Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 


FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarter ended September 30, 2023March 31, 2024

or

 

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 001-38357

 


PLAYAGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

46-3698600

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

6775 S. Edmond St., Ste #300 Las Vegas, NV 89118

(Address of principal executive offices) (Zip Code)

(702) 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

Common stock, $0.01 par value

AGS

New York Stock Exchange

As of November 3, 2023, there were 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. Yes ☒  No  ☐

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company  

Emerging growth company 

 

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  No ☐

 

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

As of May 6, 2024, there were 39,454,547 shares of the Registrant’s common stock, $0.01 par value per share, outstanding.


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, 2023 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.

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2023MARCH 31, 2024 AND DECEMBER 31, 20222023

1

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2024 AND 2023 AND 2022

2

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AT SEPTEMBER 30,MARCH 31, 2024 AND 2023 AND 2022

3

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2024 AND 2023 AND 2022

4

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2322

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

4638

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

4739

 

 

 

PART II. OTHER INFORMATION

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

4840

 

 

 

ITEM 1A.

RISK FACTORS

4840

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

4840

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

4840

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

4840

 

 

 

ITEM 5.

OTHER INFORMATION

4840

 

 

 

ITEM 6.

EXHIBITS

4941

 

 

 

 

SIGNATURES

5042

 

ii

 

 
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLAYAGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

(unaudited)

 

 

September 30, 2023

  

December 31, 2022

  

March 31, 2024

  

December 31, 2023

 

Assets

Assets

 

Assets

 

Current assets

            

Cash and cash equivalents

 $43,662 $37,891  $40,362 $50,936 

Restricted cash

 230 20  220 244 

Accounts receivable, net of allowance for credit losses of $1,359 and $1,974, respectively

 67,626 59,909 

Accounts receivable, net of allowance for credit losses $1,187 and $1,251, respectively

 70,998 68,499 

Inventories

 36,893 35,394  36,547 36,081 

Prepaid expenses

 5,909 4,020  6,710 5,473 

Deposits and other

  5,211   8,930   3,576   4,145 

Total current assets

  159,531   146,164   158,413   165,378 

Property and equipment, net

 80,377 82,361  77,433 78,768 

Goodwill

 289,879 287,680  290,987 290,486 

Intangible assets, net

 129,236 142,109  118,320 123,436 

Deferred tax asset

 8,551 7,893  7,781 7,680 

Operating lease assets, net

 10,353 11,198  9,214 9,862 

Other assets

  5,821   7,346   4,540   4,728 

Total assets

 $683,748  $684,751  $666,688  $680,338 
  

Liabilities and Stockholders’ Equity

Liabilities and Stockholders’ Equity

 

Liabilities and Stockholders’ Equity

 

Current liabilities

            

Accounts payable

 $9,455 $15,244  $5,020 $5,406 

Accrued liabilities

 36,700 37,262  35,548 35,926 

Current maturities of long-term debt

  6,267   6,060   6,239   6,253 

Total current liabilities

  52,422   58,566   46,807   47,585 

Long-term debt

 548,479 550,081  532,254 547,499 

Deferred tax liability, non-current

 2,991 2,048  2,541 2,326 

Operating lease liabilities, long-term

 9,227 10,413  7,920 8,636 

Other long-term liabilities

  7,885   14,282   4,227   6,625 

Total liabilities

  621,004   635,390   593,749   612,671 

Commitments and contingencies (Note 12)

                

Stockholders’ equity

            

Preferred stock at $0.01 par value; 50,000,000 shares authorized, no shares issued and outstanding

        

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

 386 378 

Common stock at $0.01 par value; 450,000,000 shares authorized at March 31, 2024 and at December 31, 2023; and 39,378,705 and 38,947,674 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

 393 389 

Additional paid-in capital

 415,014 406,436  419,841 417,689 

Accumulated deficit

 (353,111) (353,125) (350,850) (353,044)

Accumulated other comprehensive income (loss)

  455   (4,328)

Accumulated other comprehensive income

  3,555   2,633 

Total stockholders’ equity

  62,744   49,361   72,939   67,667 

Total liabilities and stockholders’ equity

 $683,748  $684,751  $666,688  $680,338 

 

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

 

1

 

 

PLAYAGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) INCOME

(amounts in thousands, except per share data)

 (unaudited)

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended March 31,

 
 

2023

  

2022

  

2023

  

2022

  

2024

  

2023

 

Revenues

            

Gaming operations

 $61,026  $56,592  $180,641  $166,396  $62,060  $58,642 

Equipment sales

  28,352   21,667   81,744   61,304   33,913   24,533 

Total revenues

  89,378   78,259   262,385   227,700   95,973   83,175 

Operating expenses

            

Cost of gaming operations(1)

 13,246  10,375  37,030  31,512 

Cost of equipment sales(1)

 13,540  11,857  38,854  32,030 

Cost of gaming operations(1)

 12,074  11,756 

Cost of equipment sales(1)

 15,656  12,333 

Selling, general and administrative

 19,453  16,955  56,379  50,881  18,110  17,205 

Research and development

 9,731  9,702  31,476  29,952  10,918  10,789 

Write-downs and other (gains) charges

 (11) 1,389  624  1,824  (24) 204 

Depreciation and amortization

  18,896   18,950   56,677   56,979   19,439   19,142 

Total operating expenses

  74,855   69,228   221,040   203,178   76,173   71,429 

Income from operations

 14,523  9,031  41,345  24,522  19,800  11,746 

Other expense (income)

            

Interest expense

 14,588  10,291  42,362  27,851  13,980  13,704 

Interest income

 (591) (305) (1,267) (728) (685) (357)

Loss on extinguishment and modification of debt

 -  -  -  8,549  1,636  - 

Other (expense) income

  (259)  445   (347)  714 

Other income

  (137)  (78)

Income (loss) before income taxes

 785  (1,400) 597  (11,864)  5,006   (1,523)

Income tax (expense) benefit

  (941)  1,876   (236)  1,288   (661)  1,189 

Net (loss) income

  (156)  476   361   (10,576)

Net income (loss)

  4,345   (334)

Foreign currency translation adjustment

  (1,355)  23   4,783   466   922   3,413 

Total comprehensive (loss) income

 $(1,511) $499  $5,144  $(10,110)

Total comprehensive income

 $5,267  $3,079 
  

Basic and diluted (loss) income per common share:

        

Basic and diluted income (loss) per common share:

    

Basic

 $(0.00) $0.01 $0.01 $(0.28) $0.11 $(0.01)

Diluted

 $(0.00) $0.01 $0.01 $(0.28) $0.10 $(0.01)

Weighted average common shares outstanding:

            

Basic

 38,162  37,244  37,965  37,116  39,205  37,811 

Diluted

 38,162  37,244  37,972  37,116  39,346  37,811 

 

(1) exclusive of depreciation and amortization

 

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

 

2

 

 

PLAYAGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands)

 (unaudited)

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended March 31,

 
 

2023

  

2022

  

2023

  

2022

  

2024

  

2023

 

Common stock

            

Balance, beginning of period

 $379  $371  $378  $369  $389  $378 

Vesting of restricted stock

  7   6   8   8   4   1 

Balance of common stock, end of period

  386   377   386   377   393   379 

Additional paid-in capital

            

Balance, beginning of period

 411,925  397,785  406,436  392,161  417,689  406,436 

Stock-based compensation expense

 3,096  4,946  8,586  10,572  2,106  2,544 

Modification of liability awards to equity

 - 2,391 - 2,391 

Vesting of restricted stock

  (7)  (6)  (8)  (8)  (4)  (1)

Stock option exercises

  50   - 

Balance of additional paid-in capital, end of period

  415,014   405,116   415,014   405,116   419,841   408,979 

Accumulated deficit

            

Balance, beginning of period

 (352,635) (355,951) (353,125) (344,889) (353,044) (353,125)

Net (loss) income

 (156) 476  361  (10,576)

Net income (loss)

 4,345  (334)

Restricted stock vesting and withholding

  (320)  (191)  (347)  (201)  (2,151)  (27)

Balance of accumulated deficit, end of period

  (353,111)  (355,666)  (353,111)  (355,666)  (350,850)  (353,486)

Accumulated other comprehensive income (loss)

            

Balance, beginning of period

 1,810  (5,627) (4,328) (6,070) 2,633  (4,328)

Foreign currency translation adjustment

  (1,355)  23   4,783   466   922   3,413 

Balance of accumulated other comprehensive income (loss), end of period

  455   (5,604)  455   (5,604)  3,555   (915)

Total stockholders' equity

 $62,744  $44,223  $62,744  $44,223  $72,939  $54,957 

 

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

 

3

 

 

PLAYAGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

  

Three Months Ended March 31,

 
 

2023

  

2022

  

2024

  

