
| 3/22/23 | ||||
| 1/27/23 | 8-K | |||
| 1/17/23 | 4 | |||
| 12/31/22 | 10-K | |||
| 12/15/22 | ||||
| 12/2/22 | ||||
| 9/30/22 | 10-Q, 4 | |||
| 7/1/22 | 8-K, DEF 14A | |||
| 6/30/22 | 10-Q | |||
| 6/9/22 | ||||
| 4/28/22 | ||||
| 3/18/22 | ||||
| 2/15/22 | 8-K | |||
| 1/3/22 | ||||
| 5/24/21 | ||||
| 4/30/21 | ||||
| 3/25/21 | ||||
| 2/23/21 | ||||
| 1/11/21 | ||||
| 10/28/20 | ||||
| 8/4/20 | ||||
| 7/31/20 | ||||
| 7/1/20 | 8-K, DEF 14A | |||
| 5/8/20 | 4 | |||
| 3/4/20 | 10-K, 4/A, 8-K | |||
| 11/7/19 | 10-Q, 8-K | |||
| 9/30/19 | 10-Q | |||
| 8/7/19 | 10-Q, 8-K | |||
| 8/2/18 | 10-Q, 8-K | |||
| 5/3/18 | 10-Q, 8-K | |||
| 1/26/18 | S-8 | |||
| 1/16/18 | S-1/A | |||
| 4/28/14 | 8-K | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 7/19/22 PlayAGS, Inc. S-8 7/19/22 5:97K RDG Filings/FA 3/05/19 PlayAGS, Inc. 10-K 12/31/18 103:12M |