UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

for the quarter ended September 30, ~~2017~~2018



o	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 ~~000-55119~~001-38357

~~AP GAMING HOLDCO,~~PLAYAGS, INC.

(Exact name of registrant as specified in its charter)



~~Delaware~~Nevada		46-3698600
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

5475 S. Decatur Blvd., Ste #100 Las Vegas, NV 89118

(Address of principal executive offices) (Zip Code)

(702) 722-6700

(Registrant’s telephone number, including area code)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ox No x*o

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



Large accelerated filer o	Accelerated filer o	Non-accelerated filer x (Do not check if a smaller reporting company)	Smaller reporting company o	Emerging growth company x

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 x No o

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

As of November ~~10, 2017,~~5, 2018 there were ~~100~~35,305,479 shares of the Registrant’s ~~Class A common stock, $.01 par value per share, and 15,041,361 shares of the Registrant’s Class B~~ common stock, $.01 par value per share, outstanding.

*The Company does not have any public stockholders. Accordingly, it does not maintain an investor relations website where Interactive Data Files would be posted.

TABLE OF CONTENTS



	PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, ~~2017~~2018 AND DECEMBER 31, ~~2016~~2017	1

	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE ~~LOSS~~INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017	2

	CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AT SEPTEMBER 30, 2018 AND DECEMBER 31, 2017 AND 2016	23

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2018 AND ~~2016~~2017	34

	NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	45

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2126

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	4051

ITEM 4.	CONTROLS AND PROCEDURES	4051

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	4152

ITEM 1A.	RISK FACTORS	4152

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	52

ITEM 4.	MINE SAFETY DISCLOSURES	52

ITEM 5.	OTHER INFORMATION	52

ITEM 6.	EXHIBITS	4254

	SIGNATURES	4355

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

~~AP GAMING HOLDCO,~~PLAYAGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Assets
Current assets
Cash and cash equivalents	$	10,025		$	17,977		$	33,227		$	19,242
Restricted cash	100			100			78			100
Accounts receivable, net of allowance of $1,638 and $1,972, respectively	34,484			24,035
Accounts receivable, net of allowance of $1,180 and $1,462, respectively							46,082			32,776
Inventories	18,885			10,729			31,819			24,455
Prepaid expenses	3,734			2,609			4,638			2,675
Deposits and other	3,392			3,052			4,275			3,460
Total current assets	70,620			58,502			120,119			82,708
Property and equipment, net	75,461			67,926			84,323			77,982
Goodwill	257,845			251,024			282,731			278,337
Intangible assets							204,801			232,287
Deferred tax asset	9			9			1,047			1,115
Intangible assets	211,768			232,877
Other assets	24,058			23,754			12,489			24,813
Total assets	$	639,761		$	634,092		$	705,510		$	697,242

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	10,353		$	8,790		$	12,094		$	11,407
Accrued liabilities	23,005			17,702			22,517			24,954
Current maturities of long-term debt	6,674			6,537			6,223			7,359
Total current liabilities	40,032			33,029			40,834			43,720
Long-term debt	573,068			547,238			492,208			644,158
Deferred tax liability - noncurrent	9,111			6,957			678			1,016
Other long-term liabilities	37,001			30,440			25,789			36,283
Total liabilities	659,212			617,664			559,509			725,177
Commitments and contingencies (Note 13)
Stockholders’ equity
Preferred stock at $0.01 par value; 100,000 shares authorized, no shares issued and outstanding	—			—			—			—
Common stock at $0.01 par value; 30,000,100 shares authorized; 100 Class A Shares issued and outstanding at September 30, 2017 and December 31, 2016, and 14,931,529 Class B Shares issued and outstanding at September 30, 2017 and December 31, 2016.	149			149
Common stock at $0.01 par value; 450,000,000 shares authorized at September 30, 2018 and 46,629,155 at December 31, 2017; and 35,305,479 and 23,208,706 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively.							353			149
Additional paid-in capital	177,276			177,276			359,819			177,276
Accumulated deficit	(193,037		)	(156,451		)	(212,058		)	(201,557		)
Accumulated other comprehensive loss	(3,839		)	(4,546		)	(2,113		)	(3,803		)
Total stockholders’ (deficit) equity	(19,451		)	16,428
Total stockholders’ equity							146,001			(27,935		)
Total liabilities and stockholders’ equity	$	639,761		$	634,092		$	705,510		$	697,242

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

~~AP GAMING HOLDCO,~~PLAYAGS, INC.

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

(amounts in thousands, except per share data)

(unaudited)


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenues
Gaming operations	$	42,849		$	38,877		$	125,040		$	117,093		$	50,701		$	42,849		$	152,887		$	125,040
Equipment sales	13,591			2,331			29,254			6,968			24,825			13,591			60,317			29,254
Total revenues	56,440			41,208			154,294			124,061			75,526			56,440			213,204			154,294
Operating expenses
Cost of gaming operations¹	7,344			6,711			21,794			19,627
Cost of equipment sales¹	6,330			698			14,326			4,244
Cost of gaming operations⁽¹⁾													10,494			7,344			29,062			21,794
Cost of equipment sales⁽¹⁾													12,109			6,330			28,919			14,326
Selling, general and administrative	9,742			12,970			30,368			36,654			15,284			9,742			47,411			30,368
Research and development	6,467			6,675			17,912			16,517			7,894			6,467			23,374			17,912
Write downs and other charges	490			1,852			2,655			2,153
Write-downs and other charges													667			490			3,282			2,655
Depreciation and amortization	16,931			19,419			53,598			60,527			18,968			16,931			57,784			53,598
Total operating expenses	47,304			48,325			140,653			139,722			65,416			47,304			189,832			140,653
Income (loss) from operations	9,136			(7,117		)	13,641			(15,661		)
Other (income) expense
Income from operations													10,110			9,136			23,372			13,641
Other expense (income)
Interest expense	12,666			14,903			42,380			44,151			8,956			12,666			28,253			42,380
Interest income	(25		)	(12		)	(80		)	(51		)	(89		)	(25		)	(162		)	(80		)
Loss on extinguishment and modification of debt	—			—			8,129			—			—			—			4,608			8,129
Other (income) expense	(467		)	392			(4,805		)	6,314
Loss before income taxes	(3,038		)	(22,400		)	(31,983		)	(66,075		)
Income tax (expense) benefit	(1,052		)	1,165			(4,603		)	4,935
Net loss	(4,090		)	(21,235		)	(36,586		)	(61,140		)
Other expense (income)													434			(467		)	10,121			(4,805		)
Income (loss) before income taxes													809			(3,038		)	(19,448		)	(31,983		)
Income tax benefit (expense)													3,538			(1,052		)	8,947			(4,603		)
Net income (loss)													4,347			(4,090		)	(10,501		)	(36,586		)
Foreign currency translation adjustment	(498		)	(208		)	707			(2,137		)	1,636			(498		)	1,690			707
Total comprehensive loss	$	(4,588	)	$	(21,443	)	$	(35,879	)	$	(63,277	)
Total comprehensive income (loss)													$	5,983		$	(4,588	)	$	(8,811	)	$	(35,879	)

Basic and diluted loss per common share:
Basic and diluted earnings (loss) per common share:
Basic	$	(0.27	)	$	(1.42	)	$	(2.45	)	$	(4.09	)	$	0.12		$	(0.18	)	$	(0.31	)	$	(1.58	)
Diluted	$	(0.27	)	$	(1.42	)	$	(2.45	)	$	(4.09	)	$	0.12		$	(0.18	)	$	(0.31	)	$	(1.58	)
Weighted average common shares outstanding:
Basic	14,932			14,932			14,932			14,932			35,305			23,208			34,097			23,208
Diluted	14,932			14,932			14,932			14,932			36,313			23,208			34,097			23,208

(1) exclusive of depreciation and amortization

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

~~AP GAMING HOLDCO,~~PLAYAGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands)

(unaudited)

Nine months ended September 30,
2017 2016
Cash flows from operating activities
Net loss $ (36,586 ) $ (61,140 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 53,598
60,527
Accretion of contract rights under development agreements and placement fees 3,459
3,538
Amortization of deferred loan costs and discount 2,315
2,617
Payment-in-kind interest payments (2,698 ) —
Write off of deferred loan cost and discount 3,294
—
Payment-in-kind interest capitalized 7,807
7,490
Provision for bad debts 902
1,274
Loss on disposition of assets 2,896
558
Impairment of assets 333
4,606
Provision (benefit) for deferred income tax 2,147
(6,374 )
Changes in assets and liabilities that relate to operations:
Accounts receivable (9,649 ) (556 )
Inventories (453 ) 1,121
Prepaid expenses (1,119 ) 1,673
Deposits and other (276 ) 165
Other assets, non-current (2,010 ) 673
Accounts payable and accrued liabilities 2,333
9,089
Net cash provided by operating activities 26,293
25,261
Cash flows from investing activities
Business acquisitions, net of cash acquired

(7,000 ) —
Purchase of intangible assets (565 ) (1,311 )
Software development and other expenditures (6,334 ) (4,929 )
Proceeds from disposition of assets 171
87
Purchases of property and equipment (35,961 ) (21,817 )
Net cash used in investing activities (49,689 ) (27,970 )
Cash flows from financing activities
Proceeds from issuance of first lien credit facilities 448,725
—
Repayment of senior secured credit facilities (410,655 ) (3,175 )
Payments on first lien credit facilities

(1,125 ) —
Deferred offering costs paid (1,203 ) —
Payment of financed placement fee obligations (2,971 ) (3,525 )
Payments on deferred loan costs (3,127 ) —
Repayment of seller notes (12,401 ) —
Payments on equipment long term note payable and capital leases (1,832 ) (1,993 )
Payment of previous acquisition obligation —
(1,125 )
Proceeds from employees in advance of common stock issuance 25
—
Net cash used in financing activities 15,436
(9,818 )
Effect of exchange rates on cash and cash equivalents 8
(45 )
Decrease in cash and cash equivalents (7,952 ) (12,572 )
Cash and cash equivalents, beginning of period 17,977
35,722
Cash and cash equivalents, end of period $ 10,025
$ 23,150

Supplemental cash flow information:
Cash paid during the period for interest $ 26,744
$ 29,340
Cash paid during the period for taxes $ 847
$ 922
Non-cash investing and financing activities:
Financed purchase of property and equipment $ 642
$ 1,588
Financed purchase of intangible asset $ 4,866
$ —




	Common Stock - Shares	Common Stock - Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at December 31, 2016	14,932	149		177,276			(156,451		)	(4,546		)	16,428
Net loss	—	—		—			(45,106		)	—			(45,106		)
Foreign currency translation adjustment	—	—		—			—			743			743
Balance at December 31, 2017	14,932	149		177,276			(201,557		)	(3,803		)	(27,935		)
Net loss	—	—		—			(10,501		)	—			(10,501		)
Foreign currency translation adjustment	—	—		—			—			1,690			1,690
Stock-based compensation expense	—	—		9,167			—			—			9,167
Stock split (1.5543-for-one) and reclassification	8,277	83		(83		)	—			—			—
Reclassification of management shares	171	2		1,319			—			—			1,321
Vesting of restricted stock	69	—		—			—			—			—
Stock option exercises	70	1		730			—			—			731
Issuance of common stock	11,787	118		171,410			—			—			171,528
Balance at September 30, 2018	35,305	$	353	$	359,819		$	(212,058	)	$	(2,113	)	$	146,001

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

PLAYAGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

	Nine months ended September 30,
	2018			2017
Cash flows from operating activities
Net loss	$	(10,501	)	$	(36,586	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	57,784			53,598
Accretion of contract rights under development agreements and placement fees	3,412			3,459
Amortization of deferred loan costs and discount	1,388			2,315
Payment-in-kind interest capitalized	—			7,807
Payment-in-kind interest payments	(37,624		)	(2,698		)
Write-off of deferred loan cost and discount	3,410			3,294
Stock-based compensation expense	9,167			—
(Benefit) provision for bad debts	(198		)	902
Loss on disposition of assets	1,383			2,896
Impairment of assets	1,199			333
Fair value adjustment of contingent consideration	700			—
(Benefit) provision for deferred income tax	(205		)	2,147
Changes in assets and liabilities that relate to operations:
Accounts receivable	(12,277		)	(9,649		)
Inventories	(3,173		)	(453		)
Prepaid expenses	(1,958		)	(1,119		)
Deposits and other	(626		)	(276		)
Other assets, non-current	13,574			(2,010		)
Accounts payable and accrued liabilities	(12,135		)	2,333
Net cash provided by operating activities	13,320			26,293
Cash flows from investing activities
Business acquisitions, net of cash acquired	(4,452		)	(7,000		)
Purchase of intangible assets	(931		)	(565		)
Software development	(8,794		)	(6,334		)
Proceeds from disposition of assets	21			171
Purchases of property and equipment	(34,457		)	(35,961		)
Net cash used in investing activities	(48,613		)	(49,689		)
Cash flows from financing activities
Proceeds from issuance of first lien credit facilities	—			448,725
Repayment of senior secured credit facilities	(115,000		)	(410,655		)
Payments on first lien credit facilities	(3,864		)	(1,125		)
Payment of financed placement fee obligations	(2,688		)	(2,971		)
Payments on deferred loan costs	—			(3,127		)
Repayment of seller notes	—			(12,401		)
Payments on equipment long-term note payable and capital leases	(2,108		)	(1,832		)
Initial public offering cost	(4,160		)	(1,203		)
Proceeds from issuance of common stock	176,341			—
Proceeds from employees in advance of common stock issuance	—			25
Proceeds from stock option exercise	731			—
Net cash provided by financing activities	49,252			15,436
Effect of exchange rates on cash and cash equivalents and restricted cash	4			8
Increase in cash and cash equivalents and restricted cash	13,963			(7,952		)
Cash, cash equivalents and restricted cash, beginning of period	19,342			17,977
Cash, cash equivalents and restricted cash, end of period	$	33,305		$	10,125

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

Table of Contents

~~AP GAMING HOLDCO~~PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

PlayAGS, Inc. (formerly AP Gaming Holdco, Inc.) (the ~~“Company,” “AP Gaming,” “we,” “us,”~~"Company," "PlayAGS," "we," "us," or ~~“our”~~"our") is a leading designer and supplier of gaming products and services for the gaming industry. ~~The Company is a leader~~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 Mexican gaming jurisdictions and ~~has expanded its product lines to include~~ Class III Native American, commercial and ~~charity jurisdictions. We supply electronic gaming machines~~charitable jurisdictions; Table Products (“~~EGMs”~~Table Products”), server-based systems and back-office systems that are used by casinos and various gaming locations. Since mid-2014, the Company has significantly broadened and diversified its product portfolio through both organic development and strategic acquisitions. We launched a new table products division in mid-2014 to providewhich includes live felt table games, ~~to casino operators. Through the acquisition of Amaya Americas Corporation~~side-bets and progressives as well as our newly introduced card shuffler, “DEX S”; and Interactive Social Casino Games (“~~Cadillac Jack”~~Interactive”) ~~on May 29, 2015, we greatly expanded our games library and EGM offerings. The Company also acquired online developer Gamingo Limited (formerly known as “RocketPlay”~~, ~~currently known as “AGSi”) in June 2015, further expanding its offerings to include interactive products such as~~which provides social casino games ~~available to play~~ on desktop and mobile ~~devices.~~devices as well as a platform for content aggregation used by real-money gaming (“RMG”) and sports-betting partners. Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.

The Company ~~operates and reports in~~filed a Registration Statement on Form 10 on December 19, 2013, which went effective under the ~~following three segments:~~Securities Exchange Act of 1934, as amended (the “Exchange Act”), on December 19, 2013. On January 30, 2018, we completed the initial public offering of 10,250,000 shares of our common stock, at a public offering price of $16.00 per share (the “IPO”).

A. Electronic Gaming Machines

Our EGM segment offers a selection of video slot titles developed for the global marketplace, ~~as well as~~and EGM cabinets ~~such as~~which include the Orion Portrait, ICON,, Halo,, Colossal Diamonds (“Big Red”) (“~~Big Red”),~~ and our newly introduced Orion Slant. 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.

B. Table Products

Our table products include live proprietary table ~~games~~products and ~~side bets,~~side-bets, as well as ancillary table products. Products include both internally developed and acquired proprietary table ~~games, side bets,~~products, side-bets, progressives, and table technology related to blackjack, poker, baccarat, craps and roulette. We have acquired a number of popular brands, including ~~In-Bet,~~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. ~~Our~~ ~~Tornado~~ ~~product is unique in that it allows players to control the spin of the roulette ball by pressing~~In addition, we recently introduced a ~~remote ball activation device. We believe this mechanism enhances player interaction without altering traditional roulette rules and procedures; similarly, our~~ ~~Double Ball Roulette~~ ~~game creates a unique game experience by allowing players to use two balls instead of one.~~single deck card shuffler for poker tables, “DEX S.”

C. Interactive

Our business-to-consumer (“B2C”) social ~~gaming products~~casino games are primarily delivered through our mobile ~~apps,~~ app, Lucky Play ~~Casino~~ ~~and~~ ~~Vegas Fever~~.Casino. The ~~apps contain~~app contains several game titles available for consumers to play for fun and with coins that they purchase through the app. Some of our most popular social casino games include content that is also popular in land-based settings such as ~~Colossal Diamonds~~, Golden Wins, Royal Wheels and So ~~Hot~~,Hot. We have recently expanded into the business-to-business (“B2B”) space through our core app, Lucky Play Casino, whereby we white label our social casino game product and ~~Monkey~~enable our land-based casino customers to brand the social casino gaming product with their own casino name. With the recent acquisition of Gameiom Technologies Limited (defined below) as described in ~~the Bank~~.Note 2, we now offer a platform for B2B content aggregation used by RMG and sports-betting partners.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange ~~Commission.~~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 financial statements and notes thereto included in the Company's Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2016.~~

2017.

Table of Contents

~~AP GAMING HOLDCO~~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

Gaming Operations

Gaming operations revenue is earned by providing customers with gaming machines, gaming machine content licenses, 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 ~~and then~~upon which the contract continues on a month-to-month basis thereafter. In some instances, the Company will enter arrangements for longer periods of time; however, ~~the~~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 their contracts effectively month-to-month contracts. Primarily due to these factors, our participation arrangements are accounted for as operating leases. 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.

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 daily fee. Thus, in our ~~condensed~~ 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 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 their 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. Whether contractually required or not, the Company develops and provides new gaming titles throughout the life of the lease. Certain arrangements require a portion of the win per day to be retained by the customer to fund facility-specific marketing, advertising and promotions. These amounts retained by the customer reduce the monthly revenue recognized on each arrangement.

Gaming operations revenue is also earned from the licensing of table product content and is earned and recognized on a fixed monthly rate. Our B2C social ~~gaming~~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 ~~stand-alone product sales or separate accounting units~~following criteria are ~~recorded when:~~

~~Pervasive evidence of an arrangement exists;~~

~~The sales price is fixed or determinable;~~

~~Delivery has occurred and services have been rendered; and~~

~~Collectability is reasonably assured.~~met:

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

Delivery has occurred and services have been rendered in accordance with the contract terms.

Equipment sales are generated from the sale of gaming machines and licensing rights to game content software that is installed in the gaming machine, 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. Gaming equipment sales do not include maintenance beyond a standard warranty period. The recognition of revenue from the sale of gaming devices occurs as ~~title and risk~~the customer obtains control of ~~loss have passed to~~ the ~~customer~~product and all other revenue recognition criteria have been satisfied. AsOur contracts include a fixed transaction price. Amounts are due from customers within 30 to 90 days of the ~~combination~~invoice date and to a lesser extent we offer extended payment terms of ~~game content software and~~12 to 24 months with payments due monthly during the ~~tangible gaming device function together to deliver the product’s essential functionality, revenue from the sale of gaming devices is recognized under general revenue recognition guidance.~~extended payment period.