2023

 

Cash flows from operating activities

            

Net income (loss)

 $361 $(10,576) $4,345 $(334)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

 56,677 56,979  19,439 19,142 

Accretion of contract rights under development agreements and placement fees

 4,697 4,790  1,576 1,545 

Amortization of deferred loan costs and discount

 1,918 2,167  597 628 

Write-off of deferred loan costs and discount

 - 1,586  742 - 

Cash paid for debt prepayment penalties to prior debt holders

 - 848 

Stock-based compensation expense

 8,586 10,572  2,106 2,544 

Provision for bad debts

 558 402  137 10 

Loss on disposition of long-lived assets

 385 337 

(Gain) loss on disposition of long-lived assets

 (44) 83 

Impairment of assets

 239 21  20 121 

Fair value adjustment of contingent consideration

 - 1,466 

Deferred income tax

 1,147 936 

Changes in assets and liabilities that relate to operations:

     

Benefit (expense) from deferred income tax

 270 591 

Changes in assets and liabilities related to operations:

     

Accounts receivable

 (7,550) (8,868) (2,357) (4,393)

Inventories

 1,827 (6,856) 1,025 (1,880)

Prepaid expenses

 (1,877) (2,259) (1,230) (2,286)

Deposits and other

 4,066 (1,266) 592 (467)

Other assets, non-current

 (283) (134) 784 1,763 

Accounts payable and accrued liabilities

  (10,996)  2,429   (1,677)  (12,900)

Net cash provided by operating activities

  59,755   52,574   26,325   4,167 

Cash flows from investing activities

            

Business acquisitions, net of cash acquired

 - (4,750)

Proceeds from payments on customer notes receivable

 3,081 137  - 598 

Purchase of intangibles

 (183) - 

Software development and other expenditures

 (17,855) (15,439) (5,852) (4,973)

Proceeds from disposition of assets

 11 15  12 11 

Purchases of property and equipment

  (28,458)  (34,484)  (9,432)  (8,739)

Net cash used in investing activities

  (43,404)  (54,521)

Net cash (used in) investing activities

  (15,272)  (13,103)

Cash flows from financing activities

            

Repayment of prior first lien credit facilities

 - (521,215)

Repayment of first lien credit facilities

 (4,313) (2,876) (16,438) (1,438)

Repayment of incremental term loans

 - (93,575)

Payment of financed placement fee obligations

 (4,316) (3,917) (1,441) (1,356)

Proceeds from term loans

 - 569,250 

Proceeds from stock option exercise

 50 - 

Payment of deferred loan costs

 - (4,838) (5) - 

Payment of debt prepayment penalties to prior debt holders

 - (848)

Payments of previous acquisition obligation

 (301) (445)

Payments on finance leases and other obligations

 (1,141) (920)

Payment of previous acquisition obligation

 - (55)

Payment on finance leases and other obligations

 (2,177) (504)

Repurchase of stock

  (347)  (201)  (1,655)  (27)

Net cash used in financing activities

  (10,418)  (59,585)

Effect of exchange rates on cash and cash equivalents

 48 2 

Net cash (used in) financing activities

  (21,666)  (3,380)

Effect of exchange rates on cash, cash equivalents and restricted cash

  15   (7)

Net decrease in cash, cash equivalents and restricted cash

  5,981   (61,530)  (10,598)  (12,323)

Cash, cash equivalents and restricted cash, beginning of period

  37,911   94,997   51,180   37,911 

Cash, cash equivalents and restricted cash, end of period

 $43,892  $33,467  $40,582  $25,588 
          

Supplemental cash flow information

            

Non-cash investing and financing activities:

            

Leased assets obtained in exchange for new operating lease liabilities

 $882 $956  $- $882 

Leased assets obtained in exchange for new finance lease liabilities

 $1,702 $354  $84 $25 

Property and equipment obtained in exchange for new other long-term liability

 $1,153 $-  $392 $- 

 

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

 

4

 

PLAYAGS, INC.

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 moneyreal-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 SpectraUR43PremiumOrion StarwallOrion Curve Premium and Big Red ("Colossal Diamonds") as well as cabinets available for sale or lease includingnotably the newly releasedSpectra Spectra UR43,, along with Spectra UR49C, Orion PortraitOrion SlantOrion CurveOrion 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")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”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.

 

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, 20222023.

 

5

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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.

 

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.

 

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):

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended March 31,

 
 

2023

  

2022

  

2023

  

2022

  

2024

  

2023

 
  

EGM

            

Gaming operations

 $54,026  $50,233  $160,789  $148,067  $53,799  $52,413 

Equipment sales

  27,836   21,387   80,312   60,926   33,452   24,145 

Total

 $81,862  $71,620  $241,101  $208,993  $87,251  $76,558 
  

Table Products

            

Gaming operations

 $3,871  $3,756  $11,445  $10,652  $4,105  $3,706 

Equipment sales

  516   280   1,432   378   461   388 

Total

 $4,387  $4,036  $12,877  $11,030  $4,566  $4,094 
  

Interactive

            

Gaming Operations

 $3,129  $2,603  $8,407  $7,677  $4,156  $2,523 

Total

 $4,156  $2,523 
 

Total Revenue

 $89,378  $78,259  $262,385  $227,700  $95,973  $83,175 

 

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.

 

6

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, 2023March 31, 2024 and December 31, 20222023.

 

7

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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.

 

Restricted Cash

 

Restricted cash amounts represent funds held in escrow as collateral for the Company’s surety bonds for various gaming authorities.

 

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, 2023March 31, 2024, there was no material activity in allowance for credit losses.

 

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, 2023March 31, 2024 and December 31, 20222023, the value of raw material inventory was $29.4$29.9 million and $31.0$31.3 million, respectively. As of September 30, 2023March 31, 2024 and December 31, 20222023, the value of finished goods inventory was $7.5$6.6 million and $4.4$4.8 million, respectively. There was no work in process material as of September 30, 2023March 31, 2024 and December 31, 20222023.

 

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:

 

Gaming equipment (in years)

  1 to 5 

Other property and equipment (in years)

  3 to 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.

 

8

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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.

 

Costs of Capitalized Computer Software

 

Internally developed gamingCapitalized software representsdevelopment costs represent the Company’s internal costs to develop gaming titles to utilize on the Company’s gaming machines. Internally developed gaming software isSuch costs are stated at cost and amortized over the estimated usefuleconomic lives of the title or group of titles, if applicable, using the straight-line method.software. Software development costs are capitalized once technological feasibility has been established and are amortized when the software is placed into service.available for general release. The computergaming software we develop reaches technological feasibility when a working model of the computergaming software is available. Any subsequent software maintenance costs, such as bug fixes and subsequent testing, are expensed as incurred. Discontinued software development costs are expensedwritten off when the determination to discontinue is made. Software development costs are amortized over the expected life of the title or group of titles, if applicable, to amortization expense within the consolidated statements of operations.

 

On a quarterly basis, or more frequently if circumstances warrant, the Company compares the net book value of its internally developed computercapitalized software development costs 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.

 

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. 

 

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.

 

9

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Fair Value of Financial Instruments

 

The Company applies the provisions of ASC 820,Fair Value Measurements(ASC("ASC 820820") 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, 2023March 31, 2024 and December 31, 20222023 (in thousands):

 

  

September 30, 2023

  

December 31, 2022

 
  

Carrying Amount

  

Fair Value

  

Carrying Amount

  

Fair Value

 

Long-term Debt

 $568,320  $565,998  $571,375  $539,987 
  

March 31, 2024

  

December 31, 2023

 
  

Carrying Amount

  

Fair Value

  

Carrying Amount

  

Fair Value

 

Long-term Debt

 $550,247  $551,454  $566,754  $567,658 

 

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.

 

10

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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.

 

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.

 

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.

 

Recently Issued Accounting Pronouncements

 

In March 2022,2023, the Financial Accounting Standards Board (the "FASB") issued ASUNo.2023-01, Leases ("Topic 842"): Common Control Arrangements. Upon the implementation of Topic 841, the FASB Board has prioritized monitoring and assisting stakeholders by responding to technical accounting inquiries and proactively seeking feedback on issues that arose from such topic. The amendments within 2023-01 is a response to private company stakeholders concerns regarding the application of Topic 842 to related party arrangements between entities under common control. This update aims to improve current GAAP through clarification of accounting for leasehold improvements associated with common control leases. Further, the amendments within this update targets to provide investors, lenders, creditors, and other allocators of capital with financial information that better reflects the economics of transpiring transactions. We adopted the amendment in this current quarter, which did not have a material effect on our consolidated financial statements.

In October 2023, the FASB issued ASU No. 20222023-02,06, Disclosure Improvements: Codification Amendments in Response to the SECFinancial Instruments - Credit Losses (Topic s Disclosure Update and Simplification Initiative. ASU 326No). 2023-06 modifies disclosure requirements which consists of clarifications and technical corrections. The amendments in this update applies to all reporting entities, which aims to allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subjected to the SEC's requirements. Furthermore, these amendments aim to align codification requirements with the SEC's regulations. The effective date for each amendment within ASUNo. 2023-06 is dependent on the date in which the SEC removes related disclosures from Regulation S-X or Regulation S-K. Early adoption is permitted. If by June 30, 2027, the SEC has not removed the related disclosures from Regulation S-X or Regulation S-K, the pending amendments will not become effective for any entity. The Company is currently evaluating the provisions of the amendments and the impact on its future disclosures, however, we do not anticipate the impact to be material. 

In November 2023, the FASB issued ASU No. 20222023-0207 eliminates, Segment Reporting ("Topic 280"): Improvements to Reportable Segment Disclosures. Investors, lenders, creditors and other allocators of capital have observed the accounting guidance for troubled debt restructurings by creditorscritical importance of segment information and its significance in ASC 310-40assessing an entity's overall performance and requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases.potential future cash flows. The amendments within ASU No. 20222023-0207 is aim to improve reportable segment disclosure requirements by enhancing disclosures regarding significant segment expenses. These amendments are applicable to all public entities who are required to report segment information in accordance with Topic 280, Segment Reporting. The amendments in this update are effective for fiscal years beginning after December 15, 2022,2023, includingand interim periods within those fiscal years with earlierbeginning after December 15, 2024. Early adoption is permitted. We adoptedThe Company is currently evaluating the amendment inprovisions of the first quarter of 2023, which did amendments and the impact on its segment reports, however, we do not have a significant effect on our condensed consolidated financial statements. anticipate the impact to be material. 

 

We have In December 2023, the FASB issued ASUNo.2023-09, Income Taxes ("Topic 740"): Improvements to Income Tax Disclosures. The amendments within No.2023-09addresses the requests of investors, lenders, creditors, and other allocators of capital for more transparency regarding income tax information primarily related to the rate reconciliation and income taxes paid information. Further amendments within this update also aim to improve the effectiveness of income tax disclosures. The amendments in this update apply to all entities that are subject to Topic 740, Income Taxes. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the provisions of the amendments and the impact on its income tax disclosures, however, we do not adopted any other new accounting pronouncements in anticipate 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.impact to be material. 

11


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):

 

 

September 30, 2023

  

December 31, 2022

  

March 31, 2024

  

December 31, 2023

 

Gaming equipment

 $255,076 $232,244  $266,483 $259,396 

Other property and equipment

  25,412 22,922   25,611 25,056 

Less: Accumulated depreciation

  (200,111)  (172,805)  (214,661)  (205,684)

Property and equipment, net

 $80,377  $82,361 

Total property and equipment, net

 $77,433  $78,768 

 

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 $10.0$10.1 million and $10.2$10.6 million for the three months ended September 30, 2023March 31, 2024 and 20222023, respectively. Depreciation expense was $30.5 million and $29.5 million for the nine months ended September 30, 2023 and 2022, respectively.

 

12

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):

  

Gross Carrying Amount

 
  

EGM

  

Table Products

  

Interactive(1)

  

Total

 

December 31, 2022

 $278,629  $9,051  $-  $287,680 

Foreign currency adjustments

  2,199   -   -   2,199 

Balance at September 30, 2023

 $280,828  $9,051  $-  $289,879 
  

Gross Carrying Amount

 
  

EGM

  

Table Products

  

Interactive(1)

  

Total

 

December 31, 2023

 $281,435  $9,051  $-  $290,486 

Foreign currency adjustments

  501   -   -   501 

Balance at March 31, 2024

 $281,936  $9,051  $-  $290,987 

 

(1) As of September 30, 2023,March 31, 2024, accumulated goodwill impairment charges for the Interactive segment taken prior to the fiscal year 20232024 were $8.4 million. 

 

Intangible assets consist of the following (in thousands):

 

     

September 30, 2023

  

December 31, 2022

      

March 31, 2024

  

December 31, 2023

 
 

Useful Life

 

Gross

 

Accumulated

 

Net Carrying

 

Gross

 

Accumulated

 

Net Carrying

  

Useful Life

 

Gross

 

Accumulated

 

Net Carrying

 

Gross

 

Accumulated

 

Net Carrying

 
 

(years)

  

Value

  

Amortization

  

Value

  

Value

  

Amortization

  

Value

  

(years)

  

Value

  

Amortization

  

Value

  

Value

  

Amortization

  

Value

 

Indefinite lived trade names

  

Indefinite

  $12,126  $-  $12,126  $12,126  $-  $12,126 

Indefinite-lived trade names

  

Indefinite

  $12,126  $-  $12,126  $12,126   -  $12,126 

Trade and brand names

 5 - 7  14,990  (14,765) 225  14,990  (14,722) 268  5 - 7  14,990  (14,794) 196  14,990  (14,779) 211 

Customer relationships

 5 - 12  222,123  (179,880) 42,243  219,146  (167,629) 51,517  5 - 12  223,158  (186,972) 36,186  222,690  (183,508) 39,182 

Contract rights under development and placement fees

 1 - 7  42,762  (28,542) 14,220  42,395  (23,844) 18,551  1 - 7  42,762  (31,694) 11,068  42,762  (30,118) 12,644 

Gaming software and technology platforms

 1 - 7  215,844  (162,251) 53,593  198,666  (147,437) 51,229  1 - 7  226,659  (173,685) 52,974  220,843  (167,869) 52,974 

Intellectual property

  10 - 12   21,845   (15,016)  6,829   21,845   (13,427)  8,418   10 - 12   21,845   (16,075)  5,770   21,845   (15,546)  6,299 

Total intangible assets

     $529,690  $(400,454) $129,236  $509,168  $(367,059) $142,109      $541,540  $(423,220) $118,320  $535,256  $(411,820) $123,436 

 

Intangible assets are amortized over their respective estimated useful lives ranging from one to twelve years. Amortization expense related to intangible assets was $8.9$9.4 million and $8.8$8.5 million for the three months ended September 30, 2023March 31, 2024 and 20222023, respectively. Amortization expense related to intangible assets was $26.2 million and $27.5 million for the nine months ended September 30, 2023 and 2022, respectively. 

 

13

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 $1.6 million and $1.5 million for each of the three months ended September 30, 2023March 31, 2024 and 2022. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of $4.7 million and $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):

 

 

September 30, 2023

  

December 31, 2022

  

March 31, 2024

  

December 31, 2023

 

Salary and payroll tax accrual

 $13,956 $13,255  $12,926 $12,697 

Taxes payable

 3,152 2,903  4,327 3,337 

Current portion of operating lease liability

 2,460 2,287  2,605 2,595 

License fee obligation

 713 1,000  244 482 

Placement fees payable

 6,314 6,314  6,314 6,314 

Deferred revenue

 2,246 2,429 

Accrued other

  10,105   11,503   6,886   8,072 

Total accrued liabilities

 $36,700  $37,262  $35,548  $35,926 

 

14

 

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):

 

 

September 30, 2023

  

December 31, 2022

  

March 31, 2024

  

December 31, 2023

 

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

 $552,801 $555,453 

Term loans, net of unamortized discount and deferred loan costs of $11.8 million at March 31, 2024 and $13.0 million at December 31, 2023; interest at SOFR, subject to a 0.75% floor plus 3.75% (at March 31, 2024) and 0.75% floor plus 4% (at December 31, 2023): 9.1% at March 31, 2024 and 9.5% at December 31, 2023.

 $536,746 $551,935 

Finance leases

  1,945   688   1,747   1,817 

Total debt

  554,746   556,141   538,493   553,752 

Less: Current portion

  (6,267)  (6,060)  (6,239)  (6,253)

Long-term debt

 $548,479  $550,081  $532,254  $547,499 

 

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”)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.the Company. These entities between the Borrower and PlayAGS, Inc.the Company 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 $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 $40.0 million senior secured first lien revolving facility, with a $7.5 million letter of credit subfacility and a $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, 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 0.50% and (iii) an adjusted term SOFR with an interest period of one month plus 1.00%, in each case plus an applicable margin of 4.00% for adjusted term SOFR loans and 3.00% for base rate loans.
 

The New Term Loan Facility will mature on February 15, 2029and, commencing with the quarter ending June 30, 2022,will amortize in quarterly installments equal to 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 mayvoluntarily 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 6.70 to 1.00 if the aggregate amount of funded loans and issued letters of credit (excluding up to $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 35% of the then-outstanding commitments under the New Revolving Credit Facility.