The Company enters into revenue arrangements that may consist of multiple ~~deliverables of its products.~~

performance obligations, which are typically multiple distinct products that may be shipped to the customer at different times. For example, gaming equipment arrangements may include the sale of gaming machines to be delivered upon the consummation of the contract and additional game content conversion ~~kits.~~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, meaning that the customer can benefit from the product on its own and is separately identifiable from other promises in the contract.

Revenue ~~associated with arrangements with multiple deliverables~~ is allocated to the separate ~~units of accounting if (1) the deliverables have value to the customer on a stand-alone basis or (2) the arrangement includes a general right of return relative to the delivered items, delivery or~~ performance ~~of the undelivered items is considered probable and substantially in the control of the Company.~~

~~At the inception of a multiple element arrangement, fees under the arrangement are allocated to deliverables~~obligations based on ~~their~~ relative standalone selling ~~price.~~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 ~~applying~~a product is not sold separately, we determine the ~~relative~~standalone selling price ~~method, a hierarchy is used for estimating the selling price based first on vendor-specific objective evidence (“VSOE”), then third-party evidence (“TPE”)~~with reference to our standard pricing policies and ~~finally management’s estimate of the selling price (“ESP”). Revenue for each unit of accounting is recognized when the relevant recognition criteria for each respective element has been met.~~practices.

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 and funds held to ensure the availability of funds to pay wide-area progressive jackpot awards.~~authorities.

Allowance for Doubtful Accounts

Accounts receivable are stated at face value less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts related to accounts receivable and notes receivable, which are non-interest bearing, deemed to have a high risk of collectability. The Company reviews the accounts receivable and notes receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company analyzes historical collection trends and changes in the customers’ payment patterns, customer concentration, and ~~credit worthiness~~creditworthiness when evaluating the adequacy of the allowance for doubtful accounts. ~~A large percentage of receivables are with Native American tribes, and the Company has concentrations of credit risk with several tribes.~~ The Company includes any receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts. Changes in the assumptions or estimates reflecting the collectability of certain accounts could materially affect the allowance for both accounts and notes receivable.

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PLAYAGS, INC.

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(unaudited)

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.

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~~AP GAMING HOLDCO INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

September 30, 2018 and December 31, 2017, the value of raw material inventory was $24.6 million and $19.9 million, respectively. As of September 30, 2018 and December 31, 2017, the value of finished goods inventory was $7.2 million and $4.6 million, respectively. There was no work in process material as of September 30, 2018 and December 31, 2017.

Property and Equipment

The cost of gaming equipment, consisting of ~~gaming~~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 useful 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	32 to 6 years
Other property and equipment	13 to 6 years

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 ~~are largely independent~~can be measured independently of the cash flows of other assets and ~~liabilities, which~~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 it does not expect 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 condition.

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, ~~as of~~on October 1, or whenever events or changes in circumstances indicate that the carrying value may be impaired. We

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

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~~AP GAMING HOLDCO INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

On a quarterly basis, or more frequently if circumstances warrant, the Company compares the net book value of its internally developed computer software to the net realizable value on a title or group of title basis. The net realizable value is determined based upon certain assumptions, including the expected future revenues and net cash flows of the gaming titles or group of gaming titles utilizing that software, if applicable.

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 ~~its~~the carrying amount of the reporting unit exceeds ~~its estimated~~the fair ~~value.~~value of the reporting unit. As of September 30, ~~2017,~~2018, there were no indicators of goodwill impairment.

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.

Fair Value of Financial Instruments

The Company applies the provisions of ASC 820, “Fair Value Measurements” (ASC 820) to its financial assets and liabilities. Fair value is defined as a market-based measurement intended to estimate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820 also ~~established~~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:

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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 estimated fair value of our ~~long-term~~total debt balance as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 was ~~$603.4~~$513.0 million and ~~$557.8~~$675.7 million, respectively.

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~~AP GAMING HOLDCO INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

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 ~~existing~~ assets and liabilities and their respective tax ~~bases.~~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 ~~on deferred tax assets and liabilities~~ is recognized ~~in income~~ in the period that ~~included~~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 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. We adjusted our liability in the quarter ended September 30, 2018, which is described in Note 12.

On December 22, 2017, President Trump signed H.R. 1, originally known as the “Tax Cuts and Jobs Act” (the “Tax Act”) into law, which significantly reformed the Internal Revenue Code of 1986, as amended. The new legislation, among other things, changed the U.S. federal tax rates (including permanently reducing the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate), allowed the expensing of capital expenditures, and put into effect the migration from a “worldwide” system of taxation to a territorial system. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the period ended December 31, 2017. The ultimate impact of the Tax Act on our consolidated financial statements may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. For the nine months ended September 30, 2018, there was no change to the provisional Transaction Tax recorded in the prior period. The Company expects to complete its analysis within one year from the Tax Act’s enactment in accordance with SAB 118.

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Under U.S. GAAP, the Company must make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low-Taxed Income ("GILTI") as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method). The Company has elected the period cost method and has considered the estimated 2018 GILTI impact in its 2018 tax expense which we currently deem to be immaterial on the consolidated financial statements.

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 loss in stockholders’ equity.

Recently Issued Accounting Pronouncements

Adopted in the Current Year

In May 2014, the FASB issued an accounting standards update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue from contracts with customers. The amendment outlines a single comprehensive model for entities to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. The ASU may be adopted using either a full retrospective transition method or a modified retrospective transition method and ~~will be~~was adopted by the Company on January 1, 2018. The Company ~~will use~~used the modified retrospective application approach and ~~does not expect~~the adoption of the new revenue standards todid not have a material impact on its consolidated financial statements as the majority of our revenue is recognized under lease accounting guidance. Related disclosures of the Company’s revenue recognition policy have been updated above under Revenue Recognition to reflect the adoption of the new standards.

In ~~July 2015,~~August 2016, the FASB issued ASU ~~No. 2015-11,~~ 2016-15,~~Inventory: Simplifying the Measurement~~ Statement of ~~Inventory~~Cash Flows (Topic 230). ASU 2015-11 changes the criteria for measuring inventory within the scope of the ASU. Inventory will now be measured at net realizable value, while the concept of market value will be eliminated. The ASU defines net realizable value as the estimated selling prices2016-15 intends to reduce diversity in practice in how certain transactions are classified in the ~~ordinary course~~statement of ~~business, less reasonably predictable costs of completion, disposal, and transportation.~~cash flows. ASU ~~2015-11~~2016-15 is effective for fiscal years beginning after December 15, ~~2016,~~2017, and interim periods within those fiscal years. ~~This~~Early adoption is permitted. The Company adopted this ASU in the current year and it did not have a material effect on our financial condition, results of operations or cash flows.

The FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash in 2016. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the guidance retrospectively at the beginning of the first quarter of 2018. The adoption of this guidance resulted in immaterial increases to the cash, cash equivalents and restricted cash beginning-of-period and end-of period line items in the statement of cash flows to include the balance of restricted cash.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business in order to allow for the evaluation of whether transactions should

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be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We adopted this ASU in the current year and it will be effective for acquisitions that are consummated in the current and future periods.

To be Adopted in Future Periods

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 intends to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases, where we are the lessee, to be recognized on our ~~Consolidated Balance Sheets.~~consolidated balance sheets. The ~~guidance requires~~FASB also issued ASU 2018-11, Leases (Topic 842) Targeted Improvements in July 2018. These ASUs allow lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective ~~approach.~~approach or at the adoption date with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with earlier adoption permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

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~~(unaudited)~~

In ~~August 2016, the FASB issued ASU 2016-15,~~ ~~Statement of Cash Flows (Topic 230)~~. ASU 2016-15 intends to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the provisions of ASU 2016-15 to have a material effect on our financial condition, results of operations or cash flows.

~~In January 2017,~~February 2018, the FASB issued ASU No. ~~2017-01,~~ 2018-02,~~Business Combinations~~ Income Statement—Reporting Comprehensive (Topic ~~805)~~220): ~~Clarifying~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 requires the ~~Definition~~remeasurement of deferred tax assets and liabilities as a result of a ~~Business. The new guidance clarifies the definition of a business~~change in ~~order~~tax laws or rates to ~~allow for the evaluation of whether transactions should~~ be ~~accounted for as acquisitions or disposals of assets or businesses.~~presented in net income from continuing operations. Adjusting temporary differences originally recorded to Accumulated Other Comprehensive Income (“AOCI”) through continuing operations may result in disproportionate tax effects ultimately being lodged in AOCI. The new guidance is effective for fiscal years beginning after December 15, ~~2017,~~2018, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of adopting this guidance.

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles - Goodwill and Other (Topic 350)~~: Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. We adopted this guidance prospectively at the beginning of first quarter 2017, which will simplify our future goodwill impairment testing.

We do not expect that any other recently issued accounting guidance will have a significant effect on our financial statements.

NOTE 2. ACQUISITIONS

~~Intellectual Property Acquisitions~~AGS iGaming

During the quarter ended ~~September~~June 30, ~~2017,~~2018, the Company acquired ~~certain intangible assets related to~~all of the ~~purchase~~equity of ~~table games~~Gameiom Technologies Limited (formerly known as “Gameiom”, currently known as “AGS iGaming”). AGS iGaming is a licensed gaming aggregator and ~~table game related intellectual property.~~content provider for real-money gaming (“RMG”) and sports betting partners. The acquisition was accounted for as an acquisition of a business and the assets acquired and liabilities assumed were measured based on our preliminary estimates of their fair values at the acquisition date. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as we finalize our fair value analysis. The significant items for which a final fair value has not been determined as of the filing of this report include the fair value of intangible assets. We expect to complete our fair value determinations no later than one year from the acquisition date.

We attribute the goodwill acquired to our ability to utilize AGS iGaming’s existing RMG platform to distribute our existing EGM game content into many markets, diversification of our Interactive segment’s product portfolio that now includes a real-money gaming solution and other strategic benefits. Total consideration of $5.0 million included cash paid of $4.5 million and $0.5 million of deferred consideration that is payable within 18 months of the acquisition date. The consideration was preliminarily allocated primarily to goodwill that is not tax deductible for $3.4 million and intangible assets of $2.4 million, which will be amortized over a weighted average period of approximately 6.8 years.

The intangible assets consist primarily of customer relationships and a technology platform. The customer relationships were valued using the excess earnings method (level 3 fair value measurement), which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets. The contribution to the cash flows that are made by other assets - such as working capital, workforce and other intangible assets - was estimated through contributory asset capital charges. The value of the customer relationships is the present value of the attributed post-tax cash flows, net of the post-tax return on fair value attributed to the other assets. The technology platform was valued using the royalty savings method (level 3 fair value measurement), which is a risk-adjusted discounted cash flow approach. The royalty savings method values an intangible asset by estimating the royalties saved through ownership of the asset. The royalty savings method requires identifying the future revenue that would be impacted by the technology platform (or royalty-free rights to the assets), multiplying it by a royalty rate deemed

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to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in such valuation was based on a consideration of market rates for similar categories of assets.

Rocket Gaming Systems

On December 6, 2017, the Company acquired an installed base of approximately 1,500 Class II EGMs across the United States that were operated by Rocket Gaming Systems (“Rocket”) for total consideration of $56.9 million that was paid at the acquisition date. This asset acquisition was accounted for as an acquisition of a business. The acquisition expanded the Company’s Class II footprint in primary markets such as California, Oklahoma, Montana, Washington and Texas and is expected to provide incremental revenue as the Company upgrades the EGMs with its game content and platforms over the next several years. In addition, the acquisition expanded the Company’s product library and included a wide-area progressive and standalone video and spinning-reel games and platforms, including Gold Series®, a suite of games that feature a $1 million+ progressive prize that is the longest-standing million dollar wide-area progressive on tribal casino floors.

We have recorded the Rocket assets acquired and liabilities assumed based on our estimates of their fair values at the acquisition date. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable and amortizable tangible and identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates that reflect risk inherent in the future cash flows. The estimated fair values of the Rocket assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as we finalize our fair value analysis. The significant items for which a final fair value has not been determined as of the filing of this report on Form 10-Q include the fair value of property and equipment and intangible assets. We expect to complete our fair value determinations no later than one year from acquisition date. We do not currently expect our fair value determinations to change; however, there may be differences compared to those amounts reflected in our consolidated financial statements as we finalize our fair value analysis and such changes could be material.

The preliminary allocation of the purchase price to the estimated fair values of the assets acquired and the liabilities assumed was as follows (in thousands):



Inventories	$	354
Property and Equipment	3,307
Goodwill	23,417
Intangible assets	30,090
Total Assets	57,168
Other long-term liabilities	(318		)
Total purchase price	$	56,850

Based on our preliminary estimates, the total consideration exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities at the acquisition date and has been recorded as goodwill. We attribute this goodwill to our opportunities for synergies through our ability to leverage our existing service network to service the acquired assets, the opportunity to derive incremental revenue through upgrading the EGMs with the Company’s existing game content and platforms and other strategic benefits. The goodwill associated with the acquisition is deductible for income tax purposes.

Our preliminary estimates of the fair values of identifiable intangible assets include $21.9 million customer relationships, $7.2 million gaming software and technology platforms, and $0.9 million trade names. The intangible assets have a weighted average useful life of 6.4 years.

The fair value of property and equipment assets as well as the fair value of gaming content software was primarily determined using cost approaches in which we determined an estimated reproduction or replacement cost, as applicable.

The estimated fair value of customer relationships was determined using the excess earnings method, which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets. The contribution to the cash flows that are made by other assets - such as fixed assets, working capital, workforce and other intangible assets - was estimated through contributory asset capital charges. The value of the acquired customer relationship asset is the present value of the attributed post-tax cash flows, net of the post-tax return on fair value attributed to the other assets.

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PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The estimated fair values of acquired trade names and gaming technology platforms were primarily determined using the royalty savings method, which is a risk-adjusted discounted cash flow approach. The royalty savings method values an intangible asset by estimating the royalties saved through ownership of the asset. The royalty savings method requires identifying the future revenue that would be impacted by the trade name or intellectual property (or royalty-free rights to the assets), multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in such valuation was based on a consideration of market rates for similar categories of assets.

The revenue and net loss of Rocket from the acquisition date through December 31, 2017, are presented below and are included in our consolidated statements of operations and comprehensive loss. These amounts are not necessarily indicative of the results of operations that Rocket would have realized if it had continued to operate as a stand-alone company during the period presented, primarily due to the inclusion of amortization on purchased intangible assets and short term transition services expenses that the Company incurred in December 2017.



	From December 6, 2017 through December 31, 2017
Revenue	$	1,139
Net income	$	203

It is not practicable to provide pro forma statements of operations giving effect to the Rocket acquisition as if it had been completed at an earlier date. This is due to the lack of historical financial information sufficient to produce such pro forma statements given that the Company purchased specific assets from the sellers that were not segregated in the seller’s financial records and for which separate carve-out financial statements were not produced.

In Bet Gaming

During the quarter ended September 30, 2017, the Company acquired certain intangible assets related to the purchase of table games and table game related intellectual property from In Bet. The acquisition was accounted for as an acquisition of a business and the assets acquired and liabilities assumed were measured based on our final estimates of their fair values at the acquisition date. We attribute the goodwill acquired to our ability to commercialize the products over our distribution and sales network, opportunities for synergies, and other strategic benefits. Total consideration of ~~$9.5~~$9.6 million included an estimated ~~$2.5~~$2.6 million of contingent consideration that is payable upon the achievement of certain targets and periodically based on a percentage of product revenue earned on the purchased table games.

The consideration was allocated primarily to tax deductible goodwill for ~~$4.4~~$3.2 million and intangible assets of ~~$4.2~~$5.5 million, which will be amortized over a weighted average period of approximately 9 years.

The contingent consideration was valued using scenario-based methods ~~(level~~(the Company used level 3 ~~fair value measurement)~~of observable inputs in this valuation) that account for the expected timing of payments to be made and discounted using an estimated borrowing rate. The borrowing rate utilized for this purpose was developed with reference to the Company’s existing borrowing rates, adjusted for the facts and circumstances related to the contingent consideration.

The intangible assets consist of a primary asset that includes the intellectual property acquired, which asset represents the majority of the intangible asset value. This intellectual property was valued using the excess earnings method ~~(level~~(the Company used level 3 ~~fair value measurement)~~of observable inputs in this valuation), which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets. The contribution to the cash flows that are made by other assets - such as working capital, workforce and other intangible assets - was estimated through contributory asset capital charges. The value of the acquired intellectual property is the present value of the attributed post-tax cash flows, net of the post-tax return on fair value attributed to the other assets.

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~~AP GAMING HOLDCO~~PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Gaming equipment	$	125,082		$	108,635		$	138,600		$	125,064
Other property and equipment	16,325			13,900			20,899			17,229
Less: Accumulated depreciation	(65,946		)	(54,609		)	(75,176		)	(64,311		)
Total property and equipment, net	$	75,461		$	67,926		$	84,323		$	77,982

Gaming equipment and other property and equipment are depreciated over the respective useful lives of the assets ranging from ~~one~~two to six years. Depreciation expense was ~~$7.1~~$8.0 million and ~~$6.5~~$7.1 million for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Depreciation expense was ~~$19.9~~$23.7 million and ~~$21.0~~$19.9 million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

NOTE 4. GOODWILL AND INTANGIBLES

There were no accumulated impairments of goodwill as of September 30, ~~2017.~~2018. Changes in the carrying amount of goodwill are as follows (in thousands):

Gross Carrying Amount
EGM Table Products Interactive Total
Balance at December 31, 2016 $ 242,796
$ 3,400
$ 4,828
$ 251,024
Foreign currency adjustments 2,380
—
—
2,380
Acquisition —
4,441
—
4,441
Balance at September 30, 2017 $ 245,176
$ 7,841
$ 4,828
$ 257,845



	Gross Carrying Amount
	EGM		Table Products		Interactive			Total
Balance at December 31, 2017	$	266,868	$	6,641	$	4,828		$	278,337
Acquisition - Interactive	—		—		3,359			3,359
Foreign currency adjustments	925		—		(90		)	835
Purchase accounting adjustment	200		—		—			200
Balance at September 30, 2018	$	267,993	$	6,641	$	8,097		$	282,731

Intangible assets consist of the following (in thousands):


		September 30, 2017							December 31, 2016								September 30, 2018							December 31, 2017
	Useful Life (years)	Gross Value		Accumulated Amortization			Net Carrying Value		Gross Value		Accumulated Amortization			Net Carrying Value		Useful Life (years)	Gross Value		Accumulated Amortization			Net Carrying Value		Gross Value		Accumulated Amortization			Net Carrying Value
Indefinite lived trade names	Indefinite	$	12,126	$	—		$	12,126	$	12,126	$	—		$	12,126	Indefinite	$	12,126	$	—		$	12,126	$	12,126	$	—		$	12,126
Trade and brand names	3 - 5	13,800		(6,883		)	6,917		13,600		(4,671		)	8,929		7	14,730		(9,943		)	4,787		14,730		(7,642		)	7,088
Customer relationships	5 - 12	167,410		(64,857		)	102,553		165,078		(49,528		)	115,550		7	189,496		(87,435		)	102,061		188,419		(69,564		)	118,855
Contract rights under development and placement fees	1 - 7	16,692		(8,728		)	7,964		16,488		(5,235		)	11,253		1 - 7	17,622		(13,227		)	4,395		16,834		(9,860		)	6,974
Gaming software and technology platforms	2 - 7	133,143		(63,356		)	69,787		123,596		(49,014		)	74,582		1 - 7	148,152		(78,507		)	69,645		141,231		(67,189		)	74,042
Intellectual property	3 - 10	15,880		(3,459		)	12,421		12,780		(2,343		)	10,437		10 - 12	17,205		(5,418		)	11,787		17,180		(3,978		)	13,202
		$	359,051	$	(147,283	)	$	211,768	$	343,668	$	(110,791	)	$	232,877		$	399,331	$	(194,530	)	$	204,801	$	390,520	$	(158,233	)	$	232,287

Intangible assets are amortized over their respective estimated useful lives ranging from one to twelve years. Amortization expense related to intangible assets was ~~$9.9~~$11.0 million and ~~$12.9~~$9.9 million for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Amortization expense related to intangible assets was ~~$33.7~~$34.1 million and ~~$39.5~~$33.7 million for the nine months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively.