 

On February 5, 2024, the Borrower and Holdings, entered into an amendment (the “Seventh Amendment”) to amend that certain First Lien Credit Agreement, dated as of June 6, 2017 (as amended on December 6, 2017, as amended and restated on February 7, 2018, as amended and restated as of October 5, 2018, as amended as of August 30, 2019, as amended and restated on May 1, 2020, as amended as of August 4, 2021, as amended and restated as of February 15, 2022), among the Borrower, Holdings, the lenders party thereto from time to time, Jefferies Finance LLC, as administrative agent, and the other parties named therein (as so amended, the “Amended Credit Agreement”).

Among other things, the Seventh Amendment (i) removes the credit spread adjustment with respect to term loan borrowings in Term SOFR (as defined in the Amended Credit Agreement) and (ii) reduces the Applicable Margin (as defined in the Amended Credit Agreement) on the Borrower’s existing term loan to 3.75% for Term SOFR borrowings and 2.75% for ABR (as defined in the Amended Credit Agreement) borrowings. Additionally, in conjunction with entry into the Seventh Amendment, the Company elected to repay $15 million of its total debt outstanding.

An additional $17.6$1.6 million in loan costs including original issue discount, lender fees,the write-off of deferred loan costs and third-party costs and make-whole premium were incurred related to the Amended Credit Agreement.Seventh Amendment. 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,Seventh Amendment, approximately $8.5$1.6 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.debt.

 

As of September 30, 2023March 31, 2024, 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.

 

15

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 450,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. As of September 30, 2023March 31, 2024, we have 38,702,41539,378,705 shares of common stock and 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, theour board of directors approved a share repurchase program that will permit the Company to repurchase up to $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, 2023March 31, 2024, $46.7$44.5 million of the $50.0 million authorized by theour 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 threemonths ended September 30, 2023March 31, 2024, the Company did not recognize any significantmeaningful write-downs and other chargesDuring the three months ended September 30, 2022, the Company recognized $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,March 31, 2023, the Company recognized $0.6$0.2 million in write-downs and other charges primarily related to the impairment of intangible assets (the Company used level 3 fair value inputs based on projected cash flows) and the disposal of long-lived assets.During the nine months ended September 30, 2022, the Company recognized $1.8 million in write-downs and other charges primarily related to a fair value adjustment to contingent consideration. 

 

16

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

NOTE 8. BASIC AND DILUTED INCOME (LOSS) INCOME

 

The Company computes net income (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").

 

 

Nine Months Ended September 30, 2023

  

Three Months Ended March 31, 2024

 

Numerator:

      

Net income

 $361  $4,345 

Net income attributable to participating securities

  31 

Less: Net income attributable to participating securities

  326 

Net income attributable to common stock

 $330  $4,019 
      

Denominator:

      

Weighted average of common shares outstanding, basic

 37,965  39,205 

Potential dilutive effect of stock options

  7   141 

Weighted average of common shares outstanding, diluted

  37,972   39,346 

 

Excluded from the calculation of diluted EPS for the three months ended September 30, 2023March 31, 2024 were 1,222,987 restricted shares, subject to performance vesting conditions that have not been met yet, and 622,934 dilutive stock options. Participating securities of 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 1,222,9871,027,242 restricted shares, subject to performance vesting conditions that have not been met yet. Participating securities of 3,525,008 were allocated income inThe earnings per share calculations for the three months ended March 31, 2024 include the dilutive effect for 140,798 stock options and 3,195,064 participating securities.

Excluded from the calculation of diluted EPS for the ninethree months ended September 30,March 31, 2023. were 1,221,370 restricted shares, subject to performance vesting conditions that have not been met yet, and 1,162,088 underwater stock options. Excluded from the calculation of diluted EPS for the three months ended March 31, 2023 were 3,269,247 restricted shares because the Company reported a net loss in this period. 

 

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, 2023March 31, 2024 and 20222023 was $0.5$0.6 million and $0.4 million, respectively. The expense associated with the 401(k) Plan for the nine months ended September 30, 2023 and 2022 was $1.7 million and $1.5$0.7 million, respectively. 

 

On April 28, 2014, theour 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 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 2018Omnibus Incentive Plan (the "Omnibus Incentive Plan") only.

 

On January 16, 2018, our board of directors adopted and our stockholders approved the 2018Omnibus 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, theour 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 1,607,389 shares to 4,607,389 shares, an increase of 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, theour 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 4,607,389 shares to 9,607,389 shares, an increase of 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,March 31, 2024, we had 4,423,8843,798,582 shares available for issuance under the Omnibus Incentive Plan. 

 

17

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 time-based vesting awards as well as awards that include a combination of service and market conditions, as further described below.

 

We recognize stock-based compensation on a straight-line basis over the vestingtotal requisite service period for the entire award for the time-based restricted stock units; for the awards andwith market conditions, 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 no unrecognized compensation expense associated with stock options, $3.2 million was associated with restricted stock and restricted stock units, and $12.1 million with phantom stock units. The unrecognized compensation expense associated with restricted andvaluation; for the time-based phantom stock units, is expected to be recognizedwe concurrently recognize compensation cost over a 2.3 and 2.2 year weighted averagethe requisite service period respectively.for each separately-vesting tranche using the graded vesting method.

 

DuringThe following provides the quarter ended March 31, 2023, total unrecognized stock-based compensation expense under all programs as of 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 $3.9 million, of which 50% will be recognized over the four year service period and 50% over the performance vesting tranche, not to exceed one year.following dates:

 

  

March 31, 2024

  

March 31, 2023

 
  

Unrecognized Compensation Expense (in thousands)

  

Expected Weighted Average Period to be Recognized (years)

  

Unrecognized Compensation Expense (in thousands)

  

Expected Weighted Average Period to be Recognized (years)

 

Stock Options

  -   -   -   - 

Restricted Stock Units

  2,231   2.3   4,977   2.2 

Phantom Stock Units

  7,535   2.0   9,222   2.1 

Total

  9,766   4.3   14,199   4.3 

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 no options granted during the three months ended March 31, 2024and ninethree months ended September 30, 2023March 31, 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 basedtime-based options are eligible to vest in equal installments of 20% or 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 basedtime-based options which would have vested on the next applicable vesting date shall become vested, and the remaining unvested time basedtime-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 basedtime-based options shall immediately vest. An initial public offering does not qualify as a Change in Control as it relates to the vesting of stock options.

 

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 493,104487,922 Performance Options exercisable and outstanding.

 

18

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

A summary of the changes in stock options outstanding during the ninethree months ended September 30, 2023March 31, 2024, is as follows:

 

  

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

  1,162,088  $9.05   2.4  $- 

Granted

  -  $-   -  $- 

Exercised

  -  $-   -  $- 

Canceled or forfeited

  3,886  $10.15   -  $- 

Options outstanding as of September 30, 2023

  1,158,202  $9.04   1.6  $48 

Options exercisable as of September 30, 2023

  1,158,202  $9.04   1.6  $48 

Number of Options

Options outstanding as of December31, 2023

1,158,202

Granted

-

Exercised

7,773

Canceled or forfeited

-

Options outstanding as of March31, 2024

1,150,429

Options exercisable as of March31, 2024

1,150,429

 

Restricted Stock and Restricted Stock Units

 

Restricted stock awards and restricted stock units are typically eligible to vest in equal installments of 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. In the event of a change in control, certain awards vest immediately and certain awards vest only upon termination within 12 months of the change in control event.

 

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 ninethree months ended September 30, 2023March 31, 2024, is as follows:

 

  

Shares Outstanding

  Weighted Average Grant Date Fair Value (per share) 

Restricted Stock and Restricted Stock Units Outstanding as of December 31, 2022

  1,669,424  $7.24 

Granted

  143,841  $6.68 

Vested

  384,731  $7.51 

Canceled or forfeited

  8,493  $6.80 

Restricted Stock and Restricted Stock Units Outstanding as of September 30, 2023

  1,420,041  $10.07 

Shares Outstanding

Restricted Stock Units Outstanding as of December 31, 2023

1,403,454

Granted

53,712

Vested

348,728

Canceled or forfeited

1,550

Restricted Stock Units Outstanding as of March 31, 2024

1,106,888

 

Phantom Stock Units

 

Phantom stock awardsunits are typically eligible to vest in equal installments of 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 awardsunits shall become vested. Vesting tranchesIn the event of a change in control, certain awards vest immediately and certain awards vest only upon termination within 12 months of the change in control event. The phantom stock awards canunits outstanding at March 31, 2024may be settled in cash or stock at the Company’s discretion. The phantom stock awardsunits 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”“Accrued Liabilities” within the condensed consolidated balance sheets.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 units outstanding during the ninethree months ended September 30, 2023March 31, 2024 is as follows:

 

  

Shares Outstanding

  

Weighted Average Grant Date Fair Value (per share)

 

Phantom Stock Outstanding as of December 31, 2022

  2,619,608  $5.98 

Granted

  1,620,727  $6.15 

Vested

  581,567  $6.01 

Canceled or forfeited

  70,469  $5.78 

Phantom stock outstanding as of September 30, 2023

  3,588,299  $6.44 

Shares Outstanding

Phantom Stock Outstanding as of December31, 2023

3,316,062

Granted

-

Vested

344,454

Canceled or forfeited

25,464

Phantom stock outstanding as of March31, 2024

2,946,144

 

19

 

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,March 31, 2024, was an expense of 119.9%13.2%. 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,March 31, 2024, is primarily due to changes in our valuation allowance on deferred tax assets and US tax on foreign income.assets. The Company's effective income tax rate for the three months ended September 30, 2022,March 31, 2023, was a benefit of 134.0%78.1%. 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.