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

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~~AP GAMING HOLDCO INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

rate or, if not stated explicitly in the development agreement, on an imputed interest rate. If the stated interest rate is deemed to be other than a market rate or zero, a discount is recorded on the note receivable as a result of the difference between the stated and market rate and a corresponding intangible asset is recorded. The intangible asset is recognized in the financial statements as a contract right under development agreement and amortized as a reduction in revenue over the term of the agreement. Placement fees can be in the form of cash paid upfront or free lease periods and are accreted over the life of the contract and the expense is recorded as a reduction of revenue. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of $1.2 million ~~and $1.2 million~~ for the three months ended September 30, ~~2017~~2018 and ~~2016, respectively.~~2017. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of ~~$3.5~~$3.4 million and $3.5 million for the nine months ended September 30, ~~2017~~2018 and ~~2016, respectively.~~2017.

NOTE 5. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):


	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
Salary and payroll tax accrual	$	6,601	$	6,594	$	9,962	$	9,449
Taxes payable	2,790		2,128		3,238		2,655
Accrued interest	4,064		2
License fee obligation	1,000		—		1,000		1,000
Placement fees payable	4,000		4,000		2,438		4,000
Accrued other	4,550		4,978		5,879		7,850
Total accrued liabilities	$	23,005	$	17,702	$	22,517	$	24,954

NOTE 6. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
First Lien Credit Facilities:
Term loans, interest at LIBOR or base rate plus 5.50% (6.74% at September 30, 2017), net of unamortized discount and deferred loan costs of $13.7 million at September 30, 2017.	$	435,150		$	—
Senior secured PIK notes, net of unamortized discount and deferred loan costs of $3.2 million and $3.5 million at September 30, 2017 and December 31, 2016, respectively.	141,328			133,286
Term loans, interest at LIBOR or base rate plus 4.25% (6.33% at September 30, 2018), net of unamortized discount and deferred loan costs of $11.7 million and $13.4 million at September 30, 2018 and December 31, 2017, respectively.							$	497,071		$	499,173
Senior secured PIK notes, net of unamortized discount and deferred loan costs of $3.0 million at December 31, 2017.							—			149,588
Equipment long-term note payable and capital leases	3,264			4,792			1,360			2,756
Senior secured credit facilities:
Term loans, interest at LIBOR or base rate plus 8.25% , net of unamortized discount and deferred loan costs of $15.1 million at December 31, 2016.	—			395,581
Seller notes	—			20,116
Total debt	579,742			553,775			498,431			651,517
Less: Current portion	(6,674		)	(6,537		)	(6,223		)	(7,359		)
Long-term debt	$	573,068		$	547,238		$	492,208		$	644,158

First Lien Credit Facilities

On June 6, 2017 (the “Closing Date”), AP Gaming I, LLC (the “Borrower”), a wholly owned indirect subsidiary of the Company, entered into a first lien credit agreement (“the First Lien Credit Agreement”), providing for $450.0 million in term loans and a $30.0 million revolving credit facility (the “First Lien Credit Facilities”). The proceeds of the term loans were used primarily to repay the ~~Existing~~senior secured credit facilities (the “Existing Credit ~~Facilities (as defined below)~~Facilities”), the notes issued by the Company to AGS Holdings, LLC (the “AGS Seller ~~Notes (as defined below)~~Notes”) and the promissory note issued by the Company to Amaya Inc. (the “Amaya Seller ~~Note (as defined below)~~Note”), to pay for the fees and expenses incurred in connection with the foregoing and otherwise for general corporate purposes.

On December 6, 2017, AP Gaming I, LLC (the “Borrower”), a wholly owned indirect subsidiary of the Company, entered into incremental facilities for $65.0 million in term loans. The net proceeds of the incremental term loans were used to finance the acquisition of electronic gaming machines and related assets operated by Rocket as described in Note 2, to pay fees and expenses in connection therewith and for general corporate purposes.

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~~AP GAMING HOLDCO~~PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

On February 7, 2018, the Company entered into an Incremental Assumption and Amendment Agreement (the “Incremental Agreement”), which amended and restated the First Lien Credit Agreement, dated as of June 6, 2017, as amended by the incremental facilities dated as of December 6, 2017, to reduce the applicable margin for the term loans thereunder by 1.25%. The Incremental Agreement also provides that any refinancing of the term loans through the issuance of certain debt or any repricing amendment resulting in a lower yield occurring at any time during the first six months after February 7, 2018 will be accompanied by a 1.00% payment premium or fee.

Prior to entering into the Incremental Agreement, net deferred loan costs and discounts totaling $13.3 million were capitalized and were being amortized over the term of the agreement. In conjunction with the Incremental Agreement approximately $0.4 million of these deferred loan costs and discounts was written off as a portion of the loss on extinguishment and modification of debt and the remainder of these cost will be amortized over the remaining term of the First Lien Credit Facilities. An additional $1.2 million in third party fees was incurred related to the Incremental Agreement. Given the composition of the lender group, certain lenders were accounted for as a debt modification and, as such, $1.2 million of these costs were expensed and included in the loss on extinguishment and modification of debt.

The term loans will mature on February 15, 2024, and the revolving credit facility will mature on June 6, 2022. Starting with the first full quarter after the Closing Date, the term loans require scheduled quarterly payments in amounts equal to 0.25% of the original aggregate principal amount of the term loans, with the balance due at maturity. Borrowings under the term loans bear interest at a rate equal to, at the Borrower’s option, either LIBOR or the base rate, subject to an interest rate floor plus an applicable margin rate. Borrowings under the revolving credit facility bear interest at a rate equal to, at the Borrower’s option, either LIBOR or the base rate plus an applicable margin rate. In addition, on a quarterly basis, the Borrower is required to pay each lender under the revolving credit facility a commitment fee in respect of any unused commitments thereunder at a rate of 0.50% per annum.

The First Lien Credit Facilities are guaranteed by AP Gaming Holdings, LLC, the Borrower’s material, wholly owned domestic subsidiaries (subject to certain exceptions), and are secured by a pledge by AP Gaming Holdings, LLC of the Borrower’s equity interest directly held by AP Gaming Holdings, LLC and a pledge of substantially all of the existing and future property and assets of the Borrower and the subsidiary guarantors, subject to certain exceptions. The First Lien Credit Facilities require that the Borrower maintain a maximum net first lien leverage ratio set at a maximum of 6.0 to 1.0.

The First Lien Credit Facilities also contain customary affirmative covenants and negative covenants that limit our ability to, among other things: (i) incur additional debt or issue certain preferred shares; (ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of our capital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) sell assets; (vii) enter into certain transactions with our affiliates; (viii) enter into sale-leaseback transactions; (ix) change our lines of business; (x) restrict dividends from our subsidiaries or restrict liens; (xi) change our fiscal year; and (xii) modify the terms of certain debt or organizational agreements. The new senior secured credit facilities also contain customary events of default included in similar financing transactions, including, among others, failure to make payments when due, default under other material indebtedness, breach of covenants, breach of representations and warranties, involuntary or voluntary bankruptcy, and material judgments.

On October 5, 2018, the Borrower, entered into an Incremental Assumption and Amendment Agreement No. 2 (the “Incremental Agreement No. 2”) with certain of the Borrower’s subsidiaries, the lenders party thereto from time to time and Jefferies finance LLC, as administrative agent, (the “Administrative Agent”). For more information on the Incremental Agreement, see Note 15 - Subsequent Events.

Amended and Restated Senior Secured PIK Notes

On ~~May~~January 30, ~~2017,~~2018, the Company ~~entered into an~~used the net proceeds of the IPO and cash on hand to redeem in full its 11.25% senior secured PIK notes due 2024 (the “PIK Notes”). On the redemption date, the aggregate principal amount of the PIK Notes outstanding was $152.6 million (comprised of the original principal amount of $115 million and the remaining principal amount comprised of capitalized interest) and the amount of accrued and unpaid interest was $1.4 million. In connection with the redemption, the Company repaid all of the outstanding obligations in respect of principal, interest and fees under the PIK Notes and net deferred loan costs and discounts totaling $3.0 million were written off and included in the loss on extinguishment and modification of debt.

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PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Concurrently with the redemption of the PIK notes, the Company terminated its amended and restated note purchase agreement (the “A&R Note Purchase Agreement”) ~~with~~, dated May 30, 2017, among the Company, AP Gaming Holdings, LLC, as subsidiary guarantor, ~~(the “Subsidiary Guarantor”),~~ Deutsche Bank AG, London Branch, as holder, ~~(the “Holder”),~~ and Deutsche Bank Trust Company Americas, as collateral agent, which ~~amended and restated~~governed the ~~note purchase agreement, dated as of May 29, 2015.~~

~~The A&R Note Purchase Agreement governs the Company’s previously issued 11.25% senior secured~~ PIK notes (the “Notes”), $115.0 million of which had been issued to the Holder at an issue price of 97% of the principal amount thereof to the Holder in a private placement exempt from registration under the Securities Act of 1933, as amended. The A&R Note Purchase Agreement extends the maturity of the Notes to May 28, 2024 and modifies the terms of the Notes to, among other things, account for the repayment of the AGS Seller Notes and the Amaya Seller Note.

The Notes remain secured by the Company’s equity in its subsidiary AP Gaming, Inc., subject to certain limitations including those imposed by gaming laws, and are unconditionally guaranteed by the Subsidiary Guarantor. Interest on the Notes continues to accrue at a rate of 11.25% per annum. The Company may elect to pay interest due on the Notes in cash, by increasing the principal of the outstanding Notes or by issuing new Notes (“PIK interest”) for the entire amount of the interest payment or by paying interest partially in cash and partially in PIK interest. Interest on the Notes accrues from the date of issuance and is payable on the dates described in more detail in the A&R Note Purchase Agreement.

The Notes contain limitations on additional indebtedness, guarantees, incurrence of liens, investments and distributions, as defined, some of which were modified in the A&R Note Purchase Agreement. The Notes also contains customary events of default included in similar transactions, including, among others, failure to make payments when due, acceleration of other material indebtedness, breach of covenants, breach of representations and warranties, involuntary or voluntary bankruptcy, and material judgments.Notes.

Equipment Long Term Note Payable and Capital Leases

The Company has entered into a financing agreement to purchase certain gaming devices, systems and related equipment and has entered into leases for ~~servers~~vehicles and equipment that are accounted for as capital leases.

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~~AP GAMING HOLDCO INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

~~Senior Secured Credit Facilities~~

On June 6, 2017, the Borrower terminated its senior secured credit facilities (the “Existing Credit Facilities”), dated as of December 20, 2013 (as amended as of May 29, 2015 and as of June 1, 2015 and as amended, restated, supplemented or otherwise modified prior to June 6, 2017), by and among the Borrower, the lenders party thereto from time to time and Citicorp North America, Inc., as administrative agent. In connection with the termination, the Borrower repaid all of the outstanding obligations in respect of principal, interest and fees under the Existing Credit Facilities.

On June 6, 2017, net deferred loan costs and discounts totaling $13.9 million related to the Existing Credit Facilities were capitalized and were being amortized over the term of the agreement. In conjunction with the refinancing, approximately $3.3 million of these deferred loan costs and discounts was written off as a portion of the loss on extinguishment and modification of debt and the remainder of these cost will be amortized over the term of the First Lien Credit Facilities. An additional $9.2 million in loan costs and discounts was incurred related to the issuance of the First Lien Credit Facilities. Given the composition of the lender group, certain lenders were accounted for as a debt modification and, as such, $4.8 million in debt issuance costs related to the First Lien Credit Facilities were expensed and included in the loss on extinguishment and modification of debt, the remaining amount was capitalized and will be amortized over the term of the agreement.

~~Seller Notes~~

On June 6, 2017, AP Gaming, Inc., a wholly owned subsidiary of the Company terminated two promissory notes issued by AP Gaming, Inc. to AGS Holdings, LLC, in the initial principal amounts of $2.2 million and $3.3 million, respectively (the “AGS Seller Notes”). The AGS Seller Notes had been issued to the previous owners of the Company’s primary operating company. In connection with the termination, the Company caused the repayment all of the outstanding obligations in respect of principal and interest under the AGS Seller Notes.

On the June 6, 2017, the Company terminated a promissory note issued by the Company to Amaya Inc. (the “Amaya Seller Note”) with an initial principal amount of $12.0 million. The Amaya Seller Note had been issued to satisfy the conditions set forth in the stock purchase agreement for Amaya Americas Corporation (“Cadillac Jack”). During the quarter ended March 31, 2017, the Amaya Seller Note was reduced by $5.1 million to settle a clause from the Stock Purchase Agreement allowing for a refund if certain deactivated gaming machines in Mexico were not in operation as of a specified date. In connection with the termination, the Company repaid all outstanding obligations in respect of principal and interest under the Amaya Seller Note.

NOTE 7. STOCKHOLDERS’ EQUITY

Common Stock

~~The~~Prior to the completion of the IPO, the Company’s common stock ~~consists~~consisted of two classes: class A voting common stock (“Class A Shares”) and class B non-voting common stock (“Class B Shares”). ~~The holders~~In connection with the IPO, we (i) reclassified Class B Shares into a new class of voting common stock, which is the class of stock investors received in the IPO, and (ii) canceled the Class A ~~Shares are entitled~~Shares. Concurrent with this reclassification, and immediately prior to ~~one vote per share on all matters to be voted on by~~ the ~~stockholders~~consummation of the ~~Company. The holders~~IPO, we effected a 1.5543-for-1 stock split of the ~~Class A Shares have no economic rights or privileges, including rights in liquidation, and have no right to receive dividends or any other distributions. The holders~~Company’s new voting common stock such that existing stockholders each received 1.5543 shares of the ~~Class B Shares have no right to vote on any matter to be voted on by the stockholders of the Company. Each holder~~new voting common stock described above in clause (i) for each share of Class B Shares ~~is entitled~~they held at that time. Accordingly, all share and per share amounts for all periods presented in these financial statements and notes thereto have been adjusted retroactively, where applicable, to ~~share equally, share for share, dividends declared, as well as any distributions~~reflect the stock split.

On January 30, 2018, the Company completed the IPO, in which it issued and sold 10,250,000 shares of common stock at a public offering price of $16.00 per share. On February 27, 2018 the Company sold an additional 1,537,500 shares of its common stock, pursuant to the ~~stockholders, and~~underwriters’ exercise in ~~the event~~full of the ~~Company’s liquidation, dissolution or winding up, is entitled~~over-allotment option. The aggregate net proceeds received by the Company from the IPO were $171.5 million, after deducting underwriting discounts and commissions and offering expenses directly related to ~~share ratably in any remaining assets after payment~~issuance of ~~or provision for liabilities and~~ the ~~liquidation on preferred~~equity.

Prior to the consummation of the IPO, 170,712 shares of common stock ~~if any.~~

~~As of September 30, 2017, 109,832 Class B Shares issued~~were held by management. Pursuant to ~~“Management Holder,” as defined in~~ the Securityholders Agreement dated April 28, 2014 (the “Securityholders Agreement”), these shares were ~~outstanding. The Class B Shares~~outstanding, but were ~~sold to the Management Holder and are~~ not considered issued for accounting purposes as they ~~contain~~contained a substantive performance condition, a “Qualified Public Offering”, as defined in the Securityholders Agreement, which ~~must~~had to be probable for the ~~Management Holder~~holders of these shares to benefit from their ownership. The IPO satisfied the ~~ownership of the shares. As~~substantive performance condition and as a result the shares ~~issued~~and related proceeds of $1.3 million were reclassified from other long-term liabilities to ~~the Management Holder are not~~additional paid-in capital and considered issued for accounting ~~purposes until such time that~~purposes. During the ~~performance condition is probable~~three and nine month period ended September 30, 2018, the Company ~~has recorded a liability in other long-term liabilities of $1.3 million for the proceeds from the sale of the Class B Shares. No share-based~~recognized stock-based compensation expense for ~~Class B Shares has been recognized~~stock options and ~~none will be recognized for these shares until the performance condition~~restricted stock awards, which is ~~considered to be probable.~~further described in Note 11.

~~Table~~As further clarification of ~~Contents~~

~~AP GAMING HOLDCO INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

~~Class B Shares that are~~the foregoing, prior to the IPO, shares were held by ~~a Management Holder are~~management that were subject to repurchase rights ~~(the “Repurchase Rights”),~~ as outlined in Section 6 of the Securityholders Agreement, that ~~are~~were contingent on the ~~Management Holder’s~~holder’s termination. The ~~Repurchase Rights enable~~repurchase rights enabled the Company to recover the ~~Class B Shares~~shares issued to ~~Management Holders~~management without transferring any appreciation of the fair value of the stock to the ~~Management Holder~~holder upon certain terminations of the ~~Management Holder’s~~holder’s employment prior to a “Qualified Public Offering”, as defined in the Securityholders Agreement. If a ~~Management Holder’s~~holder’s employment iswas terminated by the Company prior to the consummation of a Qualified Public Offering for “Cause”, as defined in the Securityholders Agreement, or iswas terminated by such ~~Management Holder~~holder without “Good Reason”, as defined in the Securityholders Agreement, then the Company ~~shall have~~had the right to repurchase all or any portion of the ~~Class B Shares~~shares held by ~~such Management Holder~~the holder for the lesser of original cost ~~and~~or fair market value. If a ~~Management Holder’s~~holder’s employment iswas terminated by the Company prior to the consummation of a Qualified Public Offering other than as described above and in the Securityholders Agreement, then the Company ~~shall have~~had the right to repurchase all or any portion of the ~~Class B Shares~~shares held by ~~such Management Holder~~the holder for fair market value.

NOTE 8. ~~WRITE DOWNS~~WRITE-DOWNS AND OTHER CHARGES

The Condensed Consolidated Statements of Operations and Comprehensive ~~Loss~~Income (Loss) include various non-routine transactions or consulting and transaction-related fees that have been classified as ~~write downs~~write-downs and other charges. During the three months ended September 30, 2018, the Company recognized $0.7 million in write-downs and other charges driven by losses from the disposal of assets of $0.4 million, impairment of intangible assets related to game titles of $0.2 million (level 3 fair value measurement based on projected cash flows), and a $0.1 million fair value adjustment to contingent consideration (level 3 fair value measurement based on projected cash flows). During the nine months ended September 30, 2018, the Company recognized $3.3 million in write-downs and other charges driven by losses from the disposal of assets of $1.4 million, the impairment to intangible assets of $1.2 million related to game titles and a development agreement (the Company used level 3 of observable inputs in conducting the impairment tests), and a fair value adjustment to contingent consideration of $0.7 million (the Company used level 3 fair value measurements based on projected cash flows).

During the three months ended September 30, 2017, the Company recognized $0.5 million in write-downs and other charges driven by losses from the disposal of assets. During the nine months ended September 30, 2017, the Company recognized $2.7 million in write-downs and other charges, driven by losses from the disposal of assets of ~~$3.0~~$2.9 million and the ~~full~~ impairment ~~of certain~~to intangible assets of $0.3 million ~~(level~~related to game titles (the Company used level 3 fair value measurement based on projected cash flows for the specific game titles), offset by a fair value adjustment to an acquisition contingent receivable of $0.6 million ~~(level~~(the Company used level 3 fair value measurements based on projected cash flows). The contingency was resolved inwithin the quarter ~~ending~~ended March 31, 2017. ~~See Item 1. “Financial Statements” Note 6 for a detailed discussion regarding the resolution of the contingency described above.~~

During the three months ended September 30, 2016, the company recognized $1.9 million in write-downs and other charges, driven by a $3.3 million impairment of an intangible asset related to a customer contract that will provide less benefit than originally estimated from the Cadillac Jack acquisition (a level 3 fair value measurement based on a decrease in projected cash flows). The value of the intangible asset was written down to $1.1 million at an interim date and subsequently fully amortized by December 31, 2016. Additionally a write-down of long-lived assets of $1.3 million related to older generation gaming machines (level 3 fair value measurement based on projected cash flow for the specific assets) in which the long-lived assets were written down to $0, and losses from the disposal of assets of $0.2 million. These charges were offset by a $3.0 million fair value adjustment to a contingent consideration receivable related to the Cadillac Jack acquisition (level 3 fair value measurements based on expected and probable future realization of the receivable).

During the nine months ended September 30, 2016, the Company recognized $2.2 million in write-downs and other charges, driven by a $3.3 million impairment of an intangible asset related to a customer contract that will provide less benefit than originally estimated from the Cadillac Jack acquisition (a level 3 fair value measurement based on a decrease in projected cash flows). The value of the intangible asset was written down to $1.1 million at an interim date and subsequently fully amortized by December 31, 2016. Additionally, a write-down of long-lived assets of $1.3 million related to aged gaming machines (level 3 fair value measurements based on projected cash flows), and losses from the disposal of assets of $0.6 million. These charges were offset by a $3.0 million fair value adjustment to a contingent consideration receivable related to the Cadillac Jack acquisition.

~~Due to the changing nature of our write downs and other charges, we describe the composition of the balances as opposed to providing a year over year comparison.~~

~~Table of Contents~~

~~AP GAMING HOLDCO INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

NOTE 9. BASIC AND DILUTED INCOME (LOSS) PER SHARE

The Company computes net income (loss) 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 Income (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 ~~excludes Class A~~includes common stock weighted for average number of shares ~~and Class B Shares~~ issued ~~to Management Holders until~~during the performance condition or termination event is considered probable (see Note 7). Until such time, the Class B Shares issued to Management Holders will be included in the calculation of diluted EPS using the treasury stock method and are treated as stock options.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~~see Note ~~11).~~11.

The weighted average number of common and common equivalent shares used in the calculation of basic and diluted EPS consisted of the following (in thousands, except per share amounts):



	Three months ended September 30, 2018
Numerator:
Net income	$	4,347
Net income attributable to participating securities	(16		)
Net income attributable to common stock	$	4,331

Denominator:
Weighted average of common shares outstanding	35,305
Potential dilutive effect of stock options	1,008
Weighted average of common and common equivalent shares outstanding	36,313

Basic earnings per share	$	0.12
Diluted earnings per share	$	0.12

There were no potentially dilutive securities for the ~~three and~~ nine months ended September 30, ~~2017.~~2018.

Included within the calculation of diluted EPS for the three months ended September 30, 2018 was 1,007,988 stock options, as such securities were dilutive. Excluded from the calculation of diluted EPS for the nine months ended September 30, 2018 was 70,744 restricted shares and 840,815 stock options, as such securities were anti-dilutive.

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PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Excluded from the calculation of diluted EPS for the three months ended September 30, 2017 was ~~50,000~~77,715 restricted shares and ~~0.2 million~~386,424 stock options, as such securities were anti-dilutive. Excluded from the calculation of diluted EPS for the nine months ended September 30, 2017 was ~~50,000~~77,715 restricted shares and 0.3 million stock options, as such securities were anti-dilutive. Excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2016 was 50,000 restricted shares and 0.3 million412,058 stock options, as such securities were anti-dilutive.

NOTE 10. 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, 2018 and 2017, ~~and 2016,~~ was ~~$0.2~~$0.3 million and $0.2 million, respectively. The expense associated with the 401(k) Plan for the nine months ended September 30, 2018 and 2017, ~~and 2016,~~ was ~~$0.8~~$0.9 million and ~~$0.7~~$0.8 million, respectively.

On April 28, 2014, the board of directors of the Company approved the 2014 Long-Term Incentive Plan (“LTIP”). Under the LTIP, the Company is authorized to grant nonqualified stock options, rights to purchase ~~Class B Shares,~~common stock, restricted stock, restricted stock units and other awards settleable in, or based upon, ~~Class B Shares~~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 ~~Class B Shares~~shares of common stock that may be delivered pursuant to awards under the LTIP is ~~1,450,000.~~2,253,735. As of September 30, ~~2017,~~2018, approximately ~~0.2 million~~423,468 shares remain available for issuance.

On January 16, 2018, our board adopted and our stockholders approved the 2018 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) pursuant to which equity-based and cash incentives may be granted to participating employees, directors and consultants. The Omnibus Incentive Plan provides for an aggregate of 1,607,389 shares of our common stock. As of September 30, 2018, 1,285,597 shares remain available for issuance.

NOTE 11. SHARE-BASED COMPENSATION

Stock Options

The Company has granted stock awards to eligible participants under ~~the LTIP.~~its incentive plans. The stock awards include options to purchase the Company’s ~~Class B Shares.~~common stock. These stock options include a combination of service and market conditions, as further described below. ~~In addition,~~Prior to the Company’s IPO, these stock options ~~include~~included a performance vesting condition, a Qualified Public Offering (see Note 7), which was not considered to be probable asprior to the consummation of ~~September 30, 2017. As~~the IPO and as a result, no share-based compensation expense for stock options ~~has been~~was recognized prior to 2018.

For the three months ended September 30, 2018, the Company recognized $0.3 million in stock-based compensation for stock options and ~~none will be~~$0.2 million for restricted stock awards. For the nine months ended September 30, 2018, the Company recognized $8.4 million in stock-based compensation for ~~these~~stock options and $0.8 million for restricted stock awards, ~~until~~ the ~~performance condition is considered to be probable.~~majority of which was recognized upon the consummation of the IPO. We recognize stock-based compensation on a straight line basis over the vesting period for time based awards and we recognize the expense immediately for awards with market conditions. The amount of unrecognized compensation expense associated with stock options was ~~$7.7~~$2.2 million and ~~for~~with restricted stock was ~~$0.5~~$8.1 million at September 30, ~~2017. When~~2018, which is expected to be recognized over the ~~performance condition is considered probable, the stock awards will vest in accordance with the underlying service~~a 2.5 and ~~market conditions.~~3.9 yearly weighted average period, respectively.

The Company calculated the grant date fair value of stock options that vest over a service period using the Black Scholes model. For stock options that contain a market condition related to the return on investment that the Company’s stockholders achieve, the options were valued using a lattice-based option valuation model. The assumptions used in these calculations are noted in the following table. Expected volatilities are based on implied volatilities from comparable companies. The expected time to liquidity is based on management’s estimate. The risk-free rate is based on the U.S. Treasury yield curve for a term equivalent to the estimated time to liquidity.



	Nine months ended September 30,
	2018	2017
Option valuation assumptions:
Expected dividend yield	—%	—%
Expected volatility	50%	66%
Risk-free interest rate	2.71%	1.80%
Expected term (in years)	6.3	6.2

1620

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~~AP GAMING HOLDCO~~PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Nine months ended September 30,
2017 2016
Option valuation assumptions:
Expected dividend yield —% —%
Expected volatility 66% 55%
Risk-free interest rate 1.80% 1.67%
Expected term (in years) 6.2 6.3

Stock option awards represent options to purchase ~~Class B Shares~~common stock and are granted pursuant to the Company’s ~~LTIP,~~incentive plans, and include options that the Company primarily classifies as Tranche A or time based, Tranche B and Tranche C.

Tranche A or time based options are eligible to vest in equal installments of 25% or 20% on each of the first four or five anniversaries of the date of the grant, subject to continued employment with the Company or its subsidiaries. In the event of a termination of employment without cause or as a result of death or disability, any such time based options which would have vested on the next applicable vesting date shall become vested, and the remaining unvested time based options shall be forfeited. In addition, upon a Change in Control (as defined in the ~~Company’s 2014 Long-Term Incentive Plan)~~incentive plans), subject to continued employment through the date of the Change in Control, all outstanding unvested time based options shall immediately vest. An ~~initial public offering~~IPO does not qualify as a Change in Control as it relates to the vesting of stock options.

All other option awards are eligible to vest upon the satisfaction of certain performance conditions (collectively, “Performance Options”). On January 16, 2018, we amended our option agreements to add additional vesting provisions to our Performance Options. Tranche B options are eligible to vest based on (a) achievement of an Investor IRR equal to or in excess of 20%, subject to a minimum cash-on-cash return of 2.5 times the Investor Investment (as such terms are defined in the Company’s 2014 Long-Term Incentive Plan) or (b) on the first day that the volume-weighted average price per share of our common stock for the prior 60 consecutive trading days exceeds $19.11 (provided that such 60-day period shall not commence earlier than the 181st day after the completion of our IPO). Tranche C options are eligible to vest based on (a) achievement of an Investor IRR (as defined in the incentive plans) equal to or in excess of 25%, subject to a minimum cash-on-cash return of 3.0 times the Investor ~~Investment.~~Investment or (b) on the first day that the volume-weighted average price per share of our common stock for the prior 60 consecutive trading days exceeds $22.93 (provided that such 60-day period shall not commence earlier than the 181st day after the completion of our IPO). In the event of a termination of employment without cause or as a result of death or disability, any Performance Options which are outstanding and unvested will remain eligible to vest subject to achievement of such performance targets (without regard to the continued service requirement) until the first anniversary of the date of such termination. As a result of the modification, the Company measured the incremental fair value of Tranche B and Tranche C options, which resulted in $2.9 million of incremental fair value.

As of September 30, ~~2017,~~2018, the Company had ~~0.4 million~~667,565 Performance Options outstanding.

A summary of the changes in stock options outstanding during the nine months ended September 30, ~~2017,~~2018 is as follows:

Number of Options Weighted Average Exercise Price Weighted Average Remaining Contract Term (years) Aggregate Intrinsic Value
Options outstanding as of December 31, 2016 895,100 $13.35

Granted 224,750 $15.91
Canceled (35,000) $16.98
Options outstanding as of September 30, 2017 1,084,850 $13.76 7.8 $ 2,479,475



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contract Term (years)	Aggregate Intrinsic Value (in thousands)
Options outstanding as of December 31, 2017	1,644,212		$	8.81
Granted	48,400		24.46
Exercised	(70,419	)	10.35
Canceled or forfeited	(100,565	)	10.74
Options outstanding as of September 30, 2018	1,521,628		$	9.11	6.9	$	30,976
Exercisable as of September 30, 2018	437,258		$	8.53	6.5	$	9,155

Restricted Stock

NoA summary of the changes in restricted stock ~~was granted, canceled or forfeited~~shares outstanding during the nine months ended September 30, ~~2017. There were no changes to outstanding restricted stock awards during the nine months ended September 30, 2017.~~2018 is as follows:



	Shares Outstanding		Grant Date Fair Value (per share)
Outstanding as of December 31, 2017	77,715		$	6.43
Granted	273,392		31.03
Vested	(68,772	)	8.16
Canceled or forfeited	(106	)	31.74
Outstanding as of September 30, 2018	282,229		$	29.83

Table of Contents

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

NOTE 12. INCOME TAXES

The Company determines our provision for income taxes for interim periods using an estimate of our annual effective tax rate. This estimate requires us to forecast pre-tax book income and loss. This forecast is subject to adjustment in subsequent quarterly periods as our estimates of pre-tax income and loss for the year fluctuate, including changes in the geographic mix of pre-tax income and loss.

The Company's effective income tax rate for the three months ended September 30, 2018, was a benefit of 437.3%. The difference between the federal statutory rate of 21% and the Company's effective tax rate for the three months ended September 30, 2018, was primarily due to our valuation allowance on deferred tax assets and changes in our annual forecasted pretax book losses, all of which had a significant rate impact due to the nominal pretax book income recognized for the three months ended September 30, 2018. The Company's effective income tax rate for the three months ended September 30, 2017, was an expense of 34.6%. The difference between the federal statutory rate of 35% and the Company's effective tax rate for the three months ended September 30, 2017, was primarily due to changes in our valuation allowance on deferred tax assets.

The Company's effective income tax rate for the ~~three~~nine months ended September 30, ~~2016,~~2018, was a benefit of ~~5.2%~~46.0%. The difference between the federal statutory rate of ~~35%~~21.0% and the Company's effective tax rate for the ~~three~~nine months ended September 30, ~~2016,~~2018, was primarily due to changes in our valuation allowance on deferred tax ~~assets.~~

~~Table~~assets, various permanent items and lapse in the applicable statute of ~~Contents~~

~~AP GAMING HOLDCO INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(unaudited)~~

limitations for certain uncertain tax positions.The Company's effective income tax rate for the nine months ended September 30, 2017, was an expense of 14.4%. The difference between the federal statutory rate of ~~35%~~35.0% and the Company's effective tax rate for the nine months ended September 30, 2017, was primarily due to changes in our valuation allowance on deferred tax assets.

The ~~Company's effective income~~Company entered into an indemnification agreement with the prior owners of Cadillac Jack whereby the prior owners have agreed to indemnify the Company for changes in tax ~~rate~~positions by taxing authorities for periods prior to the acquisition. As of September 30, 2018, an indemnification receivable of $9.5 million has been recorded in other assets in the financial statements. This amount includes the indemnification of the original pre-acquisition tax positions along with any related accrued interest and penalties and is offset by a corresponding liability for unrecognized tax benefits in other long-term liabilities. When the related unrecognized tax benefits are favorably resolved, a corresponding charge to relieve the associated indemnification receivable would be recognized in our Consolidated Statements of Operations and Comprehensive Loss. During the nine months ended September 30, ~~2016, was~~2018, the Company recognized a ~~benefit~~$9.4 million reduction in the indemnification receivable and related charge in our Consolidated Statements of ~~7.5%~~Operations and Comprehensive Loss.

Under U.S. GAAP, The Company must make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low-Taxed Income ("GILTI") as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method). The ~~difference between~~Company has elected the ~~federal statutory rate of 35%~~period cost method and has considered the ~~Company's effective~~estimated 2018 GILTI impact in its 2018 tax ~~rate for~~expense which we currently deem to be immaterial on the ~~nine months ended September 30, 2016, was primarily due to an increase in our valuation allowance on deferred tax assets.~~consolidated financial statements.

NOTE 13. 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 Native American tribal 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. There are no matters that meet the criteria for disclosure outlined above. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to their pending claims and litigation and may revise their estimates. Such revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial condition.

1822

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~~AP GAMING HOLDCO~~PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

NOTE 14. 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,~~chief executive officer (the “CEO”), for making decisions and assessing performance of our reportable segments.

See Note 1 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.~~

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 depreciation, amortization, ~~write downs~~write-downs and other charges, accretion of placement fees, non-cash ~~stock~~stock-based compensation expense, as well as other costs such as certain acquisitions and integration related costs including restructuring and severance charges; legal and litigation expenses including settlement payments; new jurisdictions and regulatory licensing costs; non-cash charges on capitalized installation and delivery; contract cancellation fees; and other adjustments primarily composed of professional fees incurred by the Company for projects, corporate and public filing compliance and other costs deemed to be non-recurring in nature. 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.

1923

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~~AP GAMING HOLDCO~~PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following provides financial information concerning our reportable segments for the three and nine months ended September 30, (amounts in thousands):


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenues by segment
EGM	$	53,331		$	38,377		$	145,747		$	116,153		$	71,784		$	53,331		$	202,361		$	145,747
Table Products	1,099			674			2,442			2,005			2,052			1,099			5,514			$	2,442
Interactive	2,010			2,157			6,105			5,903			1,690			2,010			5,329			6,105
Total Revenues	$	56,440		$	41,208		$	154,294		$	124,061		$	75,526		$	56,440		$	213,204		$	154,294
Adjusted EBITDA by segment
EGM	29,756			20,943			81,450			68,704			34,026			29,756			105,197			81,450
Table Products	(232		)	(380		)	(721		)	(1,395		)	428			(232		)	684			(721		)
Interactive	(123		)	(607		)	(337		)	(4,071		)	(877		)	(123		)	(1,223		)	(337		)
Subtotal	29,401			19,956			80,392			63,238			33,577			29,401			104,658			80,392
Write downs and other:
Loss on disposal of long lived assets	490			248			3,000			558
Impairment of long lived assets	—			4,604			285			4,606
Write-downs and other:
Loss on disposal of long-lived assets													363			490			1,383			3,000
Impairment of long-lived assets													204			—			1,199			285
Fair value adjustments to contingent consideration and other items	—			(3,000		)	(630		)	(3,000		)	100			—			700			(630		)
Acquisition costs	—			—			—			(11		)
Depreciation and amortization	16,931			19,419			53,598			60,527			18,968			16,931			57,784			53,598
Accretion of placement fees⁽¹⁾	1,192			1,190			3,492			3,538			1,206			1,192			3,412			3,492
Acquisitions & integration related costs including restructuring & severance	71			2,685			899			5,034
Legal & litigation expenses including settlement payments	181			361			766			1,495
Non-cash stock-based compensation expense													538			—			9,167			—
Acquisitions and integration related costs including restructuring and severance													746			71			3,156			899
Initial public offering costs													859			—			2,168			—
Legal and litigation expenses including settlement payments													(45		)	181			789			766
New jurisdictions and regulatory licensing costs	567			842			1,304			957			—			567			—			1,304
Non-cash charge on capitalized installation and delivery	359			353			1,284			1,193			494			359			1,478			1,284
Non-cash charges and loss on disposition of assets	—			285			686			2,352			—			—			—			686
Other adjustments	474			86			2,067			1,650			34			474			50			2,067
Interest expense	12,666			14,903			42,380			44,151			8,956			12,666			28,253			42,380
Interest income	(25		)	(12		)	(80		)	(51		)	(89		)	(25		)	(162		)	(80		)
Loss on extinguishment and modification of debt	—			—			8,129			—			—			—			4,608			8,129
Other expense (income)	(467		)	392			(4,805		)	6,314			434			(467		)	10,121			(4,805		)
Loss before income taxes	$	(3,038	)	$	(22,400	)	$	(31,983	)	$	(66,075	)
Income (loss) before income taxes													$	809		$	(3,038	)	$	(19,448	)	$	(31,983	)

(1) Non-cash item related to the accretion of contract rights under development agreements and placement fees.

The Company’s ~~Chief Operating Decision Maker (the CODM)~~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.

Table of Contents

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

NOTE 15. SUBSEQUENT EVENTS

Term Loan Repricing

On October 5, 2018 (the “Closing Date”), the Borrower entered into the Incremental Agreement No. 2 with certain of the Borrower’s subsidiaries, the lenders party thereto from time to time and the Administrative Agent. The Incremental Agreement amended and restated that certain First Lien Credit Agreement, dated as of June 6, 2017, as amended on December 6, 2017 and as amended and restated on February 7, 2018 (the “Existing Credit Agreement”), among the Borrower the lenders party thereto, the Administrative Agent and other parties named therein (the “Amended and Restated Credit Agreement”), to (a) reduce the applicable interest rate margin for the Term B Loans (as repriced, the “Repriced Term B Loans”) under the Credit Agreement by 0.75% (which shall increase by an additional 0.25% if at any time on or after the Closing Date the Borrower receives a corporate credit rating of at least B1 from Moody’s, regardless of any future rating) and (b) provide for the incurrence by the Borrower of incremental term loans in an aggregate principal amount of $30 million (the “Incremental Term Loans” and together with the Repriced Term B Loans, the “Term B Loans”). In connection with the Incremental Agreement No. 2, the Company incurred third-party and lender of $1.5 million. The net proceeds of the Incremental Term Loans are expected to be used for general corporate purposes and additional capital to accelerate growth.