The Company's effective income tax rate for the nine months ended September 30,March 31, 2023,was an expense of 39.5%. The difference between the federal statutory rate of 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 10.9%. The difference between the federal statutory rate of 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 mayrevise 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 $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")the Company and certain of its officers, individually and on behalf of all persons who purchased or otherwise acquired Company securities between August 2, 2018and August 7, 2019.The complaints alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (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,third plaintiff (“OPPRS”) filed a putative class action lawsuit in the same court asserting similar claims to those alleged in the firsttwo 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, as amended (the “Securities Act”), on behalf of all persons who purchased Company common stock pursuant and/or traceable to the Company’s August 2018and March 2019secondary 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, 2018through 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, 2021and 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,Second Amended Complaint, and on December 2, 2022,the court granted in part and denied in part those motions. It dismissed each of the 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, 2022decision 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. On February 13, 2024, the Court granted the motion for judgment on the pleadings and dismissed the securities class action in full with prejudice. On March 14, 2024, Plaintiff's filed a notice of appeal. The Company, Mr. Lopez, and Mr. Akiona intend to oppose the appeal and will file their opposition prior to the deadline of July 3, 2024 (which includes an automatic 30-day extension). The defendants believe all claims in the action are without merit, and intendwill continue 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 $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 2016through 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 and local 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 has been rescheduled to December 2023.August2024.

 

We have not accrued the $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 maybe required to accrue this amount as well as applicable interest. It is also possible that ADOR maysimilarly 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 2016through August 2019,we estimate that ADOR’s assessment for taxable lease rental payments for subsequent periods through September 30, December 31,2023would not exceed $2.6$2.9 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 $9.4 million. 

 

We plan to enterIn December 2023, we entered into discussions with SAT and the Mexican tax payertaxpayer advocate, Procuraduría de la Defensa del Contribuyente, (“PRODECON”), to reach an agreement with SAT regarding its final assessment which we expectexpected to receive during these discussions. The discussions concluded in January 2024with PRODECON’s assistance, are expected to nullify or result in a significant reductionno resolution of the anticipated tax to be assessed againstmatter and with no fixed amount of the Company.potential assessment. In February 2024, SAT made an assessment of the omitted taxes together with interest, fines, and surcharges of approximately $10.1 million, which has been translated into US dollars at the quarter end exchange rate. 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 filehave filed nullity petitions before the Federal Tax Court in Mexico to invalidate SAT’s resolutions in this matter.

 

SAT has We have not made an official assessment and we have not accrued any amount related to this matter, as we cannot accurately estimate the final assessmentpotential loss within the potential loss range of up to approximately $9.4$9.9 million, including the possibility of athe full reduction of the assessment based on our future petitions.

 

20

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 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,Earnings Before Interest, Taxes, Depreciation and Amortization ("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 ninemonths ended September 30, 2023March 31, 2024 and 20222023 (amounts in thousands): 

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended March 31,

 
 

2023

  

2022

  

2023

  

2022

  

2024

  

2023

 

Revenues by segment

            

EGM

 $81,862  $71,620  $241,101  $208,993  $87,251  $76,558 

Table Products

 4,387  4,036  12,877  11,030  4,566  4,094 

Interactive

  3,129   2,603   8,407   7,677   4,156   2,523 

Total Revenues

  89,378   78,259   262,385   227,700   95,973   83,175 

Adjusted EBITDA by segment

            

EGM

 36,772  31,331  107,661  93,090  39,681  34,032 

Table Products

 2,436  2,561  6,950  6,411  2,406  2,251 

Interactive

  903   575   1,596   1,862   1,932   220 

Subtotal

  40,111   34,467   116,207   101,363   44,019   36,503 

Write-downs and other:

  

Disposal of long-lived assets

 (11) (79) 385  337  (44) 83 

Impairment of long-lived assets

 -  2  239  21  20  121 

Fair value adjustments to contingent consideration

 -  1,466  -  1,466 

Depreciation and amortization

 18,896  18,950  56,677  56,979  19,439  19,142 

Interest expense, net of interest income and other

 13,738  10,431  40,748  27,837  13,158  13,269 

Loss on extinguishment and modification of debt

 -  -  -  8,549  1,636  - 

Other adjustments

 1,127  585  1,584  997  429  413 

Other non-cash charges

 2,480  2,171  7,391  6,469  2,269  2,454 

Non-cash stock-based compensation

  3,096   2,341   8,586   10,572   2,106   2,544 

Income (loss) before income taxes

 $785  $(1,400) $597  $(11,864) $5,006  $(1,523)

 

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.

 

NOTE 14. SUBSEQUENT EVENTS 

On May 8, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bingo Holdings I, LLC, a Delaware limited liability company (“Parent”), and Bingo Merger Sub, Inc., a Nevada corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates of Brightstar Capital Partners.

Upon the closing of the Merger, each share of common stock, par value $0.01 per share of the Company issued and outstanding immediately prior to the effective time of the Merger (except for shares (A) held by the Company (including in the Company’s treasury) or any direct or indirect wholly owned subsidiary of the Company; and (B) held by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, which will be cancelled and retired for no consideration, will automatically be canceled and converted into the right to receive $12.50 in cash.

Consummation of the Merger is subject to the satisfaction or waiver of customary closing conditions, including but not limited to: (i) the approval of the Merger by the Company’s stockholders, (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) absence of any legal requirement, order or injunction enjoining or otherwise prohibiting the consummation of the Merger and (iv) receipt of certain gaming regulatory approvals. The Merger is expected to be completed in the second half of calendar year 2025 and is subject to customary closing conditions, including the receipt of regulatory approvals, which include gaming regulatory approvals and gaming licenses, and approval by a majority of AGS stockholders.

21

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 $4.8 million was allocated primarily to tax deductible goodwill for $1.2 million and intangible assets of $3.5 million, which will be amortized over a weighted average period of approximately 9.1 years.

22

 

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 ninethree months ended September 30, 2023,March 31, 2024, approximately 69%65% 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.

On May 8, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bingo Holdings I, LLC, a Delaware limited liability company (“Parent”), and Bingo Merger Sub, Inc., a Nevada corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates of Brightstar Capital Partners.

Upon the closing of the Merger, each share of common stock, par value $0.01 per share of the Company issued and outstanding immediately prior to the effective time of the Merger (except for shares (A) held by the Company (including in the Company’s treasury) or any direct or indirect wholly owned subsidiary of the Company; and (B) held by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, which will be cancelled and retired for no consideration, will automatically be canceled and converted into the right to receive $12.50 in cash.

Consummation of the Merger is subject to the satisfaction or waiver of customary closing conditions, including but not limited to: (i) the approval of the Merger by the Company’s stockholders, (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) absence of any legal requirement, order or injunction enjoining or otherwise prohibiting the consummation of the Merger and (iv) receipt of certain gaming regulatory approvals. The Merger is expected to be completed in the second half of calendar year 2025 and is subject to customary closing conditions, including the receipt of regulatory approvals, which include gaming regulatory approvals and gaming licenses, and approval by a majority of AGS stockholders.

 

EGM Segment

 

EGMs constitute our largest segment, representing 92%91% of our revenue for the ninethree months ended September 30, 2023. We haveMarch 31, 2024. In 2024, we had 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 StarwallOrion Curve PremiumOrion Rise, and Big Red ("Colossal Diamonds")and the recent addition Spectra UR43 Premium. Also, our core cabinets that are available for sale and lease include the newly releasedSpectra UR49C and Spectra UR43, as well as the Orion PortraitOrion Slant, Orion CurveOrion 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.”model”. 

Our core game titles are targeted at maintaining and growing our current installed base and we believe that it is the performance of these game titles that our customers value. Our top-performing game titles include Rakin' Bacon! and a version used only on our premium games called Rakin'Bacon Deluxe. In addition to these titles, we have hundreds of additional titles that we design our core titles to provide a universal appeal to casino patrons. Our game studios are focused on continually producing new content that is then released to the market on a regular basis.