The Amended and Restated Credit Agreement also provides that any refinancing of the Term B Loans through the issuance of certain debt or any repricing amendment, in either case, that constitutes a “repricing event” applicable to the Term B Loans resulting in a lower yield occurring at any time during the first six months after the Closing Date (i.e. until April 5, 2019) will be accompanied by a 1.00% prepayment premium or fee, as applicable.

The Incremental Term Loans have the same terms as the Borrower’s Repriced Term B Loans. Other than as described above, the Term B Loans continue to have the same terms as provided under the Existing Credit Agreement. Additionally, the parties to the Amended and Restated Credit Agreement continue to have the same obligations set forth in the Existing Credit Agreement. Other than as described above, the provisions of the Term B Loans and the obligations under the Existing Credit Agreement.

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, ~~2016~~2018 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”, ~~“AP Gaming”~~“PlayAGS”, ~~“we,”~~“AGS”, “we”, “our” and “us” refer to ~~AP Gaming Holdco,~~PlayAGS, Inc. and its consolidated subsidiaries.

Overview

We are a leading designer and supplier of ~~diverse~~EGMs and other products and services for the gaming industry. Founded in 2005, ~~our roots are in the Class II Native American gaming market, where~~ we ~~are one of the market leaders in electronic gaming machines (“EGMs”), which include~~historically focused on supplying EGMs, including slot machines, video bingo machines, and other electronic gaming ~~devices. Our customers predominantly consist~~devices, to the Native American gaming market, where we maintain approximately 19% market share of ~~casino operators in~~all Class II ~~and~~EGMs. 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) table game products and ~~commercial gaming enterprises. Historically,~~(iii) 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. Our expansion into Class III and ancillary product offerings has driven our strong growth and momentum in revenue, EGM adjusted EBITDA and our installed base. For the three and nine months ended September 30, 2018, approximately ~~80%~~67% and 72%, respectively, of our total revenue iswas generated through recurring ~~which refers to Interactive revenue and revenue generated under~~ contracted lease agreements whereby we place ~~electronic gaming machines (“EGMs”), systems,~~EGMs and table game products at ~~a customer’s facility in return for~~our customers’ gaming facilities under either a ~~share~~revenue sharing agreement (we receive a percentage of the revenues that these products ~~generate,~~generate) or fee-per-day agreement (we receive a daily or monthly ~~fee. Since mid-2014, we have significantly broadened and diversified~~fixed fee per EGM or table game product), or recurring revenue from our ~~product portfolio through both organic development and strategic acquisitions, and we now offer~~Interactive gaming operations. We operate our business in three distinct ~~categories of products: Electronic Gaming Machines (“EGM”),~~segments: EGMs, Table ~~products (“Table Products”),~~Products and ~~Interactive Social Casino Games (“Interactive”).~~Interactive. Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.

EGM Segment

EGMs constitute our largest segment, representing 95% of our revenue for the three and nine months ended September 30, 2018. We have a library of over 350 proprietary game titles that we deliver on several state-of-the-art EGM cabinets, including Orion Portrait (our Premium cabinet), ICON (our core cabinet), Orion Slant (our newly introduced slant cabinet), Halo (legacy Class II cabinet) and Big Red/Colossal Diamonds (our specialty large-format cabinet). We also have developed a new Latin-style bingo cabinet called ALORA, which we plan to use in select international markets, including the Philippines and Brazil.

Our cabinets and game titles are among the top performing premium leased games in the industry. We design all of our cabinets with the intention of capturing the attention of players on casino floors while aiming to maximize operator profits. The third quarter 2018 Eilers - Fantini Quarterly Slot Survey stated our premium leased games outperform most of the EGMs manufactured by our competitors, generating win per day that is up to 2.1x times higher than house average.

As of September 30, ~~2017,~~2018, our total EGM installed base was 24,184 units (16,068 domestic and 8,116 international). We remain highly focused on continuing to expand our installed base of leased EGMs in markets that we ~~had 22,015~~currently serve, as well as

new jurisdictions where we do not presently have any EGMs installed. Since our founding, we have made significant progress in expanding the number of markets where we are licensed to sell or lease our EGMs. In 2005, we were licensed in three states (5 total licenses) and currently we are licensed in 36 U.S. states and 6 foreign countries (approximately 260 total licenses). As of September 30, 2018, our EGM ~~units~~footprint of leased and sold games represented only approximately 2% of the total domestic market of approximately 990,000 EGMs installed throughout the United States and Canada. According to Eilers & Krejcik, U.S. casino operators expect to allocate approximately 5.2% of their 2018 EGM purchases to AGS products. We believe we are positioned to gain additional market share over the next several years.

We offer our customers the option of either leasing or purchasing our EGMs and associated gaming systems. Currently, we derive the majority of our gaming revenues from EGMs installed under revenue sharing or ~~fee per day agreements. The majority~~fee-per-day lease agreements, also known as “participation” agreements, and we refer to such revenue generation as our “participation model”. As we expand into new gaming markets and roll out our new and proprietary cabinets and titles, we expect the sales of gaming machines and systems will play an increasingly important role in our ~~systems are used by Native American gaming operators in~~business and will complement our core participation model.

We have strategically shifted our focus to create new internal content and leverage our Atlas operating platform as a conduit for our current and future products. Currently, our Orion Portrait, ICON, and Orion Slant cabinets run on the Atlas operating platform. We will continue porting our legacy games onto the Atlas platform, enhancing both our Class II and ~~Class~~ III ~~jurisdictions~~offerings. We expect internally-generated content to be a larger source of our installed base going forward.

We categorize our EGM titles into two main groups: “Core” and “Premium and Specialty”. Our development studios, located in Atlanta, Austin, Las Vegas, and Sydney, are responsible for creating Core video and premium slot content as well as ~~commercial~~new hardware designs and concepts. Our Core titles have a proven track record of success and are targeted at maintaining and growing our current installed base. Our Premium titles include unique and niche titles that provide a distinctive player experience and are targeted at increasing floor space in both existing and new jurisdictions. Specialty titles describe our jumbo games, such as Colossal Diamonds, and games made specifically for high-limit winnings. In total, our development teams have the capabilities to produce approximately 50 games per year. We believe this strategy of producing diversified content will allow us to maintain and grow our market leadership within our current Class II base, as well as expand into Class III casinos in ~~Mexico. We currently derive a substantial portion~~other key jurisdictions.

Table Products

In addition to our existing portfolio of EGMs, we also offer our ~~gaming revenues from lease agreements whereby we place EGMs~~customers approximately 30 unique Table Product offerings, including premium live felt table games, side bet offerings, progressives, signage and ~~systems at a customer’s facility in return for either a share~~other ancillary table game equipment. Our table products are designed with the goal of enhancing the table games section of the ~~revenues~~casino floor (commonly known as “the pit”). Over the past 10 years, there has been a trend of introducing side-bets on blackjack tables to increase the game’s overall hold. Our Table Products segment offers a full suite of side-bets and specialty table games that ~~these machines~~capitalize on this trend, and ~~systems generate or~~we believe that this segment will serve as an important growth engine for our company, including by generating further cross-selling opportunities with our EGM offerings. As of September 30, 2018, we had an installed base of 3,065 table products domestically and internationally and we believe we are presently a ~~daily fee.~~

~~The following points should be noted as they relate~~leading supplier of table products to ~~each~~the gaming industry based on number of ~~our segments:~~

~~Electronic Gaming Machines~~products placed.

Our ~~EGM~~Table Products segment focuses on high margin recurring revenue generated by leases. Nearly all of the revenue we generate in this segment is ~~primarily~~recurring. We have acquired several proprietary table games and side-bets and developed others in-house.

As one of the newer areas of our Table Products business, our equipment offerings are ancillary to table games, such as card shufflers and table signage, and provide casino operators a ~~lease model,~~greater variety of choice in the marketplace. This product segment includes our highly-anticipated single-card shuffler, “DEX S”, as well as our Baccarat Signage solution and ~~we expect~~Roulette Readerboard. We believe this area of the business holds many opportunities for growth, as the technology currently installed in the signage and readerboard areas are in a replacement cycle.

After acquiring intellectual property around progressive bonusing systems, our Table Products segment has heavily expanded on our base systems to now offer a bonusing solution for casino operators. We believe progressive bonusing on table products is a growing trend with substantial growth opportunities. We continue to ~~realize~~develop and expand our core system to offer new and exciting bonusing and progressive products for the ~~majority~~marketplace.

Interactive Social Casino Products

Our business-to-consumer (“B2C”) social casino games include online versions of our popular EGM ~~revenues~~titles and are accessible to players worldwide on multiple mobile platforms, which we believe establishes brand recognition and cross selling opportunities. Our B2C social casino games operate on a free-to-play model, whereby game players may collect virtual currency or other virtual consumable goods (collectively referred to as “virtual goods” or “virtual currency”) free of charge, through ~~leases~~the passage of time or through targeted marketing promotions. Additionally, players have the ability to send free “gifts” of virtual goods to their friends through interactions on certain social platforms. If a game player wishes to obtain virtual goods above and beyond the level of free virtual goods available to that player, the player may purchase additional virtual goods. Once obtained, virtual currency (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than game play. We design our portfolio of B2C social casino games to appeal to the interests of a broad group of people who like to play casino-themed social and mobile games.

We have recently expanded into the business-to-business (“B2B”) space through our core B2C app, Lucky Play Casino, whereby we white label our social casino game product and enable our land-based casino customers to brand the social casino gaming product with their own casino name. The app contains numerous AGS game titles available for consumers to play for fun or with virtual goods they purchase in the app. Some of our most popular social casino games include content that is also popular in land-based settings such as Fire Wolf, Gold Dragon Red Dragon, Legend of the White Buffalo, Royal Reels, Golden Wins, So Hot, Monkey in the Bank, and many more. Our B2C social casino games leverage the global connectivity and distribution of mobile platforms such as the Apple App Store and Google Play Store. With the acquisition of Gameiom Technologies Limited (formerly known as “Gameiom”, currently known as “AGS iGaming”) in the current year, we now offer a B2B platform for content aggregation used by real-money gaming (“RMG”) and sports-betting partners.

Other Information

Customers and marketing. We market our products to casinos and other legal gaming establishments around the world with our domestic and international sales force and several domestic and international distributors and/or representatives. We believe the quality and breadth of our customer base is a strong testament to the effectiveness and quality of our product offerings, technological innovation and customer service. Our customer base includes leading casino operators in leading established gaming markets such as the United States, Canada and ~~Mexico, as well as other markets that make strategic sense.~~

~~We also expect growth in markets such as~~ Latin ~~America~~America. Our customers include, among others, Caesar’s Entertainment Corp., MGM Resorts International, Poarch Creek Band of Indians, and the ~~United States. In the current year, we have grown our footprint in Latin America~~Chickasaw Nation.

Our products and the ~~United States~~locations in which we may sell them are subject to the licensing and ~~expect continued growth~~product approval requirements of various national, state, provincial and tribal jurisdictional agencies that regulate gaming around the world, as discussed in ~~these markets.~~

~~Table Products~~

~~The majority of~~“Part I, Item 1. Business” in our ~~Table Products segment revenue is derived from royalties~~Annual Report on Form 10-K for the year-ended December 31, 2017. We lease and ~~leases~~sell our products, with an emphasis on leasing versus selling, primarily in the United States. We ~~are constantly looking~~service the products we lease and offer service packages to ~~expand our proprietary table product footprint through the acquisition or development of new games.~~

We also pursue opportunities to place Table Products in new properties and jurisdictions in the United States. In the past few years, several jurisdictions have either opened new casino properties or approved live table games, and we have seen placements of our tablecustomers who purchase products ~~in those new jurisdictions.~~

~~We intend to increase our Table Products content through development and acquisition of new proprietary titles. By increasing our footprint with new titles, we hope to increase our market penetration.~~from us.

~~Interactive~~

~~Currently,~~Product supply. We obtain most of the parts for our ~~interactive social gaming revenue is generated~~products from ~~a high volume of consumers’ purchases of virtual coins which~~outside suppliers, including both off-the-shelf items as well as components manufactured to our specifications. We also manufacture parts in-house that are used ~~to play the games.~~

for product assembly and for servicing existing products. We ~~expect to begin offering business to business (“B2B”) social casino products available to land-based casino customers.~~

generally perform warehousing, quality control, final assembly and shipping from our facilities in Atlanta, Las Vegas, Mexico City and Oklahoma City, although small inventories are maintained and repairs are performed by our field service employees. We ~~expect to devote substantial resources to the ongoing maintenance~~believe that our sources of supply for components and ~~development~~raw materials are adequate and that alternative sources of ~~our Interactive gaming segment.~~materials are available.

Key Drivers of Our Business

Our revenues are impacted by the following key factors:

•the amount of money spent by consumers on our domestic 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 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;~~

productivity, overtime and training;

•fluctuations in the price of components for gaming equipment;

•fluctuations in energy prices;

•changes in the cost of obtaining and maintaining gaming licenses; and

•fluctuations in the level of maintenance expense required on gaming equipment.

Variations in our selling, general and administrative expenses, ~~or SG&A,~~ and research and development ~~or R&D~~expenses are primarily due to changes in employment and salaries and related fringe benefits.

Results of Operations

Three Months Ended September 30, ~~2017~~2018 compared to the Three Months Ended September 30, ~~2016~~2017

The following ~~tables~~table set forth certain selected condensed consolidated financial data for the three months ended September 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three months ended September 30,						$			%		Three months ended September 30,						$			%
	2017			2016			Change			Change		2018			2017			Change			Change
Consolidated Statements of Operations:
Revenues
Gaming operations	$	42,849		$	38,877		$	3,972		10.2	%	$	50,701		$	42,849		$	7,852		18.3	%
Equipment sales	13,591			2,331			11,260			483.1	%	24,825			13,591			11,234			82.7	%
Total revenues	56,440			41,208			15,232			37.0	%	75,526			56,440			19,086			33.8	%
Operating expenses
Cost of gaming operations	7,344			6,711			633			9.4	%	10,494			7,344			3,150			42.9	%
Cost of equipment sales	6,330			698			5,632			806.9	%	12,109			6,330			5,779			91.3	%
Selling, general and administrative	9,742			12,970			(3,228		)	(24.9	)%	15,284			9,742			5,542			56.9	%
Research and development	6,467			6,675			(208		)	(3.1	)%	7,894			6,467			1,427			22.1	%
Write downs and other charges	490			1,852			(1,362		)	(73.5	)%
Write-downs and other charges												667			490			177			36.1	%
Depreciation and amortization	16,931			19,419			(2,488		)	(12.8	)%	18,968			16,931			2,037			12.0	%
Total operating expenses	47,304			48,325			(1,021		)	(2.1	)%	65,416			47,304			18,112			38.3	%
Income (loss) from operations	9,136			(7,117		)	16,253			228.4	%
Other expense (income)
Income from operations												10,110			9,136			974			10.7	%
Interest expense	12,666			14,903			(2,237		)	(15.0	)%	8,956			12,666			(3,710		)	(29.3	)%
Interest income	(25		)	(12		)	(13		)	(108.3	)%	(89		)	(25		)	(64		)	(256.0	)%
Other (income) expense	(467		)	392			(859		)	(219.1	)%
Loss before income taxes	(3,038		)	(22,400		)	19,362			86.4	%
Income tax (expense) benefit	(1,052		)	1,165			(2,217		)	(190.3	)%
Net loss	$	(4,090	)	$	(21,235	)	$	17,145		80.7	%
Other expense (income)												434			(467		)	901			192.9	%
Income (loss) before income taxes												809			(3,038		)	3,847			126.6	%
Income tax benefit (expense)												3,538			(1,052		)	4,590			436.3	%
Net income (loss)												$	4,347		$	(4,090	)	$	8,437		206.3	%

Revenues

Gaming Operations. The increase in gaming operations revenue was primarily due to the increase in our EGM installed base of approximately ~~900 U.S.~~1,500 domestic units, which is primarily attributable to the purchase of approximately 1,500 EGMs from Rocket in December 2017 as described in Item 1 “Financial Statements” Note 2 to our condensed consolidated financial statements. The increase is also attributable to the continued success of our ICON cabinet and the popularity of our ~~new~~ ~~ICON~~Orion Portrait cabinet and ~~Orion~~ ~~cabinets~~the placement of over 500 domestic Class II units in casino expansions and newly opened casinos offset by the strategic removal of approximately ~~1,000 Mexico units, which~~500 EGMs in the third quarter at one casino as well as the sale of previously leased EGMs. In addition, the increase is attributable to ~~the to our gaining market share in under serviced markets within Mexico. We also had a 2.6%,~~an increase of $1.70, or ~~$0.64, increase~~6.7% in our ~~U.S.~~domestic EGM revenue per day driven by our new product offerings and through the optimization of our installed base by installing our newer and more competitive game content on our EGMs. ~~Although~~In addition, the ~~Company has experienced~~increase is also attributable to the increase of 645 international EGM units, which is due to our gaining market share in under serviced markets within Mexico. Furthermore, we had a ~~decrease~~$0.8 million increase in ~~participation share rates for~~Table Products gaming operations revenue ~~received pursuant~~which is attributable to ~~participation agreements with Native American tribal customers, player demand, driven by~~ the ~~Company’s newer~~increase in the Table Products installed base to 3,065 units compared to 2,350 units in the prior year period most notably due to the increased installed base of our side bets and ~~more competitive game content, has offset~~progressive games as well as revenue from the ~~effects of decreased participation share rates and U.S. EGM revenue per day has increased~~In Bet games in ~~total.~~the entire third quarter, as those games were acquired in August in 2017.

Equipment Sales. The increase in equipment sales is due to the sale of ~~842~~1,332 EGM units in the three months ended September 30, ~~2017,~~2018, compared to 66842 units in the prior year period. The increase in the number of units sold is primarily attributable to the success of our ~~new~~premium ~~ICON~~Orion Portrait ~~and~~ ~~Orion~~ ~~cabinets~~cabinet and our growth in the Class III market ~~in which many customers prefer to buy rather than lease EGMs.~~as well as the continued success of our ICON cabinet. The increase was also attributable to a ~~$1,529,~~$2,161, or ~~10.6%,~~13.6% increase in the average sales price compared to the prior year period. The increase in ~~equipment~~the average sales ~~was offset by a decrease in revenues from~~price is due to the ~~sale~~higher sales price of ~~nontransferable~~ our premium Orion Portrait and ~~nonexclusive licenses of certain licensed game content~~ Orion Slant cabinets compared to ~~a third party for $1.1 million in the prior year period that was not present in the current year period.~~other cabinets.

Operating Expenses

Cost of gaming operations. The ~~increase in~~additional costs of gaming operations was the result of our increased service and production costs related to our increased installed base of ~~22,015~~24,184 EGM units compared to ~~20,108~~22,015 units in the prior year period, as well as ~~increased~~ table games installed base that increased ~~95.0%~~30.4% compared to the prior year period. As a percentage of gaming operations revenue, costs of gaming operations ~~was 17.1%~~increased to 20.7% for the three months ended September 30, ~~2017~~2018 compared to ~~17.3%~~17.1% for the prior year ~~period.~~primarily due to the increase service costs mentioned above, as well as period costs related to manufacturing.

Cost of Equipment Sales. The increase in cost of equipment sales is attributable to ~~the increase of 842~~1,332 EGM units sold for the three months ended September 30, ~~2017~~2018 compared to 66842 in prior year period. As a percentage of equipment sales revenue, costs of equipment sales was 48.8% for the three months ended September 30, 2018 compared to 46.6% for the prior year period primarily due to changes in the mix of products sold in each period and the costs to manufacture the sold products.