 

2322

 

 

Table Products Segment

 

In addition to our existing portfolio of EGMs, we alsoWe offer our customers more than 60 unique table product offerings,products, including live felt table games, side bet offerings,bets, 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"“the pit”). Our table products segment offers a full suite of side bets and specialty table games as well as progressive technology products that provide this enhancement and weincrease gaming activity and hold percentages for our casino customers. We believe that this segment will serve as an important growth engine for the Company, includingour company by generating further cross-selling opportunities with our EGM offerings. As of September 30, 2023,March 31, 2024, we had an installed base of over 5,300placed 5,410 table products domestically and internationally andinternationally. Based on the number of products placed, we believe we are presently a leading supplier of table products to the gaming industry based on number of products placed.industry.

 

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 Segment

 

We specialize in providing a Business-to-Business ("B2B")B2B game aggregation platform catering to the rapidly growing online real-money gaming ("RMG")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.

 

AGSWe also offers Business-to-Consumer (“B2C”)offer 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.

 

2423

 

 

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.

 

2524

 

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 endedSeptember 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.

26

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.

27

Results of Operations

 

NineThree Months Ended September 30, 2023March 31, 2024 compared to the NineThree Months Ended September 30, 2022March 31, 2023

 

The following tables set forth certain selected condensed consolidated financial data for the ninethree months ended September 30,March 31, 2024 and 2023 and 2022 (in thousands): 

 

 

Nine Months Ended September 30,

  

$

  

%

  Three Months Ended March 31,  

$

  

%

 
 

2023

  

2022

  

Change

  

Change

  

2024

  

2023

  

Change

  

Change

 

Consolidated Statements of Operations:

                

Revenues

                

Gaming operations

 $180,641  $166,396  $14,245  8.6% $62,060  $58,642  $3,418  5.8%

Equipment sales

  81,744   61,304   20,440   33.3%  33,913   24,533   9,380   38.2%

Total revenues

  262,385   227,700   34,685   15.2%  95,973   83,175   12,798   15.4%

Operating expenses

                

Cost of gaming operations

 37,030  31,512  5,518  17.5% 12,074  11,756  318  2.7%

Cost of equipment sales

 38,854  32,030  6,824  21.3% 15,656  12,333  3,323  26.9%

Selling, general and administrative

 56,379  50,881  5,498  10.8% 18,110  17,205  905  5.3%

Research and development

 31,476  29,952  1,524  5.1% 10,918  10,789  129  1.2%

Write-downs and other charges

 624  1,824  (1,200) (65.8)% (24) 204  (228) (111.8)%

Depreciation and amortization

  56,677   56,979   (302)  (0.5)%  19,439   19,142   297   1.6%

Total operating expenses

  221,040   203,178   17,862   8.8%  76,173   71,429   4,744   6.6%

Income from operations

 41,345  24,522  16,823  68.6% 19,800  11,746  8,054  68.6%

Other expense (income)

                

Interest expense

 42,362  27,851  14,511  52.1% 13,980  13,704  276  2.0%

Interest income

 (1,267) (728) (539) 74.0% (685) (357) (328) 91.9%

Loss on extinguishment and modification of debt

 - 8,549 (8,549) (100.0)% 1,636 - 1,636 100.0%

Other (expense) income

  (347)  714   (1,061)  (148.6)%  (137)  (78)  (59)  75.6%

Income (loss) before income taxes

  597   (11,864)  12,461   (105.0)%  5,006   (1,523)  6,529   (428.7)%

Income tax (expense) benefit

  (236)  1,288   (1,524)  (118.3)%  (661)  1,189   (1,850)  (155.6)%

Net income (loss)

 $361  $(10,576) $10,937   (103.4)% $4,345  $(334) $4,679   (1400.9)%

 

Revenues

Gaming Operations.

Gaming operations revenue increased primarily due to an increase in our EGM segment. EGM RPDdomestic Interactive segment, which increased 9.5%by $1.6 million compared to the prior year from $24.07 per day to $26.36 per day.year. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed basesegment, which increased by $1.4 million compared to the prior year over year, offset by a decrease in our international EGM installed base primarily due to the imposition of new gaming taxes in one Mexican state that compelled casino operators to remove units in the second half of 2022. The increase in gaming operations revenue is also attributable to a $0.8 million increase in Table Products revenue related to an increase in ourdomestic installed base. 

base by 236 units. 

 

Equipment Sales. 

 

The increase in equipment sales was primarily due to an increase of 822320 EGMs sold year over year. We sold 3,7251,441 EGM units during the ninethree months ended September 30, 2023 March 31, 2024, compared to 2,9031,121 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 asdue to increased activity, offset by decreased direct expenses and related costs compared to the prior year period due to increased activity.period. As a percentage of gaming operations revenue, costs of gaming operations was 20.5%19.5% for the ninethree months ended September 30, 2023 March 31, 2024 compared to 18.9%20.0% for the prior year period.

 

2825

 

Cost of equipment sales.The increase in cost of equipment sales is primarily 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 47.5%46.2% for the ninethree months ended September 30, 2023 March 31, 2024 compared to 52.2%50.3% 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 $6.2$0.6 million increase in professional fees incurred in the current period, as well as due to a $0.6 million increase in salaries and benefits, offset by a $1.0$0.5 million decrease in non-cash stock-based compensation.

 

Research and development.The increase is primarily attributable to a $0.3 million increase in operational support costs to support our research and development expense is primarily due to a $2.7 million increase in salaries & benefits,resources, offset by a $0.9$0.2 million decrease in non-cash stock-based compensation.

salaries and benefits.

 

Write-downs and other charges. During the nine three months ended September 30, 2023 March 31, 2024, the Company recognized $0.6 million indid not recognize any meaningful write-downs and other charges  primarily related to the impairment of intangible assets and the disposal of long-lived assets.  charges. During the nine three months ended September 30, 2022,March 31, 2023, the Company recognized $1.8$0.2 million in write-downs and other charges primarily related to athe impairment of intangible assets (the Company used level 3 fair value adjustment to contingent consideration.

inputs based on projected cash flows) and the disposal of long-lived assets.

 

Depreciation and amortization. The decreaseincrease was predominantly due to a $1.3$0.8 million increase in amortization, offset by a $0.5 million decrease in amortization expense, offset by a $1.0 million increase in depreciation from new placements of machines on lease. 

deprecation. 

 

Other (expense) income

 

Interest expense. The increase in interest expense is predominantly attributable to an increase in our effectiveincreased interest rate in the current period as compared to the prior year period. The increase was offset by a decreaselowered interest rate from repricing of term loan credit facility in the amount outstanding on the term loan borrowing facility fromcurrent quarter by entering into the Amended Credit Agreement.Seventh Amendment. See Item 1."Financial Statements" Note 5."Long-Term Debt" for a detailed discussion regarding long-term debt. debt.

 

Loss on extinguishment of debt. On February 5, 2024, in connection with entering into the Seventh Amendment, $1.6 million in loan costs related to third-party costs were expensed and included in the loss on extinguishment and modification of debt.

Other (expense) income. The fluctuation is due to the effect of foreign currency fluctuation on trade payables and receivables denominated in foreign currencies.

 

Loss on extinguishment and modification of debt. On February 15, 2022, in connection with entering into the Amended Credit Agreement, $8.5 million in loan costs including third-party costs and make-whole premium were expensed and included in the loss on extinguishment and modification of debt.

Income taxes.The Company's effective income tax rate for the ninethree months ended September 30, 2023,March 31, 2024, was an expense of 39.5%13.2%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the ninethree months ended September 30, 2023,March 31, 2024, 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.assets. The Company's effective income tax rate for the ninethree months ended September 30, 2022,March 31, 2023, was a benefit of 10.9%78.1%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the ninethree months ended September 30, 2022,March 31, 2023, 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.

2926

 

 

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 (gain) 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.