Selling, general and administrative. The ~~decrease~~$5.5 million increase in selling, general and administrative expenses iswas primarily due to ~~the resolution~~a $2.5 million increase in the prior year period of a $2.0 million customer liability related to the Cadillac Jack acquisition, $1.0 million in marketing costs due to the timing of tradeshows, $0.6 million decreased user acquisition fees from our Interactive segment in efforts to optimize marketing spend, $0.3 million decreased bad debt expense, and offset by increased salary and benefit costs ~~of $0.9 million~~ due to higher ~~headcount.~~headcount, $0.2 million increase due to to stock-based compensation expense, and $2.2 million increase in professional fees driven by costs associated with the acquisition and integration of AGS iGaming and previous offerings.

Research and development. The ~~decrease~~increase in research and development expenses is ~~driven by decreased professional fees related~~primarily due to ~~software testing and compliance~~$0.4 million of ~~$1.0 million, which was offset by increases in~~increased salary and benefit costs ~~of $0.7 million~~ due to higher ~~headcount.~~headcount, a $0.3 million increase of stock-based compensation expense, an increase in software and development expenses of $0.2 million and an increase of $0.2 million in hardware and equipment expenses. As a percentage of total revenue, research and development expense was ~~11.5%~~10.5% for the ~~three months~~period ended September 30, ~~2017~~2018 compared to ~~16.2%~~11.5% for the prior year period.

~~Write downs~~Write-downs and other charges. The Condensed Consolidated Statements of Operations and Comprehensive Loss include various non-routine transactions or consulting and transaction-related fees that have been classified as write-downs and other charges. During the three months ended September 30, 2018, we recognized $0.7 million in write-downs and other charges driven by losses from the disposal of assets of $0.4 million, impairment of intangible assets of $0.2 million and a fair value adjustment to contingent consideration of $0.1 million (the Company used level 3 fair value measurements based on projected cash flows). During the three months ended September 30, 2017, the Company recognized $0.5 million in write-downs and other charges driven by losses from the disposal of assets.

the long-lived assets were written down to $0, and losses from the disposal of assets of $0.2 million. These charges were offset by a $3.0 million fair value adjustment to a contingent consideration receivable related to the Cadillac Jack acquisition.

Due to the changing nature of our ~~write downs~~write-downs and other charges, we describe the composition of the balances as opposed to providing a year over year comparison.

Depreciation and amortization. The ~~decrease~~increase was predominantly due to a ~~$3.0~~$0.9 million ~~decrease in amortization driven by certain intangible assets that have reached the end of their useful lives. Secondarily, the decrease was due to a $0.6 million decrease~~increase in depreciation driven by ~~assets that have reached~~an increased installed base and an increase of amortization expense of $1.1 million due to the ~~end~~purchase of ~~their useful lives. These assets were fully depreciated at~~In Bet, AGS iGaming and Rocket Gaming Systems. See Item 1. “Financial Statements” Note 2 for a detailed discussion regarding the ~~beginning~~acquisitions of ~~the current period~~In Bet, AGS iGaming and ~~therefore had no depreciation for three months ended September 30, 2017.~~Rocket Gaming Systems.

Other Expense (Income)~~, net~~

Interest expense. The decrease in interest expense is predominantly attributed to the termination of our senior secured credit facilities and seller notes and entering into a first lien credit agreement on June 6, ~~2017.~~2017 and the redemption of its 11.25% senior secured PIK notes as well as the further decrease in the interest rate on our first lien credit facilities we obtained on February 7, 2018. See Item 1. “Financial Statements” Note 6 for a detailed discussion regarding long-term debt. These transactions resulted in a lower weighted average interest rate. These decreases were partially offset by an increase in the average principal amounts outstanding under the ~~senior secured PIK notes of $15.0 million~~first lien credit facilities as of September 30, ~~2017,~~2018, compared to the amount outstanding at September 30, ~~2016.~~2017.

Other expense (income) ~~expense.~~. The ~~decrease~~increase is predominantly ~~attributed~~due to changes from the effect of foreign currency fluctuation on trade payables and receivables denominated in foreign currencies. ~~To a lesser extent, the change was due to a $0.2 million change in the balance of the tax indemnification receivable recorded in connection with the acquisition of Cadillac Jack.~~

Income Taxes

The Company's effective income tax rate for the three months ended September 30, 2018, was a benefit of 437.3%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2018, was primarily due to changes in our valuation allowance on deferred tax assets and increases in our estimated annual forecasted losses during the third quarter of 2018 due to changes in our business and various permanent items, all of which impacted the required accounting for income taxes under generally accepted accounting principles for interim reporting periods.

The Company's effective income tax rate for the three months ended September 30, 2017, was an expense of 34.6%. The difference between the federal statutory rate of 35% and the Company's effective tax rate for the three months ended September 30, 2017, was primarily due to changes in our valuation allowance on deferred tax assets. The Company's effective income tax rate for the three months ended September 30, 2016, was a benefit of 5.2%. The difference between the federal statutory rate of 35% and the Company's effective tax rate for the three months ended September 30, 2016, was primarily due to changes in our valuation allowance on deferred tax assets.

Nine Months Ended September 30, ~~2017~~2018 compared to the Nine Months Ended September 30, ~~2016~~2017

The following ~~tables~~table set forth certain selected condensed consolidated financial data for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Nine months ended September 30,						$			%		Nine months ended September 30,						$			%
	2017			2016			Change			Change		2018			2017			Change			Change
Consolidated Statements of Operations:
Revenues
Gaming operations	$	125,040		$	117,093		$	7,947		6.8	%	$	152,887		$	125,040		$	27,847		22.3	%
Equipment sales	29,254			6,968			22,286			319.8	%	60,317			29,254			31,063			106.2	%
Total revenues	154,294			124,061			30,233			24.4	%	213,204			154,294			58,910			38.2	%
Operating expenses
Cost of gaming operations	21,794			19,627			2,167			11.0	%	29,062			21,794			7,268			33.3	%
Cost of equipment sales	14,326			4,244			10,082			237.6	%	28,919			14,326			14,593			101.9	%
Selling, general and administrative	30,368			36,654			(6,286		)	(17.1	)%	47,411			30,368			17,043			56.1	%
Research and development	17,912			16,517			1,395			8.4	%	23,374			17,912			5,462			30.5	%
Write downs and other charges	2,655			2,153			502			23.3	%
Write-downs and other charges												3,282			2,655			627			23.6	%
Depreciation and amortization	53,598			60,527			(6,929		)	(11.4	)%	57,784			53,598			4,186			7.8	%
Total operating expenses	140,653			139,722			931			0.7	%	189,832			140,653			49,179			35.0	%
Income (loss) from operations	13,641			(15,661		)	29,302			187.1	%
Other expense (income)
Income from operations												23,372			13,641			9,731			71.3	%
Interest expense	42,380			44,151			(1,771		)	(4.0	)%	28,253			42,380			(14,127		)	(33.3	)%
Interest income	(80		)	(51		)	(29		)	(56.9	)%	(162		)	(80		)	(82		)	(102.5	)%
Loss on extinguishment and modification of debt	8,129			—			8,129			—	%	4,608			8,129			(3,521		)	(43.3	)%
Other (income) expense	(4,805		)	6,314			(11,119		)	(176.1	)%
Loss before income taxes	(31,983		)	(66,075		)	34,092			51.6	%
Income tax (expense) benefit	(4,603		)	4,935			(9,538		)	(193.3	)%
Net loss	$	(36,586	)	$	(61,140	)	$	24,554		40.2	%
Other expense (income)												10,121			(4,805		)	14,926			310.6	%
Income (loss) before income taxes												(19,448		)	(31,983		)	12,535			39.2	%
Income tax benefit (expense)												8,947			(4,603		)	13,550			294.4	%
Net income (loss)												$	(10,501	)	$	(36,586	)	$	26,085		71.3	%

Revenues

Gaming Operations. The increase in gaming operations revenue was primarily due to the increase in our EGM installed base of approximately ~~900 U.S.~~1,500 domestic units, which is primarily attributable to the purchase of approximately 1,500 EGMs from Rocket in December 2017 as described in Item 1. “Financial Statements” Note 2 to our condensed consolidated financial statements. The increase is also attributable to the continued success of our ICON cabinet and the popularity of our ~~new~~ ~~ICON~~Orion Portrait cabinet and ~~Orion~~ ~~cabinets~~the placement of over 500 domestic Class II units in casino expansions and newly opened casinos offset by the strategic removal of approximately ~~1,000 Mexico units, which is attributable to~~500 EGMs in the ~~to our gaining market share in under serviced markets within Mexico. We also~~third quarter at one casino as well as the sale of previously leased EGMs. Additionally, we had ~~a 2.1%,~~an increase of $1.49, or ~~$0.54, increase~~5.8% in our ~~U.S.~~domestic EGM revenue per day driven by our new product offerings, recently entered jurisdictions and through the optimization of our installed base by installing our newer and more competitive game content on our EGMs. ~~Although~~In addition, the ~~Company has experienced~~increase is due to the increase of 645 international EGM units, which is attributable to our gaining market share in under serviced markets within Mexico. Furthermore, we had a ~~decrease~~$2.9 million increase in ~~participation share rates for~~Table Products gaming operations revenue ~~received pursuant~~which is attributable to ~~participation agreements with Native American tribal customers, player demand, driven by~~ the ~~Company’s newer and more competitive game content, has offset~~increase in the ~~effects of decreased participation share rates and U.S. EGM revenue per day has increased in total. Current period results have been negatively impacted by $1.0 million relating~~Table Products installed base to ~~foreign currency fluctuations~~3,065 units compared to 2,350 units in the prior year ~~period. Additionally, we had a $0.2 million increase in Interactive revenue driven by Business-to-Consumer (“B2C”) arrangements when compared~~period most notably due to the ~~prior~~increased installed base of our side bets and progressive games as well as revenue from the In Bet games in the entire current year ~~period.~~period, as those games were acquired in August in 2017.

Equipment Sales. The increase in equipment sales is due to the sale of ~~1,868~~3,228 EGM units in the nine months ended September 30, ~~2017,~~2018, compared to ~~205~~1,868 EGM units in the prior year period. The increase in the number of units sold is primarily attributable to the success of our ~~new~~premium ~~ICON~~Orion Portrait ~~and~~ ~~Orion~~ ~~cabinets~~cabinet and our growth in the Class III market ~~in which many customers prefer to buy rather than lease EGMs.~~as well as the continued success of our ICON and Orion Slant cabinet. The increase was also attributable to a ~~$1,205,~~$2,373, or ~~8.2%,~~15.0% increase in the average sales price compared to the prior year period. The increase in ~~equipment~~the average sales ~~was offset by a decrease in revenues from~~price is due to the ~~sale~~higher sales price of ~~nontransferable~~ our premium Orion Portrait and ~~nonexclusive licenses of certain licensed game content~~ Orion Slant cabinets compared to ~~a third party for $3.2 million in the prior year period that was not present in the current year period.~~other cabinets.

Operating Expenses

Cost of gaming operations. The increase in costs of gaming operations was the result of our increased installed base of ~~22,015~~24,184 EGM units compared to ~~20,108~~22,015 units in the prior year period, as well as increased table games installed base that increased ~~95.0%~~30.4% compared to the prior year period. As a percentage of gaming operations revenue, costs of gaming operations was ~~17.4%~~19.0% for the nine months ended September 30, ~~2017~~2018 compared to ~~16.8%~~17.4% for the prior year ~~period.~~primarily due to increased service costs, as well as period costs related to manufacturing.

Cost of Equipment Sales. The increase in cost of equipment sales is attributable to ~~the increase of 1,868~~3,228 EGM units sold for the nine months ended September 30, ~~2017~~2018 compared to ~~205~~1,868 in the prior year period. As a percentage of equipment sales revenue, costs of equipment sales was 47.9% for the nine months ended September 30, 2018 compared to 49.0% for the prior year period primarily due to changes in the mix of products sold in each period and the costs to manufacture the sold products.

Selling, general and administrative. The ~~decrease~~increase in selling, general and administrative expenses is primarily due to ~~decreased user acquisition~~$6.8 million of stock-based compensation expense (which includes an initial charge of $6.2 million recorded in connection with the IPO), professional fees of ~~$2.8~~$4.8 million ~~from our Interactive segment in efforts to optimize marketing spend, the resolution in the prior year period of a $2.0 million customer liability~~ related to the ~~Cadillac Jack~~ acquisition ~~$0.8 million in trade show~~and integration of AGS iGaming, the Company’s IPO and related ~~marketing~~offerings as well as legal settlements. Additionally, the increase is attributable to an increase in salary and benefit costs of $5.0 million due to ~~the timing~~higher headcount, increased occupancy and costs related to our increased presence of ~~trade shows,~~$1.2 million and ~~$0.8~~increased insurance costs of $0.6 million, and offset by a decrease of $0.9 million of property tax expense and a decrease in ~~legal and litigation expenses including settlement payments in the prior year period.~~marketing expense of $0.3 million.

Research and ~~development.~~development. The increase in research and development expenses is ~~driven by increased~~primarily due to $2.2 million of salary and benefit costs ~~of $2.3 million~~ due to higher headcount, ~~and protype parts~~$2.3 million of ~~$1.2~~stock-based compensation expense (which includes an initial charge of $1.6 million ~~associated~~recorded in connection with the ~~development of our new Orion and Orion Slant cabinets, which are offset by decreased professional fees~~IPO), a $0.3 million increase related to internal software testing and ~~compliance~~external product approval costs and an increase in professional fees of ~~$2.1~~$0.6 million. As a percentage of total revenue, research and development expense was ~~11.6%~~11.0% for the ~~nine months~~period ended September 30, ~~2017~~2018 compared to ~~13.3%~~11.6% for the prior year period.

~~Write~~Write-downs and other charges. The Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) include various non-routine transactions or consulting and transaction-related fees that have been classified as write downs and other charges. During the nine months ended September 30, 2018, the Company recognized $3.3 million in write-downs and other charges driven by losses from the disposal of assets of $1.4 million, the impairment to intangible assets related to game titles and assets associated with terminated development agreements of $1.2 million (the Company used level 3 of observable inputs in conducting the impairment tests), and a fair value adjustment to contingent consideration of $0.7 million (the Company used level 3 fair value measurements based on projected cash flows).

During the nine months ended September 30, 2017, the Company recognized $2.7 million in write-downs and other charges, driven by losses from the disposal of assets of ~~$3.0~~$2.9 million, the full impairment of certain intangible assets of $0.3 million ~~(level~~(the Company used level 3 fair value measurement based on projected cash flows for the specific game titles), offset by a fair value adjustment to an acquisition contingent receivable of $0.6 million ~~(level~~(the Company used level 3 fair value measurements based on projected cash flows). The contingency was resolved in the quarter ~~ending~~ended March 31, ~~2017. See Item 1. “Financial Statements” Note 6 for a detailed discussion regarding the resolution of the contingency described above.~~

~~During the nine months ended September 30, 2016, the~~2017 (the Company recognized $2.2 million in write-downs and other charges, driven by a $3.3 million impairment of an intangible asset related to a customer contract that will provide less benefit than originally estimated from the Cadillac Jack acquisition (aused level 3 ~~fair value measurement based on a decrease~~of observable inputs in ~~projected cash flows). The value of~~conducting the intangible asset was written down to $1.1 million at an interim date and subsequently fully amortized by December 31, 2016. Additionally, a write-down of long-lived assets of $1.3 million related to aged gaming machines, and losses from the disposal of assets of $0.6 million. These charges were offset by a $3.0 million fair value adjustment to a contingent consideration receivable related to the Cadillac Jack acquisition.impairment tests).

Due to the changing nature of our ~~write downs~~write-downs and other charges, we describe the composition of the balances as opposed to providing a year over year comparison.

Depreciation and amortization. The ~~decrease~~increase was predominantly due to a ~~$5.8~~$3.8 million ~~decrease in amortization driven by certain intangible assets that have reached the end of their useful lives. Secondarily, the decrease was due to a $1.2 million decrease~~increase in depreciation driven by ~~assets that have reached~~an increased installed base, and an increase of amortization expense of $0.4 million due to the ~~end~~purchase of ~~their useful lives. These assets were fully depreciated at~~In Bet, AGS iGaming and Rocket Gaming Systems. See Item 1. “Financial Statements” Note 2 for a detailed discussion regarding the ~~beginning~~acquisitions of ~~the current period~~In Bet, AGS iGaming and ~~therefore had no depreciation for the nine months ended September 30, 2017.~~Rocket Gaming Systems.

Other Expense (Income)~~, net~~

~~Loss on extinguishment and modification of debt.~~ The increase is attributed to the refinancing of the Company’s long-term debt, as described in Item 1. “Financial Statements” Note 6. Approximately $3.3 million of deferred loan costs and discounts related to our old senior secured credit facilities were written off as a portion of the loss on extinguishment and modification of debt and $4.8 million in debt issuance costs related to the first lien credit facilities were expensed.2017.

Other ~~(income) expense.~~income. The increase is predominantly attributed to the write-off in the current year of indemnification receivables of $9.4 million as the related liability for uncertain tax positions was also written off due to the applicable lapse in the statute of limitations. See Item 1. “Financial Statements” Note 12 for a detailed description of the indemnification receivable. The remaining change was due to the effect of foreign currency fluctuation on trade payables and receivables denominated in foreign currencies. ~~To a lesser extent, the change was due to a $4.8 million change in the balance of the tax indemnification receivable recorded in connection with the acquisition of Cadillac Jack.~~

Income Taxes

The Company's effective income tax rate for the nine months ended September 30, 2018, was a benefit of 46.0%. The difference between the federal statutory rate of 21% and the Company's effective tax rate for the nine months ended September 30, 2018, was primarily due to changes in our valuation allowance on deferred tax assets, various permanent items and lapse in applicable statute of limitations for certain uncertain tax positions. The Company's effective income tax rate for the nine months ended September 30, 2017, was an expense of 14.4%. The difference between the federal statutory rate of 35% and the Company's effective tax rate for the nine months ended September 30, 2017 was primarily due to changes in our valuation allowance on deferred tax assets. The Company's effective income tax rate for the nine months ended September 30, 2016, was a benefit of 7.5%. The difference between the federal statutory rate of 35% and the Company's effective tax rate for the nine months ended September 30, 2016, was primarily due to an increase in our valuation allowance on deferred tax assets.

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 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 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. For our Interactive segment, we view the number of unique players and revenues provided by players on a daily or monthly basis.

The following tables provide reconciliations of segment financial information to our consolidated statement of operations. We have included revenues, operating expenses and other adjustments by segment which we believe are important to understanding the operating results of our segment:

Three months ended September 30, 2017
EGM Table Products Interactive Total
Revenues
Gaming operations $ 39,767
$ 1,072
$ 2,010
$ 42,849
Equipment sales 13,564
27
—
13,591
Total revenues 53,331
1,099
2,010
56,440
Cost of gaming operations⁽¹⁾
6,352
405
587
7,344
Cost of equipment sales⁽¹⁾
6,329
1
—
6,330
Selling, general and administrative 8,011
586
1,145
9,742
Research and development 5,537
524
406
6,467
Write downs and other charges 490
—
—
490
Depreciation and amortization 16,181
185
565
16,931
Total operating expenses 42,900
1,701
2,703
47,304

Write downs and other
Loss on disposal of long lived assets 490
—
—

Impairment of long lived assets —
—
—

Fair value adjustments to contingent consideration and other items —
—
—

Acquisition costs —
—
—

Depreciation and amortization 16,181
185
565

Accretion of placement fees⁽²⁾
1,192
—
—

Acquisitions & integration related costs including restructuring & severance⁽³⁾
65
5
1

Legal & litigation expenses including settlement payments⁽⁴⁾
181
—
—

New jurisdictions and regulatory licensing costs⁽⁵⁾
556
11
—

Non-cash charge on capitalized installation and delivery⁽⁶⁾
359
—
—

Non-cash charges and loss on disposition of assets⁽⁷⁾
—
—
—

Other adjustments⁽⁸⁾
301
169
4

Adjusted EBITDA $ 29,756
$ (232 ) $ (123 )

~~(1) Exclusive of depreciation and amortization.~~

~~(2) Non-cash item related to the accretion of contract rights under development agreements and placement fees.~~

(3) Acquisitions & integration related costs primarily relate to costs incurred after the purchase of businesses, such as the purchase of Cadillac Jack and AGSi, to integrate operations and obtain costs synergies. Restructuring and severance costs 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.

~~(4) Legal and litigation related costs consist of payments to law firms and settlements for matters that are outside the normal course of business. These costs~~

~~related to litigation and matters that were not significant individually.~~

~~(5) New jurisdictions and regulatory licensing costs primarily relate to the costs the Company incurred to obtain licenses and develop products for new jurisdictions.~~

~~(6) Non-cash charge on capitalized installation and delivery primarily include the costs to acquire contracts that are expensed over the estimated life of each contract.~~

(7) Non-cash charges and loss on disposition of assets are primarily composed of the net book value of electronic gaming machines sold into secondary markets. These gaming machines were previously leased to customers and sold at substantially lower average selling prices. Additional non-cash inventory obsolescence charges are also included.

(8) Other adjustments are primarily composed of professional fees incurred by the Company for projects, corporate and public filing compliance, contract cancellation fees, and other costs deemed to be non-recurring in nature.

Three months ended September 30, 2016
EGM Table Products Interactive Total
Revenues
Gaming operations $ 36,048
$ 672
$ 2,157
$ 38,877
Equipment sales 2,329
2
—
2,331
Total revenues 38,377
674
2,157
41,208
Cost of gaming operations⁽¹⁾
5,749
350
612
6,711
Cost of equipment sales⁽¹⁾
698
—
—
698
Selling, general and administrative 10,600
643
1,727
12,970
Research and development 5,761
489
425
6,675
Write downs and other charges 1,852
—
—
1,852
Depreciation and amortization 18,806
404
209
19,419
Total operating expenses 43,466
1,886
2,973
48,325

Write downs and other
Loss on disposal of long lived assets 248
—
—

Impairment of long lived assets 4,604
—
—

Fair value adjustments to contingent consideration and other items (3,000 ) —
—

Acquisition costs —
—
—

Depreciation and amortization 18,806
404
209

Accretion of placement fees⁽²⁾
1,190
—
—

Acquisitions & integration related costs including restructuring & severance⁽³⁾
2,413
272
—

Legal & litigation expenses including settlement payments⁽⁴⁾
235
126
—

New jurisdictions and regulatory licensing costs⁽⁵⁾
812
30
—

Non-cash charge on capitalized installation and delivery⁽⁶⁾
353
—
—

Non-cash charges and loss on disposition of assets⁽⁷⁾
285
—
—

Other adjustments⁽⁸⁾
86
—
—

Adjusted EBITDA $ 20,943
$ (380 ) $ (607 )

~~(1) Exclusive of depreciation and amortization.~~

~~(2) Non-cash item related to the accretion of contract rights under development agreements and placement fees.~~

~~(4) Legal and litigation related costs consist of payments to law firms and settlements for matters that are outside the normal course of business. These costs~~

~~related to litigation and matters that were not significant individually.~~

~~(5) New jurisdictions and regulatory licensing costs primarily relate to the costs the Company incurred to obtain licenses and develop products for new jurisdictions.~~

~~(6) Non-cash charge on capitalized installation and delivery primarily include the costs to acquire contracts that are expensed over the estimated life of each contract.~~

Nine months ended September 30, 2017
EGM Table Products Interactive Total
Revenues
Gaming operations $ 116,587
$ 2,348
$ 6,105
$ 125,040
Equipment sales 29,160
94
—
29,254
Total revenues 145,747
2,442
6,105
154,294
Cost of gaming operations⁽¹⁾
19,188
798
1,808
21,794
Cost of equipment sales⁽¹⁾
14,318
8
—
14,326
Selling, general and administrative 25,490
1,424
3,454
30,368
Research and development 15,652
1,277
983
17,912
Write downs and other charges 2,655
—
—
2,655
Depreciation and amortization 51,603
1,012
983
53,598
Total operating expenses 128,906
4,519
7,228
140,653

Write downs and other
Loss on disposal of long lived assets 3,000
—
—

Impairment of long lived assets 285
—
—

Fair value adjustments to contingent consideration and other items (630 ) —
—

Acquisition costs —
—
—

Depreciation and amortization 51,603
1,012
983

Accretion of placement fees⁽²⁾
3,492
—
—

Acquisitions & integration related costs including restructuring & severance⁽³⁾
952
164
(217 )
Legal & litigation expenses including settlement payments⁽⁴⁾
766
—
—

New jurisdictions and regulatory licensing costs⁽⁵⁾
1,293
11
—

Non-cash charge on capitalized installation and delivery⁽⁶⁾
1,284
—
—

Non-cash charges and loss on disposition of assets⁽⁷⁾
686
—
—

Other adjustments⁽⁸⁾
1,878
169
20

Adjusted EBITDA $ 81,450
$ (721 ) $ (337 )

~~(1) Exclusive of depreciation and amortization.~~

~~(2) Non-cash item related to the accretion of contract rights under development agreements and placement fees.~~

~~(4) Legal and litigation related costs consist of payments to law firms and settlements for matters that are outside the normal course of business. These costs~~

~~related to litigation and matters that were not significant individually.~~

~~(5) New jurisdictions and regulatory licensing costs primarily relate to the costs the Company incurred to obtain licenses and develop products for new jurisdictions.~~

~~(6) Non-cash charge on capitalized installation and delivery primarily include the costs to acquire contracts that are expensed over the estimated life of each contract.~~

Nine months ended September 30, 2016
EGM Table Products Interactive Total
Revenues
Gaming operations $ 109,214
$ 1,976
$ 5,903
$ 117,093
Equipment sales 6,939
29
—
6,968
Total revenues 116,153
2,005
5,903
124,061
Cost of gaming operations⁽¹⁾
16,913
997
1,717
19,627
Cost of equipment sales⁽¹⁾
4,244
—
—
4,244
Selling, general and administrative 27,352
2,557
6,745
36,654
Research and development 13,652
1,353
1,512
16,517
Write downs and other charges 2,162
—
(9 ) 2,153
Depreciation and amortization 58,193
1,251
1,083
60,527
Total operating expenses 122,516
6,158
11,048
139,722

Write downs and other
Loss on disposal of long lived assets 558
—
—

Impairment of long lived assets 4,606
—
—

Fair value adjustments to contingent consideration and other items (3,000 ) —
—

Acquisition costs (2 ) (9 )
Depreciation and amortization 58,193
1,251
1,083

Accretion of placement fees⁽²⁾
3,538
—
—

Acquisitions & integration related costs including restructuring & severance⁽³⁾
4,574
460
—

Legal & litigation expenses including settlement payments⁽⁴⁾
478
1,017
—

New jurisdictions and regulatory licensing costs⁽⁵⁾
927
30
—

Non-cash charge on capitalized installation and delivery⁽⁶⁾
1,193
—
—

Non-cash charges and loss on disposition of assets⁽⁷⁾
2,352
—
—

Other adjustments⁽⁸⁾
1,650
—
—

Adjusted EBITDA $ 68,704
$ (1,395 ) $ (4,071 )

~~(1) Exclusive of depreciation and amortization.~~

~~(2) Non-cash item related to the accretion of contract rights under development agreements and placement fees.~~

~~(4) Legal and litigation related costs consist of payments to law firms and settlements for matters that are outside the normal course of business. These costs~~

~~related to litigation and matters that were not significant individually.~~

~~(5) New jurisdictions and regulatory licensing costs primarily relate to the costs the Company incurred to obtain licenses and develop products for new jurisdictions.~~

~~(6) Non-cash charge on capitalized installation and delivery primarily include the costs to acquire contracts that are expensed over the estimated life of each contract.~~

Electronic Gaming Machines

Three Months Ended September 30, ~~2017~~2018 compared to Three Months Ended September 30, ~~2016~~2017


	Three months ended September 30,				$			%		Three months ended September 30,				$		%
	2017		2016		Change			Change		2018		2017		Change		Change
EGM Segment Revenue:
Gaming operations	$	39,767	$	36,048	$	3,719		10.3	%	$	47,109	$	39,767	$	7,342	18.5	%
Equipment sales	13,564		2,329		11,235			482.4	%	24,675		13,564		11,111		81.9	%
Total EGM revenues	$	53,331	$	38,377	$	14,954		39.0	%	$	71,784	$	53,331	$	18,453	34.6	%

EGM adjusted EBITDA	$	29,756	$	20,943	$	8,813		42.1	%	$	34,026	$	29,756	$	4,270	14.4	%

EGM unit information:
EGM installed base, end of period	22,015		20,108		1,907			9.5	%
EGM revenue per day	$	19.65	$	19.78	$	(0.13	)	(0.7	)%
Domestic installed base, end of period										16,068		14,544		1,524		10.5	%
International base, end of period										8,116		7,471		645		8.6	%
Total installed base, end of period										24,184		22,015		2,169		9.9	%

EGM units sold	842		66		776			1,175.8	%
Average sales price	$	15,890	$	14,361	$	1,529		10.6	%
Domestic revenue per day										$	27.14	$	25.44	$	1.70	6.7	%
International revenue per day										$	8.52	$	8.33	$	0.19	2.3	%
Total revenue per day										$	20.95	$	19.65	$	1.30	6.6	%

Domestic EGM units sold										1,332		842		490		58.2	%
International EGM units sold										—		—		—		—	%
Total EGM units sold										1,332		842		490		58.2	%

Total average sales price										$	18,051	$	15,890	$	2,161	13.6	%

Gaming Operations Revenue

The increase in gaming operations revenue was primarily due to the increase in our EGM installed base of approximately ~~900 U.S.~~1,500 domestic units, which is primarily attributable to the ~~popularity~~purchase of approximately 1,500 EGMs from Rocket in December 2017 as described in as described in Item 1. “Financial Statements” Note 2 to our ~~new~~ ~~ICON~~ ~~and~~ ~~Orion~~ ~~cabinets and approximately 1,000 Mexico units, which~~condensed consolidated financial statements. The increase is also attributable to the continued success of our ICON cabinet and the popularity of our Orion Portrait cabinet and the placement of over 500 domestic Class II units in casino expansions and newly opened casinos offset by the removal of approximately 500 EGMs in the third quarter at one casino as well as the sale of previously leased EGMs. In addition, the increase is also attributable to ~~our gaining market share in under serviced markets within Mexico. We also had a 2.6%,~~an increase of $1.70, or ~~$0.64, increase~~6.7% in our ~~U.S.~~domestic EGM revenue per day driven by our new product offerings and through the optimization of our installed base by installing our newer and more competitive game content on our EGMs. ~~Although~~In addition, the ~~Company has experienced a decrease~~increase is also attributed to the increase of 645 international EGM units, which is attributable to our gaining market share in participation share rates for gaming revenue received pursuant to participation agreements with Native American tribal customers, player demand, driven by the Company’s newer and more competitive game content, has offset the effects of decreased participation share rates and U.S. EGM revenue per day has increased in total.under serviced markets within Mexico.

Equipment Sales

The increase in equipment sales revenue is due to the sale of ~~842~~1,332 units in the ~~three months~~quarter ended September 30, ~~2017,~~2018, compared to 66842 units in the prior year period. The increase in the number of units sold is primarily attributable to the success of our ~~new~~ ~~ICON~~ ~~and~~premium OrionPortrait ~~cabinets~~cabinet and our growth in the Class III market ~~in which many customers prefer to buy rather than lease EGMs.~~as well as the continued success of our ICON cabinet. The increase was also attributable to a ~~$1,529,~~$2,161, or ~~10.6%,~~13.6% increase in the average sales price compared to the prior year period. The increase in ~~equipment~~the average sales ~~was offset by a decrease in revenues from~~price is due the ~~sale~~higher sales price of ~~nontransferable and nonexclusive licenses of certain licensed game content~~our premium Orion Portrait cabinet compared to ~~a third party for $1.1 million in the prior year period that was not present in the current year period~~other cabinets.

EGM Adjusted EBITDA

Note 14 for further explanation of adjustments. The increase in EGM adjusted EBITDA is attributable to the increases in revenue described above, ~~a decrease in~~and offset by increased adjusted ~~operating~~selling, general and administrative expenses of ~~$0.3~~$4.0 million, ~~related primarily to~~and increased research and development expenses of $1.3 million, both driven by the ~~decrease~~increase in ~~marketing~~salaries and benefit costs due to ~~the timing of tradeshows,~~increased headcount and other operating expenses.The increase in revenue was further offset by increased adjusted cost of gaming operations and equipment sales of ~~$6.3~~$8.9 million due to higher sales volume.

EGM adjusted EBITDA margin was 47.4% and 55.8% for the three months ended September 30, 2018 and 2017, respectively. The decrease in adjusted EBITDA margin is attributable to the increased proportion of equipment sales as part of total revenues, increased service costs and period costs related to manufacturing and increased operating costs.

Nine Months Ended September 30, ~~2017~~2018 compared to Nine Months Ended September 30, ~~2016~~2017


	Nine months ended September 30,				$			%		Nine months ended September 30,				$			%
	2017		2016		Change			Change		2018		2017		Change			Change
EGM Segment Revenue:
Gaming operations	$	116,587	$	109,214	$	7,373		6.8	%	$	142,301	$	116,587	$	25,714		22.1	%
Equipment sales	29,160		6,939		22,221			320.2	%	60,060		29,160		$	30,900		106.0	%
Total EGM revenues	$	145,747	$	116,153	$	29,594		25.5	%	$	202,361	$	145,747	$	56,614		38.8	%

EGM adjusted EBITDA	$	81,450	$	68,704	$	12,746		18.6	%	$	105,197	$	81,450	$	23,747		29.2	%

EGM unit information:
EGM installed base, end of period	22,015		20,108		1,907			9.5	%
EGM revenue per day	$	19.86	$	20.20	$	(0.34	)	(1.7	)%
Domestic installed base, end of period										16,068		14,544		1,524			10.5	%
International base, end of period										8,116		7,471		645			8.6	%
Total installed base, end of period										24,184		22,015		2,169			9.9	%

EGM units sold	1,868		205		1,663			811.2	%
Domestic revenue per day										$	27.22	$	25.73	$	1.49		5.8	%
International revenue per day										$	8.53	$	8.37	$	0.16		1.9	%
Total revenue per day										$	21.22	$	19.86	$	1.36		6.8	%

Domestic EGM units sold										3,182		1,690		1,492			88.3	%
International EGM units sold										46		178		(132		)	(74.2	)%
Total EGM units sold										3,228		1,868		1,360			72.8	%

Average sales price	$	15,835	$	14,630	$	1,205		8.2	%	$	18,208	$	15,835	$	2,373		15.0	%

Gaming Operations Revenue

The increase in gaming operations revenue was primarily due to the increase in our EGM installed base of approximately ~~900 U.S.~~1,500 domestic units, which is primarily attributable to the purchase of approximately 1,500 EGMs from Rocket in December 2017 as described in as described in Item 1. “Financial Statements” Note 2 to our condensed consolidated financial statements. The increase is also attributable to the continued success of our ICON cabinet and the popularity of our ~~new~~ ~~ICON~~Orion Portrait cabinet and ~~Orion~~ ~~cabinets~~the placement of over 500 domestic units in casino expansions and newly opened casinos offset by the removal of approximately ~~1,000 Mexico units, which is attributable to~~500 EGMs in the ~~to our gaining market share in under serviced markets within Mexico.~~third quarter at one casino as well as the sale of previously leased EGMs. We also had ~~a 2.1%,~~an increase of $1.49, or ~~$0.54, increase~~5.8% in our ~~U.S.~~domestic EGM revenue per day driven by our new product offerings, recently entered jurisdictions and through the optimization of our installed base by installing our newer and more competitive game content on our EGMs. ~~Although~~In addition, the Company has experienced a decrease in participation share rates for gaming revenue received pursuant to participation agreements with Native American tribal customers, player demand, driven by the Company’s newer and more competitive game content, has offset the effects of decreased participation share rates and U.S. EGM revenue per day has increased in total. Current period results have been negatively impacted by $1.0 million relating to foreign currency fluctuations comparedincrease is also attributed to the ~~prior year period.~~increase of 645 international EGM units, which is attributable our gaining market share in under serviced markets within Mexico.

Equipment Sales

The increase in equipment sales revenue is due to the sale of ~~1,868~~3,228 units in the nine months ended September 30, ~~2017,~~2018, compared to ~~205~~1,868 units in the prior year period. The increase in the number of units sold is primarily attributable to the success of our ~~new~~ ~~ICON~~ ~~and~~premium Orion Portrait ~~cabinets~~cabinet and our growth in the Class III market ~~in which many customers prefer to buy rather than lease EGMs.~~ as well as the continued success of our ICON cabinet.

The increase was also attributable to an approximate ~~$1,205,~~$2,373, or ~~8.2%~~15.0%, increase in the average sales price compared to the prior year period. The increase in ~~equipment~~the average sales ~~was offset by a decrease in revenues from~~price is due the ~~sale~~higher sales price of ~~nontransferable and nonexclusive licenses of certain licensed game content~~our premium Orion Portrait cabinet compared to ~~a third party for $3.2 million in the prior year period that was not present in the current year period~~other cabinets.

EGM Adjusted EBITDA

EGM adjusted EBITDA includes the revenues and operating expenses from the EGM segment adjusted for depreciation, amortization, ~~write downs~~write-downs and other charges, accretion of placement fees, as well as other costs. See Item 1. “Financial Statements” Note 14 for further explanation of adjustments. The increase in EGM adjusted EBITDA is attributable to the increases in revenue described above offset by increased adjusted cost of gaming operations and equipment sales of ~~$12.4~~$21.9 million due to higher sales volume and ~~an increase in~~increased adjusted operating expenses of ~~$2.8~~$10.7 million due to increased headcount and ~~prototype parts associated with~~other operating expenses. EGM adjusted EBITDA margin was 52.0% and 55.9% for the ~~development of our new Orion~~nine months ended September 30, 2018 and ~~Orion Slant cabinets. Increases~~2017, respectively. The decrease in adjusted ~~operating expenses were offset by decreased professional fees and marketing costs due~~EBITDA margin is attributable to the ~~timing~~increased proportion of ~~tradeshows.~~equipment sales as part of total revenue, increased service costs and period costs related to manufacturing and increased operating costs.

Table Products

Three Months Ended September 30, ~~2017~~2018 compared to Three Months Ended September 30, ~~2016~~2017


	Three Months Ended September 30,						$			%		Three months ended September 30,					$		%
	2017			2016			Change			Change		2018		2017			Change		Change
Table Products Segment Revenue:
Gaming operations	$	1,072		$	672		$	400		59.5	%	$	1,902	$	1,072		$	830	77.4	%
Equipment sales	27			2			25			1,250.0	%	150		27			123		455.6	%
Total Table Products revenues	$	1,099		$	674		$	425		63.1	%	$	2,052	$	1,099		$	953	86.7	%

Table Products adjusted EBITDA	$	(232	)	$	(380	)	$	148		38.9	%	$	428	$	(232	)	$	660	284.5	%

Table Products unit information:
Table products installed base, end of period	2,350			1,205			1,145			95.0	%	3,065		2,350			715		30.4	%
Average monthly lease price	$	151		$	186		$	(35	)	(18.8	)%	$	214	$	151		$	63	41.7	%

Gaming Operations Revenue

The increase in Table Products gaming operations revenue is attributable to the increase in the Table Products installed base to ~~2,350~~3,065 units compared to ~~1,205~~2,350 units in the prior year period. The ~~newly~~recently acquired 493 ~~installs~~installed table games from the In Bet acquisition ~~our~~and the continued success of side bets, ~~and~~ most notably Buster Blackjack and our progressive Bonus Spin, are the primary ~~drivers~~driver of the increase in the Table Products revenue and installed base compared to the prior year period. See Item 1. “Financial Statements” Note 2 for a description of the In Bet acquisition. The increase is ~~offset by a decrease in~~also attributable to the higher average monthly lease price of ~~$151~~$214, up $63 compared to ~~$186 in~~ the prior year period.