 

3027

 

Electronic Gaming Machines

 

Three Months Ended September 30, 2023March 31, 2024 compared to the Three Months Ended September 30, 2022March 31, 2023

 

 Three Months Ended September 30,  

$

  

%

  Three Months Ended March 31,  

$

  

%

 

(amounts in thousands, except unit data)

 

2023

  

2022

  

Change

  

Change

  

2024

  

2023

  

Change

  

Change

 

EGM segment revenues:

                        

Gaming operations

 $54,026 $50,233 $3,793 7.6% $53,799 $52,413 $1,386 2.6%

Equipment sales

  27,836   21,387   6,449   30.2%  33,452   24,145   9,307   38.5%

Total EGM revenues

  81,862   71,620   10,242   14.3%  87,251   76,558   10,693   14.0%
  

EGM segment expenses and adjusted expenses:

                        

Cost of gaming operations(1)

 12,331 9,745 2,586 26.5% 11,084 10,815 269 2.5%

Less: Adjustments(2)

  948   633   315   49.8%  692   877   (185)  (21.1)%

Adjusted cost of gaming operations

  11,383   9,112   2,271   24.9%  10,392   9,938   454   4.6%
  

Cost of equipment sales

 13,391 11,792 1,599 13.6% 15,521 12,227 3,294 26.9%
  

Selling, general and administrative

 18,020 15,366 2,654 17.3% 16,433 15,195 1,238 8.1%

Less: Adjustments(3)

  3,673   1,815   1,858   102.4%  1,666   2,152   (486)  (22.6)%

Adjusted cost of selling, general and administrative

  14,347   13,551   796   5.9%  14,767   13,043   1,724   13.2%
  

Research and development

 8,054 8,217 (163) (2.0)% 9,063 9,409 (346) (3.7)%

Less: Adjustments(4)

  509   791   (282)  (35.7)%  597   546   51   9.3%

Adjusted cost of research and development

  7,545   7,426   119   1.6%  8,466   8,863   (397)  (4.5)%
  

Accretion of placement fees

 1,576 1,592 (16) (1.0)% 1,576 1,545 31 2.0%
  

EGM Adjusted EBITDA

 $36,772  $31,331  $5,441   17.4% $39,681  $34,032  $5,649   16.6%
  

EGM Business Segment Key Performance Indicators ("KPI's")

                  

EGM gaming operations:

                        

EGM installed base:

                  

Class II

 11,257 11,324 (67) (0.6)% 11,190 11,244 (54) (0.5)%

Class III

  5,167   4,934   233   4.7%  5,406   5,116   290   5.7%

Domestic installed base, end of period

 16,424 16,258 166 1.0% 16,596 16,360 236 1.4%

International installed base, end of period

 6,083 6,274 (191) (3.0)% 6,061 6,248 (187) (3.0)%

Total installed base, end of period

  22,507   22,532   (25)  (0.1)%  22,657   22,608   49   0.2%
  

EGM revenue per day ("RPD"):

                  

Domestic revenue per day

 $32.57 $31.13 $1.44 4.6% $32.49 $32.82 $(0.33) (1.0)%

International revenue per day

 $9.43 $7.34 $2.09 28.5% $9.70 $8.29 $1.41 17.0%

Total revenue per day

 $26.28 $24.31 $1.97 8.1% $26.38 $26.06 $0.32 1.2%
  

EGM equipment sales

                  

EGM units sold

 1,345 1,014 331 32.6% 1,441 1,121 320 28.5%

Average sales price ("ASP")

 $19,380 $19,146 $234 1.2% $20,626 $19,587 $1,039 5.3%

 

(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, restructuring and severance, legal and litigation expenses including settlement payments and other adjustments.

(4)

Adjustments to research and development costs include non-cash stock compensation expense.

 

3128

 

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 attributablewas primarily due to an increase in ourof 236 domestic EGM units installed base year over year. We installed 16,596 EGM units as ofMarch 31, 2024, compared to 16,360 EGM units installed as of March 31, 2023. 

 

Equipment Sales 

 

The increase in equipment sales was primarily due to an increase of 331320 EGMs sold year over year. We sold 1,3451,441 EGM units during the three months ended September 30, 2023March 31, 2024, compared to 1,0141,121 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, restructuring and severance costs, 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%45.5% for the three months ended September 30, 2023 and 2022, respectively.March 31, 2024 compared to 44.5% for the three months ended March 31, 2023.

 

32

Electronic Gaming Machines

Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022

  

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.

33

Gaming Operations Revenue
Gaming operations revenue increased primarily due to an increase in EGM RPD of 9.5% compared to the prior year from $24.07 per day to $26.36 per day. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed base year over year, offset by a decrease in our international EGM installed base.

Equipment Sales 

The increase in equipment sales was primarily due to an increase of 822 EGMs sold year over year. We sold 3,725 EGM units during the nine months ended September 30, 2023 , compared to 2,903 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 44.7% and 44.5% for the nine months ended  September 30, 2023 and 2022, respectively.

3429

 

 

Table Products

 

Three Months Ended September 30, 2023March 31, 2024 compared to Three Months Ended September 30, 2022March 31, 2023

 

 Three Months Ended September 30,  

$

  

%

  Three Months Ended March 31,  

$

  

%

 

(amounts in thousands, except unit data)

 

2023

  

2022

  

Change

  

Change

  

2024

  

2023

  

Change

  

Change

 

Table Products segment revenues:

                        

Gaming operations

 $3,871 $3,756 $115 3.1% $4,105 $3,706 $399 10.8%

Equipment sales

  516   280   236   84.3%  461   388   73   18.8%

Total Table Products revenues

  4,387   4,036   351   8.7%  4,566   4,094   472   11.5%
  

Table Products segment expenses and adjusted expenses:

                        

Cost of gaming operations(1)

 504 211 293 138.9% 546 475 71 14.9%

Less: Adjustments(2)

  103   63   40   63.5%  77   118   (41)  (34.7)%

Adjusted cost of gaming operations

  401   148   253   170.9%  469   357   112   31.4%
  

Cost of equipment sales

 149 65 84 129.2% 135 106 29 27.4%
  

Selling, general and administrative

 981 865 116 13.4% 1,110 1,069 41 3.8%

Less: Adjustments(3)

  81   104   (23)  (22.1)%  107   116   (9)  (7.8)%

Adjusted cost of selling, general and administrative

  900   761   139   18.3%  1,003   953   50   5.2%
  

Research and development

 517 528 (11) (2.1)% 569 440 129 29.3%

Less: Adjustments(4)

  16   27   (11)  (40.7)%  16   13   3   23.1%

Adjusted cost of research and development

  501   501   -   0.0%  553   427   126   29.5%
  

Table Products Adjusted EBITDA

 $2,436  $2,561  $(125)  (4.9)% $2,406  $2,251  $155   6.9%
  

Table Products unit information:

                        

Table products installed base, end of period

 5,309 4,969 340 6.8% 5,410 5,278 132 2.5%

Average monthly lease price

 $240 $243 $(3) (1.2)% $249 $230 $19 8.3%

 

(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, severance and restructuring, 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.

35

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,severance 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,restructuring, 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 as described above, partially offset by an increase in the cost of equipment sales and an increase in operating expenses.

 

3630

 

 

Interactive

 

Three Months Ended September 30, 2023March 31, 2024 compared to Three Months Ended September 30, 2022March 31, 2023

 

 Three Months Ended September 30,  

$

  

%

  Three Months Ended March 31,  

$

  

%

 

(amounts in thousands)

 2023  2022  Change  Change  2024  2023  Change  Change 

Interactive segment revenue:

                        

Gaming Operations

 $3,129 $2,603 $526 20.2% $4,156 $2,523 $1,633 64.7%

Total Interactive revenue

  3,129   2,603   526   20.2%  4,156   2,523   1,633   64.7%
  

Interactive segment expenses and adjusted expenses:

                        

Cost of gaming operations(1)

 411 419 (8) (1.9)% 444 466 (22) (4.7)%
  

Selling, general and administrative

 452 724 (272) (37.6)% 567 941 (374) (39.7)%

Less: Adjustments(2)

  (223)  50   (273)  (546.0)%  41   33   8   24.2%

Adjusted cost of selling, general and administrative

  675   674   1   0.1%  526   908   (382)  (42.1)%
  

Research and development

 1,160 957 203 21.2% 1,286 940 346 36.8%

Less: Adjustments(3)

  20   22   (2)  (9.1)%  32   11   21   190.9%

Adjusted cost of research and development

  1,140   935   205   21.9%  1,254   929   325   35.0%
  

Interactive Adjusted EBITDA

 $903  $575  $328   57.0% $1,932  $220  $1,712   778.2%

 

(1)

Exclusive of depreciation and amortization.

(2)

Adjustments to selling, general and administrative expense include non-cash stock compensation expense.expense and severance and restructuring expenses.

(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.

37

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 INCOME (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.income (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 income (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 income (loss) income,, income from operations, EGM Adjusted EBITDA, Table Products Adjusted EBITDA or Interactive Adjusted EBITDA, and use Total Adjusted EBITDA only supplementally.

 

3831

 

 

The following tables reconcile net lossincome (loss) to total Adjusted EBITDA (amounts in thousands):

 

Three Months Ended September 30, 2023March 31, 2024 compared to the Three Months Ended September 30, 2022March 31, 2023

 

  

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%
  

Three Months Ended March 31,

  

$

  

%

 
  

2024

  

2023

  

Change

  

Change

 

Net income (loss)

 $4,345   (334) $4,679   (1400.9)%

Income tax benefit (expense)

  661   (1,189)  1,850   (155.6)%

Depreciation and amortization

  19,439   19,142   297   1.6%

Interest expense, net of interest income and other

  13,158   13,269   (111)  (0.8)%

Loss on extinguishment of debt (1)

  1,636   -   1,636   100.0%

Write-downs and other(2)

  (24)  204   (228)  (111.8)%

Other adjustments(3)

  429   413   16   3.9%

Other non-cash charges(4)

  2,269   2,454   (185)  (7.5)%

Non-cash stock-based compensation(5)

  2,106   2,544   (438)  (17.2)%

Total Adjusted EBITDA

 $44,019  $36,503  $7,516   20.6%

 

(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.

39

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 third party costs incurred in connection with entering into the refinancing of long-term debt, in which deferred loan costs and discounts related to old senior secured credit facilities were written-off.Seventh Amendment. 

(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.assets.

(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.

  

4032

 

 

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,March 31, 2024, the Company had $43.7$40.4 million in cash and cash equivalents and $40.0 million available to draw under its revolving credit facility. As of September 30, 2023,March 31, 2024, 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,March 31, 2024, there were no required financial covenants for our debt instruments.

 

4133

 

The following table summarizes our historical cash flows (in thousands):

 

 

Nine Months Ended September 30,

  

Three Months Ended March 31,

 
 

2023

  

2022

  

Change

  

2024

  

2023

  

Change

 

Cash Flow Information:

            

Net cash provided by operating activities

 $59,755  $52,574  $7,181  $26,325  $4,167  $22,158 

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 cash (used in) investing activities

 (15,272) (13,103)  (2,169)

Net cash (used in) financing activities

 (21,666) (3,380)  (18,286)

Effect of exchange rates on cash, cash equivalents and restricted cash

  15   (7)  22 

Net decrease in cash, cash equivalents and restricted cash

 $5,981  $(61,530) $67,511  $(10,598) $(12,323) $1,725 

 

Operating activities

 

The increase in cash provided by operating activities is attributable to a $2.1$17.3 million increasedecrease in cash used related to operatinguse for assets and liabilities as well asthat relate to operations, the increase is further supported by an improvement in our net lossincome (loss) adjusted for non-cash expenses that increased by $5.7$4.9 million.

 

Investing activities 

 

The decreaseincrease in cash used in investing activities was primarily due to a $6.0$0.9 million decreaseincrease in thesoftware development and other expenditures, $0.7 million increase in purchases of property and plant, as well as a $4.8$0.6 million decrease cash used in business acquisitions described in Item 1. “Financial Statements” Note 14. “Acquisitions”, a $2.9 million increase in collections on a customer note receivable, offset by $2.4 million increase in software development and other expenditures.receivable.

 

Financing activities

 

The decreaseincrease in cash used in financing activities of $49.4$18.3 million is primarily attributable to the reduction of debt principal due to the voluntary payment of $15.0 million in the current period and payment of related debt issuance costs in conjunction with our entering into The Amended Credit Agreementother financed obligations in the prior period as described in Item 1. “Financial Statements” Note 5. "Long-Term Debt."current period.

 

4234

 

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.

 

4335

 

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, 2022.2023. There were no material changes to our policies during the ninethree months ended September 30, 2023.March 31, 2024.

 

4436

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

See related disclosure at Item 1. “Financial Statements” Note 1. “Description of the Business and Summary of Significant Accounting Policies.”Policies” of this Quarterly Report.

 

4537

 

 

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.Not Applicable.

 

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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.March 31, 2024. 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.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

"Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 20222023 (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. The Company is supplementing its risk factors described in the Annual Report and the following risk factor should be read in conjunction with the other risk factors disclosed in the Annual Report.

Risks Related to the Proposed Merger

The announcement and pendency of our agreement to be acquired by Brightstar Capital Partners may have an adverse effect on our business, operating results and our stock price, and may result in the loss of employees, customers, suppliers, and other business partners.

On May 8, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bingo Holdings I, LLC, a Delaware limited liability company (“Parent”), and Bingo Merger Sub, Inc., a Nevada corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by affiliates of Brightstar Capital Partners. We are subject to risks in connection with the announcement and pendency of the Merger, including, but not limited to, the following:

● market reaction to the announcement of the Merger;

● changes in our business, operations, financial position, and prospects;

● market assessments of the likelihood that the Merger will be consummated;

● the amount of cash offered per share will not be increased to account for positive changes in our business, assets, liabilities, prospects, outlook, financial condition, or results of operations during the pendency of the Merger, including any successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;

● potential adverse effects on our relationships with our current customers, suppliers and other business; partners, or those with which we are seeking to establish business relationships, due to uncertainties about the Merger;

● we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and many of these fees and costs are payable by us regardless of whether the Merger is consummated;

● potential adverse effects on our ability to attract, recruit, retain, and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the Merger, and the possibility that our employees could lose productivity as a result of uncertainty regarding their employment following the Merger;

● the pendency and outcome of the legal proceedings that have been or may be instituted against us, our directors, executive officers and others relating to the transactions contemplated by the Merger Agreement; and

● the possibility of disruption to our business, including increased costs and diversion of management time and resources that could otherwise have been devoted to other opportunities that may have been beneficial to us.

While the Merger is pending, we are subject to contractual restrictions that could harm ourbusiness, operating results and our stock price.

The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our businesses in the ordinary course in all material respects, and restricting us from taking certain specified actions absent Brightstar Capital Partners’ prior written consent. We may find that these and other obligations in the Merger Agreement may delay or prevent us from or limit our ability to respond effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management and board of directors think they may be advisable. These restrictions could adversely impact our business, operating results and our stock price and our perceived acquisition value, regardless of whether the Merger is completed.

The failure to complete the Merger may adversely affect our business and our stock price.

The Merger with Brightstar Capital Partners is subject to a number of conditions, including, among other things, (i) the Company’s receipt of the approval of the Company’s stockholders representing a majority of the voting power of the outstanding shares; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (iii) absence of any legal requirement, order or injunction enjoining or otherwise prohibiting the consummation of the Merger; and (iv) receipt of certain gaming regulatory approvals. There can be no assurance that these conditions to the completion of the Merger will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe or at all.  If the Merger is not completed, we may be subject to negative publicity or be negatively perceived by the investment or business communities and our stock price could fall to the extent that our current stock price reflects an assumption that the Merger will be completed. Furthermore, if the Merger is not completed, we may suffer other consequences that could adversely affect our business and results of our operations.

The Merger Agreement withBrightstar Capital Partners limits our ability to pursue alternative transactions which could deter a third party from proposing an alternative transaction.

The Merger Agreement contains provisions that, subject to certain exceptions, limit our ability to (i) solicit, initiate, or knowingly facilitate, or knowingly encourage (including by way of furnishing non-public information) any acquisition proposal or any inquiries regarding, or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal, or (ii) engage in, continue or otherwise participate in any discussions or negotiations regarding, or furnish or afford access to any other person any non-public information relating to the Company or its business, properties, assets, books, records or other non-public information, among other prohibitions. It is possible that these or other provisions in the Merger Agreement might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of our outstanding common stock from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower per share price to acquire our common stock than it might otherwise have proposed to pay.

 

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.Not applicable.

 

 

ITEM 5. OTHER INFORMATION

 

None.. 

 

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ITEM 6. EXHIBITS

 

(a). Exhibits

 

Exhibit Number

 

Exhibit Description

3.1 Certificate of Amended and Restated Articles of Incorporation of PlayAGS, Inc., effective January 29, 2018 (incorporated by reference to Exhibit 3.1 to PlayAGS, Inc.'s Annual Report on Form 10-K filed on March 5, 2019).

 

 

 

3.2 

Amended and Restated Bylaws of PlayAGS,Inc., Adopted January 29, 2018 (incorporated by reference to Exhibit 3.2 to PlayAGS, Inc.'s Annual Report on Form 10-K filed on March 5, 2019).

   
4.110.1 Second Amendment to PlayAGS, Inc. Omnibus Incentive Planthat certain First Lien Credit Agreement (incorporated by reference to Exhibit 4.1exhibit 10.13 to PlayAGS, Inc.’s Registration StatementInc's Annual Report on Form S-810-K filed on July 19, 2022)March 6, 2024).
   

*31.1

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*31.2

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*3232.1

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

101.IN101.INS

 

Inline XBRL Instance Document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

   

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contains in Exhibit 101)

 


* Filed herewith. 

 

4941

 

SIGNATURES

 

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.

 

 

 

 

PlayAGS, Inc.

 

 

 

 

 

Date:

November 7, 2023May 9, 2024

 

By:

/s/ KIMO AKIONA

 

 

 

Name:

Kimo Akiona

 

 

 

Title:

Chief Financial Officer, Chief Accounting Officer and Treasurer

(Principal Financial and Accounting Officer)

 

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