Equipment Sales

The increase in equipment sales is primarily due to the sales of our new products, roulette and baccarat signs, in the current year.

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~~write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 14 for further explanation of adjustments. The increase in Table Products adjusted EBITDA is attributable to the increases in revenue described above, and offset by ~~an increase in~~higher adjusted ~~operating~~research and development expenses of $0.2 million ~~due~~related to ~~increased headcount and professional fees. The Table Products segment began its operations in mid-2014 and it has continued to grow through~~ the ~~addition~~development of ~~headcount and purchases of intellectual property from third parties.~~our new card shuffler, the “DEX S”.

Nine Months Ended September 30, ~~2017~~2018 compared to Nine Months Ended September 30, ~~2016~~2017


	Nine Months Ended September 30,						$			%		Nine months ended September 30,					$		%
	2017			2016			Change			Change		2018		2017			Change		Change
Table Products Segment Revenue:
Gaming operations	$	2,348		$	1,976		$	372		18.8	%	$	5,257	$	2,348		$	2,909	123.9	%
Equipment sales	94			29			65			224.1	%	257		94			163		173.4	%
Total Table Products revenues	$	2,442		$	2,005		$	437		21.8	%	$	5,514	$	2,442		$	3,072	125.8	%

Table Products adjusted EBITDA	$	(721	)	$	(1,395	)	$	674		48.3	%	$	684	$	(721	)	$	1,405	194.9	%

Table Products unit information:
Table products installed base, end of period	2,350			1,205			1,145			95.0	%	3,065		2,350			715		30.4	%
Average monthly lease price	$	111		$	185		$	(74	)	(40.0	)%	$	215	$	111		$	104	93.7	%

Gaming Operations Revenue

The increase in Table Products gaming operations revenue is attributable to the increase in the Table Products installed base to ~~2,350~~3,065 units compared to ~~1,205~~2,350 units in the prior year period. The ~~newly~~recently acquired 493 ~~installs~~installed table games from the In Bet acquisition ~~our~~and the continued success of side bets, ~~and~~ most notably Buster Blackjack and our progressive Bonus Spin, are the primary driver of the increase in the Table Products revenue and installed base compared to the prior year period. See Item 1. “Financial Statements” Note 2 for a description of the In Bet acquisition. The increase is ~~offset by a decrease in~~also attributable to the higher average monthly lease price of ~~$74~~$215, up $104 compared to ~~$185 in~~ the prior year period.

Equipment Sales

The increase in equipment sales is primarily due to the sales of our new products, roulette and baccarat signs, in the current year.

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~~write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 14 for further explanation of adjustments. The increase in Table Products adjusted EBITDA is attributable to the increases in revenue described above, and offset by higher adjusted research and development expenses of $0.7 million related to the development of our new card shuffler, the “DEX S”, a ~~decrease~~$0.7 million increase in adjusted cost of gaming operations related to In Bet progressive fees and ~~equipment sales of $0.3 million. The Table Products segment began its operations~~a $0.2 million increase in ~~mid-2014~~adjusted selling, general and ~~it has continued to grow through the addition of headcount and purchases of intellectual property from third parties.~~administrative expenses.

Interactive

Three Months Ended September 30, ~~2017~~2018 compared to Three Months Ended September 30, ~~2016~~2017


	Three months ended September 30,						$			%		Three months ended September 30,						$			%
	2017			2016			Change			Change		2018			2017			Change			Change
Interactive Segment Revenue:
Gaming operations	$	2,010		$	2,157		$	(147	)	(6.8	)%	$	1,690		$	2,010		$	(320	)	(15.9	)%
Total Interactive revenues	$	2,010		$	2,157		$	(147	)	(6.8	)%	$	1,690		$	2,010		$	(320	)	(15.9	)%

Interactive adjusted EBITDA	$	(123	)	$	(607	)	$	484		79.7	%	$	(877	)	$	(123	)	$	(754	)	(613.0	)%

Interactive unit information:
Average MAU⁽¹⁾	194,239			207,151			(12,912		)	(6.2	)%	148,668			194,239			(45,571		)	(23.5	)%
Average DAU⁽²⁾	36,906			42,953			(6,047		)	(14.1	)%	33,948			36,906			(2,958		)	(8.0	)%
ARPDAU⁽³⁾	$	0.59		$	0.47		$	0.12		25.5	%	$	0.43		$	0.59		$	(0.16	)	(27.1	)%

(1) MAU = Monthly Active Users and is a count of unique visitors to our sites during a month

(2) DAU = Daily Active Users, a count of unique visitors to our sites during a day

(3) ARPDAU = Average daily revenue per DAU is calculated by dividing revenue for a period by the DAU for the period by the number of days for the period

Gaming Operations Revenue

~~The decrease in~~Because of our optimization strategy, interactive gaming operations revenue ~~is primarily driven by a 14.1% decrease in average DAU for the three months ended September 30, 2017 when~~decreased compared to the prior year ~~period. The~~period due to the decrease in ~~average DAU was driven by decreased user acquisition costs in efforts to optimize marketing spend. These decreases were offset by increases attributable to~~ Business-to-Consumer (“B2C”) revenue. This decrease was offset by an increase of $0.2 million in real money gaming revenue ~~driven by a 25.5% increase~~ in ~~ARPDAU.~~the current period from our recent acquisition of AGS iGaming.

Interactive Adjusted EBITDA

Interactive adjusted EBITDA includes the revenues and operating expenses from the Interactive segment adjusted for depreciation, amortization, ~~write downs~~write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 14 for further explanation of adjustments. The ~~increase~~decrease in interactive adjusted EBITDA is attributable to ~~a decrease~~decreased revenues, as described above as well as additional operating costs incurred by AGS iGaming that were not present in ~~adjusted operating expenses of $0.6 million primarily driven~~the prior period offset by decreased ~~marketing and~~ user acquisition ~~costs. These decreases in adjusted operating expenses were partially offset by the decrease in gaming operations revenues discussed above.~~

costs of $0.4 million.

Nine Months Ended September 30, ~~2017~~2018 compared to Nine Months Ended September 30, ~~2016~~2017


	Nine Months Ended September 30,						$			%		Nine months ended September 30,						$			%
	2017			2016			Change			Change		2018			2017			Change			Change
Interactive Segment Revenue:
Gaming operations	$	6,105		$	5,903		$	202		3.4	%	$	5,329		6,105			$	(776	)	(12.7	)%
Total Interactive revenues	$	6,105		$	5,903		$	202		3.4	%	$	5,329		$	6,105		$	(776	)	(12.7	)%

Interactive adjusted EBITDA	$	(337	)	$	(4,071	)	$	3,734		91.7	%	$	(1,223	)	$	(337	)	$	(886	)	(262.9	)%

Interactive unit information:
Average MAU⁽¹⁾	190,237			210,783			(20,546		)	(9.7	)%	183,593			190,237			(6,644		)	(3.5	)%
Average DAU⁽²⁾	37,544			41,809			(4,265		)	(10.2	)%	37,088			37,544			(456		)	(1.2	)%
ARPDAU⁽³⁾	$	0.58		$	0.48		$	0.10		20.8	%	$	0.46		$	0.58		$	(0.12	)	(20.7	)%

(1) MAU = Monthly Active Users and is a count of unique visitors to our sites during a month

(2) DAU = Daily Active Users, a count of unique visitors to our sites during a day

(3) ARPDAU = Average daily revenue per DAU is calculated by dividing revenue for a period by the DAU for the period by the number of days for the period

Gaming Operations Revenue

~~The increase in~~Because of our optimization strategy, interactive gaming operations revenue ~~is attributable to increases in Business-to-Consumer~~

~~(“B2C”) revenue driven by a 20.8% increase in ARPDAU for the nine months ended September 30, 2017 when~~decreased slightly compared to the prior year ~~period.~~period due to the decrease in Business-to-Consumer (“B2C”) revenue. These ~~increases~~decreases were offset by ~~a decrease~~an increase in Business-to-Business (“B2B”) revenue of ~~14.1%~~$0.3 million as well as an increase of $0.3 million in ~~average DAU driven by decreased user~~real money gaming revenue in the current period from our recent acquisition ~~costs in efforts to optimize marketing spend.~~of AGS iGaming.

Interactive Adjusted EBITDA

Interactive adjusted EBITDA includes the revenues and operating expenses from the Interactive segment adjusted for depreciation, amortization, ~~write downs~~write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 14 for further explanation of adjustments. The ~~increase~~decrease in interactive adjusted EBITDA is attributable to decreased revenues, as described above as well as additional operating costs incurred by AGS iGaming that were not present in the prior period offset by a decrease in user acquisition fees of $1.0 million.

Total Adjusted EBITDA

The following tables provide reconciliations of segment financial information to our consolidated statement of operations and to total adjusted EBITDA. We have included revenues, operating expenses and other adjustments by segment which we believe are important to understanding the operating results of ~~$3.6 million~~our segment:



	Three months ended September 30, 2018
	EGM			Table Products		Interactive			Total
Revenues
Gaming operations	$	47,109		$	1,902	$	1,690		$	50,701
Equipment sales	24,675			150		—			24,825
Total revenues	71,784			2,052		1,690			75,526
Cost of gaming operations⁽¹⁾	9,548			382		564			10,494
Cost of equipment sales⁽¹⁾	12,096			13		—			12,109
Selling, general and administrative	12,917			554		1,813			15,284
Research and development	6,298			694		902			7,894
Write-downs and other charges	667			—		—			667
Depreciation and amortization	17,966			701		301			18,968
Total operating expenses	59,492			2,344		3,580			65,416

Write-downs and other
Loss on disposal of long lived assets	363			—		—			363
Impairment of long lived assets	204			—		—			204
Fair value adjustments to contingent consideration and other items	100			—		—			100
Depreciation and amortization	17,966			701		301			18,968
Accretion of placement fees⁽²⁾	1,206			—		—			1,206
Non-cash stock-based compensation expense⁽³⁾	502			19		17			538
Acquisitions and integration related costs including restructuring and severance⁽⁴⁾	51			—		695			746
Initial public offering⁽⁵⁾	859			—		—			859
Legal and litigation expenses including settlement payments⁽⁶⁾	(45		)	—		—			(45		)
New jurisdictions and regulatory licensing costs⁽⁷⁾	—			—		—			—
Non-cash charge on capitalized installation and delivery⁽⁸⁾	494			—		—			494
Non-cash charges and loss on disposition of assets⁽⁹⁾	—			—		—			—
Other adjustments⁽¹⁰⁾	34			—		—			34
Adjusted EBITDA	$	34,026		$	428	$	(877	)	$	33,577

(1) Exclusive of depreciation and amortization.

(2) Non-cash item related to the accretion of contract rights under development agreements and placement fees.

(3) Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards.

(4) Acquisitions and integration related costs primarily ~~driven by decreased marketing~~relate to costs incurred after the purchase of businesses, such as the purchase of AGS iGaming, to integrate operations and ~~user acquisition costs.~~obtain costs synergies. Restructuring and severance costs 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.

(5) Costs incurred related to initial public offering, net of costs capitalized to equity and the filing of the related offerings.

(6) Legal and litigation related costs consist of payments to law firms and settlements for matters that are outside the normal course of business. These ~~decreases in adjusted operating expenses~~costs

related to litigation and matters that were ~~complimented~~not significant individually.

(7) New jurisdictions and regulatory licensing costs primarily relate to the costs the Company incurred to obtain licenses and develop products for new jurisdictions.

(8) Non-cash charge on capitalized installation and delivery primarily include the costs to acquire contracts that are expensed over the estimated life of each contract.

(9) Non-cash charges and loss on disposition of assets are primarily composed of non-cash inventory obsolescence charges.

(10) Other adjustments are primarily composed of professional fees incurred by the ~~increase~~Company for projects, corporate and public filing compliance, contract cancellation fees, and other costs deemed to be non-recurring in ~~gaming~~nature.



	Three months ended September 30, 2017
	EGM		Table Products			Interactive			Total
Revenues
Gaming operations	$	39,767	$	1,072		$	2,010		$	42,849
Equipment sales	13,564		27			—			13,591
Total revenues	53,331		1,099			2,010			56,440
Cost of gaming operations⁽¹⁾	6,352		405			587			7,344
Cost of equipment sales⁽¹⁾	6,329		1			—			6,330
Selling, general and administrative	8,011		586			1,145			9,742
Research and development	5,537		524			406			6,467
Write-downs and other charges	490		—			—			490
Depreciation and amortization	16,181		185			565			16,931
Total operating expenses	42,900		1,701			2,703			47,304

Write-downs and other
Loss on disposal of long lived assets	490		—			—			490
Impairment of long lived assets	—		—			—			—
Fair value adjustments to contingent consideration and other items	—		—			—			—
Depreciation and amortization	16,181		185			565			16,931
Accretion of placement fees⁽²⁾	1,192		—			—			1,192
Non-cash stock-based compensation expense⁽³⁾	—		—			—			—
Acquisitions and integration related costs including restructuring and severance⁽⁴⁾	65		5			1			71
Initial public offering⁽⁵⁾	—		—			—			—
Legal and litigation expenses including settlement payments⁽⁶⁾	181		—			—			181
New jurisdictions and regulatory licensing costs⁽⁷⁾	556		11			—			567
Non-cash charge on capitalized installation and delivery⁽⁸⁾	359		—			—			359
Non-cash charges and loss on disposition of assets⁽⁹⁾	—		—			—			—
Other adjustments⁽¹⁰⁾	301		169			4			474
Adjusted EBITDA	$	29,756	$	(232	)	$	(123	)	$	29,401

(1) Exclusive of depreciation and amortization.

(2) Non-cash item related to the accretion of contract rights under development agreements and placement fees.

(3) Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards.

(4) Acquisitions and integration related costs primarily relate to costs incurred after the purchase of businesses, such as the purchase of AGS iGaming, to integrate operations ~~revenues discussed above.~~and obtain costs synergies. Restructuring and severance costs 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.

(5) Costs incurred related to initial public offering, net of costs capitalized to equity and the filing of the related offerings.

(6) Legal and litigation related costs consist of payments to law firms and settlements for matters that are outside the normal course of business. These costs

related to litigation and matters that were not significant individually.

(7) New jurisdictions and regulatory licensing costs primarily relate to the costs the Company incurred to obtain licenses and develop products for new jurisdictions.

(8) Non-cash charge on capitalized installation and delivery primarily include the costs to acquire contracts that are expensed over the estimated life of each contract.

(9) Non-cash charges and loss on disposition of assets are primarily composed of non-cash inventory obsolescence charges.

(10) Other adjustments are primarily composed of professional fees incurred by the Company for projects, corporate and public filing compliance, contract cancellation fees, and other costs deemed to be non-recurring in nature.



	Nine months ended September 30, 2018
	EGM		Table Products		Interactive			Total
Revenues
Gaming operations	$	142,301	$	5,257	$	5,329		$	152,887
Equipment sales	60,060		257		—			60,317
Total revenues	202,361		5,514		5,329			213,204
Cost of gaming operations⁽¹⁾	26,085		1,427		1,550			29,062
Cost of equipment sales⁽¹⁾	28,884		35		—			28,919
Selling, general and administrative	41,694		1,861		3,856			47,411
Research and development	19,057		2,353		1,964			23,374
Write-downs and other charges	3,282		—		—			3,282
Depreciation and amortization	55,083		1,989		712			57,784
Total operating expenses	174,085		7,665		8,082			189,832

Write-downs and other
Loss on disposal of long lived assets	1,383		—		—			1,383
Impairment of long lived assets	1,199		—		—			1,199
Fair value adjustments to contingent consideration and other items	700		—		—			700
Depreciation and amortization	55,083		1,989		712			57,784
Accretion of placement fees⁽²⁾	3,412		—		—			3,412
Non-cash stock-based compensation expense⁽³⁾	8,200		844		123			9,167
Acquisitions and integration related costs including restructuring and severance⁽⁴⁾	2,461		—		695			3,156
Initial public offering⁽⁵⁾	2,166		2		—			2,168
Legal and litigation expenses including settlement payments⁽⁶⁾	789		—		—			789
New jurisdictions and regulatory licensing costs⁽⁷⁾	—		—		—			—
Non-cash charge on capitalized installation and delivery⁽⁸⁾	1,478		—		—			1,478
Non-cash charges and loss on disposition of assets⁽⁹⁾	—		—		—			—
Other adjustments⁽¹⁰⁾	50		—		—			50
Adjusted EBITDA	$	105,197	$	684	$	(1,223	)	$	104,658

(1) Exclusive of depreciation and amortization.

(2) Non-cash item related to the accretion of contract rights under development agreements and placement fees.

(3) Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards.

(4) Acquisitions and integration related costs primarily relate to costs incurred after the purchase of businesses, such as the purchase of AGS iGaming, to integrate operations and obtain costs synergies. Restructuring and severance costs 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.

(5) Costs incurred related to initial public offering, net of costs capitalized to equity and the filing of the related offerings.

(6) Legal and litigation related costs consist of payments to law firms and settlements for matters that are outside the normal course of business. These costs

related to litigation and matters that were not significant individually.

(7) New jurisdictions and regulatory licensing costs primarily relate to the costs the Company incurred to obtain licenses and develop products for new jurisdictions.

(8) Non-cash charge on capitalized installation and delivery primarily include the costs to acquire contracts that are expensed over the estimated life of each contract.

(9) Non-cash charges and loss on disposition of assets are primarily composed of non-cash inventory obsolescence charges.



	Nine months ended September 30, 2017
	EGM			Table Products			Interactive			Total
Revenues
Gaming operations	$	116,587		$	2,348		$	6,105		$	125,040
Equipment sales	29,160			94			—			29,254
Total revenues	145,747			2,442			6,105			154,294
Cost of gaming operations⁽¹⁾	19,188			798			1,808			21,794
Cost of equipment sales⁽¹⁾	14,318			8			—			14,326
Selling, general and administrative	25,490			1,424			3,454			30,368
Research and development	15,652			1,277			983			17,912
Write-downs and other charges	2,655			—			—			2,655
Depreciation and amortization	51,603			1,012			983			53,598
Total operating expenses	128,906			4,519			7,228			140,653

Write-downs and other
Loss on disposal of long lived assets	3,000			—			—			3,000
Impairment of long lived assets	285			—			—			285
Fair value adjustments to contingent consideration and other items	(630		)	—			—			(630		)
Depreciation and amortization	51,603			1,012			983			53,598
Accretion of placement fees⁽²⁾	3,492			—			—			3,492
Non-cash stock-based compensation expense⁽³⁾	—			—			—			—
Acquisitions and integration related costs including restructuring and severance⁽⁴⁾	952			164			(217		)	899
Initial public offering⁽⁵⁾	—			—			—			—
Legal and litigation expenses including settlement payments⁽⁶⁾	766			—			—			766
New jurisdictions and regulatory licensing costs⁽⁷⁾	1,293			11			—			1,304
Non-cash charge on capitalized installation and delivery⁽⁸⁾	1,284			—			—			1,284
Non-cash charges and loss on disposition of assets⁽⁹⁾	686			—			—			686
Other adjustments⁽¹⁰⁾	1,878			169			20			2,067
Adjusted EBITDA	$	81,450		$	(721	)	$	(337	)	$	80,392